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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. No. Only 40 percent of Ts 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. 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. The parents direct and indirect ownership of Subsidiary B is 49 percent (70% 70%). However, consolidation of Subsidiary B is still appropriate because 70 percent of Bs stock is held within the affiliation structure and only 30 percent is held by the noncontrolling stockholders of B. 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 Stans income (30,000) ($100,000 30%) Indirect noncontrolling interest in Stans income (14,000) ($100,000 70% 20%) Direct noncontrolling interest in Sams income (32,000) ($160,000 20%) Pats net income and controlling share of consolidated net income $384,000 Approach B Separate earnings Allocate Stans income to Sam ($100,000 70%) Allocate Sams income to Pat ($230,000 80%) Controlling share Noncontrolling interest share Pat $200,000 Sam $160,000 + 70,000 +184,000 $384,000 -184,000 $ 46,000 Stan $100,000 -70,000 0 $30,000

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9-2

Indirect and Mutual Holdings

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 subsidiarys net income before it can be allocated to the next subsidiary, and so on. P $20,000 S1 80% $10,000 - 1,000 9,000 + 3,500 -10,000 $ 2,500 S2 70% $5,000

7 Separate earnings Deduct: Unrealized profit Separate realized earnings Allocate S2s income Allocate S1s income Ps net income Noncontrolling int. share

20,000 +10,000 $30,000

5,000 -3,500 0 $1,500

S1s investment in S2 account was not adjusted for the unrealized profits because this would create a disparity between S1s investment in S2 account and S1s share of S2s equity. 8 A mutual holding situation exists because two affiliates hold ownership interests in each other. The parent is mutually owned. 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. 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. No. Parent dividends paid to the subsidiary are eliminated. 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 parents outside stockholders and parent net income, dividends, and earnings per share which also relate to the outside stockholders of the parent. 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 usedthe 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

9-3

15

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

SOLUTIONS TO EXERCISES Solution E9-1 Pen Separate earnings of the three affiliates (in thousands) Add: Dividend income from Sals investment in Win accounted for by the cost method ($200,000 15%) Allocate 60% of Tips earnings Allocate 60% of Sals earnings Controlling Share of Cons. Income Noncontrolling interest share 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 Sams income: 180 (180) to Pub ($300,000 60%) (60) to Tim ($300,000 20%) Allocate Tims loss: (272) to Pub $(340,000) 80% Controlling Share of Consol. Income $708 Noncontrolling interest share $ 60 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 Lakes income 60% to Place 36,000 (36,000) 20% to Marsh (12,000) Allocate Marshs income _______ 70% to Place 57,400 Controlling Share of Consol. Income $293,400 Noncontrolling interest share $12,000 $1,600 $1,000 30 240 (762) $508 $400 Sal Tip

762 $2,362

(240) ____ $160

Tim $(400)

60 272 $ (68)

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

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9-4

Indirect and Mutual Holdings

Solution E9-4 1 c Income from Son is equal to: 70% of Sons $160,000 income 70% of Sons 80% interest in Tans $100,000 income Income from Son d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Sons $160,000 income 20% direct noncontrolling interest in Tans $100,000 income 30% 80% indirect noncontrolling interest in Tans $100,000 income Total noncontrolling interest share 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 Alternative computation: Pins separate income Add: 70% of Sons $160,000 income Add: (70% 80%) of Tans $100,000 income Controlling interest share of Consolidated net income Solution E9-5 Separate earnings Less: Unrealized profit Separate realized earnings Allocate Vals income 70% to Tea Allocate Wons income 10% to Tea 60% to Sal Allocate Teas income 80% to Pal 10% to Sal Allocate Sals income 80% to Pal Pals net income (or Controlling share of consolidated net income) Noncontrolling interest share Pal $ 50,000 50,000 Sal $30,000 30,000 Tea $35,000 - 5,000 30,000 +28,000 - 2,000 -12,000 + 44,800 + 5,600 + 18,880 -18,880 -44,800 - 5,600 ________ ________ _________ + 2,000 + 12,000 Won $(20,000) _______ (20,000) Val $40,000 ________ 40,000 - 28,000

$112,000 56,000 $168,000

$ 48,000 20,000 24,000 $ 92,000

$620,000 92,000 $528,000 $360,000 112,000 56,000 $528,000

$113,680 $ 4,720 $ 5,600 $ (6,000) $12,000

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Solution E9-6 Pet $ 65,000 65,000 Man $18,000 - 4,000 14,000 Nun $28,000 + 2,000 30,000 + 1,000 + 3,500 + 21,700 + 3,100 + 18,540 $105,240 $ 2,060 $ 6,200 $ 500 -18,540 -21,700 - 3,100 ________ ________ Oak $9,000 -4,000 5,000 -1,000 -3,500

