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Dr. M.D.

Chase
Advanced Accounting 805-51Cc

Long Beach State University


Special Issues: Changes in Ownership Interest
Page 1

I. Changes in an Ownership Interest:


A. Sale of an ownership interest:
--Accounting issues:
1. Record the correct amount of gain or loss on the sale; Proprietary theory and SEC requirements (unless the sale is part of a broader
corporate reorganization) require the recognition of gain or loss on a disposal of all or part of an investment in a subsidiary;
2. Determine if the sale constitutes a disposal of a segment (a major line of business or class of customer; APB-30) of the business;
3. Does the sale reduce ownership below 50% and thus require the use of APB-18 (equity method; ownership levels between 20% and
50%, voting equity securities only) or SFAS-12 (cost method; ownership levels less than 20% any type of equity security);
--Procedure:
1. Determine the basis (book value) of the investment;
--Adjust the Investment account to reflect all amortizations (this is not necessary if the parent is following APB-18 procedures
(sophisticated equity method));
--If piecemeal acquisitions have been made, each acquisition will have its own basis
--If only a portion of an investment is to be sold; FIFO or Specific Identification must be used for tax
purposes;
--any Patent attendant to the investment is reduced on a pro rata basis;
EXAMPLE: --"P" acquires 90% of "S" in a series of transactions described below:

Date
Acquired
7/1/x3
4/1/x4
10/1/x5
1/1/x6
7/7/x6

Percent
acquired
(disposed)
20
40
30
(10)
(15)

Cost
(receipt)
30,000 $
74,000
81,000
(40,000)
(70,000)

Annual
SHE
1/1
100,000 $
150,000
190,000
235,000

Net
Income
50,000
40,000
45,000
55,000

SHE at
Acquisition
125,000
160,000
220,000

SHE
12/31
150,000
190,000
235,000
290,000

--all net assets of "S" are carried at "FMV" at the time of acquisitions except for a patent that has just been acquired;
--any excess of cost over book value is allocated to a patent with a ten year life from the date of allocation;
--on 1/1/x6 "P" sells 10% of "S" for $40,000;
--on 7/1/x6 "P" sells an additional 15% of "S" for $70,000
--assume that the $55,000 net income in year 6 is earned uniformly throughout the year;
Required:
1. Analyze each investment;
2. Present all necessary journal entries for years 3,4, and 5 on "P" books;
3. Compute the basis (book value) of the investment account at EOY 5;
4. Compute the basis (book value) of each investment at EOY 5;
5. Present the journal entries for year 6;

Dr. M.D. Chase


Advanced Accounting 805-51Cc
Solution:
1. analyze each investment:
Cost........................
Purchased BV: (.2)x100k=
Excess of cost>BV...........

Attributable to:
Purchased NI (125-100)(.2)
Balance to GW............
Excess accounted for..

Long Beach State University


Special Issues: Changes in Ownership Interest
Page 2

Investment
One
30,000
$
20,000 (.4)x150k)=
10,000
$

5,000
5,000
10,000

Investment
Two
74,000
$
60,000 (.3)x190k=
14,000
$

(160-150)(.4) 4,000
10,000
14,000

Investment
Three
81,000
57,000
24,000

(220-190)(.3) 9,000
15,000
24,000

2. present all necessary journal entries for years 3,4, and 5 on "P" books;
First year of investment; total interest 20%; equity method
7/1/x3 Record the first investment:
Investment in "S"...............................
30,000
Cash.......................................
30,000
12/31/x3 Record equity in "S" earnings:
Investment in "S" (50,000-(125,000-100,000)(.2).
Subsidiary NI..............................

5,000

5,000

12/31/x3 Record amortization of GW:


Subsidiary NI (5,000)(1/10)(1/2 year)...........
250
Investment in "S"..........................
250
Second year of investment; total interest 60%; equity method, consolidation rules apply
4/1/x4 Record the second investment:
Investment in "S"...............................
Cash.......................................

