33

Chapter 9

Chapter 9
INDIRECT AND MUTUAL HOLDINGS
Electronic Supplement

Solution W9-1
1

Affiliation diagram
Perez
60%

80%

70%

20%
Alice
70%

Betty
90%

Donna
2

Carol
10%

Effie

Income allocation schedule

Alice

Betty

Carol

Donna

Effie

Total

$110,000

$20,000

$35,000

$(15,000)

$(20,000)

$40,000

$170,000

Reported incomes

Perez

Dividend income:
from Alice
from Betty
from Donna
from Effie

(6,000)
(16,000)

Unrealized gain on
sale of equipment
to Effie
Separate realized
incomes

(2,000)
(3,500)

(13,500)

(12,000)
88,000

Allocate Donna
70% to Alice

4,500

(12,000)
19,500

(15,000)

(14,000)

Net loss of Alice

(20,000)

40,000

14,000

(9,500)

Allocate Alice
60% to Perez
20% to Betty

(5,700)

Allocate Carol
70% to Perez
10% to Effie

(10,500)

5,700
1,900

(1,900)
10,500
1,500

Net income of Effie

Allocate Effie
90% to Betty

(8,000)
(16,000)
(3,500)
(13,500)

(1,500)
38,500

34,650

(34,650)

$117,000

34

Indirect and Mutual Holdings

Net income of Betty

Allocate Betty
80% to Perez
Consolidated net
income
Minority interest
expense
() Deduct or loss

52,250
41,800

(41,800)

$113,600

$113,600
$(1,900)

$10,450

$ (3,000)

$ (6,000)

$ 3,850

3,400
$117,000

35

Chapter 9

Solution W9-2
Palmore Corporation and Subsidiaries
Consolidated Income Statement
for the year ended December 31, 2006
Sales

[$980,000 - $60,000]

Cost of sales

$920,000

[$520,000 - $60,000 + $15,000]

475,000

Gross profit
Other expenses

445,000
[$200,000 - $4,000]

196,000

Total consolidated income

Less:

249,000

Minority interest income (see note)

23,900

Consolidated net income

Note:

$225,100

Computation of minority interest expense

Minority interest expense in Tonkin

($50,000 - $15,000) x 20%
Minority interest expense in Summit
[$95,000 - ($15,000 x 70%)] x 20%
Check:
Separate incomes

$ 7,000
16,900
Palmore

Summit

Tonkin

$150,000

$ 60,000

$ 50,000

Unrealized inventory profit

Recognition of deferred profit on
equipment
Separate realized incomes

(15,000)
4,000
154,000

60,000

35,000

3,500

24,500

(28,000)

Allocate Tonkin's income

10% to Palmore, 70% to Summit
Summit's income

84,500

Allocate Summit's income

80% to Palmore
Palmore's net income and
consolidated net income
Minority interest expense

67,600

(67,600)

$225,100
$ 16,900

7,000

36

Indirect and Mutual Holdings

Solution W9-3
Preliminary computations:
Panda
90%
80%

Ape

70%

Baboon

Chimp

Excess of cost over book value acquired:

Panda's 90% investment in Ape
Ape's 80% investment in Baboon
Ape's 70% investment in Chimp

Cost
$380,000
220,000
155,000

Excess
$20,000
80,000
50,000

Schedule to adjust investment balances to an equity basis

Panda's 90%
Investment
in Ape

Investment balance January 1, 2003

Income from Ape-2003 on equity
basis ($80,000 x 90%) - $2,000
patent amortization
Dividends-2003 ($40,000 x 90%)

$380,000

Investment balance January 1, 2004

Income from Chimp-2004 on equity
basis ($30,000 x 70%) - $5,000
patent amortization
Income from Baboon-2004 on equity
basis ($50,000 x 80%) - $8,000
patent amortization
Income from Ape-2004 on equity
basis ($128,000 x 90%) - $2,000
patent amortizationa
Dividends-2004:
from Chimp ($30,000 x 70%)
from Baboon ($30,000 x 80%)
from Ape ($60,000 x 90%)

