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8
Changes in
Ownership Interest
Advanced Accounting, Fifth Edition
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Learning Objectives
1.
Identify the types of transactions that change the parent company’s
ownership interest in a subsidiary.
2. Describe the process needed when the parent acquires subsidiary shares
through multiple open market purchases.
3. Explain how the parent reports the difference between selling price and
book value when shares are sold subsequent to acquisition.
4. Compute the controlling interest in income after the parent sells some
shares of the subsidiary company.
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.
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Changes in Ownership Interest
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.
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LO 1 Changes in ownership and differences
between current and proposed GAAP.
Changes in Ownership Interest
Prior GAAP:
Acquisitions of additional shares are handled in a stepby-step manner.
Sales of shares are handled the same as any sale of an
asset.
The difference between the selling price and the
basis of the shares sold is shown as a gain or loss in
income.
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LO 1 Changes in ownership and differences
between current and proposed GAAP.
Changes in Ownership Interest
Current 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)
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LO 1 Changes in ownership and differences
between current and proposed GAAP.
Changes in Ownership Interest
Current 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.
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If parent loses control, retained investment should be
remeasured to fair value with adjustments recognized in
net income.
LO 1 Changes in ownership and differences
between current and proposed GAAP.
Parent Acquires Subsidiary Stock Through
Several Open-Market Purchases—Cost Method
Current GAAP FASB ASC paragraph 805-10-25-9:
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.
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LO 2 Parent acquires subsidiary shares
through multiple open market
Several Open-Market Purchases—Cost Method
Illustration: S Company had 10,000 shares of $10 par value
common stock outstanding during 2010–2013 and retained earnings
as follows:
January 1, 2010 (1st stock purchase)
January 1, 2012 (control achieved)
January 1, 2013
December 31, 2013
$ 40,000
120,000
185,000
265,000
P Co. purchased S Co. common stock on the open market for cash:
January 1, 2010
1,500 shares (15%)
$ 24,000
January 1, 2012
7,500 shares (75%)
187,500
9,000 shares (90%)
$211,500
Total
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LO 2 Parent acquires subsidiary shares
through multiple open market
Several Open-Market Purchases—Cost Method
Thus on P’s books, the following entries are made:
January 1, 2010
January 1, 2012
Assumptions:
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1.
Any difference between implied and book values of the purchases
relates solely to goodwill and is, therefore, not subject to amortization
or depreciation but is reviewed periodically for impairment.
2.
S Company distributes no dividends during the periods under
consideration.
Solution on
note page
LO 2 Parent acquires subsidiary shares
through multiple open market
Several Open-Market Purchases—Cost Method
Calculation of IMPLIED Value of S Company:
Payment by P Company for 75% interest
Percent acquired
75%
Implied value of S Company
250,000
Ownership interest
Implied value of 90% ownership interest
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$ 187,500
Solution on
note page
90%
$ 225,000
LO 2 Parent acquires subsidiary shares
through multiple open market
Several Open-Market Purchases—Cost Method
Because P Company has owned a percentage of S Company (15%)
since January 1, 2010, an entry is needed on P’s books to revalue
the 1,500 shares purchased in 2010 to their fair value as of the
date of control ( January 1, 2012).
Initial purchase price (1,500 shares at $16/share)
Change in retained earnings of S since acquisition 15%:
[.15 x ($120,000 - $40,000)]
Carrying value (implied) of initial investment
$24,000
12,000
$36,000
Thus the gain on revaluation of the initial shares is computed as:
Implied value ($25/share 1,500)
$37,500
Implied carrying value of initial shares
36,000
Revaluation gain
$ 1,500
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LO 2 Parent acquires subsidiary shares
through multiple open market
Several Open-Market Purchases—Cost Method
The following entry is made on P company books.
Investment in S Company
1,500
Gain on revaluation
1,500
A workpaper entry is needed on December 31, 2012, to convert to
equity (establish reciprocity) from 2010 to the beginning of 2012.
