Chapter 9
Chapter 9
INDIRECT AND MUTUAL HOLDINGS
Answers to Questions
1 An indirect holding of the stock of an affiliated company 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% x 40%) of T. T should be included as an
equity investment in the consolidated statements of P Company and
Subsidiaries.
3a Father-son-grandson
b Connecting affiliates
Parent
Subsidiary Y
Parent
Subsidiary A
Subsidiary B
Subsidiary Z
and
and
Majority stockholders
Direct ownership, 70% interest
Majority stockholders
Direct ownership, 30% interest in B
Minority stockholders
Direct ownership, 30% interest in A
40% interest in B. Indirect
9% interest in B (30% x 30%).
34
$230,000
(15,000)
(7,000)
(16,000)
$192,000
Approach B
Pat
Sam
Stan
Separate earnings
Allocate Stan's income to Sam
($50,000 x 70%)
Allocate Sam's income to Pat
($115,000 x 80%)
$100,000
$80,000
$50,000
+35,000
-35,000
$192,000
+ 92,000
-92,000
$23,000
$15,000
$20,000
$10,000
- 1,000
$5,000
20,000
9,000
+ 3,500
-10,000
5,000
-3,500
+10,000
35
Chapter 9
$30,000
$ 2,500
$1,500
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.
9 A mutual holding situation exists because two affiliated companies hold
ownership interests in each other.
10 The treasury stock approach considers parent company 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.
11 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 minority 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.
12 No. Parent company dividends paid to the subsidiary are eliminated.
13 The theory is that parent company stock purchased by a subsidiary is, in
effect, returned to the parent company and constructively retired.
By
recording the constructive retirement of the parent company stock on parent
company books, parent company equity will reflect the equity of stockholders
outside the consolidated entity. Also, recording the constructive retirement,
by reducing parent company stock and retained earnings to reflect amounts
applicable to majority stockholders outside the consolidated entity, will
establish consistency between capital stock and retained earnings for the
parent's outside stockholders and parent company net income, dividends, and
earnings per share which also relate to the outside stockholders of the parent.
14 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
Consolidated net income = $71,739 x 90% = $64,565
15 For eliminating the effect of mutually held parent company stock, two
generally accepted approaches are used -- the treasury stock approach and
37
Chapter 9
SOLUTIONS TO EXERCISES
Solution E9-1
Pent
Separate earnings of the
three affiliates
Sal
800,000
$500,000
$200,000
15,000
Terp
120,000
381,000
(120,000)
(381,000)
$1,181,000
$254,000
$ 80,000
Solution E9-2
Pumba Corporation and Subsidiaries
Income Allocation Schedule
for the year 2006
Pumba
Simba
Timon
$400,000
$150,000
$(200,000)
90,000
(136,000)
$354,000
(90,000)
(30,000)
30,000
136,000
$ 30,000
$ (34,000)
38
Solution E9-3
Place Corporation and Subsidiaries
Income Allocation Schedule
for the year 2006
Separate incomes
Less: Unrealized profit on land
Separate realized incomes
Place
Lake
$200,000
$80,000
(20,000)
$70,000
200,000
60,000
70,000
36,000
(36,000)
(12,000)
12,000
57,400
$293,400
Marsh
(57,400)
$12,000
$24,600
Solution E9-4
1
$112,000
56,000
$168,000
48,000
20,000
24,000
92,000
$620,000
92,000
$528,000
Alternative computation:
Paine's separate income
Add: 70% of Seron's $160,000 income
Add: (70% x 80%) of Trane's $100,000 income
$360,000
112,000
56,000
39
Chapter 9
$528,000
40
Solution E9-5
Pal
80%
80%
10%
Sal