Separate earnings Unrealized profit Separate realized earnings Allocate Oaks income 20% to Nun 70% to Man Allocate Nuns income 70% to Pet 10% to Man Allocate Mans income 90% to Pet Pets net income (or Controlling share of NI) Noncontrolling interest share Alternative solution Reported Income $65,000 18,000 28,000 9,000 + + -

Pet Man Nun Oak

Adjusted Adjustments = Income $ 65,000 $4,000 2,000 4,000 14,000a 30,000b 5,000c $114,000

Consolidated Net Income $ 65,000 12,600 23,700 3,940 $105,240

Noncontrolling Interest = Share 0 $1,400 6,300 1,060 $8,760

a b c

$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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9-6

Indirect and Mutual Holdings

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 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% Total noncontrolling interest share Alternative solution Sin $350,000 Tar $400,000 Won $(100,000) Van $240,000 Total noncontrolling 4

$400,000 (252,000) $ 148,000 $ 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 (1,925,800) $ 204,200 $ 35,000 148,000 (46,000) 67,200 204,200

10% 37% 46% 28% interest share

a [See computations for question 3] d Net income of Sin Separate income Add: 70% of Tars $400,000 Deduct: 60% of Wons $(100,000) Add: 80% of Vans $240,000 Net income of Sin Pans interest Investment increase Less: Dividends received from Sin ($200,000 90%) Net increase

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

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Solution E9-8

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 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

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

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

a Pats 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% Pats income (controlling share of consolidated net income) $220,800 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

Solution E9-10

P = Pads income on a consolidated basis S = Sads income on a consolidated basis T = Twos 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 2 3 4 b b d c

Supporting computations A = Pins income on a consolidated basis B = Sons income on a consolidated basis C = Tins 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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9-10

Indirect and Mutual Holdings

Solution E9-12 1 d Combined separate income Less: Noncontrolling interest share Controlling Share of Consolidated net income Alternatively: Pets separate income Add: Sods net income of $67,500 90% Less: Dividends received from Pet ($50,000 15%) Controlling interest share of Consolidated net income 2 b P .865P P S = = = = $100,000 + .9($60,000 + .15P) $154,000 $178,035 $60,000 + $26,705 = $86,705 $151,330 8,670 $160,000

$160,000 6,750 $153,250 $100,000 60,750 (7,500) $153,250

Controlling Share of Consolidated net income = $178,035 .85 = Noncontrolling interest share = $86,705 .10 = Total consolidated income 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 Supporting computations Computation of income from Sat: Sats separate income Add: Sats dividend income from Pug Sats net income Pugs ownership interest Pugs equity in Sats income Less: Dividends paid to Sat ($60,000 10%) Less: Excess amortization ($9,000 x 70%) Income from Sat 2 Conventional approach

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

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

Pugs 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 Pugs net income and controlling share ($159,892 90%) Noncontrolling interest share ($65,989 30%) Total income Income from Sat Controlling Share of Consolidated net income Less: Pugs separate income Income from Sat Or alternatively, ($65,989 70%) - ($159,892 10%) - $6,300 excess 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 $143,903 19,797 $163,700

$143,903 120,000 $ 23,903 $ 23,903

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

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9-12

Indirect and Mutual Holdings

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) Less: Unrealized profit Separate realized income (loss) Allocate Bans loss 70% to Sal Allocate Axes income 60% to Sal Patent Allocate Sals income 90% to Pad Patent 500,000 300,000 (14,000) Pad $500,000 Sal $300,000 Axe $150,000 (20,000) 130,000 Ban $(20,000) ______ (20,000) 14,000

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

(78,000)

Controlling share of net income $776,800 Noncontrolling interest income 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 $ 35,200 $ 52,000 $ (6,000)

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Chapter 9

9-13

Solution P9-2 1 Seas 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%). 14,000

Investment in Toy (70%) 35,000 Income from Toy To record investment income computed as follows: Share of Toys net income ($60,000 70%) Less: Unrealized profit from upstream sale of inventory items ($10,000 70%) Pots books Cash 48,000 Investment in Sea (80%) To record dividends received from Sea ($60,000 80%).

