Chapter 8: Changes in Ownership
Learning objectives (LO):
1. Prepare the journal entries in situations where the parent’s ownership has increased
from passive to significant influence (step purchase).
Learning:
Acquire knowledge:
1. Read chapter 8 notes and chapter 8 text (11th ed) pages 386-389
Application of knowledge:
1. Complete Homework: Extra homework Question 1 (end of notes).
2. Complete related assessments
LO1: Increases in a parent company’s ownership interest from no significant
influence:
• The cost or fair value method should be used to record and report investments until
the investor obtains significant influence or control. Recall: under these methods,
dividends are recorded as income and there is no acquisition differential.
• If additional purchase does not result in significant influence, there is no change to
the underlying relationship between the investor and investee. Thus, continue to
report using the cost or fair value method.
• When an investor who initially had no significant influence subsequently purchases
enough shares to obtain significant influence, the investor must change from the cost
or fair value method to the equity method for reporting purposes.
• The acquisition differential is calculated once significant influence has been achieved
and the purchase price used is the cost for all prior purchases, including the purchase
resulting in significant influence.
• The acquisition differential calculation is based on the investee’s shareholders’ equity
and fair values at the time significant influence was achieved.
• The investor is not required to go back and retroactively restate prior purchases and
calculate acquisition differential based on the investee values at that time.
• For additional purchases that still result in significant influence, the acquisition
differential is calculated separately for each purchase using the purchase price and
percentage purchased for that transaction only, and using the subsidiary values
existing at the time of that purchase.
• See textbook example first and second block purchases only (pages 386-389).
11th
Barbara Wyntjes, MBA, B.Sc., CPA, CGA
Extra Chp 8 Homework Question 1 (solution at the end of chp 8 homework)
BB purchased 10,000 of the common shares of Stergis on January 1, Year 4 for
$450,000. Stergis had 100,000 common shares outstanding. During Year 4, Stergis had
income of $30,000 and paid dividends of $40,000. On December 31, Year 4 the selling
price of Stergis shares was $47/share.
BB purchased additional 20,000 shares of the common shares of Stergis on March 1,
Year 5 for $1,000,000.
During Year 5, Stergis had income of $300,000 earned evenly over the year. In
December, Stergis declared and paid dividends of $80,000. During Year 6, Stergis had
income of $320,000 and paid dividends of $100,000.
On January 1 Year 7, the market value of the Investment in Stergis was $1,380,000 and
the decline was considered permanent.
Required: Prepare the journal entries for Years 4, 5 and 6 and January 1 Year 7 relating
to BB’s investment in Stergis.
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