Tall
10%
60%
70%
Ulti
Val
Pal
Separate earnings
Less: Unrealized profit
Separate realized earnings
Sal
Val
$30,000
$35,000
- 5,000
$(20,000)
$40,000
50,000
30,000
30,000
(20,000)
40,000
+28,000
- 2,000
-12,000
+ 44,800
+ 5,600
+ 18,880
$113,680
Ulti
$ 50,000
Tall
-28,000
+ 2,000
+ 12,000
-44,800
- 5,600
-18,880
$ 4,720
$ 5,600
$ (6,000)
$12,000
41
Chapter 9
Solution E9-6
90%
Pete
70%
10%
Mike
Nina
70%
Ople
20%
Mike
Nina
Ople
$ 65,000
$18,000
$28,000
$ 9,000
- 4,000
+ 2,000
- 4,000
14,000
30,000
5,000
+ 1,000
- 1,000
- 3,500
Separate earnings
Pete
Unrealized profit
Separate realized earnings
65,000
+ 3,500
+ 21,700
-21,700
- 3,100
+ 3,100
+ 18,540
$105,240
-18,540
$ 2,060
$ 6,200
500
Alternative solution:
Reported
Income
Pete
$65,000
Mike
18,000
Nina
Ople
28,000
9,000
+
-
Adjustments
Adjusted
Income
$ 65,000
+
-
Consolidated
Net Income
Minority
Interest
Expense
$ 65,000
$4,000
14,000a
12,600
$ 1,400
2,000
23,700
6,300
5,000
3,940
1,060
$114,000
$105,240
$ 8,760
4,000
30,000
$30,000 divided 70% + (90% x 10%) to CNI and 20% + (10% x 10%) to MIE
$5,000 divided (90% x 70%) + (70% x 20%) + (90% x 10% x 20%) to CNI [78.8%]
and 10% + (10% x 10% x 20%) + (20% x 20%) + (10% x 70%) to MIE [21.2%]
42
Solution E9-7
1
$200,000
(126,000)
$ 74,000
Alternative solution
Direct minority interest (.3 x $200,000)
Indirect minority interest (.1 x .7 x $200,000)
2
$ 60,000
14,000
$ 74,000
$120,000
20%
$ 24,000
$1,065,000
$620,000
157,500
126,000
(27,000)
86,400
Alternative solution
Sincock $175,000 x 10%
Torry $200,000 x 37%
Unger $(50,000) x 46%
Vance $120,000 x 28%
Total minority interest expense
4
(962,900)
102,100
$ 17,500
74,000
(23,000)
33,600
$102,100
$175,000
140,000
(30,000)
96,000
$381,000
90%
342,900
(90,000)
$252,900
43
Chapter 9
Solution E9-8
Affiliation diagram
Pasko
80%
70%
10%
Savoy
1
Trent
$ 80,000
32,000
$260,000
148,000
d
Pasko
Savoy
Trent
Separate income
Unrealized profit on inventory
Unrealized profit on land
$148,000
$80,000
(10,000)
$32,000
$148,000
(15,000)
$70,000
$17,000
$148,000
56,000
$220,800
16,800
$235,000
220,800
$ 14,200
$
7,000
2,100
5,100
$ 14,200
44
Solution E9-9
Pant
80%
30%
Solo
Affiliation diagram
Packard
70%
Smedley
80%
10%
Tweed
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
45
Chapter 9
T = $80,000 + .1($200,000)
T = $100,000
Income Allocation
Consolidated net income (equal to P)
Minority interest expense in Smedley ($200,000 x 20%)
Minority interest expense in Tweed ($100,000 x 20%)
Total income
Solution E9-11
1
$340,000
40,000
20,000
$400,000
[AICPA adapted]
Supporting computations
A = Akron's income on a consolidated basis
B = Benson's income on a consolidated basis
C = Cashin'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 = $647,295.59
Determine C
C = $230,000 + .25($647,295.59)
C = $391,823.90
Determine B
B = $170,000 + .15($391,823.90)
B = $228,773.58
46
Consolidated net income ($647,295.59 x 75%)
$485,471.69
45,754.72
58,773.59
Total income
$590,000.00
47
Chapter 9
Solution E9-12
1
$160,000
6,750
$153,250
Alternatively:
Petty's separate
Add: Soma's net
Less: Dividends
Consolidated net
$100,000
60,750
(7,500)
$153,250
income
income of $67,500 x 90%
received from Petty ($50,000 x 15%)
income
b
P
.865P
P
S
=
=
=
=
$151,330
8,670
$160,000
48
Solution E9-13
Separate earnings
Pusan
Skagg
Tabor
$50,000
$42,000
$20,000
Intercompany profit
3,000
(5,000)
$50,000
$40,000
$20,000
$ 98,699.28
7,458.24
3,842.48
Total income
$110,000.00
49
Chapter 9
Solution E9-14
1
$247,500
26,700
(21,000)
6,000
$259,200
Supporting computations
Computation of income from Scat:
Scat's separate income
Add:
$ 50,000
6,000
56,000
70%
39,200
Less:
(6,000)
Less:
Excess amortization
(6,500)
$ 26,700
50
Solution E9-14
2
(continued)
Conventional approach
S = $50,000 + .1($159,677)
S = $65,968
$143,710
19,790
$163,500
Or alternatively,
($65,968 x 70%) - ($159,677 x 10%) - $6,500 excess
$143,710
120,000
$ 23,710
$ 23,710
$247,500
23,710
6.000
(21,000)
$256,210
51
Chapter 9
SOLUTIONS TO PROBLEMS
Solution P9-1
Pida Corporation and Subsidiaries
Schedule to Compute Consolidated Net Income and Minority Interest Income
for the year 2008
Pida
Staley
Axel
Bean
$500,000
$300,000
$150,000
$(20,000)
Unrealized profit
(20,000)
500,000
300,000
130,000
(14,000)
78,000
Patent
(20,000)
14,000
(78,000)
(14,000)
350,000
315,000
Patent
(40,000)
(315,000)
$775,000
$ 35,000
$ 52,000
$ (6,000)
Check:
Income allocated: $775,000 consolidated net income + $35,000 minority
interest expense in Staley + $52,000 minority interest expense in Axel $6,000 minority interest loss in Bean = $856,000
Income to allocate: $500,000 Pida income + $300,000 Staley income + $130,000
realized income of Axel - $20,000 loss of Bean - $54,000 patent = $856,000
Consolidated net income: $500,000 - $40,000 + 90%($300,000 - $14,000) + (90%
x 60% x $130,000) - (90% x 70% x $20,000) = $775,000
52
Solution P9-2
1
Seaton's books
Investment in Thayer (70%)
Assets
$150,000
$150,000
7,000
7,000
$ 16,500
$ 16,500
$21,000
(3,500)
(1,000)
$16,500
Posey's books
Cash
$ 24,000
Investment in Seaton (80%)
$ 24,000
$ 43,200
$ 43,200
$53,200
(10,000)
$43,200
53
Chapter 9
Solution P9-2
2
(continued)
Separate earnings
Less: Unrealized profits
Separate realized earnings
Allocate Thayer's realized earnings
to Seaton ($25,000 x 70%)
Deduct: Patent amortization
Thayer
$150,000
(10,000)
$ 50,000
$ 30,000
(5,000)
50,000
25,000
17,500
(1,000)
(17,500)
66,500
53,200
Seaton
140,000
Check:
Posey
(53,200)
$193,200
$ 13,300
7,500
$215,000
(1,000)
(20,800)
$193,200
Assets
Investment in Seaton (80%)
Investment in Thayer (70%)
Total assets
Liabilities
Capital stock
Retained earnings
Total liabilities and equity
924,000
219,200
$1,143,200
150,000
600,000
393,200
$1,143,200
Seaton
Thayer
$227,000
$270,000
159,500
$386,500
$270,000
$100,000
200,000
86,500
$386,500
$ 50,000
150,000
70,000
$270,000
Note: Posey's assets other than investments consist of $800,000 assets at the
beginning of the year, plus separate earnings of $150,000 and dividend income
of $24,000, less dividends paid of $50,000.
Seaton's assets other than investments consist of $350,000 assets at
the beginning of the period, plus separate earnings of $50,000 and dividend
income of $7,000, less investment cost of $150,000 and dividends paid of
$30,000.
54
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:
Pony
Star
Teel
Total
$184,500
$ 90,000
$ 25,000
$299,500
(84,500)
(10,000)
100,000
80,000
(94,500)
25,000
8,000
205,000
8,000
Unrealized profit in
ending inventory
Separate realized incomes
Allocate Teel's income
50% to Pony
40% to Star
Star's net income
108,000
(20,000)
5,000
193,000
80,000
(20,000)
2,500
(2,500)
(2,000)
2,000
82,000
65,600
(65,600)
(5,000)
(5,000)
$188,000
$171,100
171,100
$ 16,400
500
16,900
$188,000
55
Chapter 9
Solution P9-3
(continued)
Pony Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2009
|
|
|
| Adjustments and |Consolidated
| Pony
| Star
| Teel
|
Eliminations
| Statements
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
Sales
|$500,000 |$300,000 |$100,000 |h 50,000|
|$ 850,000
Income from Star
| 72,000 |
|
|d 72,000|
|
Income from Teel
| 12,500 | 10,000 |
|a 22,500|
|