Investment in S Company
12,000
1/1 Retained Earnings—P Company
12,000
[.15 x ($120,000 - $40,000) change in retained earnings
from 1/1/10 to 1/1/12]
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LO 2 Parent acquires subsidiary shares
through multiple open market purchases
Several Open-Market Purchases—Cost Method
On the workpaper, the investment is eliminated by the following
entry:
Common Stock—S Company
100,000
1/1 Retained Earnings—S Company
120,000
Difference between Implied and Book Value
Investment in S Company ($187,500 + $37,500)
Noncontrolling Interest in Equity
30,000
225,000
25,000
LO 2 Parent acquires subsidiary shares
through multiple open market purchases
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Several Open-Market Purchases—Cost Method
Comparison to IFRS
IFRS 3, Business Combinations, provides the guidance
for step acquisitions under international standards.
Under IFRS 3, all previous ownership interests are
adjusted to fair value, with any gain or loss recorded in
earnings. This is similar to the rules issued by the FASB.
LO 2 Parent acquires subsidiary shares
through multiple open market purchases
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Sell Investment on Open-Market—Cost Method
Control Maintained
Under FASB ASC paragraphs 810–10–45–22 and 24 the
treatment of the sale of a portion 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 maintained, no gain or loss is recognized in
the income statement.

If control is lost, the entire interest is adjusted to fair
value, and a gain or loss recorded in income on all shares
owned prior to sale.
LO 3 Shares sold subsequent to acquisition
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Sell Investment on Open-Market—Cost Method
Illustration: P Company owns 9,000 shares of S Company that
were revalued to $25 a share on the date of acquisition, or
$225,000. Assume that P Company sold 1,800 shares of the
9,000 shares of S Company stock on July 1, 2013, for $84,600
($47/share). The cost of the 1,800 shares sold equals
$45,000 (or 20% of $225,000). After the sale, P Company
retains control with a 72% ((9,000 x 80%)/10,000) interest.
It should be noted that the 1,800 shares sold represent 18%
of total S Company shares.
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LO 3 Shares sold subsequent to acquisition
Sell Investment on Open-Market—Cost Method
Illustration: To record the sale of the shares, P Company
makes the following entry in its books on July 1, 2013.
Cash
84,600
Investment in S Company (20% x $225,000)
45,000
Additional Contributed Capital—P Company
39,600
After this entry, the balance in the investment in S Company
account on P Company books will be $168,000 (or $24,000
$187,500 $1,500 $45,000).
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LO 3 Shares sold subsequent to acquisition
Sell Investment on Open-Market—Cost Method
From a consolidated standpoint, the cost of the shares sold
($45,000) needs to be adjusted for 18% of the undistributed
earnings since the date of acquisition.
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LO 3 Shares sold subsequent to acquisition
Sell Investment on Open-Market—Cost Method
The correct consolidated amount of additional contributed
capital on is:
An adjustment is needed on the workpapers to reduce
additional contributed capital:
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LO 3 Shares sold subsequent to acquisition
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Equity Method—Purchase and Sale of Stock
When more than one purchase is made before control is
obtained, the acquisition date is defined as the date at
which control is achieved.
To illustrate the procedures followed for open-market
purchases and sales of subsidiary stock under the equity
method, the previous cost method example will be used.
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LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
Illustration: S Company had 10,000 shares of $10 par value
common stock outstanding during 2010–2013 and retained earnings
as follows:
January 1, 2010 (1st stock purchase)
January 1, 2012 (control achieved)
January 1, 2013
December 31, 2013
$ 40,000
120,000
185,000
265,000
P Co. purchased S Co. common stock on the open market for cash:
January 1, 2010
1,500 shares (15%)
$ 24,000
January 1, 2012
7,500 shares (75%)
187,500
9,000 shares (90%)
$211,500
Total
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LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
Assumptions:
1.
