How to Calculate Equity Income From a Subsidiary

by Eileen Rojas; Updated September 26, 2017

To account for income earned from a subsidiary, use the percentage of ownership in the subsidiary to determine the investor’s share of income. Three different methods can be used to determine how subsidiary income earned by the investor is calculated -- the cost, equity or consolidation methods. The investor’s ability to exercise significant influence over the subsidiary’s operating and financial policies is considered when determining which method to use to calculate the income amount.

Step 1

Determine the percentage ownership in the subsidiary and the method used to account for the subsidiary investment. Use the cost method when ownership is less than 20 percent and the investor does not exercise significant influence. Use the equity method when ownership falls between 20 and 50 percent; at this level, the investor usually exercises significant influence. Always use the equity method when the investor can exercise significant influence, even if the ownership percentage is less than 20 percent. When investor ownership exceeds 50 percent, the investor is regarded as having control and parent (investor) and subsidiary accounts are consolidated.

Step 2

Calculate and record subsidiary income under the cost method. When a subsidiary reports net income and declares a cash dividend, the investor reports his share of the cash dividend as an increase to cash and dividend income. The dividend from the subsidiary is calculated by multiplying the total cash dividend amount by the investor’s ownership percentage. The investor does not recognize a portion of the subsidiary’s net income under the cost method.

Step 3

Calculate and record subsidiary income under the equity method. The investor’s ownership percentage of subsidiary net income and cash dividends has two effects on the investor’s accounts. First, the investor records his portion of net income; this increases the investment asset account and an equity income account. Second, the investor’s portion of cash dividends reduces the investor’s investment account and increases his cash account.

Step 4

Calculate and record subsidiary income under the consolidation method. When parent and subsidiary consolidate, the subsidiary’s income is reflected in adjustments recorded to the subsidiary’s assets included in the parent’s consolidated financial information. The subsidiary’s income and dividends adjust the subsidiary’s retained earnings account; this account is eliminated in a journal entry, along with the parent’s investment account. The entry posts increases to the subsidiary’s balance sheet accounts, identified intangible assets and goodwill; a noncontrolling interest equity account is also recorded if less than 100 percent of the subsidiary is owned. Goodwill is recognized on the consolidated balance sheet when the subsidiary’s assets’ cost is greater than their fair value. If the assets’ fair value is greater than their cost, a gain is recorded on the consolidated income statement.

About the Author

Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. She has more than 10 years of combined experience in auditing, accounting, financial analysis and business writing.

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