Indirect and Mutual Holdings

Indirect and Mutual Holdings
Chapter 9
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9-1
Learning Objective 1
Prepare consolidated statements

when the parent company
controls through indirect holdings.
Affiliation Structures
The potential complexity of corporate

affiliation structure is limited only
by one’s imagination .
Direct Holdings
Parent
80%
Subsidiary
A
Direct Holdings
Parent
80% 70% 90%

Subsidiary Subsidiary Subsidiary
A B C
Indirect Holdings
Parent
80%
Subsidiary
A
70%
Subsidiary
B
Indirect Holdings
Parent
80% 20%
Subsidiary Subsidiary
A 40% B
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 10

Mutual Holdings
Parent
80% 10%
Subsidiary
A

Mutual Holdings
Parent
80% 20%
Subsidiary 40% Subsidiary

A 20% B

Father-Son-Grandson Structure
Poe Corporation acquires 80% of the stock

of Shaw Corporation on January 1, 2003.
Shaw acquires 70% of the stock of Turk
Corporation on January 1, 2004.
Both investments are made at book value.

Father-Son-Grandson Structure
(in thousands) Poe Shaw Turk
Other assets $400 $195 $190
Investment in Shaw: (80%) 200 – –
Investment in Turk: (70%) – 105 –
$600 $300 $190
Liabilities $100 $ 50 $ 40
Capital stock 400 200 100
Retained earnings 100 50 50
$600 $300 $190
Separate earnings $100 $ 50 $ 40
Dividends $ 60 $ 30 $ 20
Computational Approaches for
Consolidated Net Income
Poe’s separate earnings $100,000

Add: Poe’s share of Shaw’s separate earnings
($50,000 × 80%) 40,000
Add: Poe’s share of Turk’s separate earnings
($40,000 × 80% × 70%) 22,400
Poe’s net income and consolidated net income $162,400

Combined separate earnings:
Poe $100,000
Shaw 50,000
Turk 40,000 $190,000
Less: Minority interest expenses:
Direct minority interest in
Turk’s income ($40,000 × 30%) $ 12,000
Indirect minority interest in
Turk’s income ($40,000 × 70%) 5,600
Direct minority interest in
Shaw’s income ($50,000 × 20%) 10,000 – 27,600
Poe’s net income and consolidated net income $162,400
(in thousands) Poe Shaw Turk
Separate earnings $100.0 $ 50.0 $ 40.0
Allocate Turk’s income to Shaw
($40,000 × 70%) – + 28.0 – 28.0
Allocate Shaw’s income to Poe
($78,000 × 80%) + 62.4 – 62.4 –
Consolidated net income $162.4
Minority interest expense $ 15.6 $ 12.0

Indirect Holdings –
Connecting Affiliates Structure
Pet
70% 60%
Sal Ty
20%

Accounting for Connecting Affiliates
Pet 70% Pet 60% Sal 20%
(in thousands) in Sal in Ty in Ty
Cost $178 $100 $20
Less: Book value –168 – 90 –20
Goodwill $ 10 $ 10 –
Investment Balance 12/31/09
Cost $178 $100 $20
Add: Share of investees’ pre-2008
income less dividends 7 18 16
Balance 12/31/07 $185 $118 $36

Pet Sal Ty
Earnings (2008) $70,000 $35,000 $20,000
Dividends $40,000 $20,000 $10,000
Pet’s separate earnings of $70,000 included an unrealized
gain of $10,000 from the sale of land to Sal during 2008.
Sal’s separate earnings of $35,000 included unrealized
profit of $5,000 on inventory items sold to Pet for $15,000
during 2008, and remaining in Pet’s 12/31/2008 inventory.

(in thousands) Pet Sal Ty
Separate earnings $70.0 $35.0 $20.0
Deduct unrealized profit –10.0 – 5.0 –
Separate realized earnings $60.0 $30.0 $20.0
Allocate Ty’s income:
20% to Sal – + 4.0 – 4.0
60% to Pet +12.0 – –12.0
Allocate Sal’s income:
70% to Pet +23.8 –23.8 –
Consolidated net income $95.8
Minority interest expense $10.2 $ 4.0
Cash 6,000
Investment in Ty 6,000
To record dividends received from Ty
Investment in Ty 12,000
Income from Ty 12,000
To record income from Ty

Reported income ($39,000 × 70%) $27,300

Less: 70% of Sal’s unrealized
profit of $5,000 – 3,500
Less: 100% of unrealized gain on land –10,000
Total $13,800

Cash 14,000
Investment in Sal 14,000
To record dividends received from Sal
Investment in Sal 13,800
Income from Sal 13,800
To record income from Sal

Pet’s investment Investment Investment

accounts at 12/31/08 in Sal (70%) in Ty (60%)
Balance 12/31/2007 $185,000 $118,000
Add: Investment income 13,800 12,000
Deduct: Dividends – 14,000 – 6,000
Balance 12/31/2008 $183,800 $124,000

Learning Objective 2
Apply consolidated procedures of

indirect holdings to the special
case of mutual holdings.