414,000

Investment balance December 31, 2004

a

Book Value
Acquired
$360,000
140,000
105,000

Ape's 80%
Investment
in Baboon

Ape's 70%
Investment
in Chimp

$220,000

$155,000

70,000
(36,000)

16,000
32,000
113,200
(21,000)
(24,000)
(54,000)
$473,200

$228,000

Separate earnings of Ape of $80,000 + $16,000 + $32,000

$150,000

37

Chapter 9

Solution W9-3
2

(continued)

Entries on Ape's books

Investment in Baboon
Dividend income
Income from Baboon

$ 8,000
24,000
$ 32,000

To adjust investment in Baboon to an

equity basis.
Dividend income
Income from Chimp
Investment in Chimp

$21,000
$ 16,000
5,000

To adjust investment in Chimp to an

equity basis.

Entries on Panda's books

Investment in Ape
Dividend income
Retained Earnings
Income from Ape

$ 93,200
54,000
$ 34,000
113,200

To adjust investment in Ape to an

equity basis.

Check:
Stockholders'
Equity
x
Ape
Baboon
Chimp

$508,000
195,000
150,000

Percent
Owned
90%
80%
70%

Underlying
Book Value
$457,200
156,000
105,000

Unamortized
+
Excess
$16,000
72,000
45,000

December 31,
2004 Investment Balance
$473,200
228,000
150,000

38

Indirect and Mutual Holdings

Solution W9-4
1

Affiliation structure
Patter
70%

90%

Quiet

80%
60%

20%
Time

Stall
10%
Ridder

Separate realized income schedule

Reported income
Less:
from
from
from
from

Patter

Quiet

Ridder

Stall

$180,000

$56,000

$66,000

$80,000

Dividends
Quiet
Ridder
Stall
Time

(21,000)
(24,000)
(36,000)
99,000

Less: Intercompany profit:

Inventories
Land

(6,000)

(4,000)
(2,000)

50,000

60,000

Time

Total

$30,000

$412,000
(21,000)
(24,000)
(40,000)
(8,000)

80,000

30,000

(6,000)
_

Separate realized
income
$ 93,000

(3,000)
$50,000

$60,000

$80,000

$27,000

319,000

(6,000)
(3,000)
$310,000

39

Chapter 9

Solution W9-4
3

(continued)

Consolidated net income and minority interest expense

Patter

Separate
Realized Income

Consolidated
Net Income

$ 93,000

$ 93,000

Minority Interest
Expense____

Quiet

50,000a

35,000

$15,000

Ridder

60,000b

48,000

12,000

Stall

80,000c

78,400

1,600

Time

27,000d

15,660

11,340

$270,060

$39,940

$310,000
a

Quiet's $50,000 realized income is divided 70% to consolidated net income and
30% to minority interest expense.
b

Ridder's $60,000 realized income is divided 80% to consolidated net income

and 20% to minority interest expense.
c

Stall's $80,000 realized income is divided between consolidated net income

and minority interest expense as follows:
Consolidated net income = [.9 + (.8 x .1)] x $80,000 = $78,400
Minority interest expense = (.2 x .1) x $80,000 = $1,600
d

Time's $27,000 realized income is divided between consolidated net income and
minority interest expense as follows:
Consolidated net income = [(.7 x .6) + (.8 x .2)] x $27,000 = $15,660
Minority interest expense =
[(.3 x .6) + (.2 x .2) + .2] x $27,000 = $11,340

40

Indirect and Mutual Holdings

Solution W9-5
1

Pascoe Corporation and Subsidiaries

Consolidated Balance Sheet
at December 31, 2006

Assets
Other assets
Patents*

$1,200,000
137,500

Total assets

$1,337,500

Liabilities and Stockholders' Equity

Liabilities
$ 450,000
Stockholders' equity
Capital stock
650,000
Retained earnings
237,500
Total equities

*Cost of investments
Book value acquired in Sartin (100%)
Book value acquired in Tate (100%)
Patents
Less amortization (5/10 x $275,000)
Remaining patents
2

