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Advanced Accounting 810-51Cd
--In this case "P" is assumed to have sold a portion of its interest in the entity; the percentage sold is computed as follows:
[(ownership interest prior to sale-ownership interest after sale)/ownership interest prior to sale]
NOTE: APB-9 remains GAAP; the exception is not GAAP but is considered permissive; this means that to apply the exception the stock issuance
should be at public offering by an SEC covered company.
--the ownership interest of "P" is changed (reduced); the new percentage must be used in all present and future computations unless changed
again
Solution:
"S" SHE immediately subsequent to sale of 2,000 shares...............
"P" adjusted ownership interest......................................
"P" equity in "S" after sale.........................................
"P" equity in "S" prior to sale (.8)(200,000)........................
Increase (decrease) in equity in "S" as a result of sale to MI.......
Sales Price:
$
$
$20
$30
240,000 $ 260,000 $
8/12
8/12
160,000 $ 173,333 $
160,000
160,000
-0- $ 13,333 $
$10
220,000
8/12
146,667
160,000
(13,333)
13,333
Sale at $10/share:
"P" retained earnings (assumes no PIC from sub stock transactions) *
13,333*
Investment in "S"....................................................
13,333
*
it is permissible to debit ordinary PIC of "P" but is less conservative to do so;
however, this procedure is often followed because it avoids a reduction of RE.
Adjusting entries: "S" is SEC reporting company and sale is in "public offering"; gain or loss on sale recognized;
Because the shares are considered to be sold, any portion of the excess of cost over book value in the analysis of the investment must be
adjusted to reflect the indirect sale; in this case the excess of cost over book value is entirely allocated to patent so the adjustment
is simple:
Patent (per analysis).........
$
20,000
percentage sold: [(.8-.6667)/.8] = .1667
$
3,333
Patent has already been amortized over 3 years of its ten year life so ($3,333/10)x3 years or $1,000 of the patent applicable to the interest
sold has already been amortized on the consolidated financial statements. Because of the sale, the adjustments made in the past must no
longer be consolidated and must be adjusted through the retained earnings account.
Sale at $20 per share:
"P" retained earnings (prior amort of patent allocable to % sold)......
Loss on sale of "S" C/S (3,333-1,000)....................................
Investment in "S" (reduce be excess of cost>bv allocable to part sold)
1,000
2,333
1,000
10,000
1,000
15,666
3,333
11,000
16,666
Capital stock.................
$
PIC...........................
RE............................
Total PIC and RE.............. $
Less: T/S @ cost..............
Total SHE.....................
$
"P" ownership interest........
"P" total book value.......... $
Adjustment....................
Prior to
Purchase
100,000
50,000
80,000
230,000
-0230,000
8/10
184,000
$
$
$
500 sh
@ $23
100,000
50,000
80,000
230,000
11,500
218,500
8/9.5
184,000
-0-
$
$
$
500 sh
@ $30
100,000
50,000
80,000
230,000
15,000
215,000
8/9.5
181,053
(2,947)
$
$
$
500 sh
@ $10
100,000
50,000
80,000
230,000
5,000
225,000
8/9.5
189,474
5,474
Adjusting entries:
Purchase at $23/sh:
memo entry to record change in ownership percentage only
Purchase at $30/sh:
PIC from subsidiary stock transactions (or "P" RE).....
Investment in "S".................................
2,947
2,947*
Purchase at $10/sh:
Investment in "S"......................................
5,474
PIC from subsidiary stock transactions............
5,474*
*
"P" PIC (from any source) can be used but is less conservative
share