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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.
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. A mutual holding affiliation structure is a special type of indirect holding where affiliates indirectly own themselves. If there are two affiliates, each affiliate holds 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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9-2
6
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 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.
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 = $100,000 + .8S S = $40,000 + .1P P = $100,000 + .8($40,000 + .1P) P = $143,478 Controlling Share of Consolidated net income = $143,478 ´ 90% = $129,130
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.
15
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 Copyright © 2018 Pearson Education Ltd.
Chapter 9
9-3
interest’s percentage of dividends, the noncontrolling interest can be determined without use of simultaneous equations. SOLUTIONS TO EXERCISES Solution E9-1 a.
In 2013, Pandu Tbk only have indirect holdings of Dewa Tbk through Sunda Tbk, so the structure is the father-son-grandson. The percentage of ownership is calculated as follows: Pandu’s ownership of Sunda Sunda’s ownership of Dewa (90% 60%) = 54%
b.
In 2014, Pandu Tbk has both indirect and direct ownership of Dewa Tbk, so the structure is the connecting affiliates. The percentage of ownership is calculated as follows: Pandu’s indirect ownership of Dewa (a) + Pandu’s direct ownership of Dewa = 74%
Solution E9-2 Computational approach Penang's separate earnings Add: Penang's share of Minang's separate earnings (80% $80,000) Add: Penang's share of Kelang's separate earnings (80% 60% $50,000) Controlling share of consolidated net income Minang's direct noncontrolling interest share (20% $80,000) Kelang's indirect noncontrolling interest share (80% 40% $50,000) Kelang's direct noncontrolling interest share (40% $50,000) Noncontrolling interest share
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$100,000 $ 64,000 $ 24,000 $188,000
$ 16,000 $ 16,000 $ 20,000 $ 52,000
9-4
Indirect and Mutual Holdings
Solution E9-3 a
b
Under treasury stock approach, cost method is used, so: Penn's separate earnings Penn's share of Sinn's earnings (80% x $25,000)
$50,000
Controlling share of consolidated net income
$70,000
Under conventional approach, equity method is used, so: Penn’s separate earnings Penn's share of Sinn's earnings* (80% x $41,667.67)-(20% x $83,888.33)
$50,000
Controlling share of consolidated net income
$66,667
$20,000
$16,667
* Determine Penn’s and Sinn's income under consolidation basis P = Penn's income + Sinn's mutual income S = Sinn's income + Penn's mutual income P = $50,000 + 0.8S S = $25,000 + 0.2P P = $50,000 + 0.8($25,000 + 0.2P) 0.84P = $70,000 P = $83,333.33 S = $25,000 + 0.2($83,333.33) S = $41,667.67 Solution E9-4 1
2
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 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 Copyright © 2018 Pearson Education Ltd.
$112,000 56,000 $168,000
$ 48,000 20,000 24,000
Chapter 9
3
9-5
Total noncontrolling interest share
$ 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
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9-6
Indirect and Mutual Holdings
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
Tea $35,000 - 5,000
50,000
30,000
30,000
Won Val $(20,000) $40,000 _________ ________ (20,000)
+28,000 (2,000) (12,000) + 44,800 + 5,600 + 18,880
40,000 (28,000)
+ 2,000 + 12,000
(44,800) (5,600)
(18,880)
$113,680 $ 4,720
_______
________
_______
$ 5,600
$ (6,000)
$12,000
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Chapter 9
9-7
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 $130,000 130,000
Man $36,000 - 8,000 28,000
Nun $56,000 + 4,000 60,000
Oak $18,000 -8,000 10,000
+ 2,000
(2,000) (7,000)
+ 7,000 + 43,400
(43,400) (6,200)
+ 6,200 + 37,080
(37,080)
$210,480 $ 4,120
_______ $12,400
______ $1,000
Alternative solution Adjusted Adjustments = Income $130,000
+ -
Pet Man
36,000
-
$8,000
28,000a
25,200
$ 2,800
Nun
56,000
+
4,000
60,000b
47,400
12,600
Oak
18,000
-
8,000
10,000c
7,880
2,120
$210,480
$17,520
$228,000
-
Consolidated Net Income $130,000
Noncontrolling Interest = Share 0