Mutual Holding – Parent Stock
Held by Subsidiary
Pace
90% 10%
Salt
The 10% interest held by Salt, and the 90%

interest held by Pace, are not outstanding
for consolidation purposes.
Held by Subsidiary
Treasury Stock Approach
Conventional Approach

Treasury Stock Approach
It considers parent company stock held

by a subsidiary to be treasury stock
of the consolidated entity.
The investment account on the books of the
subsidiary are maintained on a cost basis
and is deducted at cost from stockholders’
equity in the consolidated balance sheet.

Held by Subsidiary
Trail balances 12/31/2005 Pace Salt
Debits
Other assets $480,000 $260,000
Investment in Salt (90%) 270,000 –
Investment in Pace (10%) – 70,000
Expenses 70,000 50,000
$820,000 $380,000
Credits
Capital stock, $10 par $500,000 $200,000
Retained earnings 200,000 100,000
Sales 120,000 80,000
$820,000 $380,000
Treasury Approach:
Working Papers December 31, 2005
Adjustments/ Consol-
Income Statement Pace Salt Eliminations idated
Sales $120 $ 80 $200
Investment income 27 a 27
Expenses (70) (50) (120)
Minority interest expense d 3 (3)
Net income $ 77 $ 30 $ 77
Retained earnings – Pace $200 $200
Retained earnings – Salt $100 b 100
Add: Net income 77 30 77
Retained earnings
December 31, 2005 $277 $130 $277

Treasury Approach:
Balance Sheet Pace Salt Eliminations idated
Investment in Salt (90%) 297 a 27
b 270
Investment in Pace (10%) 70 c 70
$777 $330 $740
Capital stock – Pace $500 $500
Capital stock – Salt $200 b 200
$777 $330
Treasury stock c 70 (70)
Minority interest b 30
d 3 33
$740
Treasury Approach:
Sales $140 $100 $240
Income from Salt 35.7 a 35.7
Dividend income 3 a 3
Expenses (80) (60) (140)
Minority interest expense d 4.3 (4.3)
Net income $ 95.7 $ 43 $ 95.7
Retained earnings – Pace $277 $277
Retained earnings – Salt $130 b 130
Dividends (27) (20) a 18
d 2 (27)
Add: Net income 95.7 43 95.7
Retained earnings
December 31, 2006 $345.7 $153 $345.7
Treasury Approach:
Investment in Salt (90%) 317.7 a 20.7
b 297
Investment in Pace (10%) 70 c 70
$845.7 $353 $811
Capital stock – Pace $500 $500
Capital stock – Salt $200 b 200
Retained earnings 345.7 153 345.7
$845.7 $353
Treasury stock c 70 (70)
Minority interest b 33
d 2.3 35.3
$811
It accounts for the subsidiary investment in

parent company stock on an equity basis.
Parent company stock held by a subsidiary
is constructively retired.
Capital stock and retained earnings applicable to
the interest held by the subsidiary do not appear
in the consolidated financial statements.

January 1, 2005 Pace Consolidated

Capital stock $500,000 $450,000
Retained earnings 200,000 180,000
Stockholders’ equity $700,000 $630,000

January 1, 2005
Investment in Salt 270,000
Cash 270,000
To record acquisition of a 90% interest in Salt at book value
January 5, 2005
Capital Stock, $10 par 50,000
Retained Earnings 20,000
To record the constructive retirement of 10% of Pace’s
outstanding stock
Allocation of Mutual Income
Determine income on a consolidated basis.

P = Pace’s separate earnings of $50,000 + 90%S
S = Salt’s separate earnings of $30,000 + 10%P

P = $50,000 + 0.9($30,000 + 0.1P)

P = $50,000 + $27,000 + 0.09P
0.91P = $77,000  P = $84,615
S = $30,000 + 0.1($84,615)
S = $30,000 + $8,462 = $38,462

P S Total
Before allocation: $50,000 $30,000 $ 80,000
After allocation: $84,615 $38,462 $123,077

Determine Pace’s net income on an

equity basis and minority interest.
P = 84,615 × 90% = $76,154
MI = 38,462 × 10% = $3,846
$76,154 + $3,846 = $80,000
Accounting for Mutual Income
($38,462 × 90%) – ($84,615 × 10%) = $26,154

How does Pace record its investment income?
Income from Salt 26,154
To record income from Salt

