Due to this relationship, the parent company must prepare consolidated financial statements. Parent companies use the equity method to record the revenue from their subsidiary company (or companies), which goes on their non-consolidated income statements. Let’s say the parent company owns 58% of its subsidiary, and the subsidiary has a net income of $1,000,000. The parent company would report $580,000 as a debit (an increase) to the Investment in Subsidiary Asset Account and a credit to the Investment Income Account.

Parent Company now has $10M less cash, but still has a total of $20M in assets. In this simplified example, we debit investments in subsidiary since Child Inc has no other assets or liabilities. Alternatively, when an investor does not exercise full control over the investee, and has no influence over the investee, the investor possesses a passive minority interest in the investee.

Acquisition of subsidiary

In granting approval for the closure, the RBI permitted the taxpayer to write off the entire investment in the subsidiary, together with unrealized export receivables. The taxpayer, therefore, made a claim to write off the loss as revenue expense allowable under the provisions of the Income-tax Act, 1961. This journal entry will eliminate the dividend receivable we have recorded previously.

As mentioned, a company sells its shares to the public that become its part-owners. Usually, its owners include individuals who buy those shares and become their shareholders. When a company buys another company’s shares, it also becomes its shareholder. However, the underlying investment does not constitute a subsidiary in all circumstances. This journal entry is made to remove the $80,000 dividend receivable that we recorded on June 30, as we receives the $80,000 cash dividend on July 15. The other problems are tax and local regulation, and the group company needs to prepare additional reports to comply with the local law for the subsidiary.

Consolidation accounting

This is because the cash dividend will be paid out from the retained earnings of the subsidiary, in which it will reduce the subsidiary’s equity or net worth as a result. The parent company will report the “investment in subsidiary” as an asset in its balance sheet. Whereas, the subsidiary company will report the same transaction as “equity” in its balance sheet. The equity method is best used for investments of between 20% to 50% or significant influence in a company or joint venture, but not over 50% ownership. If you own a small business, you may choose to use the equity method even in the event of 100% control over the subsidiary if consolidated financial statements are not necessary.

In other words, the balance of stock investment we have in the subsidiary will increase based on the percentage of share ownership that we have in the subsidiary. In accounting, there is no goodwill recorded in the company as the individual. In other words, goodwill will only show up in the group company’s consolidated financial statements that include all the subsidiaries of the company.

What is the accounting for investment in associates?

When a company acquires an interest in another company, it will record it as an asset at cost. Companies may use various forms of compensation, for example, cash, bank, stock, etc. Once invested, the parent company will use the following accounting entries to record the investment. Later, when we receive the cash dividend from subsidiary, we can make another journal entry to record the cash received with the debit of the cash account and the credit of the dividend receivable account. This is because when the subsidiary company issues the cash dividend to the shareholders, its net worth or equity will decrease by the amount of dividend paid out.

This method can only be used when the investor possesses effective control of the investee or subsidiary, which often, but not always, assumes the investor owns at least 50.1% of the subsidiary shares or voting rights. The accounting for subsidiaries under the consolidation method includes various knowing your customers steps. It involves combining both the parent and subsidiary company’s financial statements. However, accounting standards may provide an exemption to this process in some circumstances. In most situations, however, the consolidation method for accounting for subsidiaries will apply.