Chp9 Beams

Chapter 9 INDIRECT AND MUTUAL HOLDINGS Answers to Questions 1

An indirect holding of the stock of an affiliate gives the investor an ability to control or significantly influence the decisions of an investee not directly owned through an investee that is directly owned. Two primary types of indirect ownership situations are the father-son-grandson relationship and the connecting affiliates relationship.

2

No. Only 40 percent of T’s stock is held within the affiliation structure and P owns indirectly only 24 percent (60%  40%) of T. T should be included as an equity investment in the consolidated statements of P Company and Subsidiaries.

3

An indirect holding involves the ability of one corporation to control another by virtue of its control over one or more other corporations. An investor has the ability to control or significantly influence an investee that is not directly owned through an investee that is directly owned. A mutual holding affiliation structure is a special type of indirect holding where affiliates indirectly own themselves. In a mutual holding situation, the affiliates hold ownership interests in each other.

4

The parent’s direct and indirect ownership of Subsidiary B is 49 percent (70%  70%). However, consolidation of Subsidiary B is still appropriate because 70 percent of B’s stock is held within the affiliation structure and only 30 percent is held by the noncontrolling stockholders of B.

5

Approach A Pat Sam Stan

Combined separate earnings of Pat, Sam, and Stan ($200,000 + $160,000 + $100,000) $460,000 Less: Noncontrolling interest share computed as follows: Direct noncontrolling interest in Stan’s income (30,000) ($100,000  30%) Indirect noncontrolling interest in Stan’s income (14,000) ($100,000  70%  20%) Direct noncontrolling interest in Sam’s income (32,000) ($160,000  20%) Pat’s net income and controlling share of consolidated net income $384,000 Approach B Separate earnings Allocate Stan’s income to Sam ($100,000  70%) Allocate Sam’s income to Pat ($230,000  80%) Controlling share Noncontrolling interest share

Pat $200,000

+184,000 $384,000

Sam $160,000

Stan $100,000

+ 70,000

-70,000

-184,000

0

$ 46,000

$30,000

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Indirect and Mutual Holdings

9-2

6

When the schedule approach for allocating income is used, investment income from the lowest subsidiary must be added to the separate income of the next subsidiary to determine that subsidiary’s net income before it can be allocated to the next subsidiary, and so on.

7 Separate earnings Deduct: Unrealized profit Separate realized earnings Allocate S2’s income Allocate S1’s income P’s net income Noncontrolling int. share

P $20,000

S1 80% $10,000 - 1,000

S2 70% $5,000

20,000

9,000 + 3,500 -10,000

5,000 -3,500 0

$ 2,500

$1,500

+10,000 $30,000

S1’s investment in S2 account was not adjusted for the unrealized profits because this would create a disparity between S1’s investment in S2 account and S1’s share of S2’s equity. 8

A mutual holding situation exists because two affiliates hold ownership interests in each other. The parent is mutually owned.

9

The treasury stock approach considers parent stock held by a subsidiary to be treasury stock of the consolidated entity. Accordingly, the subsidiary investment account is maintained on a cost basis and is deducted at cost from stockholders’ equity in the consolidated balance sheet.

10

In situations in which a subsidiary holds stock in the parent, both the conventional and treasury stock approaches are acceptable, but they do not result in equivalent consolidated financial statements. The consolidated retained earnings and noncontrolling interest amounts will usually be different because of different amounts of investment income. The treasury stock approach is not applicable when the mutually held stock involves subsidiaries holding the stock of each other.

11

No. Parent dividends paid to the subsidiary are eliminated.

12

The theory is that parent stock purchased by a subsidiary is, in effect, returned to the parent and constructively retired. By recording the constructive retirement of the parent stock on parent books, parent equity will reflect the equity of stockholders outside the consolidated entity. Also, recording the constructive retirement, by reducing parent stock and retained earnings to reflect amounts applicable to controlling stockholders outside the consolidated entity, will establish consistency between capital stock and retained earnings for the parent’s outside stockholders and parent net income, dividends, and earnings per share which also relate to the outside stockholders of the parent.

13

Controlling share of consolidated net income is computed as follows: P = $50,000 + .8S S = $20,000 + .1P P = $50,000 + .8($20,000 + .1P) P = $71,739 Controlling share of consolidated net income = $71,739  90% = $64,565

14

For eliminating the effect of mutually held parent stock, two generally accepted approaches are used—the treasury stock approach and the conventional approach. But when the mutually held stock involves subsidiaries holding stock of each other, the treasury stock approach is not applicable.

