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Chapter 7

Chapter 7. Special Issues in Accounting. for an Investment in a Subsidiary. Special issues in accounting for an investment in a subsidiary. Stock acquired directly from subsidiary Piecemeal acquisition control with first block control achieved with later block

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Chapter 7

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  1. Chapter 7 Special Issues in Accounting for an Investmentin a Subsidiary

  2. Special issues in accounting for an investment in a subsidiary • Stock acquired directly from subsidiary • Piecemeal acquisition • control with first block • control achieved with later block • Sale of investment in subsidiary • control lost • control maintained • Effect of subsidiary preferred stock C7

  3. Stock acquired directly from subsidiary Part of original issuance Price paid and book value are equal, no excess to account for. Sub issues more shares Parent purchases enough of new issue to gain control. Parent’s interest is a percent of total sub. equity. There will be an excess as in any other purchase. C7

  4. Block purchase:Prior control • Parent already has control and buys an additional block. • Current practice views this as a separate investment with its own D&D of excess and separate amortizations. • values assigned are independent of D&D on control date. • there will be two sets of distribution and amortization entries for the two blocks on the worksheet (see WS 7-1) • Future: This may be viewed as a treasury stock transaction with an adjustment to paid-in excess and no new D&D. C7

  5. Block purchase:Control with later purchase • Separate blocks with separate D&Ds, excess distributions and amortizations. • Consolidations procedures are applied to the early (non-controlling) block retroactively. • The prior investment will be under sophisticated equity if it was a 20% or greater interest. The D&D exists and is used. • The prior investment will be maintained at cost if it is less than a 20% interest. No D&D; it is done now, retroactively. • Future: The cost of the first block may be “rolled” into the second. One D&D on date of control prepared. C7

  6. Sale of entire investment • Could be a Discontinued Operation if it meets criteria for discontinued operation. • To sell the investment, it must reflect share of sub’s past incomes and past amortizations of excess. • the investment account balance is not ready for a sale. It is not adjusted for income (cost method) and excess amortizations (cost and simple equity method) unless the sophisticated equity method has been used. • adjustment needed if cost or simple equity methods have been used. C7

  7. Sale of entire investment:Adjustments Simple Equity Adjust for sum of prior year excess amortizations. These were done in prior years on WS, but are not reflected in investment balance. Cost Convert to simple equity to pick up share of prior undistributed income, then adjust for sum of prior year excess amortizations. Example follows C7

  8. Sale of entire investment:Example D&D Schedule Price 1/1/X1 300,000 Equity 1/1/X1: Total Paid-in 100,000 Retained earnings 150,000 Total equity 250,000 Interest purchased 80%200,000 Excess: Patent, 10 yr (10,000 per year) 100,000 Additional Information RE 1/1/X4 $240,000 Income 1/1/X4 - 7/1/X4 30,000 Sold entire investment on 7/1/X4 400,000 C7

  9. Sale of entire investment:Example (continued) Cost Balance 300,000 Share of prior years’ income: 80%  90,000 RE increase + 72,000 80% of income 1/1/X4 to 7/1/X4: 80%  30,000 + 24,000 Simple equity balance 396,000 Amortization: 3½ years  10,000 (35,000) Sophisticated equity balance 361,000 Gain: 400,000 - 361,000 = $39,000 C7

  10. Sale of entire investment:Entries Cost Method (for prior years) Investment in Sub 72,000 RE 72,000 Cost and Simple Equity Methods (for prior years) RE (3 years  10,000 amortization) 30,000 Investment in Sub 30,000 C7

  11. Sale of entire investment:Entries (continued) Cost and Simple Equity (for current year) Investment in Sub 24,000 Investment Income 24,000 Investment Inc (½ yr amort of excess) 5,000 Investment in Sub 5,000 Cash 400,000 Investment in Sub 361,000 Gain on sale of Sub* 39,000 *could be discontinued operation C7

  12. Partial sale:Control lost • All of the adjustments made for the entire sale would be made.The unsold portion of the investment should be be stated at the sophisticated equity balance on the day of sale. • If remaining ownership is 20% or more, the sophisticated equity method is used in the future. • If remaining ownership is under 20%, the cost method will be used (only income recorded is dividends received). C7

  13. Partial sale:Control retained • All of the adjustments made for the entire sale would be made only for the interest sold. The unsold portion of the investment will continue to be consolidated and may be accounted for under cost or simple equity methods. • An apparent gain is an increase in paid-in excess resulting from equity transactions. An apparent loss is a distribution of retained earnings resulting from an equity transaction • Income on the interest sold is income sold to the NCI. (see WS 7-3) C7

  14. Subsidiary preferred stock:Two issues A portion of the retained earnings may have to be allocated to preferred stock to meet cumulative or participation requirements. The retained earnings applicable to common stock is the residual balance. Any preferred stock owned by a parent, must be treated as retired in the consolidation process. C7

  15. Subsidiary preferred stock:Example Worksheet 7-5 illustrates both issues: • ElimPS allocated $24,000 retained earnings to preferred shareholders. This would be done even if the parent did not own subsidiary preferred. • ElimELeliminates 80% of only the RE applicable to the controlling interest in common ($84,800). • Elim ELPretiresthe 60% parent ownership of the preferred stock. The price/book value difference is an adjustment to parent paid-in equity. C7

  16. Appendix:Balance sheet only procedures This topic is only of concern for CPA Exam preparation purposes. Procedures are as follows: • Investment Account: Date alignment is exists under simple equity. Cost requires conversion to end of year. • Excess Amortizations: All (including current) go to Retained Earnings. • Merchandise Sales: Only concern is ending inventory adjustment for intercompany profit and elimination of trade balance. C7

  17. Appendix:Balance sheet only procedures(cont’d) Fixed Asset Sales: Remove remaining year-end amount of intercompany profit from asset and adjust accumulated depreciation. Net adjustment is to RE. Leases: • Operating: reclassify assets as owned. • Financing: eliminate intercompany payable/receivables. • Sales Type: financing steps plus adjust RE for profit remaining at year end. Bonds: Retire at end of year balances. Remaining gain or loss on retirement is adjustment of RE C7

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