1. 8 - 0 Advanced Accounting by Debra Jeter and Paul Chaney Chapter 8: Changes in Ownership Interest Slides Authored by Hannah Wong, Ph.D. Rutgers University

2. 8 - 1 Changes in Ownership - Transactions lparent’s transactions: n parent purchases shares of subsidiary in the open market n parent sells shares of subsidiary in the open market

3. 8 - 2 Changes in Ownership - Transactions lsubsidiary’s transactions: n subsidiary issues new or treasury shares n subsidiary buys treasury stock

4. 8 - 3 Changes in Ownership

5. 8 - 4 Changes in Ownership lIncrease if n P purchases additional shares of S in open market n S issues stock, P acquires more than its pro-rata number of shares n S buys treasury stock, P sells less than its pro-rata number of shares lDecrease if n P sells shares of S in open market n S issues stock, P acquires less than its pro-rata number of shares n S buys treasury stock, P sells more than its pro- rata number of shares Parent’s % of ownership will:

6. 8 - 5 Step Purchases lTransaction n parent acquires subsidiary stock through several open market purchases lAccounting Treatment: the parent identifies for each step purchase n the cost of each investment, n fair value of assets acquired, and n the difference between cost and book value

7. 8 - 6 Step Purchases 15% shares acquired 75% shares acquired 1/1/20001/1/2001 1/1/20021/1/2003 An Example

8. 8 - 7 Step Purchases An Example

9. 8 - 8 Step sales - Cost Method n parent sells subsidiary stock through open market sales lAccounting Treatment n the parent identifies for each step sale: n the carrying value of the investment sold,  specific identification  FIFO n fair value of assets received, and n gain or loss on the sale

10. 8 - 9 Step Sales - Cost Method 15% shares acquired 75% shares acquired 1/1/20001/1/2001 1/1/20021/1/2003 An Example 7/1/2003 15% shares sold

11. 8 - 10 Step Sales - Cost Method In the Parent’s books: Assuming the parent uses specific identification

12. 8 - 11 Step Sales - Cost Method EE’s in the consolidation worksheet Gain on sale of investment9,750 1/1 Retained earnings - P9,750 To exclude the subsidiary undistributed income from acquisition to beginning of current year Gain on sale of investment6,000 Subsidiary income sold6,000 To exclude the subsidiary income from beginning of current year to sale date

13. 8 - 12 Step Purchases - Partial Equity Method In the Parent’s books: Investment in S12,000 Retained earnings12,000 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%

14. 8 - 13 Issuance of Shares by Subsidiary To Parent Company Only P acquired 14,000 shares (70%) of S S issued 4,000 additional shares to P 1/1/1993 1/1/20011/1/2002 An Example

15. 8 - 14 Issuance of Shares by Subsidiary To Parent Company Only, Above BV An Example *

16. 8 - 15 Issuance of Shares by Subsidiary To Parent Company Only, Above BV lNew shares issued above book value lThe purchase differential represents the transfer of interest from the parent to the noncontrolling stockholders lNoncontrolling interests in net assets increase by $4,500.

17. 8 - 16 Issuance of Shares by Subsidiary To Parent Company Only, Below BV An Example *

18. 8 - 17 Issuance of Shares by Subsidiary To Parent Company Only, Below BV lNew shares issued below book value lThe purchase differential represents the transfer of interest from the noncontrolling stockholders to the parent lNoncontrolling interests in net assets increase by $3,500.

19. 8 - 18 Issuance of Shares by Subsidiary To Parent Company and Noncontrolling Stockholders l% owned remains the same lBV of interest acquired = acquisition cost lPurchase differential = 0 regardless of issue price of new shares

20. 8 - 19 Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only P acquired 14,000 shares (70%) of S S issued 4,000 additional shares to noncontrolling stockholders 1/1/1993 1/1/20011/1/2002 An Example

21. 8 - 20 Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only lNew shares issued above book value lThe purchase differential represent the transfer of interest from the noncontrolling stockholders to the parent lControlling interests in net assets increase by (purchase differential x P%)

22. 8 - 21 Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only, Above BV To record the transfer of interest from noncontrolling stockholders to the parent Investment in S10,500 Gain from subsidiary issuance of shares10,500 In the parent’s books:

23. 8 - 22 Issuance of Shares by Subsidiary To Noncontrolling Stockholders Only, Below BV To record the transfer of interest from the parent to noncontrolling stockholders Gain from subsidiary issuance of shares8,167 Investment in S8,167 In the parent’s books:

24. 8 - 23 Purchase of Shares by Subsidiary To Noncontrolling Stockholders Only lSubsidiary purchases treasury shares above book value lControlling interest in net assets increases lAccounting is analogous to issuance of shares by subsidiary

25. 8 - 24 Advanced Accounting by Debra Jeter and Paul Chaney Copyright © 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.