Cost of sales
| 240,000*| 150,000*| 60,000*|i 20,000|g
8,000|
|
|
|
|
|h 50,000|
412,000*
Other expenses
| 160,000*| 70,000*| 15,000*|f
5,000|
|
250,000*
Minority expense-Star|
|
|
|c 16,400|
|
16,400*
Minority expense-Teel|
|
|
|c
500|
|
500*
Net income
|$ 184,500|$ 90,000 |$ 25,000 |
|
|$ 171,100
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
Retained earnings
|$115,500 |
|
|f 10,000|
|
Pony
|
|
|
|g
8,000|
|$
97,500
Retained earnings
|
|
|
|
|
|
Star
|
| 160,000 |
|e 160,000|
|
Retained earnings
|
|
|
|
|
|
Teel
|
|
| 45,000 |b 45,000|
|
Net income
| 184,500| 90,000| 25,000|
|
|
171,100
Dividends
| 80,000*| 40,000*| 10,000*|
|a
9,000|
|c
9,000|
|
|
|
|
|d 32,000|
80,000*
Retained earnings
|
|
|
|
|
|
December 31, 2009 |$220,000 |$210,000 |$ 60,000 |
|
|$ 188,600
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Cash
|$ 67,000 |$ 36,000 |$ 10,000 |
|
|$ 113,000
Accounts receivable | 70,000 | 50,000 | 20,000 |
|j 10,000|
130,000
Inventories
| 110,000 | 75,000 | 35,000 |
|i 20,000|
200,000
Plant and
|
|
|
|
|
|
equipment-net
| 140,000 | 425,000 | 115,000 |e 20,000|f 15,000|
685,000
Investment in
| 508,000 |
|
|
|d 40,000|
Star 80%
|
|
|
|
|e 468,000|
Investment in
| 95,000 |
|
|
|a
7,500|
Teel 50%
|
|
|
|
|b 87,500|
Investment in
|
| 74,000 |
|
|a
6,000|
Teel 40%
|
|
|
|
|b 68,000|
Goodwill
|
|
|
|b 25,000|
|
25,000
|$990,000 |$660,000 |$180,000 |
|
|$1,153,000
|
|
|
|
|
|
Accounts payable
|$ 70,000 |$ 40,000 |$ 15,000 |j 10,000|
|$ 115,000
Other liabilities
| 100,000 | 10,000 |
5,000 |
|
|
115,000
Capital stock
| 600,000 | 400,000 | 100,000 |b 100,000|
|
|
|
|
|e 400,000|
|
600,000
Retained earnings
| 220,000|210,000| 60,000|
|
|
188,600
|$990,000 |$660,000 |$180,000 |
|
|
Minority interest-Star (beginning)
|
|e 112,000|
Minority interest-Teel (beginning)
|
|b 14,500|
Minority interest December 31, 2009
|
|c
7,900|
134,400
|
|
|$1,153,000
*Deduct
56
Solution P9-4
1
Affiliation diagram
Parish
80%
50%
20%
Swift
Tolbert
10%
Income allocation
Definitions
P = Parish's income on a consolidated basis
S = Swift's income on a consolidated basis
T = Tolbert's 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
Consolidated net income = P =
Minority interest expense in Swift ($112,245 x .1)
Minority interest expense in Tolbert ($61,224 x .3)
$320,408
11,225
18,367
$350,000
57
Chapter 9
Solution P9-4
3
(continued)
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) + .5($51,020.41)
P = $293,673.48
Income allocation
Consolidated net income = P =
Minority interest expense in Swift ($110,204.08 x 10%)
Minority interest expense in Tolbert ($51,020.41 x 30%)
$293,673.48
11,020.40
15,306.12
$320,000.00
58
Solution P9-5
Conversion to equity method
Investment
in Skill
$(20,000)
$(20,000)
Prill-Retained
Earnings
Income
from Skill
Dividends
Prill
$ (5,000)
(10,000)
$(10,000)
(5,000)
$(20,000)
$(25,000)
$(15,000)
$(10,000)
Retained earnings-Prill
Income from Skill
Investment in Skill
Dividends-Prill
$ 20,000
15,000
$ 25,000
10,000
$ 12,000
10,000
$ 18,000
4,000
Capital stock-Skill
Retained earnings-Skill
Patent
Investment in Skill
Minority interest-beginning
$200,000
200,000
20,000
$380,000
40,000
Expenses
$
Patent
5,000
$
5,000
59
Chapter 9
Treasury stock
Investment in Prill
$ 80,000
$ 80,000
3,000
$
2,000
1,000
60
Solution P9-5
(continued)
*Deduct
Consolidated net income = $150,000 + $20,000 separate incomes - $5,000 patent
amortization - $3,000 minority interest expense = $162,000
Income from Skill = (90% x separate income of Skill) - $5,000 patent
amortization - ($10,000 dividends paid to Skill that accrue to minority
