Chapter 8
CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS
Comprehensive Chapter Outline
ACQUISITION OF A SUBSIDIARY DURING AN ACCOUNTING PERIOD
A
When a subsidiary is acquired during an accounting period, the subsidiary’s sales and
expenses are included in the consolidated income statement for the full year.
B
Income of a corporation applicable to the interest acquired prior to its acquisition during
an accounting period is preacquisition income (also referred to as purchased income).
C
Dividends paid on the purchased company’s stock before the stock is acquired by the
parent company during an accounting period is referred to preacquisition dividends.
D
Changes in consolidation working paper procedures for acquisitions during an
accounting period are as follows:
1
E
In the working paper entry that eliminates the reciprocal investment in subsidiary
and subsidiary equity accounts:
a
Preacquisition income is entered in the consolidation working papers as a
debit, and
b
Preacquisition dividends are eliminated.
2
The reason for including the above items in the working paper entry is that
subsidiary equity balances are eliminated as of the beginning of the period and
the investment balance is eliminated as of the date of acquisition within the
period.
3
Preacquisition income, like minority interest income, is deducted from total
consolidated income as a separate item in the consolidated income statement.
When the parent company’s interest increases during the year, minority interest is
computed on the basis of the minority shares outstanding at year- end.
WHEN A CORPORATION ACQUIRES A CONTROLLING INTEREST IN ANOTHER
CORPORATION THROUGH A SERIES OF STOCK PURCHASES OVER A PERIOD
OF TIME, COST/BOOK VALUE DIFFERENTIALS ARE DETERMINED FOR EACH
INVESTMENT.
A
If the piecemeal acquisitions are made within an accounting period, preacquisition
income and dividends are determined for each investment.
B
Income, dividends, and amortization of cost-book value differentials are determined for
each investment.
C
The minority interest income is based on the minority interest ownership at year end as
long as the parent company’s ownership interest did not decrease.
WHEN A PARENT COMPANY SELLS AN OWNERSHIP INTEREST, THE GAIN OR
LOSS ON THE SALE IS THE DIFFERENCE BETWEEN THE PROCEEDS FROM
THE SALE AND THE BOOK VALUE OF THE INVESTMENT INTEREST SOLD.
A
If the investment was acquired through piecemeal acquisitions, the shares sold must be
identified with particular acquisitions.
B
At the beginning of the period, a sale of an interest at a price in excess of book value
reduces the investment account and creates a gain on the sale which is both a gain for
the parent company and the consolidated entity.
C
1
In the consolidation working papers, the gain is carried to the consolidated
income statement column.
2
Minority interest is computed on the basis of the ending minority interest
percentage when an investment interest is sold at the beginning of the period.
The sale of an interest during an accounting period may be recorded as of the actual sale
date or, as an expedient, as of the beginning of the period. It is thought that use of the
beginning of the period assumption is more efficient and practical because current
retained earnings information is usually not available during the period.
1
Beginning of the period sale assumption:
a
b
c
d
The gain on the sale is the difference between the proceeds and the book
value of the interest sold at the beginning of the period.
Minority interest is computed as if the ending minority interest had been
outstanding throughout the year.
Any dividends received on the interest sold prior to the sale must be
included in the calculation of the gain or loss on sale.
Parent company and consolidated net income are not affected by the
beginning of the period assumption.
e
2
Any difference in the gain or loss on sale is exactly offset by differences
in computing the income from subsidiary, amortization of cost-book
value differentials, and minority interest amounts.
Actual sale date:
a
b
c
d
The parent company makes an entry to bring the investment account to
its book value on the date of sale (i.e., the parent records income from
subsidiary, including amortization of cost book value differentials, from
the beginning of the period to the sale date).
The proceeds from the sale of the investment are recorded, the
investment account is credited for the book value of the interest sold, and
a gain or loss is recognized for the difference.
At the end of the period, the parent company records investment income
on the investment interest retained from the date of sale to the end of the
period.
Investment income for the year is the total of the investment income on
the interest held at the beginning of the period to the date of sale plus
investment income on the percentage interest retained from the sale date
to the end of the period.
e
Minority interest income is calculated as the minority interest’s
beginning of the period percentage times the subsidiary’s income to the
date of sale plus the minority interest’s ending percentage times the
subsidiary’s income from the date of sale to the end of the period.
f
Comparison of the actual sale date and the beginning of the year sale date
assumption:
(1)
The year-end investment account balance and ending minority
interest are the same under the two assumptions.
(2)
Cash flow from the proceeds of the sale and dividends received
are the same under the two assumptions.
(3)
The difference in the gain on the sale of an interest under the two
assumptions is offset by differences in minority interest income,
the parent company’s share of subsidiary income, and
amortization of cost book value differentials.
SUBSIDIARY OPERATIONS MAY BE EXPANDED BY THE SALE OF ADDITIONAL
CAPITAL STOCK, OR OPERATIONS MAY BE CONTRACTED BY THE
SUBSIDIARY PURCHASING ITS OWN STOCK.
A
The parent company, through its controlling interest, makes the decisions for the
subsidiary.
