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To begin with, let me explain to you the meaning of a Subsidiary.
Meaning of Subsidiary
A subsidiary is a business entity in which another company termed as the parent/holding company owns & controls more than 50% of the share capital. If 100% share capital of an entity is owned by the parent company then such an entity will be referred to as a wholly-owned subsidiary.
The parent company will report the “investment in subsidiary” as an asset in its balance sheet. Whereas, the subsidiary company will report the same transaction as “equity” in its balance sheet.
Real-world examples of Holding & Subsidiary Company
1. Whatsapp & Instagram are subsidiaries of Facebook Inc.
2. Skype & LinkedIn are subsidiaries of Microsoft Corporation.
Journal Entry for Investment in Subsidiary
Suppose, Book Ltd acquires 60% shares in Paper Ltd in the month of April 20×1 against consideration of 5,000,000. In this case, more than 50% stake has been acquired by Book Ltd in the entity Paper Ltd. Therefore, Paper Ltd will be considered as a Subsidiary of Book Ltd.
Journal entry to be passed in the accounting records of Book Ltd at the time of acquisition;
|Investment in Paper Ltd (Subsidiary) A/c||Debit||5,000,000||Increase in asset|
|To Bank A/c||Credit||5,000,000||Decrease in asset|
Presentation in Financial Statements
|Balance Sheet||Presented separately as “Investment in Subsidiaries” under the head “Non-Current Assets”|