Journal entry for investment in subsidiary

Introduction

In accounting, a subsidiary company is an investee company that we as a parent company have more than 50% share of ownership. In this case, we can make the journal entry for the investment in subsidiary when we purchase the stock investment that represents more than 50% share of ownership or when our share of ownership in another company increases to more than 50% at a certain point of time.

The accounting treatment of investment in a subsidiary, after recording it as an investment asset on the balance sheet, is that we record the net income of the investee company as an increase in our investment on the balance sheet. And, the cash dividend received from the subsidiary will be recorded as a deduction on the balance of our investment.

Of course, this treatment is for the parent company’s accounts as an individual company, not as a group company. The company as a group will need to consolidate the financial statements using the “consolidation method” in which the investment in subsidiary account will be removed.

Journal entry for investment in subsidiary

Acquisition of subsidiary

As mentioned, when we make an investment in shares of another company by acquiring more than 50% shares of ownership, the investee company will become the subsidiary of our company.

In this case, we can make the journal entry for investment in subsidiary by debiting the investment in subsidiary account and crediting the cash account.

The investment in subsidiary account in this journal entry is recorded as an investment asset on the balance sheet of our company as an individual company, not the group company. And this account will be eliminated when we prepare the consolidated financial statements which are for the group company.

Revenue from subsidiary

When the subsidiary closes the year’s end accounts, we as the parent company need to record the net income of the investee company as an increase in the balance of our investment in the subsidiary. 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 this case, we can make the journal entry for revenue from subsidiary with the debit of the investment in subsidiary account and the credit of the revenue from stock investment account.

This journal entry will increase both total assets on the balance sheet and total revenues on the income statement as a result of an increase in investment in subsidiary.

Dividend from subsidiary

During the period, we may receive the cash dividend from our investment in the subsidiary. In this case, we need to record this cash dividend received as a decrease in our stock investment in the subsidiary.

This is because when we receive the cash dividend from the subsidiary, it means that the investee’s net worth or equity is reduced as well. And the investee’s net worth represents the value of our investment.

We can make the journal entry for dividend from the subsidiary by debiting the cash account and crediting the investment in subsidiary account.

In this journal entry, the balance of investment in subsidiary account will be reduced by the amount of cash dividend received. However, there is no impact to our total assets on the balance sheet as one asset decreases (credit of investment in subsidiary), while another asset increases (debit of cash).

Investment in subsidiary example

For example, on January 1, we purchased 8,000 shares of the company XYZ which represents 80% shares of ownership in XYZ. We paid $800,000 in cash for this purchase.

On June 30, the company XZY reported a net income after tax of $50,000 for the period. And later, on July 15, we received a cash dividend of $6,000 from the company XYZ.

What is the journal entry for the transactions of the investment in the subsidiary on January 1, June 30, and July 15 above?

Solution:

January 1

On January 1, as we acquired 80% of share ownership in the company XZY, it became our subsidiary company afterward.

In this case, we can make the journal entry for the $800,000 investment in subsidiary by debiting this amount to the investment in subsidiary account and crediting the same amount to the cash account.

June 30

On June 30, as the company XZY is our subsidiary, we can record $40,000, which is 80% of $50,000 net income of the company XZY, as an increase in our investment as well as revenue from the subsidiary.

Likewise, we can make the journal entry for $40,000 as the revenue from subsidiary XYZ by recording this amount to the investment in subsidiary account and the revenue from stock investment as below:

In this journal entry, total assets on the balance sheet increase by $40,000 while total revenues on the income statement increase by the same amount as a result of the $50,000 net income earned by our subsidiary XYZ. And the balance of investment in subsidiary account will increase by $40,000 as of June 30.

July 15

On July 15, when we receive the $6,000 cash dividend from the subsidiary XZY, we can make the journal entry by debiting the $6,000 to the cash account and crediting the same amount to the investment in subsidiary account.