Reported Income $130,000
a
$28,000 divided 90% to consolidated net income (CNI) 10% to noncontrolling interest share (NIS) b $60,000 divided 70% + (90% ´ 10%) to CNI and 20% + (10% ´ 10%) to NIS c $10,000 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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9-8
Indirect and Mutual Holdings
Solution E9-7 1
2
3
a Separate income of Tar Direct noncontrolling interest
$400,000 X 30% $120,000
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%
$240,000 X 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
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
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(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
Chapter 9
9-9
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 Controlling Share of Consolidated net income 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 $6,000,000 + 80% of S S = Separate income of $3,000,000 + 30% of P P = $6,000,000 + .8($3,000,000 + .3P) = $6,000,000 + $2,400,000 + .24P .76P = $8,400,000 P = $11,052,632 Controlling Share of Consolidated net income = $11,052,632 ´ 70% = $7,736,842
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9-10
Indirect and Mutual Holdings
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 = $400,000 + .7S S = $240,000 + .8T T = $160,000 + .1S Solve for S S = $240,000 + .8($160,000 + .1S) S = $368,000 + .08S S = $400,000 Compute P and T P = $400,000 + .7($400,000) P = $680,000 T = $160,000 + .1($400,000) T = $200,000 Income Allocation Controlling Share of Consolidated net income (equal to P) Noncontrolling interest share in Sad ($400,000 ´ 20%) Noncontrolling interest share in Two ($200,000 ´ 20%) Total consolidated income
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$680,000 80,000 40,000 $800,000
Chapter 9
9-11
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 = $647,295.60 Determine C C = $230,000 + .25($647,295.60) C = $391,823.90 Determine B B = $170,000 + .15($391,823.90) B = $228,773.59 Allocate income to controlling share of consolidated net income and noncontrolling interest Controlling Share of Consolidated net income ($647,295.60 ´ 75%) Noncontrolling interest — Son ($228,773.59 ´ 20%) Noncontrolling interest — Tin ($391,823.90 ´ 15%) Total consolidated income
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$485,471.70 45,754.72 58,773.58 $590,000.00
9-12
Indirect and Mutual Holdings
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 ´ . $151,330 85 = 8,670 Noncontrolling interest share = $86,705 ´ .10 = Total consolidated income $160,000
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Chapter 9
9-13
Solution E9-13 1 Treasury stock approach Investment in Sat balance December 31, 2016 Investment balance December 31, 2015 Add: Income from Sat Less: Dividends received from Sat(70% x $30,000) Add: Dividends paid to Sat Investment in Sat December 31, 2016
$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
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, 2016 Investment in Sat December 31, 2015 Add: Income from Sat Less: Dividends from Sat Investment in Sat December 31, 2016
$245,700 23,903 (21,000) $248,603
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9-14
Indirect and Mutual Holdings
SOLUTIONS TO PROBLEMS Solution P9-1 Polly and Subsidiaries Income Allocation Schedule For the year 2014
Separate earnings Add: realized profit from sale of land Less: unrealized profit from sale of land Less: unrealized profit at ending inventory Separate realized earnings Alllocate Wally's income 50% to Jolly 10% to Sally 30% to Polly Allocate Jolly's income 70% to Sally Allocate Sally''s income 80% to Polly Controlling share of consolidated net income Noncontrolling interest share
Polly $450,000
Sally $250,000
Jolly $100,000
Wally $50,000
$10,000
$5,000
$(15,000) $(10,000) $450,000
$(10,000)
$235,000
$100,000
$45,000
$22,500
$(22,500) $(4,500) $(13,500)
$4,500 $13,500
$260,200 $ 723,700
$85,750 $325,250 $(260,200)
$65,050
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$122,500 $(85,750)
$36,750
$4,500
Chapter 9
9-15
Solution P9-2 1
Sea’s books Investment in Toy (70%) 588,000 Cash 588,000 To record purchase of a 70% interest in Toy Corporation. Cash
28,000 Investment in Toy (70%) To record dividends received from Toy ($40,000 ´ 70%).
