Journal entry to record income from subsidiary

Introduction

In accounting, a subsidiary company is an investee company that we, as a parent company, have more than 50% shares of ownership. In this case, we can record the net income that the investee company earned as the income from the investment on our income statement.

Additionally, the net income that the investee company earned during the period represents an increase in its net worth. Hence, we will also treat it as an increase in the investment in subsidiary account on our balance sheet.

Alternatively, if the subsidiary company makes a loss, the balance of the investment in subsidiary account on our balance sheet will decrease instead. After all, the subsidiary company’s net worth or equity, which represents the value of our investment in the subsidiary, will decrease if it makes a loss for the period.

Journal entry to record income from subsidiary

We can record the income from the subsidiary company with the journal entry of debiting the investment in subsidiary account and crediting the income from investment account.

Income from subsidiary:

This journal entry will increase the total assets on the balance sheet as a result of the increase in the net worth of the subsidiary. At the same time, the total revenues on the income statement will increase as well as a result of the good performance of the subsidiary.

Loss on investment in subsidiary

As mentioned, if the subsidiary makes a loss, we need to record the loss on the investment in subsidiary as a decrease in the balance of investment in subsidiary account.

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

In this journal entry, the loss on investment account is an expense that we need to charge to the income statement for the period. Likewise, this journal entry will decrease total assets on the balance sheet (credit of investment in subsidiary) while increasing the total expenses on the income statement (debit of the loss on investment).

Income from subsidiary example

For example, the company ABC, which is our subsidiary company, in which we have a 70% share of ownership, reported a $500,000 net income after tax for the period.

In this case, we can record the $350,000 ($500,000 x 70%) as an income from subsidiary as in the journal entry below:

This journal entry will increase the total assets on the balance sheet and the total revenues on the income statement by $350,000.

Example 2:

For another example, on December 31, we receive a report that one of our subsidiaries, that we have an 80% share of ownership, make a net loss of $200,000 for the period.

In this case, we can make the journal entry to record a $160,000 loss ($200,000 x 80%) to the loss on investment account and the investment in subsidiary account as below:

This journal entry will reduce the balance of investment in subsidiary on the balance sheet by $160,000. And at the same time, it will increase the total expenses by the same amount as a result of the bad performance of one of our subsidiaries.