Any difference between implied and book value of net assets acquired
relates to goodwill.
2.
S Company distributed no dividends during the periods under
consideration. Since no dividends were declared, the change in
retained earnings represents the net income for that year.
3.
P Company sold 1,800 shares of S Company stock on July 1, 2013, for
$84,600.
1/1/10
Investment in S
Cash
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P Company’s Books:
24,000
24,000
1/1/12
Investment in S
Cash
187,500
187,500
LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
Since P Company now has a 90% interest in S Company and intends
to apply the equity method, the investment account must be
restated to recognize P Company’s share (15%) of the increase in S
Company’s retained earnings from January 1, 2010, to January 1,
2012.
Investment in S Company
12,000
1/1 Retained Earnings—P Company
12,000
[.15 x ($120,000 x $40,000) or the change in retained earnings from
1/1/10 to 1/1/12].
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LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
To adjust the investment to fair value as of the date of
acquisition, the gain on revaluation of the initial shares is
computed as:
P Company’s Books
Investment in S Company
Gain on revaluation
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1,500
1,500
LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
P Company will recognize its share of S Company income for 2012
as follows:
Investment in S Company
58,500
Equity in Subsidiary Income
58,500
[90% x ($185,000 - $120,000)]
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LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
Assuming P Company received a six month interim income
statement from S Company reporting $40,000 of net income, the
following entry will be made by P Company on June 30, 2013.
Investment in S Company
Equity in Subsidiary Income
36,000
36,000
(90% x $40,000)
Investment in
S Company
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1/1/10 Purchase (15%)
$ 24,000
1/1/12 Adjustment of 15% to fair value
1,500
1/1/12 Purchase (75%)
187,500
1/1/12 Adjustment
12,000
12/31/12 Subsidiary Income
58,500
6/30/13 Subsidiary Income
36,000
Balance
$319,500
Equity Method—Purchase and Sale of Stock
To record the sale of the S Company shares on July 1, 2013, P
Company will make the following entry (recall that P Company is
selling 20% of its shares):
Cash
84,600
Investment in S Company*
63,900
Additional contributed capital
20,700
* $63,900 = 20% of $319,500, the carrying value of the
investment.
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LO 3 Shares sold subsequent to acquisition
Equity Method—Purchase and Sale of Stock
After the sale of the 1,800 shares, P Company holds a 72%
interest in S Company. For the second six months of 2013 (and for
subsequent periods), P Company will recognize 72% of the
reported income and dividends received from S Company. The
December 31, 2013, book entry by P Company is:
Investment in S Company
28,800
Equity in Subsidiary Income
28,800
($40,000 X 72%)
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LO 3 Shares sold subsequent to acquisition
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Sell Investment on Open-Market—Cost Method
Loss of Control
Under FASB ASC paragraphs 810–10–45–22 and 24 the
treatment of the sale of a portion 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 maintained, no gain or loss is recognized in
the income statement.

If control is lost, the entire interest is adjusted to fair
value, and a gain or loss recorded in income on all shares
owned prior to sale.
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LO 4 Controlling interest in income
Sell Investment on Open-Market—Cost Method
The parent accounts for the deconsolidation by recognizing a gain
or loss in net income attributable to the parent, measured as the
difference between:
1.
The carrying value of S Company
2. The sum of the following:
a.
The fair value of the consideration received
b. The fair value of the retained noncontrolling interest
(at the date of deconsolidation)
c.
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The carrying value of the former noncontrolling
interest (at the date of deconsolidation). This amount also
includes any accumulated other comprehensive income attributable
to the noncontrolling interest.
LO 4 Controlling interest in income
Sell Investment on Open-Market—Cost Method
Illustration: Suppose P Company owns 9,000 shares of S Company
(90% of S Company) that were acquired at $25 a share (or
$225,000) on January 1, 2012. During 2012, S Company reported
$60,000 of income and did not pay any dividends.
