Question

Two types of intercompany stock purchases significantly complicate the consolidation process. The first occurs when the subsidiary issues added shares of stock in a public issue and the parent buys a portion of the shares. The second occurs when the subsidiary purchases outstanding shares of the parent company. Required: A- Discuss the current theoretical consolidation procedure for situations in which the parent buys a portion of the newly issued subsidiary shares that is (1) equal to its existing ownership percentage, (2) greater than its existing ownership percentage, and (3) less than its existing ownership percentage. B- Discuss the most widely supported, current theoretical consolidation procedures used when the subsidiary purchases outstanding common stock shares of the parent.

Answer 1

A. 1. Investment account of parents Company will increase but same will be increase in equal holding ratio of parents equity in th subsidiary Company. Therefore No Adjustment entry required as there is no excess addtiom in cost or book value.

2. That portion of the purchase of share that exceed the shares required to maintain the existing percentage of holding represent the new block of stocks. Its required a new determination and distribution of excess schedule for the added interest. there will be seprate account maintain for amortization of new block of stock.

3.In Effect Parents company,s investment mitigates the impacts on its portion of subsdiary equity. The Equity Interest prior to issuance plus the price paid for the added interest is compare to equity interest after issuance. if there is increase , paid up capital in excess par increase. if there is a decrease paid up capital excess par decrease.

B. Most Widely Supported view is mutual holding is that subsdiary company purchase the share of parents company as represent the parents agents. This is reasonable view since the subsdiary is controlled by the parents company. The shares purchase are treated as treasury shares because these share does not receive the any consolidated income.