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Definition:
Equity investments made by a business entity into another entity for a specific purpose such as gaining control is termed as investment in subsidiary entities. Rebuttable presumption is holding of more than half of the ownership (>50%) is considered to be having a controlling stake in the entity unless proved otherwise. For standalone financial statements, these investments are accounted at cost. For consolidated financial statements, these investments are eliminated and all the assets and liabilities of subsidiary entity is recognised on line-by-line consolidation basis along with Goodwill on Consolidation, if any.
Level of Ownership in an entity determines the status of the relationship,
(i) holding >50% (controlling stake - subsidiary),
(ii) holding >20% & <50% (significant influence - associate) and
(iii) holding <20% (investment at fair value).
In standalone financial statements, any dividend received from subsidiary company is accounted as income.
In consolidated financial statements, share of net income of subsidiary company is recognised and any dividend received from subsidiary company is reduced from investment value and not recognised as income again (as share in net profit of subsidiary is already recognised, dividend income is treated as a return of capital).
Accounting Entries:
Standalone Financial Statements:
Recognition of Investment made in Subsidiary company:
Investment in Subsidiaries A/c DR
Cash/Bank A/c CR
Amount: Payment made to acquire controlling stake in another entity
Dividend income received from Subsidiaries:
Cash/Bank A/c DR
Dividend Income A/c CR
Amount: Dividend amount received from investee subsidiary company
Disposal of Investment in Subsidiary company:
Cash/Bank A/c DR
Loss on Sale A/c DR
Investment in Subsidiaries A/c CR
Gain on Sale A/c CR
Amount: If the sale price > cost, then gain. If the sale price < cost, then loss.
Consolidated Financial Statements:
Recognition of Investment made in Subsidiary company:
Investment in Subsidiaries A/c DR
Cash/Bank A/c CR
Amount: Payment made to acquire controlling stake in another entity
Dividend income received from Subsidiaries:
Cash/Bank A/c DR
Investment in Subsidiaries A/c CR
Amount: Dividend amount received from investee subsidiary company
Recognition of line-by-line consolidation in holding entity
Subsidiaries Assets* DR
Goodwill on Consolidation A/c DR
Investment in Subsidiaries A/c CR
Minority Interest A/c CR
Subsidiaries Liabilities* CR
Amount: (*) Line-by-line consolidation takes place in case of subsidiaries and all assets and liabilities are taken over for reporting purpose. Minority interest is portion of share pertaining to outside shareholders.
Recognition of share of net profit in Subsidiary company pertaining to holding entity:
Changes in Subsidiaries Assets* DR
Share in Profit of Subsidiary A/c CR
Minority Interest A/c CR
Amount: (*) Line-by-line consolidation takes place in case of subsidiaries and all assets and liabilities are taken over for reporting purpose. Minority interest is portion of net income share pertaining to outside shareholders.
Disposal of Investment in Subsidiary company:
Cash/Bank A/c DR
Loss on Sale A/c DR
Investment in Subsidiaries A/c* CR
Gain on Sale A/c CR
Amount: If the sale price > book value of subsidiary, then gain. If the sale price < book value of subsidiary, then loss. (*) Cash proceeds received from sale is compared with the book value of subsidiary (which is net assets of the subsdiaries as at date of sale plus any recognised Goodill in the financial statements).