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Eliminations and Adjustments:

(CV) The simple equity conversion is recorded:

Undistributed income: 90% of change in retained earnings of Company S from

January 1, 20X1, to January 1, 20X4, 90% x $90,000 $81,000

Adjustment to paid-in capital resulting from the subsidiary stock sale: Controlling interest in Company S equity subsequent to sale on January 1, 20X4, 75% x $300,000 $225,000

Controlling interest in Company S equity prior to sale on January 1, 20X4, 90% x $240,000 216,000

Net increase in paid-in capital 9,000

Total increase in the investment account $90,000

(EL) Eliminate 75% of the subsidiary equity balances at the beginning of the year against the investment account. (D) Distribute the excess of cost to the equipment account as shown by the original determination and distribution of excess schedule.

(A) Depreciate the equipment for the past three years and the current year.

A dangerous shortcut might be attempted whereby the net change in the controlling ownership interest is calculated by comparing 90% of the total subsidiary equity on January 1, 20X1, to 75% of the total subsidiary equity on January 1, 20X5. This shortcut will produce the correct adjustment to the investment in subsidiary account, but it will not provide the analysis needed to distribute the adjustment to the parent's paid-in capital and retained earnings.

Parent Purchase of Newly Issued Subsidiary Stock

A parent may purchase all or a portion of the newly issued stock. The general approach in such cases is to compare the change in equity before and after the sale to the price paid for the additional interest. When the ownership interest remains the same, there will be no adjustment. When the ownership interest increases, any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block. When the ownership interest decreases, the difference between the change in equity and the price paid is viewed as a change in paid-in capital. Presented in the following table are three cases based on the previous example for which the determination and distribution of excess schedule was shown on page 8-6. Recall that the subsidiary is issuing 2,000 new shares of common stock for $30 per share.

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