B
The minority holders may exercise their preemptive right to subscribe to additional
stock issuances in proportion to their holdings.
C
The effect of subsidiary sales and purchases of its own shares may affect the parent
company’s investment in subsidiary. This depends on the purchase or sales price of the
shares.
D
The parent company’s percentage ownership in the subsidiary is determined by dividing
the number of shares held by the parent by the total number of subsidiary shares
outstanding after the sale or purchase.
E
Sales of stock by a subsidiary to its parent company result in cost/book value
differentials equal to the parent company’s share of the difference in the subsidiary’s
stockholders’ equity immediately before and immediately after the sale of stock.
1
The book value of the investment interest acquired from the subsidiary is
computed as the underlying book value of the parent company’s interest after the
purchase of the additional shares less the underlying book value of the parent
company’s interest before the purchase.
2
If the parent company acquires the additional shares at book value, the parent’s
investment account increases by the amount of the purchase, but there is no costbook value differential on the new investment.
3
If the parent company acquires the additional shares at a price above book value,
the parent’s investment account increases by the amount of the purchase and a
cost-book value differential is computed on the new investment.
a
b
4
F
The excess cost over book value acquired is assigned to identifiable
assets or goodwill and amortized over the life of the assets.
The amortization of the cost-book value differentials remaining from the
original investment does not change.
If the parent company acquires the additional shares at a price less than book
value, the parent’s investment account increases by the amount of the purchase
price. As an expedient, the excess book value over cost is charged to any
unamortized goodwill from the parent’s earlier investments in the subsidiary.
Sales of stock by a subsidiary to outside entities are considered capital transactions.
1
The effect on the parent company’s investment in subsidiary account depends on
the selling price of the subsidiary’s shares.
2
The increase or decrease in the parent company’s underlying book value in the
subsidiary is computed as the parent company’s equity in the subsidiary after the
stock issuance less the parent company’s equity in the subsidiary before the
stock issuance.
a
b
c
3
If the subsidiary shares are sold at book value, the parent company’s
equity in the subsidiary is not affected.
If the subsidiary shares are sold above book value, the parent company’s
equity in the subsidiary increases.
If the subsidiary shares are sold below book value, the parent company’s
equity in the subsidiary decreases.
There are two methods of accounting for the decreased ownership interest on the
parent company books:
a
The parent’s additional paid-in capital account and investment account
are adjusted for the change in underlying equity
(1)
(2)
b
Alternatively, the decrease in ownership is treated as a sale and the
difference between book value of the investment interest sold and the
parent’s share of the proceeds from the subsidiary’s stock issuance is
recognized as a gain or loss.
(1)
(2)
(3)
G
Unamortized cost-book value differentials are not adjusted for the
decreased ownership interest.
This method is supported by APB Opinion No. 9 which excludes
adjustments from transactions in a company’s own stock from net
income.
The parent company is assumed to have sold an interest equal to
its percentage ownership before the stock issuance less the
percentage ownership after the stock issuance.
Unamortized cost-book value differentials on the interest
assumed sold is the only difference between the gain (under this
method) and the adjustment to additional paid-in capital (under
the first method).
This method is supported by an AICPA Issues Paper and is also
permitted by the SEC.
If the parent company and minority interests (outside investors) purchase the shares in
relation to their existing stock ownership, there will be no adjustment to additional paid-
in capital, regardless of the price paid for the stock. Similarly, the parent company will
have no excess cost over book value acquired.
H
Treasury stock transactions by a subsidiary:
1
Insignificant treasury stock transactions do not require adjustments because they
tend to be offsetting.
2
Acquisition of treasury shares by a subsidiary decreases subsidiary stockholders’
equity and subsidiary shares outstanding.
a
If the subsidiary buys the shares from minority holders at book value, the
parent company’s percentage ownership increases, but its share of the
subsidiary equity is unchanged. No adjustment is required.
b
If the subsidiary buys the shares from minority holders at a price above
book value, the parent company’s percentage ownership increases, but its
share of the subsidiary’s book value decreases.
(1)
(2)
c
The parent company records the decrease by a debit to additional
paid-in capital and a credit to the investment account.
The amount of the decrease is the parent’s share of the
subsidiary’s book value before the treasury stock transaction less
the parent’s share of the subsidiary’s book value after the treasury
stock transaction.
If the subsidiary buys the shares from minority holders at a price below
book value, the parent company’s percentage ownership increases and its
share of the subsidiary’s book value increases.
(1)
The investment account is increased and additional paid-in capital
is decreased.
(2)
The increase is the parent’s share of subsidiary’s book value
immediately after the treasury stock transaction less the book
value immediately before the treasury stock transaction.
STOCK DIVIDENDS AND STOCK SPLITS
A
Subsidiary stock splits increase the number of outstanding shares, but do not affect
subsidiary net assets or the parent company and minority interest ownership
percentages.
B
Stock dividends lead to some changes in the subsidiary’s equity accounts.
1
Retained earnings equal to par or stated value or the market price of the additional
shares issued is transferred to paid-in capital. Thus, the subsidiary equity accounts
in the consolidation working papers are affected.
2
Stock dividends do not affect parent company accounting.