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

48,000

Investment in Sea (80%) 88,000 Income from Sea To record investment income computed as follows: Share of Toys 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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9-14

Indirect and Mutual Holdings

Solution P9-2 (Continued) 2 Schedule of income allocation Separate earnings Less: Unrealized profits Separate realized earnings Allocate Toys realized earnings to Sea ($50,000 70%) Seas net income Allocate Seas net income to Pot ($135,000 80%) Pots net income and Controlling share of net income Noncontrolling interest share Check: Pot $300,000 (20,000) 280,000 Sea $100,000 100,000 35,000 135,000 108,000 (108,000) Toy $ 60,000 (10,000) 50,000 (35,000)

$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 Assets Investment in Sea (80%) Investment in Toy (70%) Total assets Liabilities Capital stock Retained earnings Total liabilities and equity Sea Toy $540,000 ________ $540,000 $100,000 300,000 140,000 $540,000

$ 1,848,000 $460,000 440,000 ___________ 315,000 $ 2,288,000 $775,000 300,000 $200,000 1,200,000 400,000 788,000 175,000 $ 2,288,000 $775,000 $

Note: Pots 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. Seas 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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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 Tips income 50% to Pen 40% to Sir Sirs net income Allocate Sirs 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 Investment in Sir (80%) Implied total fair value of Sir ($420,000 / 80%) Book value of Sir Excess of fair value over book value Excess allocated to equipment with a four year lfe Amortization ($25,000 / 4 yrs) Investment in Tip (50%) Implied total fair value of Tip ($75,000 / 50%) Book value of Sir Excess of fair value over book value Goodwill Pen $184,500 (84,500) 100,000 8,000 _______ 108,000 2,500 2,000 82,000 65,600 (5,000) ________ $171,100 (65,600) ( 1,250) ________ $ 15,150 _______ $ 500 $420,000 $ 525,000 (500,000) $ 25,000 (6,250) $186,750 171,100 15,650 $186,750 _______ 80,000 (20,000) 5,000 (2,500) (2,000) Sir $90,000 (10,000) 80,000 Tip $25,000 25,000 Total $299,500 (94,500) 205,000 8,000 (20,000) 193,000

6,250

$ 75,000 $ 150,000 (120,000) $ 30,000

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9-16

Indirect and Mutual Holdings

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 Other expenses Noncont.int.share Sir Noncont.int.share Tip Cont.int.shareof NI $500,000 72,000 12,500 240,000* 160,000* Sir $300,000 10,000 150,000* 70,000* Tip $100,000 h d a i f c c $184,500 $ 90,000 $ 25,000 Adjustments and Eliminations 50,000 72,000 22,500 20,000 6,250 15,150 500 $ $ Consolidated Statements 850,000

60,000* 15,000*

g h

8,000 50,000

412,000* 251,250* 15,150* 500* 171,100

Retained Earnings Retained earnings

Pen Sir Tip

$115,500

12,500 $ 95,000

Retained earnings Retained earnings Net income Dividends

160,000 45,000 184,500 80,000* 90,000 40,000* 25,000 10,000*

g 8,000 e 160,000 b 45,000

171,100 a c d 9,000 9,000 32,000 $

80,000* 186,100

Retained earnings December 31

$220,000

$210,000

$ 60,000

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

$ 67,000 70,000 110,000 140,000 508,000 95,000

$ 36,000 50,000 75,000 425,000

$ 10,000 20,000 35,000 115,000 e 25,000

$ j i f 10,000 20,000 18,750

113,000 130,000 200,000 686,250

74,000 b $990,000 $660,000 $ 40,000 10,000 400,000 210,000 $660,000 $180,000 $ 15,000 5,000 100,000 60,000 $180,000 j 10,000 30,000

d 40,000 e 468,000 a 7,500 b 87,500 a 6,000 b 68,000 30,000 $1,159,250 $ 115,000 115,000 600,000 186,100

Accounts payable Other liabilities Capital stock Retained earnings

$ 70,000 100,000 600,000 220,000 $990,000

b 100,000 e 400,000

Noncontrolling interest Sir (beginning) Noncontrolling interest Tip (beginning) Noncontrolling interest December 31
* Deduct

e 117,000 b c 19,500 6,650 143,150 $1,159,250

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Solution P9-4

Income allocation Definitions P = Pars income on a consolidated basis S = Sits income on a consolidated basis T = Tots 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

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

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 27,000 200,000* 50,000* $ Sun 90% 100,000 10,000 50,000* 30,000* a a 27,000 10,000 250,000* 80,000* 170,000 d $ 177,000 $ 30,000 3,000 $ 3,000* 167,000 Adjustments and Eliminations $ Consolidated Statements 500,000

