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In: Accounting

1. How does a parent company account for its investments in subsidiaries past the acquisition date...

1. How does a parent company account for its investments in subsidiaries past the acquisition date (in subsequent years) on its own books ? What are some of the additional documents an accountant will have to prepare in addition to the consolidated balance sheet subsequent to an acquisition?

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Expert Solution

Meaning : A subsidiary is a company that is controlled by another company that owns 50% or more of its voting stock. The controlling company, also called the parent company, is said to have a controlling interest in the subsidiary. This type of parent-subsidiary relationship typically comes about as the result of acquisitions or heavy investment by a large corporation in another company. Parent companies will need to account for transactions with the subsidiary as well as prepare consolidated financial statements.

Record the parent’s purchase of the subsidiary’s stock. 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.

Adjust intercorporate stock-holdings. Intercorporate stock holding issues cause an overstatement of the outstanding stock balance by reporting subsidiary stock owned by the parent as outstanding stock. This can be remedied with a debit to the subsidiary's common stock, paid-in capital in excess of par, and retained earnings accounts and a credit to the investment in stock of subsidiary account for an equal amount.

  • These transactions will be for the book value of the subsidiary stock and related accounts.
  • For example, if the parents owns $100,000 in the subsidiary's stock and the subsidiary's retained earnings total $50,000, their common stock and paid-in capital in excess of par would be debited for a total of $100,000 (depending on how much the par value of the stock is) and their retained earnings would be debited for $50,000.
  • Then, the parent company's investment in subsidiary stock account would be credited for $150,000.

ekkarill92 answered 9 months ago
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