The criteria for consolidated statements stipulate that the long-term equity investment in subsidiaries should be adjusted in accordance with the equity method when preparing consolidated financial statements. Because the parent company's long-term equity investment in its subsidiaries is generally accounted for by the cost method, it needs three adjustments to reach the result required by the equity method: (1) Adjust and confirm the share of the current net profit and loss of the subsidiaries, debit or credit the "long-term equity investment" account, and credit or debit the "investment income" account; (2) Adjust the cash dividends or profits distributed by subsidiaries, debit "investment income" and credit "long-term equity investment"; (3) Adjust the increase or decrease of owner's equity of subsidiaries except net profit and loss, debit or credit the subject of "long-term equity investment" and credit or debit the subject of "capital reserve".
The reason for making the adjustment entry (1) is that there is an essential difference between the cost method and the equity method in accounting: when a subsidiary realizes the net profit and loss, it does not need to be handled under the cost method, while the equity method requires the parent company to increase or decrease the book value of the long-term equity investment according to its shareholding ratio, and the parent company should adjust and confirm the net profit of the investee based on the fair value of the identifiable assets of the investee at the time of obtaining the investment. Therefore, it is necessary to make adjustment entries: "Borrow: long-term equity investment (net profit adjusted by the fair value of subsidiaries by the shareholding ratio of the parent company)" and "Loan: investment income (same as above)".
The reason for adjusting entry (2) is that the distribution of cash dividends by subsidiaries is different under the cost method and the equity method: under the cost method, when a subsidiary distributes cash dividends or profits, it debits the subject of "dividends receivable (bank deposits)" and credits "investment income"; The treatment under the equity method is to debit "dividends receivable (bank deposits)" and credit "long-term equity investment". In order to adjust the result of cost accounting to the result of equity accounting, it is necessary to offset the investment income confirmed by the original cost method and reduce the book value of long-term equity investment, that is, it is necessary to make adjustment entries: debit "investment income" and credit "long-term equity investment".
The reason for adjusting entry (3) also lies in the difference between the cost method and the equity method: when the owner's equity of a subsidiary changes except the net profit and loss, there is no need to do anything under the cost method, while the equity method requires the parent company to increase or decrease the book value of long-term equity investment according to the shareholding ratio, and adjust the amount of capital reserve accordingly. Therefore, it is necessary to make adjustment entries: debit or credit "long-term equity investment" and credit or debit "capital reserve" to meet the requirements of equity law.
If consolidated statements are prepared continuously, adjustment entries should be re-prepared to reflect the impact of "investment income" on profits through the project of "undistributed profits-beginning of the year". The above three adjustment entries can be combined as follows:
Borrow: long-term equity investment
Loans: undistributed profits-beginning of the year
Contributed surplus
In the case of continuous preparation of consolidated statements, each accounting period should prepare adjustment entries according to the above ideas, and adjust the share of the current period and the previous period in the net profit and loss of the invested enterprise, the cash dividends issued by the invested enterprise and the changes in owner's equity except the net profit and loss according to the requirements of the equity method.
Second, the offset treatment of long-term equity investment
(1) Before the long-term equity investment project of the subsidiary is offset with the owner's equity project, the long-term equity investment of the parent company has been adjusted according to the equity method, and the following analysis should be handled according to the equity method. First of all, the usual accounting treatment of the parent company and subsidiaries is listed as follows:
(1) parent company's handling of long-term equity investment:
Initial investment
Borrow: long-term equity investment-investment cost
Loans: bank deposits, etc.
When the subsidiary realizes profit (when the subsidiary loses money, the parent company should do the opposite)
Borrow: long-term equity investment-profit and loss adjustment
Loan: investment income
When the subsidiary announces the dividend distribution,
Debit: Dividends receivable
Loan: long-term equity investment-profit and loss adjustment
The above three items are merged into item (a)
Borrow: long-term equity investment
dividend receivable
Loans: bank deposits
yield
(2) Corresponding treatment of subsidiaries:
When accepting the investment from the parent company
Borrow: bank deposits, etc.