Investment in Toy (70%) 70,000 Income from Toy To record investment income computed as follows: Share of Toy’s net income ($120,000 ´ 70%) Less: Unrealized profit from upstream sale of inventory items ($20,000 ´ 70%)
28,000
70,000 $ 84,000 (14,000) $ 70,000
Pot’s books Cash
96,000 Investment in Sea (80%) 96,000 To record dividends received from Sea ($120,000 ´ 80%).
Investment in Sea (80%) 176,000 Income from Sea To record investment income computed as follows: Share of Toy’s net income ($200,000 + $70,000) ´ 80% Less: Unrealized gain on land sold to Toy
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176,000
$216,000 (40,000) $176,000
9-16
Indirect and Mutual Holdings
Solution P9-2 (Continued) 2
Schedule of income allocation Separate earnings Less: Unrealized profits
Pot $600,000 (40,000)
Sea $200,000
Toy $120,000 (20,000)
560,000
200,000
100,000
70,000
(70,000)
Separate realized earnings Allocate Toy’s realized earnings to Sea ($100,000 ´ 70%) Sea’s net income Allocate Sea’s net income to Pot ($270,000 ´ 80%) Pot’s net income and Controlling share of net income Noncontrolling interest share Check:
3
270,000 216,000
(216,000)
$776,000
$ 54,000
_________ $ 30,000
Realized earnings ($560,000 + $200,000 + $100,000) $860,000 Less: Noncontrolling interest share (54,000+30,000) (84,000) Controlling share of net income $776,000
Schedule of assets and equities at December 31, 2017 Pot
Sea
Toy
Assets Investment in Sea (80%) Investment in Toy (70%) Total assets
$ 3,696,000 $ 920,000 880,000 ___________ 630,000 $ 4,576,000 $1,550,000
$1,080,000
Liabilities Capital stock Retained earnings Total liabilities and equity
$
$
600,000 $ 400,000 2,400,000 800,000 1,576,000 350,000 $ 4,576,000 $1,550,000
__________ $1,080,000 200,000 600,000 280,000 $1,080,000
Note: Pot’s assets other than investments consist of $3,200,000 assets at the beginning of the year, plus separate earnings of $600,000 and dividend income of $96,000, less dividends paid of $200,000. Sea’s assets other than investments consist of $1,400,000 assets at the beginning of the period, plus separate earnings of $200,000 and dividend income of $28,000, less investment cost of $588,000 and dividends paid of $120,000.
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Chapter 9
9-17
Solution P9-3 Preliminary computations Check on consolidated net income Pen Net income as stated $184,500 Less: Investment income (84,500) Separate income 100,000 Add: Unrealized profit in beginning inventory 8,000 Less: Unrealized profit in ending inventory _________ Separate realized incomes 108,000 Allocate Tip’s income 50% to Pen 2,500 40% to Sir Sir’s net income Allocate Sir’s income 80% to Pen 65,600 Less: Depreciation on excess allocated to plant and Equipment (5,000) Total income of consolidated Entity _________ Controlling share of NI $171,100 Noncontrolling int. share
Sir $90,000 (10,000) 80,000
Tip $25,000 25,000
Total $299,500 (94,500) 205,000 8,000
________ 80,000 2,000 82,000
(20,000) 5,000
(20,000) 193,000
(2,500) (2,000)
(65,600) ( 1,250) _________ $ 15,150
(6,250) ________ $ 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)
$
6,250
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
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9-18
Indirect and Mutual Holdings
Solution P9-3 (continued) Pen Corporation and Subsidiaries Consolidation Working Papers for the year ended December 31, 2016
Income Statement Sales Income from Sir
Pen
Sir
Tip
$500,000
$300,000
$100,000
72,000
Income from Tip
Adjustments and Eliminations h
50,000
d
72,000
Consolidated Statements $
850,000
12,500
10,000
a
22,500
Cost of sales
240,000*
150,000*
60,000*
i
20,000
Other expenses
160,000*
70,000*
15,000*
f
6,250
251,250*
Noncont.int.share — Sir
c
15,150
15,150*
Noncont.int.share — Tip
c
500
500*
Cont. share of net inc.
