DR investment is a common accounting entry in both individual and consolidated financial statements. When a parent entity acquires shares in an investee, DR investment represents the initial recognition of this financial asset. However, the subsequent measurement of this investment differs between individual and consolidated FS. By analyzing the adjusting entries, we can gain a thorough understanding of how DR investment is treated in various situations.
In individual FS, DR investment for initial recognition at cost
In individual financial statements, the parent will record DR investment in investee and CR cash when it acquires shares initially. The investment is carried at cost with no further adjustments. If dividends are received from investees like trade investments or associates, additional entries will be made to recognize the investment income.
No adjustment for investment in trade investments
For trade investments where ownership is <20%, no consolidation is required. The amount of DR investment and any dividend income recognized in individual FS will flow straight through to consolidated FS. No eliminating or adjusting entries are needed.
Apply equity method to account for investment in associates
For associates where ownership is 20% – 50%, equity method is used in consolidated FS. Two adjusting entries are required: 1) DR investment and CR share of associate’s profit, to reflect the increase in associate’s net assets, and 2) DR dividend income and CR investment, to eliminate dividends as they reduce the carrying amount of the investment.
Fully consolidate subsidiaries by unpacking DR investment
For subsidiaries where ownership exceeds 50%, full consolidation is performed in consolidated FS. This involves unpacking the DR investment to show the subsidiary’s assets and liabilities at full value. Additional entries record newly formed goodwill and NCI at acquisition. Any dividend income is also eliminated against retained earnings.
Core adjusting entries reveal accounting logic
Analyzing the adjusting journal entries is key to gaining a thorough grasp of consolidated accounting. The entries align the accounting across individual and consolidated FS, and reveal the underlying logic according to accounting standards. With clarity on the principles, accounting for DR investment becomes straightforward.
In summary, DR investment is initially recognized at cost in individual FS before undergoing specific adjustments in consolidated FS depending on the investee relationship. Studying the adjusting entries helps uncover the accounting rationale and ensures proper treatment of DR investment across different situations.