advanced accounting, third edition

Chapter 8-1

Chapter 8-2

Changes inChanges inOwnership InterestOwnership Interest

Advanced Accounting, Third Edition

88

Chapter 8-3

1. Identify the types of transactions that change the parent company’s ownership interest in a subsidiary, and summarize the differences between current and proposed GAAP.

2. Describe the eliminating entries needed when the parent acquires subsidiary shares through multiple open market purchases.

3. Explain how the parent determines the cost basis of subsidiary shares sold subsequent to acquisition.

4. Compute the controlling interest in income after the parent sells some shares of the subsidiary company.

Learning ObjectivesLearning Objectives

Chapter 8-4

5. Describe the effect on the eliminating process when the subsidiary issues new shares entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares.

6. Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders.

Learning ObjectivesLearning Objectives

Chapter 8-5

Changes in Ownership InterestChanges in Ownership Interest

LO 1 Changes in ownership and LO 1 Changes in ownership and differences between current and differences between current and proposed GAAP.proposed GAAP.

Parent company can increase its ownership interest in a subsidiary by either

1. buying additional subsidiary shares directly from third parties or

2. having a subsidiary purchase its (subsidiary’s) shares from third parties.

Parent company can decrease its ownership interest in a subsidiary by either

1. selling some subsidiary shares directly to third parties or 2. having a subsidiary sell additional shares (including

treasury shares) to third parties.

Chapter 8-6



Current GAAP: Acquisitions of additional shares are handled in a step-by-step manner.Sales of shares are handled the same as any sale of an asset.

Chapter 8-7



Proposed GAAP: Acquisitions that take place in stages or partial

sales:a. Measure and recognize acquiree’s identifiable

assets and liabilities at 100% of their fair values on date the acquirer obtains control, and

b. Recognize all acquiree’s goodwill (not just parent’s share), measured as difference between fair value of acquiree on acquisition date and fair value of identifiable net assets.

(Continued)

Chapter 8-8



Proposed GAAP: Acquisitions that take place in stages or partial

sales:c. Any previously held noncontrolling equity interests

should be remeasured to fair value, with resulting adjustment recognized in income.

d. After control is achieved, subsequent adjustments due to increased ownership are shown as Additional Contributed Capital, not as income.

e. If parent loses control, retained investment should be remeasured to fair value with adjustments recognized in net income.

Chapter 8-9

When more than one purchase is made before control is obtained, acquisition date is date when control is achieved.

Parent Acquires Subsidiary Stock Parent Acquires Subsidiary Stock Through Several Open-Market PurchasesThrough Several Open-Market Purchases—Cost Method—Cost Method

LO 2 Eliminating Investment.LO 2 Eliminating Investment.

Current GAAP (Interpretation No. 2 of APB Opinion No. 17):

Requires purchasing company to identify the cost of each investment, the fair value of the underlying assets acquired, and the difference between cost and book value for each step purchase. Previously held interests are not revalued at the date of subsequent purchases.

Chapter 8-10

Parent Acquires Subsidiary Stock Parent Acquires Subsidiary Stock Through Several Open-Market PurchasesThrough Several Open-Market Purchases—Cost Method—Cost Method


Proposed GAAP (Exposure Draft, Business Combinations, June 30, 2005):

Previously held noncontrolling equity interest should be remeasured to fair value when control is achieved, and the resulting adjustment should be recognized in net income. If a parent loses control but retains a noncontrolling interest, the portion retained should be remeasured to fair value on the date control is surrendered and the adjustment reflected in the income statement.

Chapter 8-11 LO 2 Eliminating Investment.LO 2 Eliminating Investment.

Several Open-Market Purchases—Cost Several Open-Market Purchases—Cost MethodMethodP8-1 Sarko Company had 300,000 shares of $10 par value common stock outstanding at all times, and retained earnings balances as indicated here:

January 1, 2004 $ 260,000January 1, 2005 540,000January 1, 2006 630,000January 1, 2007 820,000

Pelzer Co. acquired Sarko Co. common stock on the open market:January 1, 2004 30,000 shares (10%) $ 365,000January 1, 2005 75,000 shares (25%) 960,000January 1, 2006 135,000 shares (45%) 1,860,000

Total 240,000 shares (80%) $3,185,000

Chapter 8-12 LO 2 Eliminating Investment.LO 2 Eliminating Investment.

Several Open-Market Purchases—Cost Several Open-Market Purchases—Cost MethodMethod

Computation and Allocation of Difference Schedule

P Company payment

$ 1,860,000 Percentage acquired /

45%Implied value

$4,133,333

January 1, 2006

Parent NCI Total80% 20% 100%

Purchase price and implied value 3,306,666$ 826,667$ 4,133,333$ Less: Book value of equity acquired:Common stock 2,400,000 600,000 3,000,000 Retained earnings 504,000 126,000 630,000

Difference between implied and BV 402,666 100,667 503,333 Record Goodwill (402,666) (100,667) (503,333) Balance 0 0 0

January 1, 2006

Chapter 8-13

Investment in Sarko Company 59,5001/1 Retained Earnings—Pelzer Company 59,500

Because Pelzer Company has owned a percentage of Sarko Company since January 1, 2004, a workpaper entry is needed on December 31, 2006, to convert to equity/establish reciprocity from 2004 to the beginning of 2006 as follows:



Retained Earnings - Sarko CompanyJ an. 1, 2006 630,000$ 630,000$ J an. 1, 2005 540,000 J an. 1, 2004 260,000

370,000 90,000 Percent 10% 25%

37,000$ + 22,500$ = 59,500$

Chapter 8-14



Difference between implied and BV 402,666 100,667 503,333

January 1, 2006

The investment is eliminated by the following workpaper entry on December 31, 2006, (per CAD Schedule):



Common Stock—Sarko Company 3,000,0001/1 Retained Earnings—Sarko Company 630,000Difference Between Implied and Book Value 503,333

Investment in S Company * 3,306,666Noncontrolling Interest in Equity 826,667

Chapter 8-15

The following workpaper entry (Dec. 31, 2006), is made to allocate difference between implied and book value to goodwill.



Goodwill 503,333Difference Between Implied and Book Value 503,333



Difference between implied and BV 402,666 100,667 503,333

January 1, 2006

Chapter 8-16

Parent Sells Subsidiary Stock Investment Parent Sells Subsidiary Stock Investment on the Open Marketon the Open Market

LO 3 Determining the cost basis of the shares sold.LO 3 Determining the cost basis of the shares sold.

Under the Exposure Drafts (ED No. 1204-001 and 1205-001), the treatment of the sale of a portion (but not all) of its investment by a parent company depends on whether or not the sale results in the loss of effective control of the subsidiary.If control is lost, the entire interest would be adjusted to fair value under this proposal, and a gain of loss recorded in income on all shares owned prior to sale.Note, however, this proposed treatment is controversial.

Chapter 8-17

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advanced accounting, third edition

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