Consolidation : Cash consideration

Because it’s not paid to the subsidiary!

When an entity takes control over another, they acquire the shares of that other entity.

Now, ask yourself …”From whom do we buy those shares?”

If that’s enough of a clue to sort out your question, that’s fine. But if you’re still struggling, post again

“We buy the shares from the subsidiary, therefore the cash goes to them and their cash a/c is debited..”

Cara, imagine that you own shares in an entity and along comes a BIG entity looking to acquire control of the entity in which you hold your investment

Now, I’ll ask again …… to whom does the BIG entity pay money when that entity acquires the shares that will give it control? Who held those shares BEFORE the BIG entity came along?

Cara, it would be easy for me simply to tell you the answer but it will be far more beneficial in the long run is you can follow the guides that I’m giving you and work it out for yourself.

However, this is the last time I’m going to do this for you. If you still don’t understand then post one more time and I’ll spell it out for you

When the new subsidiary – let’s call it Newco plc – was created, 52 years ago, it issued its shares to many hundreds of people (including me – I bought 1,000 shares – but not you because you weren’t even born then!)

And all we shareholders sat back on our investments and watched the market price move up 🙂 and then down 🙁 and back up again. And Newco plc made profits and paid we shareholders dividends. And we shareholders attended annual general meetings and voted in new directors and appointed auditors – all the things that shareholders do

And we left the running of Newco plc to the directors that we had appointed

Some of us sold our shares to other people who themselves became shareholders but others, like me, hung on to our investments because over the 52 years since Newco plc was created we had enjoyed a good return on our investment

But 3 years ago, our directors started making poor strategic decisions and our share price started to fall again. Funnily enough, I was on the point of deciding to sell my investment and buy shares in a different entity when suddenly, out of the blue, along came a big entity (let’s call that one Big plc) and said to all we shareholders ……

“Sell us your shares in Newco plc and we’ll make it an attractive proposition for you. We’ll issue to you 1 share in Big plc for every 2 shares you hold in Newco plc and we’ll pay you $1 cash for every share that you sell to us”

Well, let me tell you, that was just too good an offer for me to refuse and a lot of the other Newco plc shareholders obviously thought the same! So I accepted Big plc’s offer and so did lots of other Newco plc’s shareholders – in total Big plc managed to acquire around 75% of the Newco plc shares

When Big plc announced that it had achieved control they then issued to me, and the others that had accepted, one share in Big plc – I received 500 Big plc shares – and they also paid me $1 for every share that I had previously owned and that I now had agreed to transfer to Big plc – that was $1,000 that I received 🙂

Is that better?

Incidentally – it is against the law for an entity to own shares in itself (there is a small exception but nothing for you to concern yourself with) so your comment “acquires the shares from the subsidiary who owns all the shares of the entity” cannot happen

You’re welcome