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Chapter 9

15

9-3

By adding beginning noncontrolling interest and noncontrolling interest share (determined by multiplying the company’s net income by the noncontrolling interest percentage) and subtracting the noncontrolling interest’s percentage of dividends, the noncontrolling interest can be determined without use of simultaneous equations.

SOLUTIONS TO EXERCISES Solution E9-1 Pen

Sal

Tip

$1,600

$1,000

$400

Separate earnings of the three affiliates (in thousands) Add: Dividend income from Sal’s investment in Win accounted for by the cost method ($200,000  15%) Allocate 60% of Tip’s earnings Allocate 60% of Sal’s earnings Controlling Share of Cons. Income Noncontrolling interest share

762 $2,362

30 240 (762)

(240) ____ $160

$508

Solution E9-2 Pub Corporation and Subsidiaries Income Allocation Schedule for the year 2011 (in thousands) Sam Pub Separate earnings or loss $800 $300 Allocate Sam’s income: 180 (180) to Pub ($300,000  60%) (60) to Tim ($300,000  20%) Allocate Tim’s loss: (272) to Pub $(340,000)  80% Controlling Share of Consol. Income $708 Noncontrolling interest share $ 60

Tim $(400)

60 272 $ (68)

Solution E9-3 Place Corporation and Subsidiaries Income Allocation Schedule for the year 2011 Lake Place Separate incomes $200,000 $80,000 Less: Unrealized profit on land _______ (20,000) Separate realized incomes 200,000 60,000 Allocate Lake’s income 60% to Place 36,000 (36,000) 20% to Marsh (12,000) Allocate Marsh’s income _______ 70% to Place 57,400 Controlling Share of Consol. Income $293,400 Noncontrolling interest share $12,000

Marsh $ 70,000 ______ 70,000 12,000 (57,400) $ 24,600

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Indirect and Mutual Holdings

9-4

Solution E9-4 1

2

3

c Income from Son is equal to: 70% of Son’s $160,000 income 70% of Son’s 80% interest in Tan’s $100,000 income Income from Son

$112,000 56,000 $168,000

d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Son’s $160,000 income 20% direct noncontrolling interest in Tan’s $100,000 income 30%  80% indirect noncontrolling interest in Tan’s $100,000 income Total noncontrolling interest share

24,000 $ 92,000

d Consolidated net income is equal to: Combined separate incomes of $360,000 + $160,000 + $100,000 Less: Noncontrolling interest share Controlling interest share of Consolidated net income

$620,000 92,000 $528,000

Alternative computation: Pin’s separate income Add: 70% of Son’s $160,000 income Add: (70%  80%) of Tan’s $100,000 income Controlling interest share of Consolidated net income

$360,000 112,000 56,000 $528,000

$ 48,000 20,000

Solution E9-5 Separate earnings Less: Unrealized profit Separate realized earnings Allocate Val’s income 70% to Tea Allocate Won’s income 10% to Tea 60% to Sal Allocate Tea’s income 80% to Pal 10% to Sal Allocate Sal’s income 80% to Pal Pal’s net income (or Controlling share of consolidated net income) Noncontrolling interest share

Pal $ 50,000

Sal $30,000

50,000

30,000

Tea $35,000 - 5,000 30,000

Won $(20,000) _______ (20,000)

+28,000 - 2,000 -12,000 + 44,800

+ 18,880

Val $40,000 ________ 40,000 - 28,000

+ 2,000 + 12,000

+ 5,600

-44,800 - 5,600

-18,880

________

________

_________

$ 4,720

$ 5,600

$ (6,000)

$12,000

$113,680

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Chapter 9

9-5

Solution E9-6

Separate earnings Unrealized profit Separate realized earnings Allocate Oak’s income 20% to Nun 70% to Man Allocate Nun’s income 70% to Pet 10% to Man Allocate Man’s income 90% to Pet Pet’s net income (or Controlling share of NI) Noncontrolling interest share

Pet $ 65,000 65,000

Man $18,000 - 4,000 14,000

Nun $28,000 + 2,000 30,000

Oak $9,000 -4,000 5,000

+ 1,000

-1,000 -3,500

+ 3,500 + 21,700

+ 18,540

+ 3,100

-21,700 - 3,100

-18,540

________

$ 2,060

$ 6,200

________

$105,240 $

500

Alternative solution Adjusted Adjustments = Income $ 65,000

+ -

Pet Man

18,000

-

$4,000

14,000a

12,600

$1,400

Nun

28,000

+

2,000

30,000b

23,700

6,300

Oak

9,000

-

4,000

5,000c

3,940

1,060

$105,240

$8,760

$114,000 a b c

-

Consolidated Net Income $ 65,000

Noncontrolling Interest = Share 0

Reported Income $65,000

$14,000 divided 90% to consolidated net income (CNI) 10% to noncontrolling interest share (NIS) $30,000 divided 70% + (90%  10%) to CNI and 20% + (10%  10%) to NIS $5,000 divided (90%  70%) + (70%  20%) + (90%  10%  20%) to CNI [78.8%] and 10% + (10%  10%  20%) + (20%  20%) + (10%  70%) to NIS [21.2%]

