Indirect and Mutual Holdings

Chapter 9: Indirect and Mutual
Holdings
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
Pearson Education, Inc. publishing as Prentice Hall
9-1
Indirect and Mutual Holdings:

Objectives
1. Prepare consolidated statements when the parent
company controls through indirect holdings.
2. Apply consolidation procedures of indirect
holdings to the special case of mutual holdings.
9-2
Indirect and Mutual Holdings
1: Indirect Holdings
9-3
Types of Indirect Holdings

Father-Son-Grandson
Connecting Affiliates
Parent
Parent
80%
Subsidiary A
70%
B
ParentSubsidiary
owns 80%
of A,
and through A,
56% of B (80% x 70%).
80%
20%
Subsidiary A
Subsidiary B
40%
Parent owns 80% of A,

20% of B,
and through A an additional
32% of B (80% x 40%).
Parent owns a total of 52% of B.
9-4
Equity Method for Father-SonGrandson Holdings

Son applies equity method for Investment in
Grandson
Father applies equity method for Investment in
Son
Controlling interest share of consolidated income
includes
Share for direct holding of son
Share for indirect holding of grandson (by
father through son)
9-5
Example: Father-Son-Grandson
On 1/1/09 Poe acquires 80% of Shaw. On 1/1/10
Shaw acquires 70% of Turk. Earnings and
dividends for 2010 are below:
Poe Shaw Turk
Separate earnings
Dividends
100
50
40
60
30
20
9-6
Equity Method Entries

Shaw applies equity method (70%):
Cash
14
Investment in Turk
14
for dividends
Investment in Turk
28
Income from Turk
28
for income
Poe applies equity method (80%):

Cash
Investment in Shaw
for dividends
24
24
9-7
Allocations to CI and NCI

Separate income
Poe
Shaw
Turk
100.0
50.0
40.0
28.0
(40.0)
CI
NCI
Total
190.0
Allocate:
Turk ==>
70% Shaw: 30% NCI
Shaw ==>
80% Poe: 20% NCI
Poe's ==>
CI
Total consolidated
income
62.4
(162.4)
12.0
(78.0)
15.6
162.4
162.4
27.6 190.0
This allocation may look like
the "stepdown method" allocation presented in cost
accounting texts. Mathematically it is!
9-8
Allocation Results
Separate income
Poe
Shaw
Turk
100.0
50.0
40.0
28.0
(40.0)
CI
NCI
Total
190.0
Allocate:
Turk ==>
70% Shaw: 30% NCI
Shaw ==>
80% Poe: 20% NCI
Poe ==>
CI
62.4
(162.4)
Onconsolidated
separate income statements:
Total
incomePoe's net income = $162.4
12.0
15.6
(78.0)
162.4
162.4 27.6 190.0
Shaw's "Income from Turk" = $28.0

Poe's "Income from Shaw" = $62.4
For consolidated statements:
Noncontrolling interest share = 12.0 + 15.6 = $27.6
9-9
Indirect Holdings with Connecting

Affiliates
Indirect holdings with connecting affiliates
Handle similar to Father-Son-Grandson, but
Father has direct holdings in both Son and Grandson
Example: Pet holds 70% of Sal and 60% of Ty. Sal holds an
additional 20% of Ty.
Pet
Sal
Ty
Intercompany profit transactions:

Separate income
70 with35a gain
20of $10. This will be
Downstream:
Pet sold Sal land
fully
attributed to Pet.
Dividends
40
20
10
Upstream: Sal sold $15 inventory to Pet, and Pet holds ending
inventory with unrealized profit of $5. This will be allocated
between Pet and NCI.
9-10
Calculating Investment Balances

Sal:
Underlying equity
Capital stock
Ty:
Jan 1 Dec 31
200
200
Retained earnings
50
69
Goodwill
12
12
100
Retained earnings
80
90
Goodwill
12
12
192
202
276
Investment in Ty
(60%)
115.2
121.2
(10)
Investment in Ty
(20%)
38.4
40.4
262
266
183.4
183.2
Noncontrolling
interest (20%)
38.4
40.4
(5)
Subtotal (split 70:30)

