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McGraw-Hill/Irwin
Scope of Chapter
Changes in parent companys ownership interest in a subsidiary. Subsidiary with preferred stock outstanding. Stock dividends distributed by a subsidiary. Treasury stock transactions of a subsidiary. Indirect shareholdings and parent companys common stock owned by a subsidiary.
If the parent pays more than carrying amount for the minority interest, the difference is attributed to goodwill. If the parent company pays less than carrying amount for the minority interest, the difference, generally immaterial, may be treated as an offset to goodwill recognized in prior acquisitions of the subsidiary's common stock.
A parent company may be able to control its subsidiary effectively without a majority ownership. It may sell portions of its subsidiarys common stock for cash or other business combinations. Such a sale involves accounting for and income statement display of the disposal of a business segment. Accounting for this sale is similar to accounting for disposal for any non-current asset.
The carrying amount of the common stock sold is removed from the parents Investment in Subsidiary common stock ledger. The difference between carrying amount and cash/fair market value of other consideration received is recognized as gain/loss on disposal of stock. This gain/loss is not an extraordinary item under generally accepted accounting principles. Specific identification is required to account for the carrying amount if control is acquired by installment purchase.
The parent company may instruct the subsidiary to issue new common stock to obtain funds. The parent company and minority stock holders waive their preemptive right to obtain new stock. Subsequently the parent companys ownership percentage changes. The funds obtained is available to the consolidated group via intercompany transactions.
A subsidiary's issuance of additional shares of common stock to the public results in:
1.
2.
Non-operating gain or loss to the parent company. An increase in the minority interest in net assets of the subsidiary.
The amounts are computed by comparing the parent's and minority stockholders' interests in the net assets of the subsidiary before and after the subsidiary's issuance of common stock to the public.
The Subsidiary may issue additional common stock to the Parent Company directly. This may happen if the Parent Company desires to increase its investments in the Subsidiary
or
If the Parent Company desires to reduce the influence of the minority stock holders.
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Subsidiarys Issuance of Additional Shares of Common Stock to the Parent Company: Accounting Treatment
Results in:
1.
2.
A non-operating gain or loss to the parent company A change in the minority interest in net assets of the subsidiary.
Computation of these amounts is carried out in the same way as for subsidiary issuances of common stock to the public.
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Parent company acquiring all of the subsidiarys preferred stock together with all/majority of its common stock. Parent company acquiring less than 100% of the subsidiarys preferred stock.
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The minority interest of preferred stockholders in the net assets of the subsidiary is measured by the call price of the preferred stock. The parent company's investment in the subsidiary's preferred stock is accounted for:
1. 2.
By the cost method, unless the subsidiary passes dividends on cumulative preferred stock. In that case, the parent uses the equity method of accounting for the passed dividend.
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Stock dividends declared by a subsidiary for which the parent company uses the equity method of accounting do not require any journal entries by the parent. The working paper elimination reflects the post-stock dividend balances of the subsidiary's stockholders' equity ledger accounts.
Note: AICPA has stated that the retained earnings in the consolidated financial statements should reflect the accumulated earnings of the consolidated group not distributed to the shareholders of, or capitalized by, the parent company.
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Treasury stock owned by a subsidiary on the date of the business combination is treated as retired stock in the preparation of consolidated financial statements. A working paper elimination is prepared to account for the retirement . Methods used:
1. 2.
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One subsidiary and the Parent company jointly owning a controlling interest in another subsidiary. A subsidiary company itself being the parent company of its own subsidiary.
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Indirect Shareholding and Parent Companys Common Stock Owned by a Subsidiary: Accounting Treatment
Indirect Ownership: Equity method of accounting should be applied for the operating results of the various subsidiaries. Reciprocal Ownership: Treasury Stock treatment should be applied for consolidation purposes.
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