Concept: Accounting for investments in other companies: When an investment is made in the shares of another company and a large stake is purchased, such an acquisition is termed as majority stake or Controlling interest. There are two methods of accounting for controlling interest in subsidiaries namely, Equity method and the Cost method. When the size of the acquisition does not exceed 20-25% of the paid up share capital of the other company, cost method is preferred. When the size of the acquisition does exceed 20-25% of the paid up share capital of the other company, equity method is preferred. The main difference between the two methods is the treatment of dividends and net profits of the subsidiary companies in the books of accounts. Reasons for proper treatment of Loss on Sale of Stake in the company.

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Chapter 15, Problem 2BTN

To determine

Concept:

Accounting for investments in other companies:

When an investment is made in the shares of another company and a large stake is purchased, such an acquisition is termed as majority stake or Controlling interest.

There are two methods of accounting for controlling interest in subsidiaries namely, Equity method and the Cost method.

When the size of the acquisition does not exceed 20-25% of the paid up share capital of the other company, cost method is preferred.

When the size of the acquisition does exceed 20-25% of the paid up share capital of the other company, equity method is preferred.

The main difference between the two methods is the treatment of dividends and net profits of the subsidiary companies in the books of accounts.

Reasons for proper treatment of Loss on Sale of Stake in the company.

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