Dr. M.D. Chase
Advanced Accounting 810-51Cd
Long Beach State University
Special Issues: Changes in Ownership Interest
Page 1
Subsidiary Stock transactions:
--Accounting Issues:
1. Valuation of the investment account;
2. adjusting the parents ownership percentage
--Types of subsidiary stock transactions:
1. Subsidiary stock dividends or splits
2. Subsidiary sales of additional newly issued shares to MI;
3. Subsidiary sales of additional newly issued shares to "P";
4. Subsidiary purchases of its own common stock (treasury stock)
5. Subsidiary sales of treasury stock
--General rules:
1. Stock sales by "S" to outsiders may be handled in two ways:
a. GAAP (APB-9) requires adjustment on "P's" books to the accounts Investment in "S" and "P" PIC
b. The SEC and AICPA allow recognition of gains and losses if the sale is part of a "public offering" by and SEC reporting entity
and not part of a broader reorganization;
2. Sales of stock by "S" to "P" result only in book value differential equal to "P's" share of the change in "S" SHE resulting from the
sale of stock; this change must be reflected on the books of "P" by adjustments to the investment account and future
amortizations of the excess of cost over book value;
-- SUBSIDIARY STOCK DIVIDENDS OR SPLITS:
Small stock dividends (<20-25% of previously issued shares;
Dr. "S" RE by FMV of shares issued;
Cr. C/S @ par;
plug PIC)
Procedure: --the valuation of the investment account is unchanged;
--the parents ownership interest is unchanged
1. make note of the increase in the number of shares of stock with a memo entry; the total number of shares owned by "P"
has increase but the ownership percentage has remained the same
Large stock dividends (>25% of previously issued shares; use par to make adjustments to "S" RE and C/S)
1. make note of the increase with a memo entry;
Stock splits: same as above
--SUBSIDIARY SALES OF ADDITIONAL NEWLY ISSUED SHARES TO MI
the valuation of the investment account is changed if the sale price is at an amount different from the book value per share
recognized by the parent (refer to IV A above);
in so far as gains and losses cannot result from transactions of an entities own stock (APB-9, paragraph 28)
o If a credit ("constructive gain") is required, credit "P" PIC from subsidiary stock transactions;
o If a debit ("constructive loss") is required, debit “P” PIC from subsidiary stock transactions until it is zero balance then
debit "P" retained earnings as required
THE EXCEPTION TO THIS RULE is when shares are sold in a "PUBLIC OFFERING"; gains and losses may be recognized in public
offering sales that are not part of a broader reorganization that will involve other capital transactions (1980 AICPA Accounting
Standards Executive Committee "Accounting in Consolidation for Issuances of a Subsidiary's Stock"; 1983 SEC Staff Bulletin 51).
--In this case "P" is assumed to have sold a portion of its interest in the entity; the percentage sold is computed as follows:
[(ownership interest prior to sale-ownership interest after sale)/ownership interest prior to sale]
NOTE: APB-9 remains GAAP; the exception is not GAAP but is considered permissive; this means that to apply the exception the stock issuance
should be at public offering by an SEC covered company.
--the ownership interest of "P" is changed (reduced); the new percentage must be used in all present and future computations unless changed
again
Dr. M.D. Chase
Advanced Accounting 810-51Cd
Long Beach State University
Special Issues: Changes in Ownership Interest
Page 2
Example: Sales of Newly Issued Shares to MI (Continued)
Example:
--"S" stockholders equity consists of:
Common Stock ($10 par)............
$
100,000
PIC in excess of par..............
60,000
Retained earnings.................
40,000
Total SHE....................
$
200,000
--"P" purchases 80% of "S" for $180,000 with the excess attributed to Patent with a 10 year life;
Cost..............................
$
180,000
Purchased BV: (.8)(200,000).......
160,000
Excess attributed to PATENT...........
$
20,000
--At the end of 3 years, "S" sells 2,000 shares to minority stockholders.
Required:
1. record the necessary adjustments required by "P" if the sale is for $20, $30 and $10 per share respectively.
Solution:
"S" SHE immediately subsequent to sale of 2,000 shares...............
"P" adjusted ownership interest......................................
"P" equity in "S" after sale.........................................
"P" equity in "S" prior to sale (.8)(200,000)........................
Increase (decrease) in equity in "S" as a result of sale to MI.......
Sales Price:
Adjusting entries: GAAP followed; no "gain" or "loss" recorded:
Sale at $20/share..............................................................
Sale at $30/share:
Investment in "S".........................................................
"P" PIC from subsidiary stock transactions...........................
$
$
$20
$30
240,000 $ 260,000 $
8/12
8/12
160,000 $ 173,333 $
160,000
160,000
-0- $ 13,333 $
$10
220,000
8/12
146,667
160,000
(13,333)
Memo entry only
13,333
13,333
Sale at $10/share:
"P" retained earnings (assumes no PIC from sub stock transactions) *
13,333*
Investment in "S"....................................................
