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.
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(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:
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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.?
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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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Definitions:

Behavioral Economics

A branch of economics focused on understanding how a range of factors, including psychological, cognitive, emotional, cultural, and social elements, influence the economic decision-making processes of both individuals and institutions.

Hedonic Treadmill

A concept suggesting that people consistently return to a relatively stable level of happiness despite major positive or negative events or life changes.

Richard Easterlin

An economist known for the Easterlin Paradox, which posits that people's happiness does not necessarily increase as their country's economy grows.

Wannamaker's Lament

The problem of not knowing which part of one's advertising is effective or how it directly impacts sales.