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What should be the equity account that I should use to record the net assets of a previous branch - now a legal separate entity - as we open their new books?

Jastine Arnonobal's Profile

Hi! I hope someone can help me on my dilemma right now. The company's situation goes like this, we have a branch that is now a legal separate entity. Their assets, AR, AP and other miscellaneous accounts are sitting in our books. These accounts are pending to be transferred to their newly created company code, so currently the figures are as follows: Dr Assets 50M Cr AP 2M Cr Capital 6M Cr ??? 42M The capital account is fixed at 6M for this is what has been agreed on the articles of incorporation, my problem is that I do not know which equity account should I use for the other 42M. We do not want to use the Retained Earnings account for the assumption is that this is a newly founded/created company, it has no earnings yet but the assets have been funded by the parent company. Thanks all for your help!

Answers

Steven Weydert, MS, CFP(R)
Title: Senior Financial Analyst
Company: The Thornhill Companies
(Senior Financial Analyst, The Thornhill Companies) |

Off the top of my head see the journal entries and the paragraph on the use of the Net Assets of Discontinued Operations account almost half way down the page here.
https://macabacus.com/restructuring/spin-offs

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Nice article, cleary written.

Jastine Arnonobal
Title: Management Accountant
Company: SKM
(Management Accountant, SKM) |

Hi Steven,

Thank you for this, but I am not sure if this is actually a spin-off transaction/event. For in recording the net assets of the subsidiary out of our books, we will be using the following entry: Dr Investment in Subsidiary Cr Net Assets of Subsidiary.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

At face value, if you are constrained by the Equity limit ($6M), then you have no choice (following A= L+C) but to use a Liability account. It all depends on the agreement/goal by the parent/source and newly formed entity.

Jastine Arnonobal
Title: Management Accountant
Company: SKM
(Management Accountant, SKM) |

Hi Emerson,

Only the capital account is restricted at 6M. We can use other equity accounts for the other 42M, but I am not sure which equity account should I use.

Steven Weydert, MS, CFP(R)
Title: Senior Financial Analyst
Company: The Thornhill Companies
(Senior Financial Analyst, The Thornhill Companies) |

Jastine - sorry all I'd know to use is some Par/Additional Paid-in Capital in Excess of Par combo.

Jastine Arnonobal
Title: Management Accountant
Company: SKM
(Management Accountant, SKM) |

Hi Steven,

Thank you for this. Technically, the new company did not issue any share publicly, but can I still use APIC for the excess of assets invested against the capital that was agreed in the articles of incorporation? Thank you.

Steven Weydert, MS, CFP(R)
Title: Senior Financial Analyst
Company: The Thornhill Companies
(Senior Financial Analyst, The Thornhill Companies) |

Hi Jastine - yes, as a former securities analyst and FP&A specialist I would certainly expect the child company to use APIC consistent with what you described. However, the opinion of an experienced accountant would be preferable.

Jastine Arnonobal
Title: Management Accountant
Company: SKM
(Management Accountant, SKM) |

Thank you Steven for your help!

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