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Unformatted text preview: Chapter 8 UNDERSTANDING THE ISSUES 1. The stock dividend will result in the following 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 subsidiary account, the parent will now simply eliminate 90% of the revised (but equal in total) subsidiary equity accounts. 2. The parent shares in any equity raised in excess of the current book value of $40 per share ($4,000,000/100,000 shares). The increase in equity that results is not recorded as income. It is an increase in paid-in capital in excess of par. The calculation in this case would be: Equity after sale, 75% × (4,000,000 + 1,000,000).................. $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 increase will normally go to paid-in capital in excess of par. (b) If the parent maintains its percentage, there is no impact other than an increase 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 create a new (small) block holding. This investment will create a new excess, probably attributed to goodwill. 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 common 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 interest. 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 Company 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 purchasing 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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- Spring '08