$184,500
$ 90,000
g h
8,000 50,000
$ 25,000
412,000*
$
171,100
$
95,000
Retained Earnings Retained earnings — Pen Retained earnings
$115,500 160,000
— Sir
Cont. share of net inc. Dividends
12,500
g
8,000
e 160,000 45,000
Retained earnings — Tip
f
184,500ü
90,000ü
25,000ü
80,000*
40,000*
10,000*
b
45,000 171,100 a c d
9,000 9,000 32,000
80,000*
Retained earnings December 31
$220,000
$210,000
$ 60,000
Balance Sheet Cash
$ 67,000
$ 36,000
$ 10,000
70,000
50,000
20,000
j
10,000
130,000
110,000
75,000
35,000
i
20,000
200,000
140,000
425,000
115,000
f
18,750
686,250
Accounts receivable Inventories
$
$
186,100
113,000
Plant and equipment — net Investment in Sir 80% Investment in Tip 50%
Accounts payable
25,000
d 40,000 e 468,000
508,000 95,000
Investment in Tip 40% Goodwill
e
74,000 ________
________
________
$990,000
$660,000
$180,000
$ 70,000
$ 40,000
$ 15,000
Other liabilities
100,000
10,000
5,000
Capital stock
600,000
400,000
100,000
Retained earnings
220,000ü
210,000ü
$990,000
$660,000
b
7,500 87,500
a b
6,000 68,000
30,000
30,000 $1,159,250
j
10,000
$
115,000 115,000
b 100,000 e 400,000
600,000 186,100
60,000ü $180,000 e 117,000
Noncontrolling interest — Sir (beginning)
b
Noncontrolling interest — Tip (beginning) Noncontrolling interest December 31
a b
_________ 976,900
19,500
c
6,650
143,150
976,900
$1,159,250
*Deduct
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Chapter 9
9-19
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 = $400,000 + .8S + .5T S = $200,000 + .2T T = $100,000 + .1S Solve for S S = $200,000 + .2($100,000 + .1S) S = $220,000 + .02S .98S = $220,000 S = $224,489.80 or $224,490 Compute T T = $100,000 + .1($224,489.80) T = $100,000 + $22,448.98 T = $122,448.98 or $122,449 Compute P P = $400,000 + .8($224,489.80) + .5($122,448.98) P = $640,816.33 or $640,816 Income allocation Controlling share of consolidated net income = P = Noncontrolling interest share in Sit ($224,490 ´ .1) Noncontrolling interest share in Tot ($122,449 ´ .3)
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$640,816 22,449 36,735 $700,000
9-20
Indirect and Mutual Holdings
Solution P9-4 (continued) 2
P, S, and T are as defined in part 1. Equation P = ($400,000 - $40,000) + .8S + .5T S = $200,000 + .2T T = ($100,000 - $20,000) + .1S Solve for S S = $200,000 + .2($80,000 + .1S) S = $216,000 + .02S S = $220,408.16 Compute T T = $80,000 + .1($220,408.16) T = $102,040.82 Compute P P = $360,000 + .8($220,408.16) + .5($102,040.82) P = $587,346.94 Income allocation Controlling share of consolidated net income = P = Noncontrolling interest share in Sit ($220,408.16 ´ 10%) Noncontrolling interest share in Tot ($102,040.82 ´ 30%)
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$587,346.94 22,040.82 30,612.25 $640,000.01
Chapter 9
9-21
Solution P9-5 Preliminary computations Shin's separate income (Sales - Expenses) Shin's dividend income Shin's income Pamela's share of income (90%) Intercompany dividend adjustment Income from Shin
$ $ $ $ $ $
40,000 4,000 44,000 39,600 (4,000) 35,6001
Pamela's dividend - beginning Intercompany dividend adjustment Pamela's dividend - ending
$ 40,000 $ (4,000) $ 36,0002
Investment in Shin - beginning Add: Pamela's share of Shin's income Less: Dividend from Shin (90%) Investment in Shin - ending
$315,000 $ 39,600 $ 27,000 $327,6003
Implied fair value (100%) Book value of equity Goodwill
$350,000 $340,000 $ 10,000
Consolidation workpaper entries a
b c
d
Income from Shin Dividend income Dividends Investment in Shin To eliminate income from Shin Noncontrolling interest share Dividends Noncontrolling interest Common stock - Shin Retained earnings - Shin Goodwill Investment in Shin Noncontrolling interest To eliminate equity accounts and recognize goodwill Treasury stock Investment in Pamela To recognize treasury stock under treasury stock approach
$35,600 $4,000 $27,000 $12,600 $4,400 $3,000 $1,400 $200,000 $140,000 $10,000 $315,000 $35,000 $80,000 $80,000
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9-22
Indirect and Mutual Holdings