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Indirect and Mutual Holdings

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Solution E9-7 1

b Separate income of Tar Included in consolidated net income (.9  .7  $400,000) Alternative solution Direct noncontrolling interest (.3  $400,000) Indirect noncontrolling interest (.1  .7  $400,000)

2

3

a Separate income = net income of Van Noncontrolling interest (direct) c Total separate incomes Less: Controlling share of Consolidated net income Pan $1,240,000  100% Sin $350,000  90% Tar $400,000  90%  70% Win $(100,000)  90%  60% Van $240,000  90%  80%

$ 120,000 28,000 $ 148,000

$240,000 20% $ 48,000

$2,130,000 $1,240,000 315,000 252,000 (54,000) 172,800

Total noncontrolling interest share Alternative solution Sin $350,000  Tar $400,000  Won $(100,000) Van $240,000  Total noncontrolling

$400,000 (252,000) $ 148,000

10% 37%  46% 28% interest share

4

a [See computations for question 3]

5

d Net income of Sin Separate income Add: 70% of Tar’s $400,000 Deduct: 60% of Won’s $(100,000) Add: 80% of Van’s $240,000 Net income of Sin Pan’s interest Investment increase Less: Dividends received from Sin ($200,000  90%) Net increase

(1,925,800) $ 204,200 $

$

$

35,000 148,000 (46,000) 67,200 204,200

350,000 280,000 (60,000) 192,000 $ 762,000 90% 685,800 (180,000) $ 505,800

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Chapter 9

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Solution E9-8

1

2

b Separate income of Sam (net income) Separate income of Ten $40,000 - ($80,000  10%) Separate income of Pat $240,000 - ($40,000  70%) - ($80,000  80%) Total separate income

$ 80,000 32,000 148,000 $260,000

d Separate income Unrealized profit on inventory Unrealized profit on land Separate realized income

Pat $148,000 ________ $148,000

Sam $80,000 (10,000) _______ $70,000

Ten $32,000 (15,000) $17,000

3

a Pat’s separate income $148,000 56,000 Add: Investment income from Sam ($70,000  80%) Add: Investment income from Ten 16,800 [$17,000 + ($70,000  10%)]  70% Pat’s income (controlling share of consolidated net income) $220,800

4

d Total separate realized income Less: Controlling share of consolidated net income Noncontrolling interest share Alternative solution Direct noncontrolling interest in Sam ($70,000  .1) Indirect noncontrolling interest in Sam ($70,000  .3  .1) Direct noncontrolling interest in Ten ($17,000  .3) Noncontrolling interest share

$235,000 220,800 $ 14,200 $

7,000

2,100 5,100 $ 14,200

Solution E9-9

P = Income of Pan on a consolidated basis (including mutual income) S = Income of Sol on a consolidated basis (including mutual income) P = Separate income of $3,000,000 + 80% of S S = Separate income of $1,500,000 + 30% of P P = $3,000,000 + .8($1,500,000 + .3P) = $3,000,000 + $1,200,000 + .24P .76P = $4,200,000 P = $5,526,316 Controlling Share of Consolidated net income = $5,526,316  70% = $3,868,421

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Indirect and Mutual Holdings

9-8

Solution E9-10

P = Pad’s income on a consolidated basis S = Sad’s income on a consolidated basis T = Two’s income on a consolidated basis P = $200,000 + .7S S = $120,000 + .8T T = $80,000 + .1S Solve for S S = $120,000 + .8($80,000 + .1S) S = $184,000 + .08S S = $200,000 Compute P and T P = $200,000 + .7($200,000) P = $340,000 T = $80,000 + .1($200,000) T = $100,000 Income Allocation Controlling share of consolidated net income (equal to P) Noncontrolling interest share in Sad ($200,000  20%) Noncontrolling interest share in Two ($100,000  20%) Total consolidated income

