Chapter 8 Subsidiary Equity Transactions; Indirect and Mutual Holdings

C82 Subsidiary equity transactions; Indirect and mutual holdings uSubsidiary stock dividends uSubsidiary issues additional shares –parent purchases some shares uSubsidiary purchases its own shares uIndirect holdings –subsidiary controls another company uMutual holdings –subsidiary owns parent common stock

C83 Subsidiary stock dividend uOnly impact on parent is to spread investment balance over more shares uThe sub moves retained earnings to paid-in capital Complication - under the cost method, the cost to equity conversion can no longer be based simply on the change in RE since RE has been capitalized (moved to paid-in). Conversion must be based on change in total subsidiary equity.

C84 Sub issues additional shares: Parent buys none Compare equity before and after issue: –if equity increases, credit parent paid-in excess. –if equity decreases, debit parent paid-in excess (if insufficient, parent retained earnings).

C85 Sub issues additional shares: Parent buys none - Example Prior to issue: Parent owns 9,000 of 10,000 sub shares. Sub equity = $200,000. Sub Issue: Assume sub issues 2,000 shares at following alternative prices: Added Price Equity $15$30,000 $20$40,000 $24$48,000

C86 Sub issues additional shares: Parent buys none - Example (con’t) Adjustment is to Parent paid-in unless there is a decrease and Parent paid-in is insufficient, then adjust RE

C87 Sub issues additional shares: Parent buys some Parent maintains % (buys 90% or 1,800 shares in our example) - there is no adjustment beyond recording purchase at cost. Parent increases % (buys more than 90%) - creates a new block, the difference is excess of cost or book value on the block. Parent decreases % (buys less than 90%) - Difference between equity change and cost is adjustment following rules where parent purchases none of shares. Example follows

C88 Sub issues additional shares: Parent buys some - Example

C89 Sub issues additional shares: Parent buys some - Entries 1,000 shares Investment in Sub36,658 Cash (purchase 1,000 $24)24,000 Paid-in excess12,658 1,800 shares Investment in Sub43,200 Cash (purchase 1,800 $24)43,200 2,000 shares Investment in Sub48,000 Cash (purchase 2,000 $24)48,000 (Includes excess cost of $658 attributed to goodwill)

C810 Sub purchase of its own shares uSub is viewed as agent of parent purchasing a new block uD&D of excess is prepared for the new block Example follows

C811 Sub purchase of its own shares: Example Example Sub equity is $200,000 Parent owns 90% (9,000 shares) Sub purchases 1,000 shares for $25 each Price paid25,000 Equity purchased: 10%  200,00020,000 Excess cost 5,000 4Excess is distributed using normal rules 4Treasury stock account of sub is eliminated, on the worksheet, in same manner as a new 10% block

C812 Sub purchase of its own shares: Example (con’t) èFuture: This will likely be treated as a treasury stock transaction with an adjustment to paid-in only.

C813 Indirect Holdings uThese are multi-tier ownership arrangements uControl requires over 50% at each level uP controls S if P owns 51% of SP and SP owns 51% of S, even though: uP gets only 26% (51%  51%) of income reported by S

C814 Indirect Holdings: P owns SP, SP purchases S Price Paid200,000 Interest acquired (70%  $200,000)140,000 Excess60,000 S Building (70%  $50,000 mkt adjustment)35,000 Goodwill25,000 Example: P owns 80% of SP; SP purchases 70% of S

C815 uAmortizations of excess are shared 80/20 by P and SP uIDS and RE adjustments for unrealized profits by S are split –56% (80%  70%) to P –14% (20%  70%) to SP –30% to S èFuture: FASB proposal would increase NCI of S for $15,000 on building. Might also impute GW to NCI. Indirect Holdings: P owns SP, SP purchases S (con’t)

C816 Indirect Holdings: SP owns S, P purchases SP Price Paid250,000 Interest acquired: 80%  $200,000160,000 Excess90,000 S Bldg: 80%  70%  $50,000 mkt adj 28,000 Goodwill62,000

C817 Indirect Holdings: SP owns S, P purchases SP (con’t) uAmortizations are charged only to P uAn SP asset would be adjusted for 80% of difference between book and fair value uIDS and RE Adjustments for unrealized profits by S are split –P 56% (80%  70%) –SP 14% (20%  70%) –S 30%. èFuture - FASB proposal would increase NCI of S for $15,000 and NCI of SP for $7,000 on building. Might also impute GW to NCI

C818 Mutual Holdings: Sub owns Parent shares “Treasury Stock Method” uSub’s interest treated as if the parent purchased the shares for treasury. uInvestment is maintained at cost uInvestment shown as treasury shares and deducted from total consolidated equity