13,333
*
it is permissible to debit ordinary PIC of "P" but is less conservative to do so;
however, this procedure is often followed because it avoids a reduction of RE.
Adjusting entries: "S" is SEC reporting company and sale is in "public offering"; gain or loss on sale recognized;
Because the shares are considered to be sold, any portion of the excess of cost over book value in the analysis of the investment must be
adjusted to reflect the indirect sale; in this case the excess of cost over book value is entirely allocated to patent so the adjustment
is simple:
Patent (per analysis).........
$
20,000
percentage sold: [(.8-.6667)/.8] = .1667
$
3,333
Patent has already been amortized over 3 years of its ten year life so ($3,333/10)x3 years or $1,000 of the patent applicable to the interest
sold has already been amortized on the consolidated financial statements. Because of the sale, the adjustments made in the past must no
longer be consolidated and must be adjusted through the retained earnings account.
Sale at $20 per share:
"P" retained earnings (prior amort of patent allocable to % sold)......
Loss on sale of "S" C/S (3,333-1,000)....................................
Investment in "S" (reduce be excess of cost>bv allocable to part sold)
1,000
2,333
Sale at $30 per share:
"P" retained earnings (prior amort of patent allocable to % sold)......
Investment in "S" (13,333- 3,333)........................................
Gain on sale of "S" C/S.............................................
1,000
10,000
Sale at $20 per share:
"P" retained earnings (prior amort of patent allocable to % sold)......
Loss on sale of "S" C/S .................................................
Investment in "S" (13,333 + 3,333)..................................
1,000
15,666
3,333
11,000
16,666
Dr. M.D. Chase
Advanced Accounting 810-51Cd
Long Beach State University
Special Issues: Changes in Ownership Interest
Page 3
--SALES OF NEWLY ISSUED SUBSIDIARY STOCK DIRECTLY TO "P"
--No special accounting treatment; handled like any other investment
--SUBSIDIARY TREASURY STOCK TRANSACTIONS
--There are two approaches in handling subsidiary treasury stock acquisitions:
Method 1: --The acquisition is considered an indirect purchase of "S" by "P"(APB-16, par 26); as such, the rules of piecemeal or
block acquisition described above apply;
--if this approach is followed, the treasury stock account is eliminated against the underlying equity accounts
associated with it;
--this approach can get very complex if "S" uses the par method and has a lot of excess of cost over book value
to allocate on the treasury stock acquisition;
Method 2: --Acquisition of T/S is recognized by adjusting the investment account to reflect the adjusted book value of the
investment resulting from the treasury stock acquisition;
--this approach is not theoretically consistent with the handling of other acquisitions put just like the cost
method of accounting for treasury stock transactions, it is frequently followed due to ease of use and the
relative immateriality of subsidiary treasury stock transactions.
--General rules:
--Shares acquired from MI at BV: "P" ownership percentage increases but no adjustments are necessary because "P" owns more of
less "S" SHE; BV per share of "P" investment is unchanged;
--Shares acquired from MI at < or > BV:"P" ownership percentage increases and the investment account must be adjusted to
reflect change in underlying BV per share
Example:
--"P" owns 80% of "S"
--"S" has 10,000 shares of $10 par C/S outstanding on 12/31/x5
--"S" had PIC of $50,000 and RE of $90,000
--on 1/1/x6 "S" purchases 500 shares from MI stockholders;
--"S" accounts for treasury stock under the cost method;
Required:
1. compute the effect of the treasury stock purchase on "P's" book value if the purchase is made at $23, $30 and $10 per
respectively;
2. give the necessary adjusting entry to reflect the change for each situation described above
Solution:
Capital stock.................
$
PIC...........................
RE............................
Total PIC and RE.............. $
Less: T/S @ cost..............
Total SHE.....................
$
"P" ownership interest........
"P" total book value.......... $
Adjustment....................
Prior to
Purchase
100,000
50,000
80,000
230,000
-0230,000
8/10
184,000
$
$
$
$
500 sh
@ $23
100,000
50,000
80,000
230,000
11,500
218,500
8/9.5
184,000
-0-
$
$
$
$
500 sh
@ $30
100,000
50,000
80,000
230,000
15,000
215,000
8/9.5
181,053
(2,947)
$
$
$
$
500 sh
@ $10
100,000
50,000
80,000
230,000
5,000
225,000
8/9.5
189,474
5,474
Adjusting entries:
Purchase at $23/sh:
memo entry to record change in ownership percentage only
Purchase at $30/sh:
PIC from subsidiary stock transactions (or "P" RE).....
Investment in "S".................................
2,947
2,947*
Purchase at $10/sh:
Investment in "S"......................................
5,474
PIC from subsidiary stock transactions............
5,474*
*
"P" PIC (from any source) can be used but is less conservative
share