cpa-05617

On January 1, Year 1, Placid Company acquired 80% of Serene Company's 100,000 shares of common stock for $1,600,000.  Placid accounts for the investment internally using the cost method.  On January 1, Year 5, Placid sold 50,000 shares of Serene for $25 per share.  What is the total gain to be reported on Placid's Year 5 income statment?

Answer:  400,000
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It took me a long while to figure this one out...but I finally got it by following the logic and setting up my problem similar to pages 27-28!!  The solution in Becker chose to set it up different, however, to get the same answer.


My specific question as it relates to this problem is...
The amount of shares owned appear to go from 80% ownership (given) TO 60% ownership (30/50).  This means we went from CONTROL to LESS CONTROL.  If you follow the rules in the Becker textbook, Chapter 3, p. 27....such a percentage change should be acounted for as an equity transaction with no gain or loss recognized.  But the answer to this problem definitely includes both 1.) gain on sale AND 2.) gain on remeasure to FMV.  Why is that????  Does it have something to do with the fact that we used the cost method internally (versus the equity method)???  <<--creating the assumption that we went from "no control" TO "control" ............  I'm not comprehending the logic here. 

Any help???  I'd appreciate it!!

They went from own 80% to owning 30%.

They originally owned 80,000 of the 100,000 shs outstanding

They sold 50,000. 80,000-50,000= 30,000   30,000/100,000=30%

So control to non-control

I calculated the answer to this problem a little different than what Becker provides in the answer key.  I just followed the format listed on page 28 for step acquisitions.  However…this didn’t appear to be a remeasure treatment since it **appears** to me that we go from “Control” to “Less Control” (=an equity transaction…no Gain/Loss).  Hence, my original question and continued confusion as it relates to this problem. 

Any help???

Question:  What is the total gain to be reported in Year 5?


(side note:  below is where it “appears” that we go from owning 80% to 60%) – please correct me if I am in total ERROR here:

January/Year 1	January/Year 5
80%	80% = 80 Shares Total
= 80 shares	80 shares total – 50 shares SOLD = 30 shares remaining
Purchase Price:  $1600	30 remaing amt OWNED / 50 remaing TOTAL = 60%
$1600/80 shares = $20 per share
(= NBV)	New price per share (given) = $25 per share
	(FMV)

#1) GAIN ON SALE:

50 shares sold * $25 = $1250  (FMV)

50 shares sold * $20 = $1000  (NBV)

= 250  (GAIN)

#2) GAIN ON REMEASURE

Original interest (after sale)—60%	Non-Controlling Interest (after sale—40%)	Total FMV
$600 (30 shares remain * $20 original cost/share)
+150 (squeezed)
750 (squeezed)	500 (40%*1250)	1250 (50 TOTAL shares remain * $25)

Dr. Investment in sub…….150
CR GAIN……………………………150

Total gain to be reported in year 5 :   $250 + $150 = $400       

I think your confusion is that Serene still has 100,000 shs outstanding no matter who owns the shares. Placid sold 50 of their original 80 purchased. Just because they sold those 50 to someone else does not make those shares disappear. The shares are still outstanding so Placid now owns 30/100 or 30%.

A quicker way to calculate the answer would be do the following

$5 increase in stock price

$5x50,000= 250,0000 gain on sale

$5x30,000= 150,000 recognize gain on shs still held

 $400,000 total gain

I'm not really sure what you're using the percentage of ownership for in the gain on remeasurement?