A subsidiary owes its parent company $1 million, but the parent instructs them to retain the amount. What are the appropriate Accounting entries, and how does this affect the cash flow statement?
We believe that the subsidiary will reclassify the amount from accounts payable (AP) to additional paid-in capital (APIC), while the parent will adjust its records from accounts receivable (AR) to an investment in the subsidiary.
Additionally, we think there won’t be any impact on the cash flow statement, although there might be a need for disclosure.
One response
Your understanding of the situation appears to be mostly correct. When a subsidiary owes a parent company $1M and the parent allows the subsidiary to keep the amount, the appropriate Accounting entries would generally involve reclassifying the amounts in both entities’ financial statements.
The subsidiary would reclassify its liability:
Parent Company’s Entry:
As for the cash flow statement, there will not be any direct cash flow impact from this transaction since it is merely a balance sheet reclassification and does not involve cash changing hands. However, it may require disclosure in the financial statements as it represents a change in the nature of the financial relationship between the parent and the subsidiary.
It’s advisable to check the specific Accounting standards applicable in your jurisdiction (like GAAP or IFRS) to ensure compliance and proper disclosures.