Question:

And there is another proposal where we already own 35% of a WA based company, and we are considering buying another 35%. Would you be able to please shed some light on how to account for these investments in our accounting records?

Provided answer

- this is an example of step acquisition. The 35% that we owned was accounted using the equity model. Since we are proposing to buy an additional 35%, that will result to a total 70% ownership, therefore the equity model is not applicable anymore, so we have to use the accounting for parent and subsidiary. Here is the step by step accounting: 1. Adjust/remeasure the previously held 35% share at its fair value 2. Add the consideration given for the acquisition of another 35%. The total amount will now become the aggregate consideration the company has incur to acquire the controlling interest that will result in a parent-subsidiary relationship

Can you please explain the highlighted number 1 and 2 and explain the effect of this process and provide me with the journal entries.