UNDERSTANDING THE ISSUES
The stock dividend will result in the follow-
ing entry being made by the subsidiary:
(10,000 shares ×
$60 per share).
($1 par, 10,000
shares × $1).
Paid-In Capital in
Excess of Par
($600,000, $10 par).
The parent need make no adjustment to its
investment account since there has been
no change in the total subsidiary equity.
When eliminating the investment in subsidi-
ary account, the parent will now simply
eliminate its share of the revised (but equal
in total) subsidiary equity accounts.
The parent’s share in any equity increases
from the excess of the current book value
of $40 per share ($4,000,000/100,000
shares) that the subsidiary receives. The
parent does not record as income the in-
crease in equity that results. Rather, it is an
increase in the parent’s paid-in capital in
excess of par. The calculation in this case
would be as follows:
Equity after sale
shares = 75%) ×
[$4,000,000 + ($50
× 20,000 shares)]}.
Equity prior to sale
(90% × $4,000,000).
Increase in equity interest.
The subsidiary is selling the additional
shares at $50 each, which is in excess of
the current book value of $40 per share
(a) If the parent buys less than its current
ownership percentage of shares, it will
increase its equity to the extent others
pay more than book value. The in-
crease will normally go to paid-in capit-
al in excess of par.
(b) If the parent maintains its percentage,
there is no impact other than an in-
crease in the investment account equal
to the price paid. The parent will supply
90% of the funds and will own 90% of
the equity provided by the new funds.
(c) If the parent buys more than 90% of
the shares issued, it will adjust its in-
vestment based on the impact of the
sale. A sale at more than book value
will cause a reduction in the invest-
ment; a sale at less than book value
will cause an increase in the invest-
Control, in this example, is a “chain link”
process. If A controls B and B, in turn,
controls C, then all three are under com-
mon ownership, and B and C are controlled
In the distribution of Company C’s $10,000
income, 40% (or $4,000) will flow to the
NCI of Company C, and 60% (or $6,000)
will flow to Company B, the controlling in-
terest. That $6,000 will flow as follows: 40%
(or $2,400) will flow to the NCI of Company
B, and 60% (or $3,600) will flow to Com-
pany A, the controlling interest.
The 2% holding in Company P shares,
owned by Company S, is best treated as
treasury stock. This approach views the
subsidiary as the parent’s agent in purchas-
ing parent company shares. As treasury
stock, the 2,000 shares will not share in the
distribution of income and will not create a
separate excess of cost or book value.