0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 8: Changes in Ownership Interest
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Changes in Ownership - Transactions
parent’s transactions:
parent purchases shares of subsidiary in the open market
parent sells shares of subsidiary in the open market
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2. Changes in Ownership - Transactions
subsidiary’s transactions:
subsidiary issues new or treasury shares
subsidiary buys treasury stock
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3. Changes in Ownership
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4. Parent’s % of ownership will:
Changes in Ownership
Parent’s % of ownership will:
Increase if
P purchases additional shares of S in open market
S issues stock, P acquires more than its pro-rata number of shares
S buys treasury stock, P sells less than its pro-rata number of shares
Decrease if
P sells shares of S in open market
S issues stock, P acquires less than its pro-rata number of shares
S buys treasury stock, P sells more than its pro-rata number of shares
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5. Accounting Treatment: the parent identifies for each step purchase
Step Purchases
Transaction
parent acquires subsidiary stock through several open market purchases
Accounting Treatment: the parent identifies for each step purchase
the cost of each investment,
fair value of assets acquired, and
the difference between cost and book value
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6. Step Purchases An Example 1/1/2002 1/1/2003 1/1/2000 1/1/2001
15% shares acquired
75% shares acquired
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7. Step Purchases
An Example
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8. Elimination Entries To establish reciprocity for first purchase:
Investment in S Company
1/1 Retained Earnings – P Co.
(P’s first purchase percent of the change in S’s retained earnings from acquisition to the beginning of this year)
To eliminate P’s investment in S:
Common Stock – S
1/1 Ret. Earnings – S
Diff. between C & BV
Investment in S Company
(use the total percent P now owns)
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9. Step Purchases - Partial Equity Method
In the Parent’s books:
Investment in S 12,000
Retained earnings ,000
To restate the investment account
from cost method (15% ownership)
to partial equity method
The amount = change in subsidiary R/E since first purchase x 15%
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10. Step sales - Cost Method
parent sells subsidiary stock through open market sales
Accounting Treatment
the parent identifies for each step sale:
the carrying value of the investment sold,
specific identification
FIFO
fair value of assets received, and
gain or loss on the sale
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11. Step Sales - Cost Method
An Example
1/1/2000
1/1/2001
1/1/2002
1/1/2003
7/1/2003
15% shares acquired
75% shares acquired
15% shares sold
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12. Step Sales - Cost Method
In the Parent’s books:
Assuming the parent uses specific identification
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13. Step Sales - Cost Method
EE’s in the consolidation worksheet
Gain on sale of investment 9,750
1/1 Retained earnings - P 9,750
To exclude the subsidiary undistributed income
from acquisition to beginning of current year
Gain on sale of investment 6,000
Subsidiary income sold 6,000
To exclude the subsidiary income
from beginning of current year to sale date
obj 3, 4

14. Issuance of Shares by Subsidiary To Parent Company Only
An Example
1/1/2001
1/1/2002
1/1/1993
P acquired 14,000 shares (70%) of S
S issued 4,000 additional shares to P
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15. Issuance of Shares by Subsidiary To Parent Company Only, Above BV
An Example *
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16. Issuance of Shares by Subsidiary To Parent Company Only, Above BV
New shares issued above book value
The purchase differential represents the transfer of interest from the parent to the noncontrolling stockholders
Noncontrolling interests in net assets increase by $4,500.
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17. Issuance of Shares by Subsidiary To Parent Company Only, Below BV
An Example *
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18. Issuance of Shares by Subsidiary To Parent Company Only, Below BV
New shares issued below book value
The purchase differential represents the transfer of interest from the noncontrolling stockholders to the parent
Noncontrolling interests in net assets increase by $3,500.
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19. % owned remains the same BV of interest acquired = acquisition cost
Issuance of Shares by Subsidiary To Parent Company and Noncontrolling Stockholders
% owned remains the same
BV of interest acquired = acquisition cost
Purchase differential = 0 regardless of issue price of new shares
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20. Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only
An Example
1/1/2001
1/1/2002
1/1/1993
P acquired 14,000 shares (70%) of S
S issued 4,000 additional shares to noncontrolling stockholders
obj 6

21. Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only
New shares issued above book value
The purchase differential represent the transfer of interest from the noncontrolling stockholders to the parent
Controlling interests in net assets increase by (purchase differential x P%)
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22. Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only, Above BV
In the parent’s books:
Investment in S ,500
Gain from subsidiary issuance of shares 10,500
To record the transfer of interest from noncontrolling stockholders to the parent
obj 6

23. Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only, Below BV
In the parent’s books:
Gain from subsidiary issuance of shares 8,167
Investment in S 8,167
To record the transfer of interest from the parent to noncontrolling stockholders
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24. Purchase of Shares by Subsidiary To Noncontrolling Stockholders Only
Subsidiary purchases treasury shares above book value
Controlling interest in net assets increases
Accounting is analogous to issuance of shares by subsidiary
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25. On the Workpaper
If the treasury stock is purchased at book value, there’s no net effect on the dollar amount of P’s investment in S – the elimination entry must reflect the contra-asset Treasury Stock
If the treasury stock is purchased for more than book value, P’s interest decreases – it implies an undervaluation of S’s assets. That decrease is added to the Difference between cost and book value.
If treasury stock is purchased for less than book value, P’s interest increases – it implies an over-valuation of S’s assets. That increase is deducted from the Difference between cost and book value.
If the treasury stock is reissued, treat the transaction just like a new stock issue. If P buys the stock, its equity interest increases. If P doesn’t buy the stock, its equity interest decreases and there’s a nonoperating gain or loss.
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26. Advanced Accounting by Debra Jeter and Paul Chaney
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