$1,337,500

$840,000
(315,000)
(250,000)
$275,000
137,500
$137,500

Proof of consolidated retained earnings

Retained earnings-Pascoe
Amortization of patents over the time period
Increase from Sartin ($150,000 - $115,000)
Increase from Tate ($90,000 - $50,000)
Consolidated retained earnings

$300,000
(137,500)
35,000
40,000
$237,500

Alternative proof of consolidated retained earnings:

P = Pascoe's retained earnings and consolidated retained earnings
S = Sartin's retained earnings increase since acquisition on a consolidated
basis
T = Tate's retained earnings increase since acquisition on a consolidated
basis
P = $300,000 - $137,500 + .8S + .7T
S = $35,000 + .3T
T = $40,000 + .2S
Solve for S
S = $35,000 + .3($40,000 + .2S)
S = $35,000 + $12,000 + .06S
S = $50,000
Determine T
T = $40,000 + .2($50,000)
T = $50,000
Determine P
P = $300,000 - $137,500 + .8($50,000) + .7($50,000)
P = $237,500 = Consolidated retained earnings
Note:

There is no minority interest.

Chapter 9

41

42

Indirect and Mutual Holdings

Solution W9-6
1

Affiliation diagram

Punk
90%

10%

Sub-one
80%
Sub-two
2

Schedule of separate earnings

Punk

Net income
Dividends

Sub-one

Sub-two

Total

$140,000
(36,000)

$60,000
(8,000)

$25,000
(7,000)

$225,000
(51,000)

104,000

52,000
(2,000)

18,000

174,000
(2,000)

Intercompany profit
Separate earnings
3

$104,000

$50,000

$18,000

$172,000

Treasury stock approach

Punk's separate income

Add: 90% x $50,000 realized income of Sub-one
Add: (90% x 80%) x $18,000 realized income of Sub-two
Less: Dividends of Punk accruing to minority stockholders
$7,000 x [20% + (10% x 80%)]
Consolidated net income
Minority interest expense in Sub-two
($18,000 + $7,000) x 20%
Minority interest expense in Sub-one
($50,000 x 10%) + [$25,000 x (10% x 80%)]
Total minority interest income

$104,000
45,000
12,960
(1,960)
$160,000

5,000
7,000

$ 12,000

Note that Sub-two's net assets increased by $15,000 during 2003 ($18,000
separate income plus $7,000 dividends received from Punk less $10,000
dividends paid). This net asset increase must be allocated $12,000 to Sub-one
and $3,000 to Sub-two's minority stockholders.

43

Chapter 9

Solution W9-6
4

(continued)

Conventional approach

P = Punk's income on a consolidated basis

S1 = Sub-one's income on a consolidated basis
S2 = Sub-two's income on a consolidated basis
Equations
P = $104,000 + .9S1
S1 = $50,000 + .8S2
S2 = $18,000 + .1P
S1 = $50,000 + .8($18,000 + .1P)
S1 = $64,400 + .08P
P = $104,000 + .9($64,400 + .08P)
P = $104,000 + $57,960 + .072P
.928P = $161,960
P = $174,525.86
S1 = $64,400 + .08($174,525.86)
S1 = $78,362.07
S2 = $18,000 + .1($174,525.86)
S2 = $35,452.59
Allocation of income
Consolidated net income (90% of P)
Minority interest expense of Sub-one (10% of S1)
Minority interest expense of Sub-two (20% of S2)

$157,073.27
7,836.21
7,090.52
$172,000.00

44

Indirect and Mutual Holdings

Solution W9-7
Incomplete equity-to-equity conversion schedule

Prior years' effects

Patent amortization
ignored ($5,000 per year)
Unrealized inventory
profit ($10,000 x 90%)
Unrealized gain on equipment

Pamol's
Beginning
Retained
Earnings

Investment
in Seward

$(20,000)

$(20,000)

(9,000)

(9,000)

(13,500)

(13,500)

Current year's effects

Patent amortization
Unrealized profit in beginning inventory x 90%
Unrealized profit in
ending inventory x 90%
Piecemeal recognition of
gain on equipment
Loss on land x 90%
Dividends paid to Seward
Increase (decrease)