$340,000 40,000 20,000 $400,000

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Chapter 9

9-9

Solution E9-11 [AICPA adapted] 1

b

2

b

3

d

4

c

Supporting computations A = Pin’s income on a consolidated basis B = Son’s income on a consolidated basis C = Tin’s income on a consolidated basis A = $190,000 + .8B + .7C B = $170,000 + .15C C = $230,000 + .25A Solve for A A = $190,000 + .8[$170,000 + .15($230,000 + .25A)] + .7($230,000 + .25A) A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175A A = $514,600 + .205A .795A = $514,600 A = $647,295.59 Determine C C = $230,000 + .25($647,295.59) C = $391,823.89 Determine B B = $170,000 + .15($391,823.90) B = $228,773.58 Allocate income to controlling share of consolidated net income and noncontrolling interest Controlling Share of Consolidated net income ($647,295.59  75%) Noncontrolling interest — Son ($228,773.58  20%) Noncontrolling interest — Tin ($391,823.90  15%) Total consolidated income

$485,471.69 45,754.72 58,773.59 $590,000.00

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Indirect and Mutual Holdings

9-10

Solution E9-12 1

2

d Combined separate income Less: Noncontrolling interest share Controlling Share of Consolidated net income

$160,000 6,750 $153,250

Alternatively: Pet’s separate income Add: Sod’s net income of $67,500  90% Less: Dividends received from Pet ($50,000  15%) Controlling interest share of Consolidated net income

$100,000 60,750 (7,500) $153,250

b P .865P P S

= = = =

$100,000 + .9($60,000 + .15P) $154,000 $178,035 $60,000 + $26,705 = $86,705

Controlling Share of Consolidated net income = $178,035  .85 = Noncontrolling interest share = $86,705  .10 = Total consolidated income

$151,330 8,670 $160,000

Solution E9-13 1

Treasury stock approach

Investment in Sat balance December 31, 2011 Investment balance December 31, 2010 Add: Income from Sat Less: Dividends received from Sat Add: Dividends paid to Sat Investment in Sat December 31, 2011

$245,700 26,900 (21,000) 6,000 $257,600

Supporting computations Computation of income from Sat: Sat’s separate income Add: Sat’s dividend income from Pug Sat’s net income Pug’s ownership interest Pug’s equity in Sat’s income Less: Dividends paid to Sat ($60,000  10%) Less: Excess amortization ($9,000 x 70%) Income from Sat

$ 50,000 6,000 56,000 70% 39,200 (6,000) (6,300) $ 26,900

2

Conventional approach

Pug’s net income and consolidated net income P = ($120,000 + .7S) - $6,300 S = $50,000 + .1P P P .93P P

= = = =

$120,000 + .7($50,000 + .1P) - $6,300 $120,000 + $35,000 + .07P - $6,300 $148,700 $159,892 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 9

9-11

S = $50,000 + .1($159,892) S = $65,989 Pug’s net income and controlling share ($159,892  90%) Noncontrolling interest share ($65,989  30%) Total income

$143,903 19,797 $163,700

Income from Sat Controlling Share of Consolidated net income Less: Pug’s separate income Income from Sat

$143,903 120,000 $ 23,903

Or alternatively, ($65,989  70%) - ($159,892  10%) - $6,300 excess

$ 23,903

Investment in Sat December 31, 2011 Investment in Sat December 31, 2010 Add: Income from Sat Less: Dividends from Sat Investment in Sat December 31, 2011

$245,700 23,903 (21,000) $248,603

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Indirect and Mutual Holdings

9-12

SOLUTIONS TO PROBLEMS Solution P9-1 Pad Corporation and Subsidiaries Schedule to Compute Controlling Share of Consolidated Net Income and Noncontrolling Interest Share for the year 2011 Separate income (loss)

Pad $500,000

Sal $300,000

500,000

300,000

______

130,000

(20,000)

(14,000)

Allocate Axe’s income 60% to Sal Patent Allocate Sal’s income 90% to Pad Patent

Ban $(20,000)

(20,000)

Less: Unrealized profit Separate realized income (loss) Allocate Ban’s loss 70% to Sal

Axe $150,000

78,000 (12,000) 352,000 316,800 (40,000)

14,000

(78,000)

(316,800)

Controlling share of net income $776,800 Noncontrolling interest income

$ 35,200

$ 52,000

$ (6,000)

Check: Income allocated: $776,800 consolidated net income + $35,200 noncontrolling interest share in Sal + $52,000 noncontrolling interest share in Axe - $6,000 noncontrolling interest share (loss) in Ban = $858,000 Income to allocate: $500,000 Pad income + $300,000 Sal income + $130,000 realized income of Axe - $20,000 loss of Ban - $52,000 patent = $858,000 Controlling share of consolidated net income: $500,000 - $40,000 + 90%($300,000 - $12,000) + (90%  60%  $130,000) - (90%  70%  $20,000) = $776,800

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Chapter 9

9-13

Solution P9-2 1

Sea’s books Investment in Toy (70%) 294,000 Cash 294,000 To record purchase of a 70% interest in Toy Corporation. Cash

14,000 Investment in Toy (70%) To record dividends received from Toy ($20,000  70%).