74,000

12/31/x4 Record equity in "S" earnings:


Investment in "S"(40,000)(.2) full year.........
(40,000-(160,000-150,000)(.4)..
Subsidiary NI..............................

8,000
12,000

74,000

20,000

12/31/x4 Record amortization of GW:


Subsidiary NI (5,000)(1/10).....................
500
(10,000)(1/10)(9/12)...............
750
Investment in "S"..........................
Consolidation entries:
12/31/x4 Eliminate current year investment account entries:
Subsidiary NI (20,000-1,250)....................
Investment in "S"..........................

1,250
Simple Equity

12/31/x4 Eliminate pro rata share per analysis:


"S" SHE (from first investment) (20,000 + 4,750)
"S" SHE (from second investment, per analysis)..
Investment in "S"..........................

24,750
60,000

12/31/x4 Allocate the excess of cost over book value per analysis:
Purchased NI (per first investment).............
Purchased NI (per second investment)............
Patent (per first investment).................
Patent (per second investment)................
Investment in "S"..........................

5,000
4,000
5,000
10,000

12/31/x4 Amortize the excess of cost over bookvalue:


Amortization expense (5,000)(1/10) first inv....
Amortization expense (10,000)(1/10)(9/12) 2nd...
"P" RE (prior year amortizations)...............
Patent...................................

500
750
250

18,750

18,750

84,750

24,000

1,500

Sophisticated Equity
20,000

25,000
60,000

20,000

85,000

Dr. M.D. Chase


Advanced Accounting 805-51Cc

Long Beach State University


Special Issues: Changes in Ownership Interest
Page 3

Third year of investment; total interest 90%; equity method, consolidation rules apply
10/1/x5 Record the third investment:
Investment in "S"...............................
Cash.......................................

81,000

12/31/x5 Record equity in "S" earnings:


Investment in "S"(45,000)(.2) full year.........
(45,000)(.4) full year.........
(45,000-(220,000-190,000)(.3)..
Subsidiary NI..............................

9,000
18,000
4,500

12/31/x5 Record amortization of GW:


Subsidiary NI (5,000)(1/10).....................
(10,000)(1/10).....................
(15,000)(1/10)(3/12)...............
Investment in "S"..........................
A. SALE OF OWNERSHIP INTEREST--CONTINUED
Consolidation entries:

500
1,000
375

81,000

31,500

1,875

Simple Equity

12/31/x5 Eliminate current year investment account entries:


Subsidiary NI (31,500-1,875)....................
Investment in "S"..........................

29,625

12/31/x5 Eliminate pro rata share per analysis:


"S" SHE (first: 20,000+4,750+7,500) ...........
"S" SHE (second: 60,000+11,250).................
"S" SHE (from third investment, per analysis)...
Investment in "S"..........................

32,250
71,250
57,000

12/31/x5 Allocate the excess of cost over book value per analysis:
Purchased NI (per first investment).............
Purchased NI (per second investment)............
Purchased NI (per third investment).............
Patent (per first investment).................
Patent (per second investment)................
Patent (per third investment).................
Investment in "S"..........................

5,000
4,000
9,000
5,000
10,000
15,000

12/31/x5 Amortize the excess of cost over bookvalue:


Amortization expense (5,000)(1/10) first inv....
Amortization expense (10,000)(1/10) 2nd inv.....
Amortization expense (15,000)(1/10)(3/12) 3rd...
"P" RE (prior year amortizations)...............
Patent...................................

