Increased Investment in Subsidiary Journal Entry
A subsidiary is a company that is owned or controlled by another company, usually referred to as the parent company. The parent company will generally have at least 50% ownership of the subsidiary, sometimes more depending on the terms of the agreement.
There are numerous reasons why investing in a subsidiary may make sense for a parent company. By controlling the ownership of an additional business entity, the finances, reputation and other assets associated with that business are directly accessible to the parent company.
This allows them to spread out their investments and diversify their risks while still having access to industry knowledge within those experts through contractual agreements or board positions held by personnel representing their interests. Furthermore, subsidiaries often provide added tax benefits due to favorable tax laws regarding multiple taxation entities available through corporate structures. In addition, acquiring exclusive rights over a certain product line or technology from a subsidiary may lead to increased revenue streams for both companies involved.
When considering investing in a subsidiary, it’s important for companies to consider various factors such as regulatory issues, capital requirements, and other items necessary to successfully complete such an agreement. It’s also important to understand any risk premiums associated with these investments and if they outweigh any potential future synergies or discounts that could come into play when structuring deals with strategic partners.
Companies should also ask themselves how well integrated this new venture would end up being with the existing core operations or infrastructure by creating incentives for smoother cross-functional collaboration between both companies.
Ultimately investing in a subsidiary can be beneficial but requires careful analysis and research beforehand to ensure such an agreement makes financial sense and aligns with both organizations’ long-term goals.
Journal Entry to Increase Investment in Subsidiary
The company invests its resource into other entities as the subsidiary. Most of the time, the company invests cash into the subsidiary. But it also invests in other assets such as fixed assets as well.
The journal entry is debiting Investment in Subsidiary and credit Cash.
| Account | Debit | Credit |
|---|---|---|
| Investment in Subsidiary | XXX | |
| Cash | XXX |
The entry will increase the investment account on the balance sheet, it is reflected in the total investment that the company invests into the subsidiary. The cash or other assets account will be reduced when company increases its investment in the subsidiary.
Example
Company ABC has its investment in one subsidiary abroad which specializes in the retail shop. The management team has decided to increase its investment in the subsidiary by an amount $ 2 million to support the increase in new stores. The new investment does not change the ownership percentage. Please prepare a journal entry for the increase of investment in the subsidiary.
The company has decided to increase its investment in the subsidiary to amount $ 2 million. It is not changing any ownership percentage.
The journal entry is debiting investment in subsidiary $ 2 million and credit cash $ 2 million.
| Account | Debit | Credit |
|---|---|---|
| Investment In Subsidiary | 2,000,000 | |
| Cash | 2,000,000 |