08_Fischer10e_SM_Ch08_final

08_Fischer10e_SM_Ch08_final - CHAPTER 8 UNDERSTANDING THE...

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CHAPTER 8 UNDERSTANDING THE ISSUES 1. The stock dividend will result in the follow- ing entry being made by the subsidiary: Retained Earnings (10,000 shares × $60 per share). ............ 600,000 Common Stock ($1 par, 10,000 shares × $1). ............... 10,000 Paid-In Capital in Excess of Par ($600,000, $10 par). .... 590,000 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. 2. 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 {(90,000 shares/120,000 shares = 75%) × [$4,000,000 + ($50 × 20,000 shares)]}. .............. $3,750,000 Equity prior to sale (90% × $4,000,000). ........... 3,600,000 Increase in equity interest. ..... $ 150,000 3. The subsidiary is selling the additional shares at $50 each, which is in excess of the current book value of $40 per share ($4,000,000/100,000 shares). (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- ment. 4. 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 by A. 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. 5. 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.
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This note was uploaded on 02/05/2010 for the course ACC 476 taught by Professor Hildy during the Spring '07 term at Lane.

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08_Fischer10e_SM_Ch08_final - CHAPTER 8 UNDERSTANDING THE...

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