Chapter 8
Subsidiary Equity Transactions;
Indirect
and
Mutual
Holdings
Subsidiary equity transactions;
Indirect and mutual holdings
 Subsidiary stock dividends
 Subsidiary issues additional shares
– parent purchases some shares
 Subsidiary purchases its own shares
 Indirect holdings
– subsidiary controls another company
 Mutual holdings
– subsidiary owns parent common stock
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Subsidiary stock dividend
 Only impact on parent is to spread investment
balance over more shares
 The sub moves retained earnings to paid-in
capital
Complication - under the cost method, the cost to
equity conversion can no longer be based simply on the
change in RE since RE has been capitalized (moved to
paid-in). Conversion must be based on change in
total subsidiary equity.
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Sub issues additional shares:
Parent buys none
Compare equity before and after issue:
– if equity increases, credit parent paid-in
excess.
– if equity decreases, debit parent paid-in
excess (if insufficient, parent retained
earnings).
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Sub issues additional shares:
Parent buys none - Example
Prior to issue: Parent owns 9,000 of 10,000 sub
shares. Sub equity = $200,000.
Sub Issue: Assume sub issues 2,000 shares at
following alternative prices:
Added
Price
Equity
$15
$30,000
$20
$40,000
$24
$48,000
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Sub issues additional shares:
Parent buys none - Example (con’t)
Sub Issues 2,000 additional shares
Share price
$15
$20
Sub equity before
sale
200,000 200,000
Proceeds
30,000
40,000
Equity after sale
230,000 240,000
200,000
48,000
248,000
75% interest
172,500
180,000
186,000
90% interest prior to
sale
Increase (decrease)
180,000
(7,500)
180,000
-
180,000
6,000
$24
Adjustment is to Parent paid-in unless there is a decrease
and Parent paid-in is insufficient, then adjust RE
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Sub issues additional shares:
Parent buys some
Parent maintains % (buys 90% or 1,800 shares in our
example) - there is no adjustment beyond recording
purchase at cost.
Parent increases % (buys more than 90%) - creates a
new block, the difference is excess of cost or book value
on the block.
Parent decreases % (buys less than 90%) - Difference
between equity change and cost is adjustment following
rules where parent purchases none of shares.
Example follows
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Sub issues additional shares:
Parent buys some - Example
Sub sells 2,000 shares at $24
Parent purchases:
1,000 shares 1,800 shares 2,000 shares
Sub equity after sale:
248,000
248,000
248,000
Parent ownership %
.8333
.9000
.9167
Parent equity after
206,658
223,200
227,342
sale
Parent equity prior to
180,000
180,000
180,000
sale
Increase
36,658
43,200
47,342
Cost at $24/share
24,000
43,200
48,000
Adjust parent pd-in
12,658
Excess cost, 1.67%
658
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Sub issues additional shares:
Parent buys some - Entries
1,000 shares
Investment in Sub
Cash (purchase 1,000 shares @ $24)
Paid-in excess
36,658
24,000
12,658
1,800 shares
Investment in Sub
Cash (purchase 1,800 shares @ $24)
43,200
43,200
2,000 shares
Investment in Sub
48,000
Cash (purchase 2,000 shares @ $24)
(Includes excess cost of $658 attributed to goodwill)
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48,000
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Sub purchase of its own shares
 Sub is viewed as agent of parent purchasing a
new block
 D&D of excess is prepared for the new block
Example follows
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Sub purchase of its own shares:
Example
Example
Sub equity is $200,000
Parent owns 90% (9,000 shares)
Sub purchases 1,000 shares for $25 each
Price paid
Equity purchased: 10%  200,000
Excess cost
25,000
20,000
5,000
 Excess is distributed using normal rules
 Treasury stock account of sub is eliminated, on the
worksheet, in same manner as a new 10% block
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Sub purchase of its own shares:
Example (con’t)
 Future: This will likely be treated as a treasury
stock transaction with an adjustment to paid-in
only.
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Indirect Holdings
 These are multi-tier ownership
arrangements
 Control requires over 50% at each
level
 P controls S if P owns 51% of SP
and SP owns 51% of S, even
though:
 P gets only 26% (51%  51%) of
income reported by S
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Indirect Holdings:
P owns SP, SP purchases S
Example: P owns 80% of SP; SP purchases 70% of S
Price Paid
Interest acquired (70%  $200,000)
Excess
S Building (70%  $50,000 mkt adjustment)
Goodwill
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200,000
140,000
60,000
35,000
25,000
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Indirect Holdings:
P owns SP, SP purchases S (con’t)
 Amortizations of excess are shared 80/20 by P
and SP
 IDS and RE adjustments for unrealized profits
by S are split
– 56% (80%  70%) to P
– 14% (20%  70%) to SP
– 30% to S
Future: FASB proposal would increase NCI
of S for $15,000 on building. Might also
impute GW to NCI.
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Indirect Holdings:
SP owns S, P purchases SP
Price Paid
250,000
Interest acquired: 80%  $200,000
160,000
Excess
90,000
S Bldg: 80%  70%  $50,000 mkt adj 28,000
Goodwill
62,000
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Indirect Holdings:
SP owns S, P purchases SP (con’t)
 Amortizations are charged only to P
 An SP asset would be adjusted for 80% of difference
between book and fair value
 IDS and RE Adjustments for unrealized profits by S
are split
– P 56% (80%  70%)
– SP 14% (20%  70%)
– S 30%.
Future - FASB proposal would increase NCI of S for
$15,000 and NCI of SP for $7,000 on building. Might
also impute GW to NCI
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Mutual Holdings:
Sub owns Parent shares
“Treasury Stock Method”
 Sub’s interest treated as if the
parent purchased the shares for
treasury.
 Investment is maintained at cost
 Investment shown as treasury
shares and deducted from total
consolidated equity
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