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Chapter 8 Consolidations – Changes in Ownership Interests to accompany Advanced Accounting, 11th edition by Beams,

Chapter 8

Consolidations – Changes in Ownership Interests

to accompany Advanced Accounting, 11th edition by Beams, Anthony, Bettinghaus, and Smith

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8-1

Consolidations - Changes in Ownership Interests: Objectives 1. Prepare consolidated statements when parent's ownership percentage increases

Consolidations -

Changes in Ownership Interests: Objectives

1. Prepare consolidated statements when parent's ownership percentage increases or decreases during the reporting period. 2. Apply consolidation procedures to interim (mid-year) acquisitions. 3. Record subsidiary/investee stock issuances and treasury stock transactions.

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8-2

Consolidations – Changes in Ownership Interests 1: CHANGES IN OWNERSHIP PERCENTAGE Copyright ©2012 Pearson Education, Inc.

Consolidations – Changes in Ownership Interests

1: CHANGES IN OWNERSHIP PERCENTAGE

Consolidations – Changes in Ownership Interests 1: CHANGES IN OWNERSHIP PERCENTAGE Copyright ©2012 Pearson Education, Inc.

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8-3

Changes in Parent Ownership Increases (acquires or maintains control) 1. Parent acquires controlling interest during interim

Changes in Parent Ownership

Increases (acquires or maintains control) 1. Parent acquires controlling interest during interim period

  • 2. Parent acquires controlling interest in stages

  • 3. Parent acquires additional shares from noncontrolling interest

Decreases (maintains or loses control)

  • 4. Parent sells shares but maintains control

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  • 5. Parent sells shares giving up

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8-4

Interim Acquisition of Control Parent obtains control  Determine implied value and allocate excess  Apply

Interim Acquisition of Control

Parent obtains control Determine implied value and allocate excess Apply consolidation procedures

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8-5

Interim Acquisition Where Control is Maintained Parent increases its share by buying more stock or decreases

Interim Acquisition

Where Control is Maintained

Parent increases its share by buying more stock or decreases its share by selling some stock Change in Investment in sub is based on the underlying fair value of equity No gain or loss is recognized; paid in capital is adjusted

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8-6

Interim Sale Where Control is Relinquished Parent sells part of its investment and no longer maintains

Interim Sale

Where Control is Relinquished

Parent sells part of its investment and no longer maintains control Reduce the investment based on proportion of interest sold Record gain or loss on sale Discontinue consolidation

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8-7

Is There a Gain or Loss? asic rule: No gain or loss is recorded on equity

Is There a Gain or Loss?

asic rule: No gain or loss is recorded on equity transactions with a firm's owners.

ontrol before and after the transaction is an equity transaction

No gain or loss

Adjust paid in capital, if needed

o control before and control after Point of business acquisition No loss Might have gain on bargain

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8-8

Preacquisition Earnings Earnings prior to the date of acquisition are eliminated from consolidated income by one

Preacquisition

Earnings

Earnings prior to the date of acquisition are eliminated from consolidated income by one of two methods.

1.Exclude revenues and expenses of the subsidiary prior to acquisition from consolidated amounts, or 2.Include the revenues and expenses of the subsidiary in the consolidated income statement for the full year and deduct preacquisition income as a separate item.

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8-9

Equity Book Value on Interim Date Calculate book value (equity) as of the acquisition date: Beginning

Equity Book Value on Interim Date

Calculate book value (equity) as of the acquisition date:

Beginning BV equity + preacquisition revenues – preacquisition expenses – preacquisition dividends = BV equity at acquisition Sales and expenses (not dividends) for the year may be assumed level.

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8-10

Consolidations – Changes in Ownership Interests 2: INTERIM ACQUISITIONS Copyright ©2012 Pearson Education, Inc. Publishing as

Consolidations – Changes in Ownership Interests

Consolidations – Changes in Ownership Interests 2: INTERIM ACQUISITIONS Copyright ©2012 Pearson Education, Inc. Publishing as

2: INTERIM ACQUISITIONS

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8-11

Simple Interim Acquisition: Example Pot acquires 80% of Spot for $2,400 on 5/1/12. Fixed assets with

Simple Interim Acquisition: Example

Pot acquires 80% of Spot for $2,400 on 5/1/12. Fixed assets with a remaining life of 5 years are undervalued by $600. Spot distributed $150 dividends each on 3/1/12 and 12/1/12. Spot's trial balance on 12/31/12 was:

Cash

50

Accounts payable

300

Inventories

900

Other liabilities

1,200

Fixed assets, net

2,800

Common stock

600

Cost of sales

1,500

Retained earnings, 1/1

1,350

Operating expenses

600

Sales

2,700

Dividends

300

6,150

6,150

Revenues and expenses are assumed to be incurred uniformly over the year.