Loan: share capital/paid-in capital
Capital reserve-equity premium/capital premium
After profit, surplus reserve and undistributed profit increase. When the surplus reserve is withdrawn,
Debit: profit distribution-withdrawal of statutory surplus reserve/withdrawal of arbitrary surplus reserve.
Loan: surplus reserve-statutory surplus reserve/discretionary surplus reserve
When distributing cash dividends
Debit: Profit Distribution-Cash Dividends Payable
Loan: dividend payable
The above three items are merged into item (b)
Borrow: bank deposits, etc.
Profit distribution-withdrawal of statutory surplus reserve/withdrawal of arbitrary surplus reserve.
-Cash dividends payable
Loan: share capital/paid-in capital
Capital reserve-equity premium/capital premium
Surplus reserve-statutory surplus reserve/discretionary surplus reserve
undistributed profits
Comparing entry (a) and entry (b), we can see that from the perspective of enterprise groups, the total amount of bank deposits has not increased with their increase or decrease; Dividends receivable and dividend payable are internal creditor's rights and debts, which should offset each other. If dividends have been paid, there is no need to offset them. In addition to the above offset items, it is necessary to further offset the book value of long-term equity investment with subsidiary owner's equity items, and offset the investment income with subsidiary profit distribution. In the case of a wholly-owned subsidiary, the long-term equity investment amount of the parent company in the subsidiary is fully offset with the owner's equity amount of the subsidiary; If the two are not equal, the difference should be included in the "goodwill" item; For non-wholly-owned subsidiaries, the owner's equity of subsidiaries that do not belong to the parent company's share is separately reflected in the owner's equity item of the consolidated balance sheet as "minority shareholders' equity".
(II) The offset between the internal investment income of the parent company and the profit distribution of subsidiaries, etc. The internal investment income refers to the income of the parent company's equity capital investment in subsidiaries. In the case that the subsidiaries included in the merger scope are wholly-owned subsidiaries, the current net profit of the subsidiaries is equal to the current investment income of the parent company, and the investment income has been included in the net profit of the parent company, which is equivalent to the same profit being recognized twice. Therefore, the internal investment income of the parent company must be offset. In the case of a non-wholly-owned subsidiary, the net profit of the subsidiary is not equal to the investment income confirmed by the parent company, and the difference is reflected in the consolidated income statement as the profit and loss of minority shareholders. As a part of the net profit in the previous accounting period, the undistributed profit at the beginning of the subsidiary has also been included in the investment income of the parent company in the previous year and the undistributed profit at the beginning of the parent company. The sum of the undistributed profit at the beginning of the subsidiary and the current net profit constitutes the distributable profit of the subsidiary and is the source of profit distribution. The current profit distribution of subsidiaries includes drawing surplus reserves and distributing dividends, and the undistributed profit at the end of the period is the result of profit distribution. Therefore, the sum of the internal investment income of the parent company, the profit and loss of minority shareholders in the current period and the undistributed profit of the subsidiary at the beginning of the period just offsets the profit distribution items of the subsidiary in the current period.
(III) Offset of impairment provision for long-term equity investment When preparing consolidated statements, the long-term equity investment of the parent company in its subsidiaries has been offset by internal transactions, so the corresponding asset impairment provision should also be offset. When the parent company originally made provision for asset impairment, it debited "asset impairment loss" and credited "long-term equity investment impairment reserve", so the corresponding offset treatment should debit "long-term equity investment impairment reserve" and credit "undistributed profit at the beginning".
According to the above explanation, it is not difficult to draw a conclusion that in order to correctly understand the preparation of offset entries, it is necessary to understand the accounting treatment of both parties to the transaction when the internal transaction occurs and the influence of the treatment results on individual statements. That is, before making offset entries, it is best to list the economic consequences of the internal business of the group in detail (that is, the changes in various accounting subjects or accounts caused by the internal business), and then summarize the final results of the internal business, and make opposite entries according to the results to offset the changes in accounting items caused by the internal economic business.