Please help.
1) Company A owns 30% of Company B. Company B received a net profit of USD 100 for the reporting period. How did this affect the 3 reporting forms of Company A?
2) The same condition but with the addition: Company B paid 30% of net profit as dividends. What effect did this have on the 3 forms of reporting by company A?
Thanks!
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It all comes down to how you account for investments. Since we own 30% we fall into the equity accounting for investments (Macabacus has a great article on subsidiary accounting https://macabacus.com/accounting/subsidiary-accounting)
The equity method states that we recognize our share of the income of our subsidiaries whether they pay dividends or not. If they pay dividends we debit cash with our share of the dividend and reduce the carrying value of our investment in the associate. We recognize this in the cash flow statements by accounting dividend as cash received and adding back the earnings. We also recognize our share of the net income of the subsidiary before Net Income on the income statement as revenue from investment.
Therefore for A: We just recognize $30 in investments in associates (debit as an asset) and $30 (investment revenue / gain)
For B: We do the same as A, but we also recognize 30% of 30% (9%) as dividend. So we recognize $9 in cash (debit) and $9 in investment in associates (credit)
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