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8-12

Find Book Value at Acquisition Retained Earnings and Common Stock at 1/1/12. Book value of equity

Find Book Value at Acquisition

Retained Earnings and Common Stock at 1/1/12.

Find Book Value at Acquisition Retained Earnings and Common Stock at 1/1/12. Book value of equity

Book value of equity on 1/1/12 Preacquisition amounts:

Revenues Cost of sales Operating expenses Dividends Book value on 5/1/12

$1,950

900 Jan-Apr

(500)Jan-Apr

(200)Jan-Apr

(150)none

$2,000

Find Book Value at Acquisition Retained Earnings and Common Stock at 1/1/12. Book value of equity

Four months’ proportion of revenue and expenses.

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8-13

Analysis and Amortizations Cost of 80% of Spot 2,400 $2,400 / . 80 Implied value of

Analysis and Amortizations

Cost of 80% of Spot

2,400

$2,400 / .

 
80

80

Implied value of Spot

3,000

 

Book value Excess

2,000 1,000
2,000
1,000

From previous

calculation.

$600/5 x 8/12.

 

Unamort

2012

2012

Unamort

 

Allocated to:

5/5/12

12/31/12

Fixed assets

600

(80)

520

Goodwill

400

0

400

Total

1,000

(80)

920

Spot's 20012 income

600

Income since May 1

400

CI 80% share

256

Amortization

(80)

320

(80) 320 NCI 20% share

NCI 20% share

Adjusted

64

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8-14

Pot's Equity Entries These entries are made in Pot’s general ledger: Investment in Spot 2,400 Cash

Pot's Equity Entries

These entries are made in Pot’s general ledger:

Investment in Spot

2,400

 

Cash

 

2,400

for acquisition

   

Cash

120

 

Investment in Spot

 

120

for dividends

   

Investment in Spot

256

 

Income from Spot

 

256

for income from sub

   

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8-15

Income from Spot 256 Dividends 120 Investment in Spot 136 Noncontrolling interest share 64 Dividends 30

Income from Spot

256

 

Dividends

 

120

Investment in Spot

 

136

Noncontrolling interest share

64

 

Dividends

 

30

Noncontrolling interest

 

34

Sales

900

 

Common stock

600

 

Retained earnings 1/1

1,350

 

Fixed assets

600

 

Goodwill

400

 
   

500

   

200

   

150

Investment in Spot

 

2,400

Noncontrolling interest

 

600

Depreciation expense

80

 

Accumulated depreciation

 

80

Worksheet

elimination entries for

2012.

Notice the preacquisition revenues, expenses, and dividends included in the third entry.

Income from Spot 256 Dividends 120 Investment in Spot 136 Noncontrolling interest share 64 Dividends 30
  • Cost of sales

  • Operating expenses

  • Dividends

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8-16

Income statement: Pot Spot DR CR Consol Sales Income from Spot Cost of sales Operating expense
Income statement:
Pot
Spot
DR
CR
Consol
Sales
Income from Spot
Cost of sales
Operating expense
Noncontrolling interest share
Controlling interest share
5,000
2,700
900
6,800
256
256
0
(2,100)
(1,500)
500
(3,100)
(800)
(600)
80
200
(1,280)
64 (64)
2,356
600
2,356
State of retained earnings:
Retained earnings, 1/1
Add net income
Deduct dividends
4,300
1,350
1,350
4,300
2,356
600
2,356
(1,000)
(300)
120
30
150
(1,000)
Retained earnings, 12/31
5,656
1,650
5,656

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8-17

Balance sheet: Pot Spot DR CR Consol Cash Inventories Fixed assets, net Investment in Spot 950
Balance sheet:
Pot
Spot
DR
CR
Consol
Cash
Inventories
Fixed assets, net
Investment in Spot
950 50
1,000
1,300
900
2,200
5,170
2,800
600
80
8,490
2,536
136
2,400
0
Goodwill
Total
Accounts payable
Other liabilities
Common stock
Retained earnings
Noncontrolling interest
400
400
9,956
3,750
12,090
500 300
800
1,800
1,200
3,000
2,000
600
600
2,000
5,656
1,650
5,656
600
34
634
Total
9,956
3,750
12,090

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8-18

Piecemeal Acquisition: Example Pepper acquired Salt in a series of acquisitions, resulting in a total 90%

Piecemeal Acquisition:

Example

Pepper acquired Salt in a series of acquisitions, resulting in a total 90% ownership.