Investment in Toy (70%) 35,000 Income from Toy To record investment income computed as follows: Share of Toy’s net income ($60,000  70%) Less: Unrealized profit from upstream sale of inventory items ($10,000  70%)

14,000

35,000 $ 42,000 (7,000) $ 35,000

Pot’s books Cash

48,000 Investment in Sea (80%) To record dividends received from Sea ($60,000  80%).

48,000

Investment in Sea (80%) 88,000 Income from Sea To record investment income computed as follows: Share of Toy’s net income ($100,000 + $35,000)  80% Less: Unrealized gain on land sold to Toy

88,000

$108,000 (20,000) $ 88,000

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Indirect and Mutual Holdings

9-14

Solution P9-2 (Continued) 2

Schedule of income allocation Separate earnings Less: Unrealized profits Separate realized earnings Allocate Toy’s realized earnings to Sea ($50,000  70%) Sea’s net income Allocate Sea’s net income to Pot ($135,000  80%) Pot’s net income and Controlling share of net income Noncontrolling interest share Check:

3

Pot $300,000 (20,000)

Sea $100,000

Toy $ 60,000 (10,000)

280,000

100,000

50,000 (35,000)

35,000 135,000 108,000

(108,000)

$388,000 $ 27,000

_______ $ 15,000

Realized earnings ($280,000 + $100,000 + $50,000) $430,000 Less: Noncontrolling interest share (27,000+15,000) (42,000) Controlling share of net income $388,000

Schedule of assets and equities at December 31, 2012 Pot

Sea

Toy

Assets Investment in Sea (80%) Investment in Toy (70%) Total assets

$ 1,848,000 $460,000 440,000 ___________ 315,000 $ 2,288,000 $775,000

$540,000

Liabilities Capital stock Retained earnings Total liabilities and equity

$

$100,000 300,000 140,000 $540,000

300,000 $200,000 1,200,000 400,000 788,000 175,000 $ 2,288,000 $775,000

________ $540,000

Note: Pot’s assets other than investments consist of $1,600,000 assets at the beginning of the year, plus separate earnings of $300,000 and dividend income of $48,000, less dividends paid of $100,000. Sea’s assets other than investments consist of $700,000 assets at the beginning of the period, plus separate earnings of $100,000 and dividend income of $14,000, less investment cost of $294,000 and dividends paid of $60,000.

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Chapter 9

9-15

Solution P9-3 Preliminary computations Check on consolidated net income Net income as stated Less: Investment income Separate income Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Separate realized incomes Allocate Tip’s income 50% to Pen 40% to Sir Sir’s net income Allocate Sir’s income 80% to Pen Less: Depreciation on excess allocated to plant and Equipment Total income of consolidated Entity Controlling share of NI Noncontrolling int. share

Pen $184,500 (84,500) 100,000

Sir $90,000 (10,000) 80,000

Tip $25,000 25,000

Total $299,500 (94,500) 205,000

8,000 _______ 108,000

8,000 _______ 80,000

2,500 2,000 82,000 65,600

(65,600)

(5,000)

( 1,250)

________ $171,100

(20,000) 5,000

(20,000) 193,000

(2,500) (2,000)

(6,250)

________

_______

$ 15,150

$

500

$186,750 171,100 15,650 $186,750

Investment in Sir (80%)

$420,000

Implied total fair value of Sir ($420,000 / 80%) Book value of Sir Excess of fair value over book value

$ 525,000 (500,000) $ 25,000

Excess allocated to equipment with a four year lfe Amortization ($25,000 / 4 yrs)

$

Investment in Tip (50%)

$ 75,000

Implied total fair value of Tip ($75,000 / 50%) Book value of Sir Excess of fair value over book value – Goodwill

$ 150,000 (120,000) $ 30,000

6,250

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Indirect and Mutual Holdings

9-16

Solution P9-3 (continued) Pen Corporation and Subsidiaries Consolidation Working Papers for the year ended December 31, 2011 Pen Income Statement Sales Income from Sir Income from Tip Cost of sales

