It is common for a parent firm to record its investment in a subsidiary under either the cost or simple equity method to expedite the elimination process. This does create some complications, however, when all or a portion of the investment is sold. Assume that in each of the following cases, the parent sells its investment midway through its fiscal year. (1) The parent owned an 80% interest and sold all of its holdings. (2) The parent owned an 80% interest and sold a 20% interest to reduce its ownership percentage to 60%. (3) The parent owned an 80% interest and sold a 60% interest to reduce its ownership percentage to 20%. Required: a. For each of the above cases, comment on the procedures necessary to record the sale, where the investment is carried under simple equity, and the impact on consolidated income of the sale. b. For each of the above cases, state the added procedures that would be necessary if the investment was recorded under the cost method.
It is common for a parent firm to record its investment in a subsidiary under either the
(1) The parent owned an 80% interest and sold all of its holdings.
(2) The parent owned an 80% interest and sold a 20% interest to reduce its ownership percentage to 60%.
(3) The parent owned an 80% interest and sold a 60% interest to reduce its ownership percentage to 20%.
Required:
a. For each of the above cases, comment on the procedures necessary to record the sale, where the investment is carried under simple equity, and the impact on consolidated income of the sale.
b. For each of the above cases, state the added procedures that would be necessary if the investment was recorded under the cost method.
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