 

Interest

Investment

Date

Acquired

Cost

April 1

5%

7,000

July 1

5%

8,000

October 1

80%

210,000

90%

225,000

The total book value and fair value of Salt's net assets on October 1 (date control was acquired)

was $220,000.

Cost of 90% of Salt

225,000

Implied value of Salt

250,000

Book value

220,000

Goodwill

30,000

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8-19

Income Distribution Salt's income allocation for the year: Total Oct 1 - Dec 31 before Oct

Income Distribution

Salt's income allocation for the year:

 

Total

Oct 1 - Dec 31

before Oct 1

Income

CI 90% share

NCI 10% Share

Preacquisition

Sales

150,000

33,750

3,750

112,500

Expenses

(110,000)

(24,750)

(2,750)

(82,500)

Net income

40,000

9,000

1,000

30,000

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8-20

Pepper's Worksheet Entries There were no dividends before or after the acquisition in this case. Zeros

Pepper's Worksheet Entries

There were no dividends before or after the acquisition in this case. Zeros are included just for clarity.

Income from Salt

9,000

 

Dividends

 

0

Investment in Salt

 

9,000

 

1,000

 

Noncontrolling interest share Dividends

 

0

   

1,000

Noncontrolling interest Sales

112,500

 

Common stock

100,000

 
 

90,000

 

Retained earnings 1/1 Expenses

 

82,500

Dividends

 

0

Investment in Salt

 

225,000

Noncontrolling interest

 

25,000

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8-21

Income statement: Pepper Salt DR CR Consol Sales Income from Salt Expenses Noncontrolling interest share Controlling
Income statement:
Pepper
Salt
DR
CR
Consol
Sales
Income from Salt
Expenses
Noncontrolling interest share
Controlling interest share
274,875
150,000
112,500
312,375
9,000
9,000
0
(220,000)
(110,000)
82,500
(247,500)
1,000
(1,000)
63,875
40,000
63,875
State of retained earnings:
Retained earnings, 1/1
Add net income
Deduct dividends
Retained earnings, 12/31
221,500
90,000
90,000
221,500
63,875
40,000
63,875
0 0
285,375
130,000
285,375

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8-22

Balance sheet: Pepper Salt DR CR Consol Other assets Investment in Salt 451,375 300,000 751,375 234,000
Balance sheet:
Pepper
Salt
DR
CR
Consol
Other assets
Investment in Salt
451,375
300,000
751,375
234,000
9,000
225,000
0
Goodwill
Total
Liabilities
Common stock
Retained earnings
Noncontrolling
interest
Total
30,000
30,000
685,375
300,000
781,375
100,000
70,000
170,000
300,000
100,000
100,000
300,000
285,375
130,000
285,375
25,000
26,000
1,000
685,375
300,000
781,375

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8-23

Interim Sale, Continued Control: Example Pablo owns 90% of Sergio. Pablo’s 1/1/12 $228 investment balance reflects

Interim Sale, Continued Control: Example

Pablo owns 90% of Sergio. Pablo’s 1/1/12 $228 investment balance reflects Sergio's underlying equity plus $18 goodwill ($20 total implied goodwill). During 2012, Sergio reports $36 income and pays $20 dividends on July 1. Pablo sells 10% interest in Sergio on April 1 for

$40.

Pablo's interest in Sergio Investment account:

1/1 balance Income to 4/1 4/1 balance

Before

Interest

After

the sale

sold

the sale

90%

10%

80%

288.0

8.1

296.1

32.9

263.2

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8-24

Investment in Sergio: T-account Investment in Sergio 1/1 Balance 288.0 90% income to 4/1 8.1 4/1

Investment in Sergio:

T-account

Investment in Sergio

1/1 Balance

288.0

 

90% income to 4/1

8.1

4/1 Balance

296.1

32.9 4/1 sale of 10% (1/9 of shares) 16.0 6/1 dividends (80%)

80% income since 4/1

21.6

12/31 Balance

268.8

 

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8-25

Pablo's Entry for the Sale Cash 40.0 Investment in Sergio 32.9 Additional paid in capital 7.1

Pablo's Entry for the Sale

Cash

40.0

 

Investment in Sergio

 

32.9

Additional paid in capital

 

7.1

No gain or loss is recorded. Since Pablo retains control, the sale of some shares is treated as an owner transaction; the difference impacts paid in capital.