$500,000 72,000 12,500 240,000*

Other expenses

Sir

Tip

$300,000

$100,000

10,000 150,000*

60,000*

70,000*

15,000*

160,000*

Noncont.int.share — Sir Noncont.int.share — Tip Cont.int.shareof NI

$184,500

$ 90,000

Adjustments and Eliminations h d a i

50,000 72,000 22,500 20,000

f c

6,250 15,150

c

500

Consolidated Statements $

g h

8,000 50,000

850,000

412,000* 251,250* 15,150* 500*

$ 25,000

$

171,100

$

95,000

Retained Earnings Retained earnings

Retained earnings Retained earnings

— Pen

$115,500

45,000 184,500 80,000*

Dividends

Retained earnings December 31

Balance Sheet Cash Accounts receivable Inventories Plant and equipment — net Investment in Sir 80% Investment in Tip 50% Investment in Tip 40% Goodwill

Accounts payable Other liabilities Capital stock Retained earnings

90,000 40,000*

12,500

g 8,000 e 160,000

160,000

— Sir — Tip

Net income

f

b

45,000 171,100

25,000 10,000*

$220,000

$210,000

$ 60,000

$ 67,000 70,000 110,000

$ 36,000 50,000 75,000

$ 10,000 20,000 35,000

140,000

425,000

115,000

a c d

e

25,000

74,000 b $990,000

$660,000

$180,000

$ 70,000 100,000 600,000

$ 40,000 10,000 400,000

$ 15,000 5,000 100,000

$990,000

210,000 $660,000

$

186,100

$ j i

10,000 20,000

113,000 130,000 200,000

f

18,750

686,250

30,000

30,000 $1,159,250

j

10,000

$

b 100,000 e 400,000

115,000 115,000 600,000 186,100

60,000 $180,000

Noncontrolling interest — Sir (beginning)

e 117,000

Noncontrolling interest — Tip (beginning) Noncontrolling interest December 31

b

19,500

c

6,650

*

80,000*

d 40,000 e 468,000 a 7,500 b 87,500 a 6,000 b 68,000

508,000 95,000

220,000

9,000 9,000 32,000

143,150 $1,159,250

Deduct

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Chapter 9

9-17

Solution P9-4

1

Income allocation Definitions P = Par’s income on a consolidated basis S = Sit’s income on a consolidated basis T = Tot’s income on a consolidated basis Equations P = $200,000 + .8S + .5T S = $100,000 + .2T T = $50,000 + .1S Solve for S S = $100,000 + .2($50,000 + .1S) S = $110,000 + .02S .98S = $110,000 S = $112,244.90 or $112,245 Compute T T = $50,000 + .1($112,244.90) T = $50,000 + $11,224.49 T = $61,224.49 or $61,224 Compute P P = $200,000 + .8($112,244.90) + .5($61,224.49) P = $320,408.16 or $320,408

Income allocation Controlling share of consolidated net income = P = Noncontrolling interest share in Sit ($112,245  .1) Noncontrolling interest share in Tot ($61,224  .3)

$320,408 11,225 18,367 $350,000

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Indirect and Mutual Holdings

9-18

Solution P9-4 (continued) 2

P, S, and T are as defined in part 2. Equation P = ($200,000 - $20,000) + .8S + .5T S = $100,000 + .2T T = ($50,000 - $10,000) + .1S Solve for S S = $100,000 + .2($40,000 + .1S) S = $108,000 + .02S S = $110,204.08 Compute T T = $40,000 + .1($110,204.08) T = $51,020.41 Compute P P = $180,000 + .8($110,204.08) + .5($51,020.41) P = $293,673.48 Income allocation Controlling share of consolidated net income = P = Noncontrolling interest share in Sit ($110,204.08  10%) Noncontrolling interest share in Tot ($51,020.41  30%)

$293,673.48 11,020.40 15,306.12 $320,000.00

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Chapter 9

9-19

Solution P9-5 Working paper entries a Income from Sun 27,000 Dividend income 10,000 Dividends 28,000 Investment in Sun 9,000 To eliminate income from Sun, dividend income, and 90% of Sun’s dividends, and return the investment in Sun account to the beginning-of-the-period balance under the equity method. b

200,000 Capital stock — Sun 200,000 Retained earnings — Sun Goodwill 50,000 Investment in Sun 405,000 45,000 Noncontrolling interest — beginning To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period goodwill and noncontrolling interest.

c

Treasury stock 80,000 Investment in Pin To reclassify investment in Pin to treasury stock.

d

80,000

Noncontrolling Interest Share 3,000 Dividends 2,000 Noncontrolling Interest 1,000 To record noncontrolling interest share of subsidiary income and dividends.