Unrealized profit on
land
Investment in Sal (70%)
* (70%
x 276)
- 10 =
Pearson
Education,
Inc.183.2
publishing as Prentice Hall
Capital stock
Jan 1 Dec 31
100
Unrealized profit in
inventory
Total
Underlying equity
Total
9-11

Separate income
Pet
Sal
Ty
70.0
35.0
20.0
Unrealized $5 profit on
inventory (upstream)
Unrealized $10 gain on land
(downstream)
CI
NCI Total
125.0
(5)
(5)
(10)
(10)
Allocate:
Ty ==> 60% Pet: 20% Sal: 20% NCI
12.0
Sal ==> 70% Pet: 30% NCI
23.8 (34.0)
Pet ==> CI
(95.8)
Total consolidated income
4.0 (20.0)
4.0
10.2
95.8
95.8 14.2 110.0
Dividend distributions:
6
2
(10)
Ty ==> 60% Pet: 20% Sal: 20% NCI
Sal's Income from Ty = $4.0
Pet's70%
Income
from
(20)
Sal ==>
Pet: 30%
NCITy = $12.0 14
Pet's Income from Sal = $23.8 - $10 unrealized gain = $13.8
(40)
40
Pet ==> CI
2
6
9-12
Worksheet Entries
Sales
15.0
Cost of sales
Cost of sales
15.0
5.0
Inventory
Gain on sale of land
5.0
10.0
Land
Income from Ty
10.0
16.0
Dividends
8.0
Investment in Ty
8.0
both Sal's and Pet's

Noncontrolling interest share (Ty)
4.0
9-13
Income from Sal
13.8
Investment in Sal
0.2
Dividends
14.0
including 10 unrealized gain on land

Noncontrolling interest share (Sal)
10.2
Dividends
6.0
Noncontrolling interest (Sal)
4.2
Capital stock (Ty)
100.0
Retained earnings (Ty)
80.0
Goodwill
12.0
Investment in Ty (Sal & Pet)
153.6
Noncontrolling interest (Ty)
38.4
Capital stock (Sal)

Retained earnings (Sal)
Goodwill
200.0
50.0
12.0
9-14
Consolidation Worksheet
Income statement:
Sales
Pet
Sal
Ty
DR
200.0
150.0
100.0
15.0
435.0
13.8
0.0
16.0
0.0
10.0
0.0
Income from Sal
13.8
Income from Ty
12.0
Gain on land
10.0
Cost of sales
Other expenses
4.0
(100.0) (80.0)
(50.0)
(40.0) (35.0)
(30.0)
Noncontrolling
interest share
Controlling interest
share
5.0 15.0
39.0
20.0
Consol
(220.0)
(105.0)
10.2
4.0
95.8
CR
14.2
95.8
9-15
Statement of retained
earnings:
Beginning retained
earnings
Add net income
Deduct dividends
Ending retained
earnings
Pet
Sal
Ty
DR
CR Consol
80.0
50.0
223.0
223.0
50.0
80.0
95.8
39.0
20.0
(40.0)
95.8
(20.0) (10.0)
8.0
2.0
14.0
6.0
(40.0)
278.8
69.0
90.0
Pet
Sal
Ty
Other assets
50.6
19.6
85.0
Inventories
50.0
40.0
15.0
5.0
100.0
Plant assets, net
400.0
200.0
100.0
10.0
690.0
Investment in Sal (70%)
183.2
183.4
0.0
Investment in Ty (60%,
20%)
121.2
8.0
153.6
0.0
Balance sheet:
Goodwill
278.8
DR
CR Consol
155.2
0.2
40.4
12.0
9-16
Pet
Sal
Ty
Liabilities
126.2
31.0
10.0
Capital stock
400.0
200.0
100.0
Retained earnings
278.8
69.0
90.0
Noncontrolling
interest
Total
DR
CR
167.2
100.0
200.0
278.8
2.0
4.2
38.4
78.6
805.0
300.0
200.0
Consol
123.2
969.2
9-17
Indirect and Mutual Holdings
2: Mutual Holdings
9-18
Types of Mutual Holdings

