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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

+184,000
$384,000

Sam
$160,000

Stan
$100,000

+ 70,000

-70,000

-184,000

$ 46,000

$30,000

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9-1

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.

7
Separate earnings
Deduct: Unrealized profit
Separate realized earnings
Allocate S2s income
Allocate S1s income
Ps 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

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.

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 parents 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 = $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

15

9-3

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

Sal

Tip

$1,600

$1,000

$400

30
240
(762)

(240)
____

$508

$160

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

762
$2,362

Solution E9-2
Pub Corporation and Subsidiaries
Income Allocation Schedule
for the year 2011
(in thousands)
Pub
Sam
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

Tim
$(400)
60
272
$ (68)

Solution E9-3
Place Corporation and Subsidiaries
Income Allocation Schedule
for the year 2011
Place
Lake
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

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

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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

$112,000
56,000
$168,000

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

$ 48,000
20,000
24,000
$ 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:
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

$360,000
112,000
56,000
$528,000

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

Pal
$ 50,000

Sal
$30,000

Tea
$35,000
- 5,000

Won
$(20,000)
_______

Val
$40,000
________

50,000

30,000

30,000

(20,000)

40,000

+28,000
- 2,000
-12,000
+ 44,800
+ 18,880

+ 5,600

-44,800
- 5,600

-18,880

________

- 28,000
+ 2,000
+ 12,000

________

$113,680

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_________

Chapter 9

share

9-5

$ 4,720

$ 5,600

$ (6,000)

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$12,000

9-6

Indirect and Mutual Holdings

Solution E9-6

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

Pet
$ 65,000
65,000

Man
$18,000
- 4,000
14,000

Nun
$28,000
+ 2,000
30,000

Oak
$9,000
-4,000
5,000

+ 1,000

-1,000
-3,500

+ 3,500
+ 21,700
+ 18,540

+ 3,100

-21,700
- 3,100

-18,540

________

$ 2,060

$ 6,200

________

$105,240
$

500

Alternative solution
Adjusted
Adjustments =
Income
$ 65,000

+
-

Pet
Man

18,000

$4,000

14,000a

12,600

$1,400

Nun

28,000

2,000

30,000b

23,700

6,300

Oak

9,000

4,000

5,000c

3,940

1,060

$105,240

$8,760

$114,000
a
b
c

Consolidated
Net Income
$ 65,000

Noncontrolling
Interest
=
Share
0

Reported
Income
$65,000

$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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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)

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%

$ 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

Total noncontrolling interest share


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

$400,000
(252,000)
$ 148,000

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

(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

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9-8

Indirect and Mutual Holdings

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

$ 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

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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Chapter 9

9-9

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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Indirect and Mutual Holdings

Solution E9-11 [AICPA adapted]


1

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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Chapter 9

9-11

Solution E9-12
1

d
Combined separate income
Less: Noncontrolling interest share
Controlling Share of Consolidated net income

$160,000
6,750
$153,250

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

$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
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

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

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

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

Conventional approach

Pugs net income and consolidated net income


P = ($120,000 + .7S) - $6,300
S = $50,000 + .1P
P = $120,000 + .7($50,000 + .1P) - $6,300
P = $120,000 + $35,000 + .07P - $6,300
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9-12

Indirect and Mutual Holdings

.93P = $148,700
P = $159,892
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

$143,903
19,797
$163,700

Income from Sat


Controlling Share of Consolidated net income
Less: Pugs 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, 2011


Investment in Sat December 31, 2010
Add: Income from Sat
Less: Dividends from Sat
Investment in Sat December 31, 2011

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

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Chapter 9

9-13

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)

Pad
$500,000

Sal
$300,000

Less: Unrealized profit


Separate realized income (loss)
Allocate Bans loss
70% to Sal

Ban
$(20,000)

(20,000)
500,000

300,000

______

130,000

(20,000)

(14,000)

Allocate Axes income


60% to Sal
Patent
Allocate Sals income
90% to Pad
Patent

Axe
$150,000

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

14,000
(78,000)

(316,800)

Controlling share of net income $776,800


Noncontrolling interest income

$ 35,200

$ 52,000

$ (6,000)

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

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Indirect and Mutual Holdings

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%).

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%)

14,000

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

Pots books
Cash

48,000
Investment in Sea (80%)
To record dividends received from Sea ($60,000 80%).

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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Chapter 9

9-15

Solution P9-2 (Continued)


2

Schedule of income allocation


Separate earnings
Less: Unrealized profits

Pot
$300,000
(20,000)

Sea
$100,000

Toy
$ 60,000
(10,000)

280,000

100,000

50,000

35,000

(35,000)

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:

135,000
108,000

(108,000)

$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

Sea

Toy

Assets
Investment in Sea (80%)
Investment in Toy (70%)
Total assets

$ 1,848,000 $460,000
440,000
___________ 315,000
$ 2,288,000 $775,000

$540,000

Liabilities
Capital stock
Retained earnings
Total liabilities and equity

$100,000
300,000
140,000
$540,000

300,000 $200,000
1,200,000 400,000
788,000 175,000
$ 2,288,000 $775,000

________
$540,000

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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Indirect and Mutual Holdings

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

Pen
$184,500
(84,500)
100,000

Sir
$90,000
(10,000)
80,000

Tip
$25,000
25,000

Total
$299,500
(94,500)
205,000

8,000
_______
108,000

8,000
_______
80,000

(20,000)
5,000

2,500

(2,500)
(2,000)

2,000
82,000
65,600

(65,600)

(5,000)

( 1,250)