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Indirect and Mutual Holdings

9-20

Solution P9-5 (continued) Treasury Stock approach Pin Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2013 Pin Income Statement Sales Income from Sun Dividend income Cost of sales Expenses

$

400,000 27,000

$

$

177,000

Retained Earnings Retained earnings — Pin

$

300,000

100,000 10,000 50,000* 30,000*

200,000* 50,000*

Consolidated NI Noncontrolling share Controlling share of NI

$

$

200,000 30,000

Dividends

100,000*

20,000*

Balance Sheet Other assets Investment in Sun 90%

250,000* 80,000* 170,000 3,000

$

377,000

$

210,000

$

486,000 414,000

$

420,000

$

167,000

$

300,000

b 200,000

a d

900,000

$

123,000 $ 400,000 377,000 900,000 $

$

90,000* 377,000

$

906,000

500,000

$

50,000 956,000

90,000 200,000 b 200,000 210,000 500,000

$

a 9,000 b 405,000 c 80,000 b

$

28,000 2,000 $

80,000

$

50,000

Noncontrolling interest January 1 Noncontrolling interest December 31 Treasury stock

3,000*

167,000

Investment in Pin 10% Goodwill

Liabilities Capital stock Retained earnings

c

b

45,000

d

1,000

213,000 400,000 377,000

46,000

80,000 $

*

500,000

27,000 10,000

30,000

177,000

Consolidated Statements $

a a

d

Retained earnings — Sun Net income (Controlling share in Consol. Column)

Retained earnings December 31

Adjustments and Eliminations

Sun 90%

80,000* 956,000

Deduct

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Chapter 9

9-21

Solution P9-6 Calculations Income from Sip Par separate income (140,000 - 80,000) Sip separate income (100,000 + 3,000 - 60,000)

$ 60,000 $ 43,000

Formula: P income = Adjusted Par income + % interest  S income Adjusted Par income = $60,000 + $2,000 delayed gain on land - $4,000 patent amortization (80%) S income = Sip income + % interest  P income P income = $58,000 + 80%  ($43,000 + 20%  P income) P income = $92,400 + .16  P income P income = $110,000 S income = $43,000 + 20%  $110,000 S income = $65,000 Controlling share of consolidated net income = P income  % outstanding Controlling share = $88,000 Noncontrolling share = S income  % outstanding Noncontrolling share = $12,000 [($65,000 - $5,000 amortiz.) x 20%] Income from Sip = consolidated income less P separate income Income from Sip = $28,000 ($88,000-$60,000) Working paper entries a Investment in Sip 2,000 Gain on sale of land To recognize previously deferred gain on sale of land. b

2,000

Dividend income 4,000 Investment in Sip To eliminate intercompany dividends paid to Sip

4,000

c

Income from Sip 28,000 Dividends 16,000 Investment in Sip 12,000 To eliminate income from Sip and 80% of Sip’s dividends, and return the investment in Sip account to the beginning-of-theperiod balance under the equity method.

d

Investment in Sip Investment in Par To eliminate reciprocal investments.

100,000 100,000

e

50,000 Capital stock — Sip 180,000 Retained earnings — Sip Patent 20,000 Investment in Sip 195,710 54,290 Noncontrolling interest — beginning To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest.

f

Expenses 5,000 Patent To record current year’s amortization of patent.

g

Noncontrolling Interest Share Dividends Noncontrolling Interest

5,000

12,000

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4,000 8,000

9-22

Indirect and Mutual Holdings

To record the noncontrolling interest share of subsidiary income and dividends.

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 9

9-23

Solution P9-6 (continued) Par Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Par Income Statement Sales Income from Sip Dividend income Gain on sale of land Expenses Consolidated net income Noncontrolling share Controlling share of NI

$

140,000 28,000

$

80,000*

$

88,000

$

405,710

Adjustments and Eliminations

Sip 90%

$

100,000 c

28,000

4,000 b 3,000 60,000* f

4,000

g

12,000

a

Consolidated Statements $

240,000

$

5,000 145,000* 100,000 12,000* 88,000

$

405,710

2,000

5,000

47,000

Retained Earnings Retained earnings — Par

$

Retained earnings — Sip Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Other assets Investment in Sip

88,000 16,000*

180,000

e 180,000 88,000

47,000 20,000*

$

477,710

$

207,000

$

448,000 109,710

$

157,000

c g

100,000 e $

557,710

$

80,000 477,710 557,710 $

Noncontrolling interest January 1 Noncontrolling interest December 31

16,000* $

477,710

$

605,000

$

15,000 620,000

a 2,000 d 100,000

Investment in Par Patent

Capital stock Retained earnings

16,000 4,000

$

b 4,000 c 12,000 e 195,710 d 100,000 20,000 f 5,000

257,000 50,000 e 207,000 257,000

50,000

80,000 477,710

e g

54,290 8,000 $

*

62,290 620,000

Deduct

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Indirect and Mutual Holdings