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8-26

Noncontrolling Interest Calculations Balance on Jan 1: (288*.1/.9) $32.0 Income to April 1: (36*.1*3/12) 0.9 Addition

Noncontrolling Interest Calculations

Balance on Jan 1: (288*.1/.9)

$32.0

Income to April 1: (36*.1*3/12)

0.9

Addition to NCI on April 1

32.9

Income since April 1: (36*.2*9/12)

5.4

Dividends (20*.2)

(4.0)

Balance at Dec 31

$67.2

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8-27

Worksheet Entries Income from Sergio (8.1+21.6) 29.7 Dividends 16.0 Investment in Sergio 13.7 Noncontrolling interest share

Worksheet Entries

Income from Sergio (8.1+21.6)

29.7

 

Dividends

 

16.0

Investment in Sergio

 

13.7

Noncontrolling interest share (0.9+5.4)

6.3

 

Dividends

 

4.0

Noncontrolling interest

 

2.3

Common stock

200.0

 

Retained earnings 1/1

100.0

 

Goodwill

20.0

 

Investment in Sergio (288-32.9)

 

255.1

Noncontrolling interest, 1/1

 

32.0

Noncontrolling interest, 4/1

 

32.9

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8-28

Interim Sale, Loss of Control: Example 1. Bring investment account up to date, recognizing partial year's

Interim Sale, Loss of Control: Example

  • 1. Bring investment account up to date, recognizing partial year's income as appropriate

  • 2. Determine BV of fraction of investment sold

  • 3. Compare to selling price

  • 4. Record a gain or loss on difference

  • 5. The "parent" no longer consolidates the "subsidiary" That relationship has been dissolved Parent will use equity or fair value/cost method as appropriate

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8-29

Consolidations – Changes in Ownership Interests 3: SUBSIDIARY’S STOCK TRANSACTIONS Copyright ©2012 Pearson Education, Inc. Publishing

Consolidations – Changes in Ownership Interests

3: SUBSIDIARY’S STOCK TRANSACTIONS

Consolidations – Changes in Ownership Interests 3: SUBSIDIARY’S STOCK TRANSACTIONS Copyright ©2012 Pearson Education, Inc. Publishing

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8-30

Subsidiary Actions Subsidiary actions increasing Parent share 1. Sub issues additional shares to Parent 2. Sub

Subsidiary Actions

Subsidiary actions increasing Parent share

  • 1. Sub issues additional shares to Parent

  • 2. Sub reacquires shares from noncontrolling interest

Subsidiary actions decreasing Parent share

  • 3. Sub issues additional shares to noncontrolling interests

  • 4. Sub reacquires shares from Parent

Subsidiary actions not impacting ownership

  • 5. Sub issues stock to both parent & noncontrolling interest

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Sub Issues Stock to Parent: Example Pratt owns 80% of Strut, acquired at $180. Cost of

Sub Issues Stock to Parent: Example

Pratt owns 80% of Strut, acquired at $180.

Cost of 80% of Strut

$180

Implied value of Strut

$225

Book value of Strut

200

Excess, goodwill

$25

Strut issues additional shares to Pratt. Outstanding shares increased from 10K to 12K. Pratt had owned 8K of the 10K (80%), but now owns 10K of the 12K shares (66.67%).

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Pratt's Entry Pratt acquires additional shares directly from Strut at book value, $40. Investment in Strut

Pratt's Entry

Pratt acquires additional shares directly from Strut at book value, $40.

Investment in Strut

40

 

Cash

 

40

If Pratt had paid $70 (above book value) or $30 (below book value), only the amount in the entry would change. The following analysis shows different amounts of goodwill which will be used in the consolidation worksheet.