________
$171,100

(20,000)
193,000

(6,250)

________

_______

$ 15,150

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)

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

6,250

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Chapter 9

9-17

Solution P9-3 (continued)


Pen Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2011

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

72,000

Consolidated
Statements
$

850,000

12,500

10,000

22,500

Cost of sales

240,000*

150,000*

60,000*

20,000

Other expenses

160,000*

70,000*

15,000*

6,250

251,250*

Noncont.int.share Sir

15,150

15,150*

Noncont.int.share Tip

500

500*

Cont.int.shareof NI

$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

12,500

8,000

e 160,000
45,000

Retained earnings Tip

Net income

184,500

90,000

25,000

Dividends

80,000*

40,000*

10,000*

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

10,000

130,000

Inventories

110,000

75,000

35,000

20,000

200,000

Plant and
equipment net

140,000

425,000

115,000

18,750

686,250

Accounts receivable

Investment in
Sir 80%

25,000

95,000

Investment in
Tip 40%

74,000

Goodwill

Accounts payable

$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

220,000

210,000

$990,000

113,000

d 40,000
e 468,000

508,000

Investment in
Tip 50%

186,100

$660,000

a
b

7,500
87,500

a
b

6,000
68,000

30,000

30,000
$1,159,250

10,000

115,000
115,000

b 100,000
e 400,000

600,000

60,000

186,100

$180,000

Noncontrolling interest Sir (beginning)

e 117,000

Noncontrolling interest Tip (beginning)

19,500

Noncontrolling interest December 31

6,650

143,150
$1,159,250

Deduct

2011 Pearson Education, Inc. publishing as Prentice Hall

9-18

Indirect and Mutual Holdings

Solution P9-4
1

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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Chapter 9

9-19

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

2011 Pearson Education, Inc. publishing as Prentice Hall

9-20

Indirect and Mutual Holdings

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.

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 9

9-21

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

Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings Pin
Retained earnings Sun
Net income (Controlling
share in Consol. Column)

400,000
27,000

177,000

300,000

$
177,000

250,000 *
80,000 *
170,000
3,000

3,000 *

30,000

167,000

300,000

200,000 b 200,000
30,000
167,000

377,000

210,000

486,000
414,000

420,000

a
d

900,000

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

90,000 *
377,000

906,000

500,000

50,000
956,000

90,000
200,000 b 200,000
210,000
500,000

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

28,000
2,000
$

80,000

50,000

Noncontrolling interest January 1


Noncontrolling interest December 31
Treasury stock

45,000

1,000

213,000
400,000
377,000

46,000

80,000
$

500,000

27,000
10,000

20,000 *

Investment in Pin 10%


Goodwill

Liabilities
Capital stock
Retained earnings

Consolidated
Statements
$

a
a

d
$

100,000 *

Balance Sheet
Other assets
Investment in Sun 90%

100,000
10,000
50,000 *
30,000 *

200,000 *
50,000 *

Dividends
Retained earnings
December 31

Adjustments and
Eliminations

Sun 90%

80,000*
956,000

Deduct

2011 Pearson Education, Inc. publishing as Prentice Hall

9-22

Indirect and Mutual Holdings

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

2,000

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

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

12,000

2011 Pearson Education, Inc. publishing as Prentice Hall

5,000

Chapter 9

9-23

Dividends
4,000
Noncontrolling Interest
8,000
To record the noncontrolling interest share of subsidiary income
and dividends.

2011 Pearson Education, Inc. publishing as Prentice Hall

9-24

Indirect and Mutual Holdings

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

140,000
28,000

80,000 *

Controlling share of NI

88,000

Retained Earnings
Retained earnings Par

405,710

Retained earnings Sip

100,000
c

28,000

4,000 b
3,000
60,000 * f

4,000

12,000

47,000

180,000

Controlling share of NI

88,000

47,000

Dividends

16,000 *

20,000 *

Retained earnings
December 31
Balance Sheet
Other assets
Investment in Sip

477,710

207,000

448,000
109,710

157,000

Investment in Par
Patent

100,000
$

557,710

80,000
477,710
557,710 $

Capital stock
Retained earnings

Noncontrolling interest January 1


Noncontrolling interest December 31

Adjustments and
Eliminations

Sip 90%

Consolidated
Statements
$

240,000

5,000
145,000 *
100,000
12,000 *
88,000

405,710

2,000

5,000

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

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

50,000

80,000
477,710

e
g

54,290
8,000
$

62,290
620,000

Deduct

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 9

9-25

Solution P9-7
Preliminary Computations
Pans investment cost

$340,000

Implied total fair value of Set ($340,000 / 80%)


Book value of Set
Excess of fair value over book value - Goodwill

$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.

Investment in Set (80%)

10,000

32,000

2011 Pearson Education, Inc. publishing as Prentice Hall

9-26

Indirect and Mutual Holdings

Dividends
10,000
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.

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 9

9-27

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%).

Net income for 2013


Separate incomes
Investment income
Net income

Pan
$200,000
58,261
$258,261

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

Pan
$416,000
(160,000)
58,261
10,000
(32,000)
$292,261

Stockholders equity December 31, 2013


Stockholders equity January 1, 2013
Add: Net income
Less: Dividends
Stockholders equity December 31, 2013

Pan
Set
$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

$568,696
20%
$ 113,739

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

$ 100,000
21,739
(8,000)
$ 113,739

Set
80,000
28,696
$ 108,696
$

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

2011 Pearson Education, Inc. publishing as Prentice Hall

9-28

Indirect and Mutual Holdings

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-theperiod 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