Solution P9-5 (continued) Pamela Incorporated and Subsidiary Consolidated Workpaper For year ended December 31, 2014
Pamela
Adjustments and eliminations
Shin
Debits
Consolidate d Statements
Credits
Income Statement Sales
$220,000
Income from Shin
$35,600
Dividend income
$110,000 a $4,000
Expenses including COGS Noncontrolling interest share Controlling share of net income
$(100,000)
$330,000 a
$ $ -
$(70,000)
$(170,000) b
$155,600
$35,600 $4,000 $4,400
$(4,400)
$44,000
$155,600
Retained Earnings Statement Retained earnings - Pamela
$308,000
Retained earnings - Shin Dividends
$140,000 $(36,000)
Controlling share of net income Retained earnings - December 31
$308,000 c
$140,000
$(30,000)
a
$27,000
b
$3,000
$(36,000)
$155,600
$44,000
$155,600
$427,600
$154,000
$427,600
Other assets
$600,000
$274,000
$874,000
Investment in Shin - 90%
$327,600
Balance Sheet
Investment in Pamela - 10%
$80,000
Goodwill
c $927,600
Common stock - Pamela
a
$12,600
c
$315,000
d
$80,000
$10,000
$354,000
$884,000 $500,000
$200,000
Retained earnings Treasury stock
$ $10,000
$500,000
Common stock - Shin
$ -
$427,600
$154,000
$927,600
$354,000
c
$200,000 $427,600
d
$80,000
Noncontrolling interest
$(80,000) b
$1,400
c
$35,000
$36,400 $884,000
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Chapter 9
9-23
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)
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9-24
Indirect and Mutual Holdings
Solution P9-6 (continued) 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
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
5,000
Noncontrolling Interest Share 12,000 Dividends 4,000 Noncontrolling Interest 8,000 To record the noncontrolling interest share of subsidiary income and dividends.
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Chapter 9
9-25
Solution P9-6 (continued) Par Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2017 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 80%
$
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
180,000
Controlling share of NI
88,000ü
47,000ü
Dividends
16,000 *
20,000 *
Retained earnings December 31 Balance Sheet Other assets Investment in Sip
Investment in Par Patent
$
477,710
$
207,000
$
448,000 109,710
$
157,000
__________ $ 557,710
Capital stock Retained earnings $
100,000 __________ $ 257,000
80,000 477,710 ü 557,710 $
Noncontrolling interest January 1 Noncontrolling interest December 31
e 180,000 88,000 c g
16,000 4,000
16,000 * $
477,710
$
605,000
$
15,000 620,000
a 2,000 b 4,000 d 100,000 c 12,000 e 195,710 d 100,000 e 20,000 f 5,000
50,000 e 207,000 ü 257,000
50,000
e 54,290 _________ g 8,000 401,000 401,000 $
*Deduct
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80,000 477,710
62,290 620,000
9-26
Indirect and Mutual Holdings
Solution P9-7 Preliminary Computations Pop’s investment cost
$170,000
Implied total fair value of Son ($170,000 / 80%) Book value of Son Excess of fair value over book value – Goodwill
$212,500 (200,000) $ 12,500
1
Consolidated net income and noncontrolling interest share (conventional approach) Definitions P = Pop’s income on a consolidated basis S = Son’s income on a consolidated basis P = $100,000 separate earnings + .8S S = $40,000 separate earnings + .1P Solve for P P = $100,000 + .8($40,000 + .1P) P = $100,000 + $32,000 + .08P P = $143,478 Compute S S = $40,000 + .1($143,478) S = $54,348 Income allocation Controlling Share of Consolidated net income ($143,478 ´ 90% $129,130 outside ownership) 10,870 Noncontrolling interest share ($54,348 ´ 20%) Total (separate incomes)
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$140,000
Chapter 9
9-27
Solution P9-7 (continued) 2
Entries to account for investments on an equity basis Pop’s books Capital stock 60,000 Retained earnings 20,000 Investment in Son 80,000 To record constructive retirement of 10% of Pop’s stock. Investment in Son (80%) 29,130 Income from Son 29,130 To record income from Son computed as follows: 80%($54,348) - 10% ($143,478) = $29,130. Alternatively $129,130 - $100,000 separate income = $29,130. Cash
16,000 Investment in Son To record receipt of 80% of Son’s dividends.