Parent Mutually Owned
Connecting Affiliates
Mutually Owned
Parent
Parent
80%
10%
Subsidiary A
and through A,
has 8% (80% x 10%) of
its own (treasury) stock.
80%
Subsidiary A
20%
20%
Subsidiary B
40%
20% of B,
through A an additional
32% (80% x 40%) of B, and
through B an additional 4%
(20% x 20%) of A.
9-19
Treasury Stock or Conventional

Treasury stock method
Treats parent mutually held stock as treasury
stock
Parent has fewer shares outstanding
"Interdependency" assumed eliminated by
treasury stock treatment
Conventional method for mutual holding
Treats stock as retired
Parent has fewer shares outstanding
Simultaneous set of equations
Fully recognizes interdependencies
9-20
Parent Stock Mutually Held

One or more affiliates holds parent company stock
Treasury stock method
Recognize treasury stock at cost of
subsidiary's investment in parent
Reduce Investment in subsidiary
Conventional method
Parent treats stock as retired, reducing
common stock, and additional paid in capital
or retained earnings
Reduce Investment in subsidiary
9-21
Comparison
Both methods reduce
Income from Subsidiary for the
Parent dividends paid to subsidiary
Methods result in different
Equity accounts
Treasury stock
Retired common stock
Consolidated retained earnings
Noncontrolling interest
9-22
Treasury Stock Method - Data

Pace owns 90% of Salt acquired at fair value
equal to cost, no goodwill. Salt owns 10% of
Pace. At the start of 2010:
Investment in Salt, $297
Noncontrolling interest, $33
Salt's total stockholders' equity
Common stock $200
Retained earnings $130
During 2010,
Separate income: Pace $60, Salt $40
Dividends: Pace $30, Salt $20
9-23
Pace Uses Treasury Stock Method

Allocations of income to CI and NCI:
Pace Salt
CI
NCI Total
Separate Income
60.0
40.0
100.0
Parent dividends
(3.0)
3.0
Allocate:
Salt => 90%:10%
38.7 (43.0)
4.3
Pace
Controlling
share $95.7 95.7
=> 100% interest95.7
Noncontrolling interest share $4.3
4.3 100.0
Totals
Pace's Income from Salt $38.7 95.7
3.0 = $35.7
9-24
Pace's Equity Method Entries

Cash
18.0
Investment in Salt
18.0
for dividends
Investment in Salt
38.7
Income from Salt
38.7
for income
Income from Salt
3.0
In place
of the last entry, the Pace could record its dividend directly
Dividends
3.0as:
Dividends
for Pace dividends paid to Salt

Income from Salt
Cash
27.0
3.0
30.09-25
Worksheet Entries
Income from Salt
35.7
Dividends
18.0
Investment in Salt
17.7
Noncontrolling interest share
4.3
Dividends
2.0
2.3
Common stock
200.0
Retained earnings
130.0
Investment in Salt
297.0
Noncontrolling interests
Treasury stock
33.0
70.0
9-26
Parent Mutually Held - Data

Pace2 owns 90% of Salt2 acquired at fair value equal to cost,
no goodwill. Salt owns 10% of Pace. At the start of 2010:
Investment in Salt2, $226,154
Investment and
Noncontrolling interest, $33,846
noncontrolling interest
Salt2's total stockholders' equity
= 226,154 + 33,846
Common stock $200,000
Retained earnings $130,000
equals underlying
equity less mutual
During 2010,
holding
Separate income: Pace2 $60,000, Salt2 $40,000
Dividends: Pace2 $30,000, Salt2 $20,000 = 200,000 + 100,000
70,000.
9-27
Pace2 Uses Conventional Method

