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How to account for associate income and dividends?

A few questions on intercompany investments with associates:

1. Let’s say the parent owns 50% of the subsidiary; the sub’s income is $100k and assumes no dividends paid, the parent’s investment account of the sub increases by $50k. Why are we accounting for the value of the sub through its net income, and not its fair value change?

2. When the investment account increases by $50k for the parent, how is this increase balanced? Is it in shareholder’s equity?

3. In the case the subsidiary pays out a dividend of $50k, the parent’s investment account increases by $25k in this case. How is the income statement and cash flow statement affected in this case?

Thanks in advance

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iceshift wrote:
A few questions on intercompany investments with associates:

I presume that you’re talking about using the equity method.

iceshift wrote:
1. Let’s say the parent owns 50% of the subsidiary; the sub’s income is $100k and assumes no dividends paid, the parent’s investment account of the sub increases by $50k. Why are we accounting for the value of the sub through its net income, and not its fair value change?

Because that’s what the accounting standards say to do.

iceshift wrote:
2. When the investment account increases by $50k for the parent, how is this increase balanced? Is it in shareholder’s equity?

We show $50,000 in Income from Affiliate, which is closed out to Retained Earnings.  Shareholders’ Equity increases by $50,000.

iceshift wrote:
3. In the case the subsidiary pays out a dividend of $50k, the parent’s investment account increases decreases by $25k in this case. How is the income statement and cash flow statement affected in this case?

There … that’s better.

There’s no effect on the income statement.

The cash flow statement shows a cash inflow from investing (CFI) of $25,000: dividends.

iceshift wrote:
Thanks in advance

You’re welcome in arrears.

Simplify the complicated side; don't complify the simplicated side.

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