Journal entry for revenues received from subsidiary
Overview
In accounting, we have a subsidiary company when we have more than 50% share ownership in the investee company. In this case, we need to make the journal entry for revenues received from the subsidiary when it reports a net income at the end of its accounting period.
Of course, if it reports the net loss instead, we still need to make the journal entry to account for the loss on investment in subsidiary. And this will result in a decrease in the balance of our stock investment on the balance sheet.
Additionally, the cash dividend that we receive from the subsidiary company will also need to be recorded as a decrease in investment in subsidiary. This is because the cash dividend will be paid out from the retained earnings of the subsidiary, in which it will reduce the subsidiary’s equity or net worth as a result.
Journal entry for revenues received from subsidiary
When our subsidiary company reports the net income or net loss at the end of its accounting period, we as a parent company will need to record such net income or net loss as an increase or decrease in our stock investment in the subsidiary.
Net income from subsidiary
If the subsidiary had a good performance in which it reported a net income after tax for the period, we can record such net income (based on the percentage we owe) as revenue from the subsidiary to the income statement. At the same time, this revenue from subsidiary will increase the balance of investment in subsidiary account on the balance sheet.
Likewise, we can make the journal entry for revenue received from subsidiary by debiting the investment in subsidiary account and crediting the revenue from investment account.
| Account | Debit | Credit |
|---|---|---|
| Investment in subsidiary | 000 | |
| Revenue from investment | 000 |
In this journal entry, total assets on the balance sheet and total revenues on the income statement increase by the same amount as a result of the revenue received from the subsidiary.
Net loss from subsidiary
On the other hand, if the subsidiary reported a net loss on its income statement instead, we will need to recognize it as a loss (based on the percentage of the share we owe) on the investment. In this case, the balance of our investment in subsidiary will decrease instead.
We can make the journal entry for net loss from subsidiary with the debit of the loss on investment account and the credit of the investment in subsidiary account.
| Account | Debit | Credit |
|---|---|---|
| Loss on investment | 000 | |
| Investment in subsidiary | 000 |
This journal entry has the opposite effect from the above, in which the total assets on balance will decrease while the total expenses on the income statement increase as a result of the loss made by the subsidiary company.
Revenues from subsidiary example
For example, on June 30, one of our subsidiary companies reported a net income of $500,000 for the period. We as a parent company have an 80% share of ownership in the subsidiary.
In this case, we can record $400,000 ($500,000 x 80%) as an increase in investment in subsidiary on our balance sheet as well as record it as revenue to the income statement.
Likewise, we can make the journal entry for the $400,000 revenue from subsidiary by debiting this amount to the investment in subsidiary account and crediting the same amount to the revenue from investment account.
June 30:
| Account | Debit | Credit |
|---|---|---|
| Investment in subsidiary | 400,000 | |
| Revenue from investment | 400,000 |
This journal entry will increase both total assets on the balance sheet and total revenues on the income statement by $400,000 as of June 30.
Example 2:
For example, another one of our subsidiaries report a net loss of $100,000 as the company had a difficult time in business in the current market. We owe 100% share in this subsidiary company.
In this case, as the parent company, we need to record all the $100,000 loss as a decrease of our investment in subsidiary. Additionally, this loss also needs to be reported as an expense on the income statement for the period.
Hence, we can make the journal entry for the $100,000 loss on investment in subsidiary by recording this amount to the loss on investment account and the investment in subsidiary account as below:
| Account | Debit | Credit |
|---|---|---|
| Loss on investment | 100,000 | |
| Investment in subsidiary | 100,000 |
This journal entry will decrease total assets on the balance sheet by $100,000 while increasing the total expenses on the income statement by the same amount.
Dividend from subsidiary
As a parent company, we may also receive the cash dividend from time to time from the subsidiary companies. In this case, we need to record this dividend from subsidiary as a decrease in the investment in subsidiary.
This is because when the subsidiary company issues the cash dividend to the shareholders, its net worth or equity will decrease by the amount of dividend paid out. And the subsidiary’s net worth represents the value of our stock investment in the subsidiary. Hence, as the subsidiary’s net worth decrease, the balance of our investment in the subsidiary will also decrease.
Likewise, when the subsidiary declares the cash dividend, we can make the journal entry for dividend from the subsidiary with the debit of the dividend receivable account and the credit of the investment in subsidiary account.
Dividend declared by subsidiary:
| Account | Debit | Credit |
|---|---|---|
| Dividend receivable | 000 | |
| Investment in subsidiary | 000 |
Later, when we receive the cash dividend from subsidiary, we can make another journal entry to record the cash received with the debit of the cash account and the credit of the dividend receivable account.
Dividend received from subsidiary:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Dividend receivable | 000 |
This journal entry will eliminate the dividend receivable we have recorded previously.
Of course, if the declaration date and payment date of the dividend are made during the accounting period of the parent company, we can just record only one journal entry when we receive the cash dividend as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Investment in subsidiary | 000 |
Dividend from subsidiary example
For example, on June 30, one of our subsidiary companies that reported a net income of $500,000 in the example above, also declared a $100,000 cash dividend on the same date of June 30. And this $100,000 dividend is to be paid on July 15.
In this case, as we have an 80% share of ownership, we can record the dividend receivable of $80,000 ($100,000 x 80%) to our balance sheet on June 30 together with the $400,000 ($500,000 x 80%) revenue from the subsidiary as below:
June 30:
| Account | Debit | Credit |
|---|---|---|
| Investment in subsidiary | 400,000 | |
| Revenue from investment | 400,000 |
| Account | Debit | Credit |
|---|---|---|
| Dividend receivable | 80,000 | |
| Investment in subsidiary | 80,000 |
Later, when we receive the cash dividend of $80,000 from the subsidiary on July 15, we can make the journal entry as below:
July 15:
| Account | Debit | Credit |
|---|---|---|
| Cash | 80,000 | |
| Dividend receivable | 80,000 |
This journal entry is made to remove the $80,000 dividend receivable that we recorded on June 30, as we receives the $80,000 cash dividend on July 15.