9-24

Solution P9-7 Preliminary Computations Pan’s investment cost

$340,000

Implied total fair value of Set ($340,000 / 80%) Book value of Set Excess of fair value over book value - Goodwill

$425,000 (400,000) $ 25,000

1

Consolidated net income and noncontrolling interest share (conventional approach) Definitions P = Pan’s income on a consolidated basis S = Set’s income on a consolidated basis P = $200,000 separate earnings + .8S S = $80,000 separate earnings + .1P Solve for P P = $200,000 + .8($80,000 + .1P) P = $200,000 + $64,000 + .08P P = $286,957 Compute S S = $80,000 + .1($286,957) S = $108,696 Income allocation Consolidated net income ($286,957  90% outside ownership) Noncontrolling interest share ($108,696  20%) Total (separate incomes)

2

$258,261 21,739 $280,000

Entries to account for investments on an equity basis Pan’s books Capital stock 120,000 Retained earnings 40,000 Investment in Set 160,000 To record constructive retirement of 10% of Pan’s stock. Investment in Set (80%) 58,261 Income from Set 58,261 To record income from Set computed as follows: 80%($108,696) 10%($286,957) = $58,261. Alternatively $258,261 - $200,000 separate income = $58,261. Cash

32,000 Investment in Set To record receipt of 80% of Set’s dividends.

Investment in Set (80%) Dividends

32,000

10,000

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10,000

Chapter 9

9-25

To eliminate dividends on stock that was constructively retired and to adjust the investment in Set account for the transfer equal to 10% of Pan’s dividends.

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Indirect and Mutual Holdings

9-26

Solution P9-7 (continued) 3

Journal entries on Set’s books Investment in Pan (10%) 160,000 Assets 160,000 To record acquisition of a 10% interest in Pan at book value. Investment in Pan 28,696 Income from Pan 28,696 To record 10% of Pan’s $286,957 income on a consolidated basis. Cash

10,000 Investment in Pan (10%) 10,000 To record receipt of dividends from Pan ($100,000  10%). Set 80,000 28,696 $ 108,696

Net income for 2013 Separate incomes Investment income Net income

Pan $200,000 58,261 $258,261

Investment balance December 31, 2013 Investments beginning of 2013 Less: Constructive retirement of Pan’s stock Add: Investment income Add: Dividends paid to Set Less: Dividends received Investment balances December 31, 2013

Pan $416,000 (160,000) 58,261 10,000 (32,000) $292,261

6

Stockholders’ equity December 31, 2013 Stockholders’ equity January 1, 2013 Add: Net income Less: Dividends Stockholders’ equity December 31, 2013

Set Pan $1,440,000 $500,000 258,261 108,696 (90,000) (40,000) $1,608,261 $568,696

7

Noncontrolling interest at December 31, 2013 Set’s equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31, 2013

$568,696 20% $ 113,739

Alternative solution Noncontrolling interest January 1, 2013 ($500,000  20%) Noncontrolling interest share ($108,696  20%) Noncontrolling interest dividends Noncontrolling interest at December 31, 2013

$ 100,000 21,739 (8,000) $ 113,739

4

5

$

Set $ 160,000 28,696 (10,000) $ 178,696

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Chapter 9

9-27

Solution P9-7 (continued) 8

Adjustment and elimination entries a

Income from Pan 28,696 Dividends 10,000 Investment in Pan 18,696 To eliminate investment income and dividends from Pan and return the investment account to its beginning-of-the-period balance.

b

Investment in Set 160,000 Investment in Pan 160,000 To eliminate investment in Pan balance and increase the investment in Set for the constructive retirement of Pan’s stock that was charged to the investment in Set account.

c

Dividends Investment in Set To eliminate dividends.

10,000 10,000

d

Income from Set 58,261 Dividends 32,000 Investment in Set 26,261 To eliminate income and dividends from Set and return the investment in Set to its beginning-of-the-period balance.

e

300,000 Capital stock — Set 200,000 Retained earnings — Set Goodwill 25,000 Investment in Set 416,000 Noncontrolling interest 109,000 To eliminate Set’s equity account balances and the investment in Set, enter beginning-of-the-period goodwill and noncontrolling interest.

f

Noncontrolling interest share 21,739 Dividends 8,000 Noncontrolling Interest 13,739 To record the noncontrolling interest share of subsidiary income and dividends.

© 2011 Pearson Education, Inc. publishing as Prentice Hall