It Is Common for a Parent Firm to Record Its $80 \%$

question 23

Essay

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 hol dings.
(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.

---

Definitions:

Outstanding

Refers to shares that are currently owned by investors, including public shareholders, company officials, and insiders.

Earnings Per Share

A financial metric that calculates the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of a company's profitability.

Stock Dividend

A distribution of additional shares of a company's stock to its shareholders without any change in ownership percentage.

Stock Split

A corporate action where a company divides its existing shares into multiple shares to boost the liquidity of the shares, although the overall value of the company does not change.