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Strut's equity Goodwill Total value Pratt's Investment in Strut Pratt's share of BV of equity Goodwill

Strut's equity Goodwill Total value Pratt's Investment in Strut Pratt's share of BV of equity Goodwill Total value

Before sale

200

25

225

180

160

20

180

Goodwill may go

up or down

depending on the value Pratt paid

for the additional

shares of Strut

 

Sell at BV for $40

Sell > BV for $70

Sell < BV for $30

Strut's equity, after the issuance

  • 240 270

 

230

Pratt's Investment, after

  • 220 250

 

210.0

Pratt's share of equity, 10/12 share

  • 200 225

191.7

New measure of goodwill

 

20

 

25

 

18.3

Total

 

220

 

250

 

210.0

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8-34

Sub Issues Stock to Outsiders Example Puny owns 80% of Stat, acquired at $180. Cost of

Sub Issues Stock to Outsiders Example

Puny owns 80% of Stat, acquired at $180.

Cost of 80% of Stat

$180

Implied value of Stat

$225

Book value of Stat

200

Excess, goodwill

$25

Stat issues additional shares to outside entities. Outstanding shares increased from 10K to 12K. Puny had owned 8K of the 10K (80%), but now owns 8K of the 12K shares (66.67%).

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Before sale 200 25 Stat equity Goodwill Total value Puny's Investment Puny's share of BV of

Before sale

200

25

Stat equity

Goodwill Total value Puny's Investment Puny's share of BV of equity Goodwill Total value

 

Puny's measure of

 

225

goodwill does not

180

change when Stat issues the shares to

160

outside entities, just

20

the value of its

180

 

Investment in Stat account.

 

Sell at BV for $40

Sell > BV for $70

Sell < BV for $30

 

Stat equity, after

 

240

 

270

 

230

Puny's Investment current balance

180

180

 

180.0

Puny's share of equity, 10/12 share

160

180

153.3

Old goodwill

 

20

 

20

 

20.0

Total, new balance in Investment

 

180

 

200

 

173.3

Adjustment

   

0

+20

 

-6.7

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8-36

Puny's Adjusting Entry for $40: no entry needed for $70 Investment in Stat 20.0 Additional paid

Puny's Adjusting Entry

for $40:

   

no entry needed

   

for $70

   

Investment in Stat

20.0

 

Additional paid in capital

 

20.0

for $30

   

Additional paid in capital

6.7

 

Investment in Stat

 

6.7

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8-37

Sub Purchases Treasury Stock: Example Pointer owns 80% of Shelly acquired for $160, at cost equal

Sub Purchases Treasury Stock: Example

Pointer owns 80% of Shelly acquired for $160, at cost equal to book value.

Cost of 80% of Shelly

$160

Implied value of Shelly

$200

Book value of Shelly

200

Excess, goodwill

$0

Pointer holds 8K of Shelly's 10K shares outstanding (80%). Shelly reacquires 0.4K shares from outsiders. Pointer now holds 8K of Shelly's 9.6K shares outstanding (83.33%)

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Before treasury stock 200 0 Shelly's equity Goodwill Total value Pointer's Investment in Shelly Pointer's share

Before treasury stock

200

0

Shelly's equity

Goodwill Total value Pointer's Investment in Shelly Pointer's share of BV of equity Goodwill Total value

 

There was no prior

 

200

goodwill; none is

160

created by Shelly purchasing treasury

160

stock. Pointer adjusts

 

0

the balance in its Investment account.

 

160

     

Buy = BV

Buy > BV

Buy < BV

 

for $8

for $12

for $6

Shelly's equity, after

 

192

 

188

 

194

Pointer's Investment current balance

160

 

160

 

160.0

Pointer's share of equity, 8/9.6

160

 

156.7

161.7

Old goodwill

 

0

 

0.0

 

0.0

Total, new balance in Investment

 

160

 

156.7

 

161.7

Adjustment needed

   

0

 

-3.3

 

+1.7

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8-39

Pointer's Adjustment Pointer's entry when Shelly purchases treasury shares from outsiders. Treasury stock purchased for $8

Pointer's Adjustment

Pointer's entry when Shelly purchases treasury shares from outsiders.

Treasury stock purchased for $8

   

no entry needed

   

Treasury stock purchased for $12

   
 

3.3

 

Additional paid in capital Investment in Shelly

 

3.3

Treasury stock purchased for $6

   
 

1.7

 

Investment in Shelly Additional paid in capital

 

1.7

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8-40

Sub Stock Splits/ Stock Dividends: Example A subsidiary may issue stock dividends or stock splits 

Sub Stock Splits/ Stock Dividends: Example

A subsidiary may issue stock dividends or stock splits Impact is proportional on both controlling and noncontrolling interests Percentage ownership does not change Stock dividends capitalize some of the subsidiary's retained earnings

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