Accounting for Subsidiaries in Consolidated Statements

Explore practical examples of accounting for subsidiaries in consolidated financial statements to enhance your understanding.
By Jamie

Understanding Accounting for Subsidiaries in Consolidated Statements

Consolidated financial statements are essential for companies with subsidiaries, as they provide a comprehensive view of the financial health of the entire corporate group. These statements aggregate the financial results of the parent company and its subsidiaries, reflecting their collective performance. Proper accounting for subsidiaries ensures that all assets, liabilities, income, and expenses are accurately represented. Below are three practical examples illustrating how to account for subsidiaries in consolidated statements.

Example 1: Acquisition of a Subsidiary

Context

When a company acquires a subsidiary, it must account for the acquisition in its consolidated financial statements, including the fair value of the acquired assets and liabilities.

In this example, Company A acquires 100% of Company B for $1 million. At the acquisition date, Company B has the following assets and liabilities:

  • Assets: $800,000 (cash, inventory, equipment)
  • Liabilities: $300,000 (accounts payable, loans)

Example

At the time of acquisition, Company A will record the following in its consolidated financial statements:

  • Total Assets: $800,000 (from Company B)
  • Total Liabilities: $300,000 (from Company B)
  • Goodwill: \(1,000,000 (purchase price) - (\)800,000 - \(300,000) = \)500,000

The journal entries would look like this:

  • Debit Assets (Company B): $800,000
  • Credit Liabilities (Company B): $300,000
  • Debit Goodwill: $500,000
  • Credit Cash: $1,000,000

Notes

This example highlights the importance of fair value measurement during acquisition. Goodwill represents the excess of purchase price over the net identifiable assets acquired and is tested for impairment annually.

Example 2: Joint Venture Accounting

Context

In a situation where a parent company has joint control over a subsidiary, it must account for its share of the subsidiary’s assets, liabilities, and results of operations in the consolidated financial statements.

Let’s say Company C and Company D form a joint venture, Company E, where Company C owns 60% of the equity. Company E has total assets of \(1 million and total liabilities of \)400,000.

Example

Company C will consolidate the financial results of Company E by including its proportional share:

  • Total Assets: \(1,000,000 * 60% = \)600,000
  • Total Liabilities: \(400,000 * 60% = \)240,000
  • Equity in Earnings: Company E generates \(200,000 in profit, so Company C will recognize \)120,000 in its income statement.

The journal entries would be:

  • Debit Assets (Company E): $600,000
  • Credit Liabilities (Company E): $240,000
  • Credit Equity in Earnings: $120,000

Notes

This example illustrates how joint ventures are accounted for using the equity method. The parent does not fully consolidate the joint venture but recognizes its share of profits and net assets.

Example 3: Deconsolidation of a Subsidiary

Context

If a parent company sells a subsidiary or loses control over it, it must deconsolidate the subsidiary from its financial statements.

Assume Company F sells its 80% stake in Company G for $2 million. At the time of sale, Company G has the following financials:

  • Assets: $1.5 million
  • Liabilities: $1 million
  • Equity: $500,000

Example

Upon selling the subsidiary, Company F will remove Company G’s assets and liabilities from its consolidated financial statements:

  • Remove Assets: $1,500,000
  • Remove Liabilities: $1,000,000
  • Recognize Gain on Sale: Sale proceeds (\(2,000,000) - (Net assets sold (\)500,000)) = $1,500,000

The journal entries will be:

  • Debit Cash: $2,000,000
  • Debit Liabilities (Company G): $1,000,000
  • Credit Assets (Company G): $1,500,000
  • Credit Gain on Sale: $1,500,000

Notes

Deconsolidation can occur for various reasons, including divestitures or loss of control. It is crucial to accurately reflect the financial impact of such transactions in the parent company’s financial statements.