Investment (9,000 x $25)
Cash
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225,000
225,000
LO 4 Controlling interest in income
Sell Investment on Open-Market—Cost Method
On January 1, 2013, P Company sold two-thirds of its investment
(6,000 shares) of S Company stock, for $180,000 ($30/share).
After the sale, P Company has lost control and now only maintains a
30% ((9,000 - 6,000)/10,000) interest. The carrying value of S
company, on January 1, 2013, is computed as follows:
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Sell Investment on Open-Market—Cost Method
The gain or loss in net income attributable to P Company is
computed as follows:
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LO 4 Controlling interest in income
Sell Investment on Open-Market—Cost Method
To record the sale of the shares, P Company makes the following
entry in its books on January 1, 2013.
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LO 4 Controlling interest in income
Sell Investment on Open-Market—Cost Method
Because P Company now holds a 30% (not controlling) interest in S
Company, the investment must be carried on the books using the
equity method.
Thus the investment account must be adjusted for previous
earnings of S Company (i.e., the reciprocity entry usually made on
the consolidated workpaper).
Investment in S Company (60,000 x .90)
1/1 Retained Earnings-P Company
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54,000
54,000
LO 4 Controlling interest in income
Subsidiary Issues Stock
The newly issued shares may be purchased
1.
entirely by the parent company,
2. partly by the parent company and partly by the noncontrolling
stockholders, or
3. entirely by the noncontrolling stockholders.
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
New Shares Issued above Existing Carrying Value
per Share
Illustration: P Company purchased 14,000 shares (70%) of S
Company’s $10 par value common stock on January 1, 2006, for
$210,000, which included a $20,000 excess of implied over book
value; the excess cost was assigned to land. S Company’s retained
earnings on January 1, 2006, were $50,000.
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
On January 1, 2014, P Company purchased 4,000 additional shares
of S Company stock directly from S Company at its current market
price of $22 per share ($88,000). This price is greater than the
existing book value per share of S Company. Noncontrolling
stockholders elected not to participate in the new issue. S
Company’s stockholders equity on January 1, 2014, was:
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Subsidiary Issues Stock
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
If a workpaper were prepared immediately after the purchase of
the new shares, the workpaper entries to establish reciprocity
(convert to equity) and eliminate the investment account would be:
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Subsidiary Issues Stock
New Shares Issued at or below the Existing
Carrying Value per Share
Illustration: The shares are issued at their book value of
$17.50 per share (or $70,000), the computation is as follows:
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
Although the noncontrolling stockholders’ percentage of
ownership decreases from 30% to 25%, their share of the net
assets of S Company decreased only by the land value
transferred, as shown here:
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
Assume the new shares were issued at $14 per share (or $56,000).
The excess of book value over cost is computed as follows:
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Subsidiary Issues Stock
Journal entry by P Company to record the purchase of the new
shares is:
P Company’s Books
Investment in S company
Cash
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56,000
56,000
LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
Workpaper entries:
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LO 5 Subsidiary issues new shares entirely
to parent
Subsidiary Issues Stock
New Shares Purchased Ratably by Parent and
Noncontrolling Stockholders
If the noncontrolling stockholders had elected to exercise their
rights, the percentage of stock owned by the parent and
noncontrolling stockholders after the new issue would be the same
as their respective interests prior to the new issue.
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LO 6 Noncontrolling shareholders acquire
new shares issued by subsidiary
Subsidiary Issues Stock
New Shares Purchased Entirely by Noncontrolling
Stockholders
As long as the number of new shares issued is not so large that it
reduces the parent’s percentage of ownership below that needed
for control, new financing can be made available and control
retained.

Issuance of new shares to noncontrolling stockholders
reduces the parent’s percentage of ownership.

Economic substance of the transaction is a sale of interest by
P Company.
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LO 6 Noncontrolling shareholders acquire
new shares issued by subsidiary
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