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 holdings. (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.

(a) Simple equity--A simple equity adjustment is made to record current year income to the date of sale. Amortization of excess must be made for all prior periods and the current partial period. This will bring the entire investment to its sophisticated equity balance and will adjust retained earnings for prior years' amortization, which, in the past, were made on the consolidated worksheet. The gain or loss on the sale may qualify as a discontinued operation.

Cost--This is the same as equity except that an additional adjustment is needed to convert from cost to simple equity for prior periods. An equity adjustment is also needed for the current partial period. Once the equity adjustment is made, amortization would be adjusted for as it would under the simple equity method.

(b) Simple equity--Amortization of excess adjustments for the prior and current periods are made only on the 20% investment sold. Amortization applicable to the 60% controlling interest will still be made on the consolidated worksheet. A gain or loss on the sale of the investment will appear in the paid-in capital section of the consolidated balance sheet. The non-controlling share of income will be 20% for the first half year and 40% for the second half year. The controlling interest will receive 80% and 60%, respectively.

Cost--This is the same as simple equity except that an additional adjustment is needed to convert only the 20% interest sold from cost to the simple equity method for both the prior periods and the current partial period.

(c) Simple equity--The recording adjustments are the same as those for the sale of the entire interest. The 20% investment that remains will now be accounted for under the sophisticated equity method and thus needs to be brought to this amount. The gain or loss on the sale will be shown in the "other gains and losses" section of the income statement. There will no longer be a consolidation, and the 20% interest will be listed on the balance sheet as a long-term investment.

Cost--Again, all recording adjustments are the same as those for the sale of the entire interest.