Final answer:
The correct entry for a consolidation worksheet when the subsidiary's income exceeds dividends paid, under the initial method, is to debit Investment in Subsidiary and credit Equity in Subsidiary's Income.
Step-by-step explanation:
When a company applies the initial method in accounting for its investment in a subsidiary, and the subsidiary reports income that is greater than the dividends paid, the appropriate consolidation worksheet entry is to increase the Investment in the subsidiary account and to record the excess income in the Equity in subsidiary's income account. The entry would be:
Investment in subsidiary Equity in subsidiary's income
This reflects that the parent company has increased its underlying economic interest in the subsidiary due to the subsidiary's earnings not being distributed as dividends. The entry aligns the parent's books with the equity method of accounting for investments, where undistributed earnings increase the investment account.