How to Consolidate an Equity Method Subsidiary

Accounting

GAAP requires companies to use the equity method of accounting for consolidations when a company owns between 20 percent and 50 percent of a subsidiary. The company must also have significant influence over the subsidiary. Usually 20 percent to 50 percent shows significant influence but factors such as another person owning over 50 percent of the company, or the company undergoing bankruptcy proceedings, could show there is no significant influence.

Instructions

1. Record the initial investment. Debt investment in subsidiary and credit cash by the amount paid for the subsidiary.

2. Record net income from the subsidiary. Debit investment in subsidiary and credit equity in subsidiary by the amount of income the subsidiary reports multiplied by the percentage ownership. For example if a company owns 30 percent of a subsidiary whose net income for the year is $500,000, the company reports $150,000 of income from the subsidiary.

3. Record dividends from the subsidiary Debit cash and credit investment in subsidiary by the amount of dividends paid by the subsidiary to the company. For example, record $10,000 if the subsidiary paid the company $10,000 in dividends for the year.

4. Depreciate undervalued assets. If when purchasing part of a subsidiary, the net book value of a subsidiary's net assets is different from the net fair value of the subsidiary's net assets, the company must amortize the difference. Multiply the difference by the company's percentage of ownership in the subsidiary, then divide the product by the remaining useful life of the assets. For example, a company buys 30 percent of a subsidiary. The subsidiary's net book assets are worth $80,000. The subsidiary's net fair market value of assets is $100,000. The difference is due to depreciation over the next ten years. The company debits equity in subsidiary and credits investment in subsidiary by ($100,000 - $80,00) / 10 years, or $2,000.

5. Record goodwill, if any. Subtract the purchase price from the company's share of the subsidiary's fair value of assets. For example, the company purchased 30 percent of a subsidiary for $500,000. The subsidiary had a $900,000 fair value in assets. Subtract $500,000 by $270,000, or $900,000 * 30 percent, which equals $130,000 of goodwill. Goodwill is not amortized.

References

• CPA Class: APB Opinion 18
• Principles of Accounting: Chapter 14