Allocation information:
Pace2
Separate Income
Salt2's allocation
Salt2
CI
NCI
$60,000 $40,000
.90S
Equations:
Pace2's
allocation
P = $60,000 + .9S
S = $40,000 + .1P
CI share = .9P
NCI share = .1S
Total
$100,000
.10S
Solved, substituting 2nd
.10P
.90Pinto 1st:
equation
P = 105,495
S = 50,550
CI share = 94,945
NCI share = 5,055
Conventional method is analogous to reciprocal cost allocation method.

9-28
Note on Results:
Results:
P = 105,495
S = 50,550
CI = 94,945
NCI = 5,055
CI + NCI = $100,000, the total separate income
Pace2's Income from Salt2 = .9S - .1P = $34,945
90% of Salt's income 10% mutual holding
CI = Pace2's separate income + Income from Salt2
$60,000 + $34,945 = $94,945 (as a check!)
9-29
Pace2's Equity Method Entries

Cash
18,000
Investment in Salt2
18,000
for dividends
Investment in Salt2
37,945
Income from Salt2
37,945
for income
Income from Salt2
Dividends
3,000
3,000
for Pace2 dividends paid to Salt2

9-30
Worksheet Entries - Conventional

Income from Salt2
34,945
Dividends
18,000
Investment in Salt2
15,945
Noncontrolling interest share
5,055
Dividends
2,000
3,055
Common stock
200,000
Retained earnings
130,000
Investment in Salt2
296,154
Noncontrolling interests
Investment in Salt2
33,846
70,000
9-31
Subsidiary Stock Mutually Held

Subsidiaries hold stock in each other
Use conventional approach
Treasury stock method is not appropriate
It is not parent's stock
Subsidiary stock is eliminated in
consolidation
9-32
Subsidiary Mutual Holdings

Poly owns 80% of Seth acquired at book value
plus $25,000 goodwill. Seth owns 70% of Uno
acquired at book value plus $10,000 goodwill.
Uno owns 10% of Seth, cost method.
At the start of 2010:
Investment in Seth (by Poly, 80%), $340,000
Investment in Uno (by Seth, 70%), $133,000
Investment in Seth (by Uno, 10%), $40,000
Noncontrolling interest, $102,000
For 2010:
Separate income
Dividends
Poly
Seth
Uno
112,000
51,000
40,000
50,000
30,000
20,000
9-33
Allocate income to CI and NCI

Allocation Info.
Separate income
Poly
Seth
CI NCI
112,000 51,000 40,000
Uno's allocation =>
Total
203,000
.7U
Seth's allocation => .8S

Poly's allocation
=>
Equations:
P = 112,000 + .8S
S = 51,000 + .7U
U = 40,000 + .1S
CI = 1P
NCI = .3U + .1S
Uno
.3U
.1S
.1S
1.0P
nd
Solving, substituting 2 equation

into 3rd (or 3rd into 2nd):
U = 48,495
S = 84,946
P = 179,957
CI share = 179,957
NCI share = 14,548 + 8,495 = 23,043
9-34
A Look at the Results

Results:
U = 48,495
S = 84,946
P = 179,957
CI share = 179,957
NCI share = 14,548 + 8,495 = 23,043
Consolidated income
CI and NCI shares = 203,000, total separate income.
Intercompany income
Poly's Income from Seth = .8S = 67,957
Seth's Income from Uno = .7U = 33,946
Uno's Dividend income = .1(Seth's dividends) = 3,000
Individual reported income
Poly's separate income + income from Seth = 179,957
Seth's separate income + income from Uno = 84,946
9-35
All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
9-36

Indirect and Mutual Holdings

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Indirect and Mutual Holdings

Загружено:

Авторское право:

Доступные форматы

Chapter 9: Indirect and Mutual

Pearson Education, Inc. publishing as Prentice Hall