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Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 8: Changes in Ownership Interest
Slides Authored by Hannah Wong, Ph.D.Rutgers University
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Changes in Ownership - Transactions
parent’s transactions: parent purchases shares of subsidiary
in the open market parent sells shares of subsidiary in
the open market
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Changes in Ownership - Transactions
subsidiary’s transactions: subsidiary issues new or treasury
shares subsidiary buys treasury stock
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Changes in Ownership
Situation Accounting Treatment
Parent’s percentage ofownership increases
Purchase of additionalinvestment with allocation ofpurchase differential
Parent’s percentage ofownership decreases
Sale of investment with gainor loss
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Changes in Ownership
Increase if P purchases additional
shares of S in open market
S issues stock, P acquires more than its pro-rata number of shares
S buys treasury stock, P sells less than its pro-rata number of shares
Decrease if
P sells shares of S in open market
S issues stock, P acquires less than its pro-rata number of shares
S buys treasury stock, P sells more than its pro-rata number of shares
Parent’s % of ownership will:
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Step Purchases
Transaction parent acquires subsidiary stock
through several open market purchases
Accounting Treatment: the parent identifies for each step purchase the cost of each investment, fair value of assets acquired, and the difference between cost and book
value
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Step Purchases
15% shares acquired
75% shares acquired
1/1/2000 1/1/2001 1/1/2002 1/1/2003
An Example
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Step Purchases
An Example First(15%)Purchase
Second(75%)Purchase
Purchase price 240,000 188,000
Equity acquired:
Common stock (15,000) (75,000)
Retained earningsOn the acquisition date (6,000) (90,000)
Difference betweencost and book value
3,000 23,000
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Elimination Entries
To establish reciprocity for first purchase:
Investment in S Company
1/1 Retained Earnings – P Co.
(P’s first purchase percent of the change in S’s retained earnings from acquisition to the beginning of this year)
To eliminate P’s investment in S:
Common Stock – S
1/1 Ret. Earnings – S
Diff. between C & BV
Investment in S Company
(use the total percent P now owns)
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Step Purchases - Partial Equity Method
In the Parent’s books:
Investment in S 12,000
Retained earnings 12,000
To restate the investment account from cost method (15% ownership)
to partial equity method
The amount = change in subsidiary R/E since first purchase x 15%
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Step sales - Cost Method
parent sells subsidiary stock through open market sales
Accounting Treatment the parent identifies for each step sale: the carrying value of the investment
sold,specific identificationFIFO
fair value of assets received, and gain or loss on the sale
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Step Sales - Cost Method
15% shares acquired
75% shares acquired
1/1/2000 1/1/2001 1/1/2002 1/1/2003
An Example
7/1/2003
15% shares sold
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Step Sales - Cost Method
In the Parent’s books:First(15%)
PurchaseSecond(75%)
PurchaseShares sold from eachpurchase 0 15,000
Sale price 0 $70,000
Cost 0 (37,600)Gain on sale ofinvestments
32,400
Assuming the parent uses specific identification
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Step Sales - Cost Method
EE’s in the consolidation worksheet
Gain on sale of investment 9,750
1/1 Retained earnings - P 9,750
To exclude the subsidiary undistributed income from acquisition to beginning of current year
Gain on sale of investment 6,000
Subsidiary income sold 6,000
To exclude the subsidiary income from beginning of current year to sale date
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Issuance of Shares by SubsidiaryTo Parent Company Only
P acquired 14,000 shares
(70%) of S
S issued 4,000 additional shares
to P
1/1/1993 1/1/2001 1/1/2002
An Example
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Issuance of Shares by SubsidiaryTo Parent Company Only, Above BV
An Example FirstPurchase
SecondPurchase
Purchase price $216,000 $88,000
Equity acquired:
Common stock (140,000) (40,000)
Other contributedcapital (21,000) (37,500)Retained earnings (35,000) (6,000)
Difference betweencost and book value
20,000 4,500*
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Issuance of Shares by SubsidiaryTo Parent Company Only, Above BV
New shares issued above book value
The purchase differential represents the transfer of interest from the parent to the noncontrolling stockholders
Noncontrolling interests in net assets increase by $4,500.
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Issuance of Shares by SubsidiaryTo Parent Company Only, Below BV
An Example FirstPurchase
SecondPurchase
Purchase price $216,000 $56,000
Equity acquired:
Common stock (140,000) (40,000)
Other contributedcapital (21,000) (13,500)Retained earnings (35,000) (6,000)
Difference betweencost and book value
20,000 (3,500)*
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Issuance of Shares by SubsidiaryTo Parent Company Only, Below BV
New shares issued below book value
The purchase differential represents the transfer of interest from the noncontrolling stockholders to the parent
Noncontrolling interests in net assets increase by $3,500.
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Issuance of Shares by SubsidiaryTo Parent Company and Noncontrolling Stockholders
% owned remains the same
BV of interest acquired = acquisition cost
Purchase differential = 0 regardless of issue price of new shares
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Issuance of Shares by SubsidiaryTo Noncontrolling Stockholders Only
P acquired 14,000 shares
(70%) of S
S issued 4,000 additional shares to noncontrolling
stockholders
1/1/1993 1/1/2001 1/1/2002
An Example
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Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only
New shares issued above book value
The purchase differential represent the transfer of interest from the noncontrolling stockholders to the parent
Controlling interests in net assets increase by (purchase differential x P%)
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Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only,
Above BV
To record the transfer of interest from noncontrolling stockholders to the parent
Investment in S 10,500
Gain from subsidiary issuance of shares10,500
In the parent’s books:
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Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only,
Below BV
To record the transfer of interest from the parent to noncontrolling stockholders
Gain from subsidiary issuance of shares 8,167
Investment in S 8,167
In the parent’s books:
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Purchase of Shares by Subsidiary To Noncontrolling Stockholders Only
Subsidiary purchases treasury shares above book value
Controlling interest in net assets increases
Accounting is analogous to issuance of shares by subsidiary
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On the Workpaper
If the treasury stock is purchased at book value, there’s no net effect on the dollar amount of P’s investment in S – the elimination entry must reflect the contra-asset Treasury Stock
If the treasury stock is purchased for more than book value, P’s interest decreases – it implies an undervaluation of S’s assets. That decrease is added to the Difference between cost and book value.
If treasury stock is purchased for less than book value, P’s interest increases – it implies an over-valuation of S’s assets. That increase is deducted from the Difference between cost and book value.
If the treasury stock is reissued, treat the transaction just like a new stock issue. If P buys the stock, its equity interest increases. If P doesn’t buy the stock, its equity interest decreases and there’s a nonoperating gain or loss.
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Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2003 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