$(42,500)

(5,000)

$(5,000)

9,000

9,000

(4,500)

(4,500)

3,000
9,000

3,000
9,000
(3,000)

$(31,000)

Minority interest expense

Net income of Seward
Add: Unrealized profits in beginning inventory
Less: Unrealized profits in ending inventory
Add: Unrealized loss on upstream sale of land
Realized income
Minority interest percentage
Minority interest expense

Income from
Seward

$ 8,500

Pamol's
Dividends

$(3,000)
$(3,000)

$50,000
10,000
(5,000)
10,000
65,000
10%
$ 6,500

Minority interest December 31, 2008

(Seward's $470,000 stockholders equity - $5,000 profits in ending inventory +
$10,000 unrealized loss on land) x 10% minority interest = $47,500.
475,000
Investment in Seward
Balance per books December 31, 2008
$473,000
Correct balance:
Underlying equity ($470,000 x 90%)
$423,000
Less: Inventory profit ($5,000 x 90%)
(4,500)
Less: Unrealized gain on equipment
(10,500)
Add: Loss on land ($10,000 x 90%)
9,000
Add: Unamortized patents
25,000
442,000
Overstatement at December 31, 2008

$ 31,000

45

Chapter 9

Solution W9-7

(continued)
Pamol Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2008

|
|
|
Income Statement
|
Sales
|$
Income from Seward
|
Dividend Income
|
Cost of sales
|
|
Depreciation expense
|
Other expenses
|
Loss on sale of land
|
Minority expense
|
Net income
|$
|
Retained Earnings
|
Retained earnings-Pamol |$
Retained earnings Seward|
Net income
|
Dividends
|

|
90%
| Adjustments and |Consolidated
| Seward |
Eliminations
| Statements
|
|
|
|
|
|
|
|
700,000 |$307,000 |b 50,000|
| $ 957,000
45,000 |
|g 53,500|a
8,500|
|
3,000 |g
3,000|
|
400,000*| 150,000*|d
5,000|b 50,000|
|
|
|c 10,000|
495,000*
100,000*| 40,000*|
|e
3,000|
137,000*
50,000*| 60,000*|i
5,000|
|
115,000*
| 10,000*|
|f 10,000|
|
|l
6,500|
|
6,500*
195,000 |$ 50,000 |
|
| $ 203,500
|
|
|
|
|
|
|
|
215,000 |
|a 42,500|
| $ 172,500
|$150,000 |h 150,000|
|
195,000| 50,000|
|
|
203,500
60,000*| 30,000*|
|a
3,000|
|l
3,000|
|
|
|
|g 27,000|
57,000*
Retained earnings
|
|
|
|
|
December 31, 2008
|$ 350,000 |$170,000 |
|
| $ 319,000
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Cash
|$
77,000 |$ 60,000 |
|
| $ 137,000
Receivables-net
|
90,000 | 80,000 |
|j 25,000|
145,000
Inventories
|
100,000 | 70,000 |
|d
5,000|
165,000
Plant assets-net
|
610,000 | 250,000 |f 10,000|e 10,500|
859,500
Investment in
|
473,000 |
|c
9,000|a 31,000|
Seward 90%
|
|
|e 13,500|g 29,500|
|
|
|
|h 435,000|
Investment in Pamol 5% |
| 60,000 |
|k 60,000|
Patents
|
|
|h 30,000|i
5,000|
25,000
|$1,350,000 |$520,000 |
|
| $1,331,500
|
|
|
|
|
Payables and accruals
|$ 200,000 |$ 50,000 |j 25,000|
| $ 225,000
Capital stock
|
800,000 | 300,000 |h 300,000|
|
800,000
Retained earnings
|
350,000|170,000|
|
|
319,000
|$1,350,000 |$520,000 |
|
|
|
|
|
Minority interest January 1, 2008
|c
1,000|h 45,000|
Treasury stock
|k 60,000|
|
60,000*
Minority interest December 31, 2008
|
|l
3,500|
47,500
|
|
| $1,331,500
|
|
|
*Deduct
Pamol