What is the journal entry for investment in subsidiary? - Accounting Capital (2024)

FAQs

How do you record investment in subsidiary journal entry? ›

To do this, debit Intercorporate Investment and credit Cash. For example, if the parent bought $50,000 worth of a subsidiary's stock, it would debit Intercorporate Investment for $50,000 to reflect the new asset and credit cash for $50,000 to reflect the cash outflow.

The amount invested in the business whether in the means of cash or kind by the proprietor or owner of the business is called capital. The capital account will be credited and the cash or assets brought in will be debited.

The consolidation method records 100% of the subsidiary's assets and liabilities on the parent company's balance sheet, even though the parent may not own 100% of the subsidiary's equity. The parent income statement will also include 100% of the subsidiary's revenue and expenses.

The two most common bookkeeping methods for a subsidiary are the equity method and the consolidated method. The parent company can ultimately decide whether to report the investment in a subsidiary using the equity method or consolidate for its internal financial statements.

Accounting practices for capital investments involve recording the cost of the asset, allocating the cost over its useful life, and carrying the investment as the difference between cost and accumulated depreciation.

Subsidiary consolidation involves reporting the subsidiary's balances in a combined statement along with the parent company's balances. The parent company will report the “investment in subsidiary” as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts.

Example of the Equity Method of Accounting

However, when a parent company initially acquires a portion of a subsidiary, it debits Investment in Subsidiary by the purchase amount and then credits cash by the purchase amount.

The double-entry rule is thus: if a transaction increases an asset or expense account, then the value of this increase must be recorded on the debit or left side of these accounts. Likewise in the equation, capital (C), liabilities (L) and income (I) are on the right side of the equation representing credit balances.

Interest on Capital Journal Entry recognizes the interest expense incurred by the partnership for using the partner's capital. Interest on Capital A/c (Expense) is debited in this case and Capital A/c of the respective partner is credited (increased) by the interest amount.

Ownership of unconsolidated subsidiaries is typically treated as an equity investment and denoted as an asset on the parent company's balance sheet. For regulatory reasons, unconsolidated subsidiaries are generally those in which a parent company does not have a significant stake.

What is a capital contribution parent to subsidiary? ›

Capital contributions

a cash payment to the subsidiary which would involve the parent making a gift of the relevant sum to the subsidiary. the parent waiving the right to receive an amount which is due and payable by the subsidiary.

An unconsolidated subsidiary is treated as an investment on a parent company's financial statements, not part of consolidated financial statements. Financial statements are written records that convey the business activities and the financial performance of a company.

Answer and Explanation: The investment in the subsidiary is considered as an asset of the business, but in the view of the investor, it is considered as an intercompany transaction. And the intercompany transactions eliminate at the time of preparation of consolidated financial statements.

Legal Implications: As a subsidiary is a separate legal entity, it has its own legal rights and liabilities. In contrast, associates and investments do not have separate legal identities and are usually subject to less legal exposure.

IAS 27 allows the entities to use the equity method to account for investment in subsidiaries, joint ventures and associates in their Separate Financial Statements (SFS).

The original investment is recorded on the balance sheet at cost (fair value). Subsequent earnings by the investee are added to the investing firm's balance sheet ownership stake (proportionate to ownership), with any dividends paid out by the investee reducing that amount.

Typical examples of non-current items are long-term loans or provisions, property, plant and equipment, intangibles, investments in subsidiaries, etc.