How to Calculate Investment Income for Consolidation

Consolidated net income includes profit from your company and its subsidiary.

When your company invests in at least 50 percent of another company’s stock, you must consolidate the financial statements of the two companies so that your company’s financial statements show results for one company. This combines the amount of the two companies’ net incomes, or profits, to show consolidated net income on the parent, or your company’s income statement. If you buy less than 100 percent of the subsidiary’s stock, you must determine the portion of the consolidated net income that is attributable to the stockholders of the shares that you do not own.

Instructions

1. Determine from your company’s records your net income for the year, excluding any income from the subsidiary in which you purchased stock. For example, assume your net income was $50,000.

2. Determine from the subsidiary’s income statement its net income for the year. In this example, assume the subsidiary’s net income was $10,000.

3. Add together your company’s and the subsidiary’s net income to calculate consolidated net income, which is the amount of net income the combined company would have if your company had purchased 100 percent of the subsidiary’s stock. In this example, add $50,000 and $10,000 to get $60,000 in consolidated net income.

4. Multiply the percentage of stock you own in the subsidiary by the subsidiary’s net income to determine the portion of its net income to which you are entitled. In this example, if you bought 75 percent of the subsidiary’s stock, multiply 75 percent, or 0.75, by $10,000 to get $7,500 of net income to which you are entitled.

5. Subtract the portion of the subsidiary’s net income to which you are entitled from the subsidiary’s total net income to calculate the income attributable to noncontrolling interest. This is the portion of the subsidiary’s net income to which the stockholders of the shares you do not own are entitled. In this example, subtract $7,500 from $10,000 to get $2,500 in income attributable to noncontrolling interest.

6. Subtract income attributable to noncontrolling interest from consolidated net income to determine income attributable to controlling interest, which is the combination of your company’s net income and the portion of the subsidiary’s net income to which you are entitled. In this example, subtract $2,500 from $60,000 to get $57,500 in income attributable to controlling interest.

References

• PrinciplesofAccounting.com: Chapter Nine -- Long-term Investments
• Advanced Financial Accounting, Eighth Edition; Richard Baker, et al.