16,000
Investment in Son (80%) 5,000 Dividends 5,000 To eliminate dividends on stock that was constructively retired and to adjust the investment in Son account for the transfer equal to 10% of Pop’s dividends.
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9-28
Indirect and Mutual Holdings
Solution P9-7 (continued) 3
Journal entries on Son’s books Investment in Pop (10%) 80,000 Assets 80,000 To record acquisition of a 10% interest in Pop at book value. Investment in Pop 14,348 Income from Pop 14,348 To record 10% of Pop’s $143,478 income on a consolidated basis. Cash
5,000 Investment in Pop (10%) 5,000 To record receipt of dividends from Pop ($50,000 ´ 10%).
4
Net income for 2018 Separate incomes Investment income Net income
Pop $100,000 29,130 $129,130
Son $ 40,000 14,348 $ 54,348
5
Investment balance December 31, 2018 Investments beginning of 2018 Less: Constructive retirement of Pop’s stock Add: Investment income Add: Dividends paid to Son Less: Dividends received Investment balances December 31, 2018
Pop $208,000 (80,000) 29,130 5,000 (16,000) $146,130
Son $ 80,000
6
Stockholders’ equity December 31, 2018 Stockholders’ equity January 1, 2018 Add: Net income Less: Dividends Stockholders’ equity December 31, 2018
Pop $720,000 129,130 (45,000) $804,130
Son $250,000 54,348 (20,000) $284,348
7
Noncontrolling interest at December 31, 2018 Son’s equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31, 2018
$284,348 20% $ 56,870
Alternative solution Noncontrolling interest January 1, 2018 ($250,000 ´ 20%) Noncontrolling interest share ($54,348 ´ 20%) Noncontrolling interest dividends Noncontrolling interest at December 31, 2018
$ 50,000 10,870 (4,000) $ 56,870
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14,348 (5,000) $ 89,348
Chapter 9
9-29
Solution P9-7 (continued) 8
Adjustment and elimination entries a
Income from Pop 14,348 Dividends 5,000 Investment in Pop 9,348 To eliminate investment income and dividends from Pop and return the investment account to its beginning-of-the-period balance.
b
Investment in Son 80,000 Investment in Pop 80,000 To eliminate investment in Pop balance and increase the investment in Son for the constructive retirement of Pop’s stock that was charged to the investment in Son account.
c
Dividends Investment in Son To eliminate dividends.
5,000 5,000
d
Income from Son 29,130 Dividends 16,000 Investment in Son 13,130 To eliminate income and dividends from Son and return the investment in Son to its beginning-of-the-period balance.
e
150,000 Capital stock — Son 100,000 Retained earnings — Son Goodwill 12,500 Investment in Son 208,000 Noncontrolling interest 54,500 To eliminate Son’s equity account balances and the investment in Son, enter beginning-of-the-period goodwill and noncontrolling interest.
f
Noncontrolling interest share 10,870 Dividends 4,000 Noncontrolling Interest 6,870 To record the noncontrolling interest share of subsidiary income and dividends.
Solution PR 9-1 According to ASC 323-10-40-1, “An share issuance by an investee as share of its investment. Any gain investee’s share issuance shall be
equity method investor shall account for a if the investor had sold a proportionate or loss to the investor resulting from an recognized in earnings.”
Solution PR 9-2 No. According to ASC 855-10-25-3, there is no need to disclose evidence about conditions that did not exist at the balance sheet date.
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