How to Account for Write-Offs of Investment in Subsidiaries

by Bryan Keythman ; Updated April 19, 2017

When a company buys more than 50 percent of another company’s stock, the investee company is called a subsidiary. The price the investing company pays that exceeds the fair market value of the subsidiary’s net assets is called goodwill, which you report on your balance sheet as a long-term asset. If the value of your company’s investment in a subsidiary decreases to less than its accounting value, you account for the write-off by reducing your goodwill account in your records. This creates an expense, which reduces your net income on your income statement.

Step 1

Determine the amount of the investment in the subsidiary that you must write off. For example, assume you must write off $2 million of your investment in a subsidiary.

Step 2

Debit the account called “impaired goodwill expense” by the amount of the write-off in a journal entry in your accounting records. This increases the impaired goodwill expense account. In this example, debit your impaired goodwill expense account by $2 million.

Step 3

Credit your goodwill account by the same amount of the write-off in the same journal entry. This decreases your goodwill account by the amount of the write-off. In this example, credit your goodwill account by $2 million.

Step 4

Write “Impaired Goodwill Expense” and the amount of the expense as a line item before the line item called “income from continuing operations” on your income statement to report the amount of the write-off. In this example, write “Impaired Goodwill Expense $2 million” on your income statement.

Step 5

Subtract the amount of the write-off from your previous goodwill balance. Report the new balance in the long-term assets section of your balance sheet. Continuing with the example, if your previous goodwill balance was $5 million, subtract $2 million from $5 million to get $3 million as your new goodwill balance. Write “Goodwill $3 million” as a line item on your balance sheet.