Consolidated NI Noncontrolling share Controlling share of NI


Retained Earnings Retained earnings Pin Retained earnings Sun Net income (Controlling share in Consol. Column) Dividends Retained earnings December 31 Balance Sheet Other assets Investment in Sun 90% Investment in Pin 10% Goodwill

300,000 $ 177,000 100,000* 200,000 30,000 b 200,000

300,000

167,000 20,000* a d 28,000 2,000 $ 90,000* 377,000

377,000

210,000

486,000 414,000

420,000 a 9,000 b 405,000 c 80,000 b 50,000

906,000

80,000 $ 900,000 $ 500,000 90,000 200,000 b 200,000 210,000 500,000

$ $

50,000 956,000 213,000 400,000 377,000

Liabilities Capital stock Retained earnings

123,000 $ 400,000 377,000 900,000 $

Noncontrolling interest January 1 Noncontrolling interest December 31


Treasury stock
* Deduct

b d c 80,000

45,000 1,000 $ 46,000 80,000* 956,000

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Chapter 9

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

2,000

4,000

Income from Sip 28,000 Dividends 16,000 Investment in Sip 12,000 To eliminate income from Sip and 80% of Sips dividends, and return the investment in Sip account to the beginning-of-theperiod balance under the equity method. Investment in Sip Investment in Par To eliminate reciprocal investments. 100,000 100,000

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. Expenses 5,000 Patent To record current years amortization of patent. Noncontrolling Interest Share Dividends Noncontrolling Interest 12,000 4,000 8,000 5,000

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Indirect and Mutual Holdings

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

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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 Retained Earnings Retained earnings Par Retained earnings Sip Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Other assets Investment in Sip $ 405,710 $ 88,000 16,000* 180,000 47,000 20,000* e 180,000 88,000 c g 16,000 4,000 $ 16,000* 477,710 $ 405,710 $ 140,000 28,000 $ Sip 90% 100,000 c 4,000 b 3,000 60,000* f g $ 88,000 $ 47,000 28,000 4,000 a 5,000 12,000 $ 2,000 5,000 145,000* 100,000 12,000* 88,000 Adjustments and Eliminations $ Consolidated Statements 240,000

80,000*

477,710

207,000

448,000 109,710

157,000 a 2,000 d 100,000 100,000 e b 4,000 c 12,000 e 195,710 d 100,000 20,000 f 5,000

605,000

Investment in Par Patent $ Capital stock Retained earnings $ 557,710 $

257,000 50,000 e 207,000 257,000 50,000

15,000 620,000 80,000 477,710

80,000 477,710 557,710 $

Noncontrolling interest January 1 Noncontrolling interest December 31

e g

54,290 8,000 $

62,290 620,000

Deduct

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Indirect and Mutual Holdings

Solution P9-7 Preliminary Computations Pans investment cost Implied total fair value of Set ($340,000 / 80%) Book value of Set Excess of fair value over book value - Goodwill 1 $340,000 $425,000 (400,000) $ 25,000

Consolidated net income and noncontrolling interest share (conventional approach) Definitions P = Pans income on a consolidated basis S = Sets 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) $258,261 21,739 $280,000

Entries to account for investments on an equity basis Pans books Capital stock 120,000 Retained earnings 40,000 Investment in Set 160,000 To record constructive retirement of 10% of Pans 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 Sets dividends. 10,000 10,000 32,000

Investment in Set (80%) Dividends

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

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Indirect and Mutual Holdings

Solution P9-7 (continued) 3 Journal entries on Sets 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 Pans $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%). Pan $200,000 58,261 $258,261 Pan $416,000 (160,000) 58,261 10,000 (32,000) $292,261 $ Set 80,000 28,696 $ 108,696

Net income for 2013 Separate incomes Investment income Net income Investment balance December 31, 2013 Investments beginning of 2013 Less: Constructive retirement of Pans stock Add: Investment income Add: Dividends paid to Set Less: Dividends received Investment balances December 31, 2013 Stockholders equity December 31, 2013 Stockholders equity January 1, 2013 Add: Net income Less: Dividends Stockholders equity December 31, 2013

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

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

Noncontrolling interest at December 31, 2013 Sets equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31, 2013 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

$568,696 20% $ 113,739 $ 100,000 21,739 (8,000) $ 113,739

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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. 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 Pans stock that was charged to the investment in Set account. Dividends Investment in Set To eliminate dividends. 10,000 10,000

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