Subsidiary Purchases Shares from Parent

Advanced financial accounting PowerPoint presentation. In this presentation we will discuss a consolidation process where we have a subsidiary that purchases shares from the parent. So what’s going to be the effect on the consolidation process? When we have a subsidiary that purchases shares from a parent get ready to account with advanced financial accounting. We are talking about a situation here where this subsidiary is purchasing shares from the parent what’s the effect on the consolidation process? In the past, the parent has often recognized a gain or loss on the difference between the selling price and the change in the carrying amount of its investment. So in the past, it’s often been recorded as a gain or loss on parent companies that difference as a gain or loss on the parent company’s income statement.


However, viewed from a consolidated entity, the transaction represents an internal transfer that should not result in gain or loss. So really, it has been recorded as basically gain or loss of the income statement that difference but since it’s consolidation, you would think that it shouldn’t be a gain or loss. So the another method that could then be used is one that’s similar to things we’ve seen in the past. And that’s going to be for the parent to adjust the additional paid in capital instead of recording the gain or loss. So if we put that adjustment or that difference, once again, to the additional paid in capital, it’s a little bit it’s a little bit kind of unusual, it doesn’t feel quite natural, but we got it you know, we got to put that different somewhere could be put to the gain or loss but then again, it doesn’t seem proper to have the gain or loss represented from a consolidated entity viewpoint. So therefore, you can put it into that additional paid in capital.

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