500
1,000
375
1,500

29,625

160,500

48,000

3,375

3. compute the basis (book value) of the investment account at end of year 5:
20%
40%
30%
Total
Cost...............
$
30,000 $
74,000 $
81,000 $
185,000
Equity in "S" ni:
Year 3
4,750
0
0
4,750
Year 4
7,500
11,250
0
18,750
Year 5
8,500
17,000
4,125
29,625
Basis EOY 5........
$
50,750 $
102,250 $
85,125 $
238,125
4. compute the basis (book value) of each investment at end of year 5:
Investment in "S":
Simple Equity
Sophisticated Equity
Beginning Balance 7/1/x3...... $
30,000
$
30,000
Add: equity is "S" ni.........
5,000
5,000
Deduct: Amortization of Patent
(250)
0
Balance 12/31/x3..............
$
34,750
$
35,000

Sophisticated Equity

31,500

33,000
72,000
57,000

31,500

162,000

Dr. M.D. Chase


Advanced Accounting 805-51Cc

Long Beach State University


Special Issues: Changes in Ownership Interest
Page 4

Beginning Balance 1/1/x4...... $


Add: equity is "S" ni.........
purchases (sales)........
Deduct: Amortization of Patent
Balance 12/31/x4..............
$

34,750
20,000
74,000
(1,250)
127,500

Beginning Balance 1/1/x5......


$
Add: equity is "S" ni.........
purchases (sales)........
Deduct: Amortization of Patent
Balance 12/31/x4..............
$

127,500
31,500
81,000
(1,875)
238,125

35,000
20,000
74,000
0
130,000
130,000
31,500
81,000
0
241,500

5. present the journal entries for year 6;


Fourth year of investment; total interest 70% after two sales of "S" C/S; equity method, consolidation rules apply
1/1/x6 Record sale of 10% interest in "S" C/S: (assume FIFO)
Cash............................................
40,000
Investment in "S" (10/20)(50,750)..........
25,375
Gain on sale...............................
14,625
7/1/x6 Record the sale of an additional 15% interest in "S" C/S (assume FIFO)
Cash............................................
70,000
Investment in "S": BV BOY (10/20)(49,750)
25,375
1st:
+NI (.1)(55,000)(1/2 year)
2,750
-Amort GW (.5)(5k)(.1)(.5 yr)
125
BV BOY (5/40)(102,250)
12,781
2nd:
+NI (.05)(55,000)(1/2 year)
1,375
-Amort GW (5/40)(10k)(.1)(.5 yr)
62
Gain on sale...............................
27,907
12/31/x6 Record equity in "S" earnings:
Investment in "S"(55,000)(.10) 1/2 year.........
(55,000)(.05) 1/2 year.........
(55,000)(.35) full year........
(55,000)(.30) full year........
Subsidiary NI..............................

2,750
1,375
19,250
16,500

12/31/x5 Record amortization of Patent:


Subsidiary NI (5,000)(1/10)(10/20)(1/2 year)
(10,000)(1/10)(35/40)(1/2 yr)......
(10,000)(1/10)(40/40)(1/2 yr)......
(15,000)(1/10).....................
Investment in "S"..........................

125
438
500
1,500

Consolidation entries:

39,875

2,563
Simple Equity

12/31/x5 Eliminate current year investment account entries:


Subsidiary NI (39,875-2,563)....................
Investment in "S"..........................

37,312

12/31/x5 Eliminate pro rata share per analysis:


"S" SHE (second: 60,000+11,250+17,000)..........
"S" SHE (third: 57,000+4,125)...................
Investment in "S"..........................

88,250
61,125

12/31/x5 Allocate the excess of cost over book value per analysis:
Purchased NI (per second investment)............
Purchased NI (per third investment).............
Patent (per second investment)................
Patent (per third investment).................
Investment in "S"..........................

4,000
9,000
10,000
15,000

37,312

149,375

38,000

Sophisticated Equity

39,875

90,000
62,000

39,875

152,000

Dr. M.D. Chase


Advanced Accounting 805-51Cc

Long Beach State University


Special Issues: Changes in Ownership Interest
Page 5

12/31/x5 Amortize the excess of cost over book value:


Amortization expense (10,000)(1/10)-62..........
Amortization expense (15,000)(1/10)..............
"P" RE (prior year amortizations)...............
Patent...................................

938
1,500
1,500

3,938

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