Conventional Approach:
Sales $120,000 $ 80,000 $200,000
Investment income 26,154 b 26,154
Expenses (70,000) (50,000) (120,000)
Minority interest (3,846)
expense d 3,846
Net income $ 76,154 $ 30,000 $ 76,154
Retained earnings – P $180,000 $180,000
Retained earnings – S $100,000 c 100,000
Add: Net income 76,154 30,000 76,154
Retained earnings
December 31, 2005 $256,154 $130,000 $256,154
Conventional Approach:
Other assets $480,000 $260,000 $740,000
Investment in S 226,154 a 70,000 b 26,154
c 270,000
Investment in P 70,000 a 70,000
$756,154 $330,000 $740,000
Capital stock – P $450,000 $450,000
Capital stock – S $200,000 c 200,000
Retained earnings 256,154 130,000 256,154
$706,154 $330,000
Minority interest b 30,000
d 3,846 33,846
$740,000
Conversion to Equity Method on
Separate Company Book
P S Total
Separate earnings 2005 $ 50,000 $ 30,000 $ 80,000
Separate earnings 2006 + 60,000 + 40,000 + 100,000
Less dividends declared – 30,000 – 20,000 – 50,000
Add dividends received + 18,000 + 3,000 + 21,000
Increase in net assets $ 98,000 $ 53,000 $ 151,000

Conversion to Equity Method on
Separate Company Book
P = $98,000 + 0.9S S = $53,000 + 0.1P

P = $98,000 + 0.9($53,000 + 0.1P) = $160,110
S = $53,000 + (0.1 × $160,110) = $69,011
Pace’s RE increase: $160,110 × 90% = $144,099
MI RE increase: 69,011 × 10% = $6,901
Net asset increase: $144,099 + $6,901= $151,000

Subsidiary Stock Mutually Held
The mutually held stock involves subsidiaries

holding the stock of each other, and the
treasury stock approach is not applicable.

Poly
80%
Seth
70% 10%
Uno

Poly acquired 80% interest in Seth on

January 2, 2005, for $260,000 ($20,000 goodwill).
Seth’s stockholders’ equity consisted of $200,000
capital stock and $100,000 retained earnings.
Seth acquired 70% interest in Uno on
January 3, 2006, for $115,000 ($10,000 goodwill).

Uno’s stockholders’ equity consisted of $100,000

Uno acquired 10% interest in Seth on
December 31, 2006, for $40,000.
Seth’s stockholders’ equity consisted of $200,000

(in thousands 12/31/2006) Poly Seth Uno
Cash $ 64 $ 40 $ 20
Other current assets 200 85 80
Plant and equipment – net 500 240 110
Investment in Seth (80%) 336 – –
Investment in Uno (70%) – 135 –
Investment in Seth (10%) – – 40
Total $1,100 $500 $250
Liabilities $ 200 $100 $ 70
Capital stock 500 200 100
Total $1,100 $500 $250
Poly 80% Seth 70% Uno 10%

in Seth in Uno in Seth
Cost $260,000 $115,000 $40,000
Add: Income less
dividends (2005) 32,000 – –
Add: Income less
dividends (2006) 48,000 21,000 –
Balance 12/31/2006 $340,000 $136,000 $40,000

End of Chapter 9

Indirect and Mutual Holdings

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Indirect and Mutual Holdings

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Авторское право:

Доступные форматы

Indirect and Mutual Holdings

Prepare consolidated statements

The potential complexity of corporate

80% 70% 90%

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 10

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 11

Subsidiary 40% Subsidiary

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 12

Poe Corporation acquires 80% of the stock

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 13

Poe’s separate earnings $100,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 15

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 17

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 18

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 19

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 20

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 22

Reported income ($39,000 × 70%) $27,300

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 23

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 24

Pet’s investment Investment Investment

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 25

Apply consolidated procedures of

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 26

The 10% interest held by Salt, and the 90%

Treasury Stock Approach

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 28

It considers parent company stock held

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 29

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 31

It accounts for the subsidiary investment in

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 35

January 1, 2005 Pace Consolidated

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 36

Determine income on a consolidated basis.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 38

P = $50,000 + 0.9($30,000 + 0.1P)

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 39

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 40

Determine Pace’s net income on an

($38,462 × 90%) – ($84,615 × 10%) = $26,154

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 42

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 45

P = $98,000 + 0.9S S = $53,000 + 0.1P

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 46

The mutually held stock involves subsidiaries

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 47

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 48

Poly acquired 80% interest in Seth on

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 49

Uno’s stockholders’ equity consisted of $100,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 50

Poly 80% Seth 70% Uno 10%

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 52

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 9 - 53

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