shareholders) = $12,000
61
Chapter 9
Solution P9-5
(continued)
Traditional approach
Prill Company and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2008
|
|
| Adjustments and |Consolidated
| Prill |Skill 90%|
Eliminations
| Statements
|
|
|
|
|
Income Statement
|
|
|
|
|
Sales
|$400,000 |$100,000 |
|
| $500,000
Income from Skill
| 27,000 |
|a 27,000|
|
Dividend income
|
| 10,000 |d 10,000|
|
Cost of sales
| 200,000*| 50,000*|
|
|
250,000*
Expenses
| 50,000*| 30,000*|c
5,000|
|
85,000*
Minority expense
|
|
|f
3,000|
|
3,000*
Net income
|$177,000 |$ 30,000 |
|
| $162,000
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
Retained earnings -Prill|$300,000 |
|b 20,000|
| $280,000
Retained earnings -Skill|
|$200,000 |b 200,000|
|
Net income
| 177,000 | 30,000 |
|
|
162,000
Dividends
| 100,000*| 20,000*|
|d 10,000|
|f
2,000|
90,000*
|
|
|
|a 18,000|___________
Retained earnings
|
|
|
|
|
December 31, 2008
|$377,000 |$210,000 |
|
| $352,000
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Other assets
|$491,000 |$420,000 |
|
| $911,000
Investment in Skill 90%| 409,000 |
|
|a
9,000|
|
|
|
|b 400,000|
Investment in Prill 10%|
| 80,000 |
|e 80,000|
Patent
|
|
|b 20,000|c
5,000|
15,000
|$900,000 |$500,000 |
|
| $926,000
|
|
|
|
|
Liabilities
|$123,000 |$ 90,000 |
|
| $213,000
Capital stock
| 400,000 | 200,000 |b 200,000|
|
400,000
Retained earnings
| 377,000 |210,000 |
|
|
352,000
|$900,000 |$500,000 |
|
|
|
|
|
Minority interest January 1, 2008
|
|b 40,000|
Minority interest December 31, 2008
|
|f
1,000|
41,000
Treasury stock
|e 80,000|
|
80,000*
|
|
| $926,000
|
|
|__________
*Deduct
62
Solution P9-6
Calculations
Income from Scimp
Paroll separate income (140,000 - 80,000)
Scimp separate income (100,000 + 3,000 - 60,000)
$60,000
$43,000
Formula:
P income = Adjusted Paroll income + % interest x S income
Adjusted Paroll income = $60,000 + $2,000 delayed gain on land
- $4,000 patent amortization
S income = Scimp income + % interest x P income
P income = $58,000 + 80% x ($43,000 + 20% x P income)
P income = $92,400 + .16 x P income
P income = $110,000
S income = $43,000 + 20% x $110,000
S income = $65,000
Consolidated income = P income x % outstanding
Consolidated income = $88,000
Minority expense = S income x % outstanding
Minority expense = $13,000
Income from Scimp = consolidated income less P separate income
Income from Scimp = $28,000 ($88,000-$60,000)
Working paper entries
a
Investment in Scimp
$ 2,000
Gain on sale of land
$
To recognize previously deferred gain on sale of land.
2,000
Dividend income
$ 4,000
Investment in Scimp
To eliminate intercompany dividends paid to Scimp
4,000
$ 28,000
$ 16,000
$ 12,000
Investment in Scimp
Investment in Paroll
To eliminate reciprocal investments.
$100,000
Capital stock-Scimp
Retained earnings-Scimp
Patent
Investment in Scimp
Minority interest-beginning
$ 50,000
180,000
16,000
$100,000
$195,710
50,290
63
Chapter 9
Expenses
4,000
Patent
4,000
4,000
9,000
$ 13,000
64
Solution P9-6
(continued)
Income Statement
Sales
Income from Scimp
Dividend income
Gain on sale of land
Expenses
Minority expense
Net income
|
| Paroll
|
|
|$140,000
| 28,000
|
| Adjustments and
|Scimp 90%|
Eliminations
|
|
|
|
|
|
|$100,000 |
|
|
|c 28,000|
|Consolidated
| Statements
|
|
| $240,000
|__________
|
|
4,000 |b
4,000|
|__________
|
|
3,000 |
|a
2,000|
5,000
| 80,000*| 60,000*|f
4,000|
|
144,000*
|
|
|g 13,000|
|
13,000*
| $88,000 |$ 47,000 |
|
| $ 88,000
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
Retain. earnings -Paroll|$405,710 |
|
|
| $405,710
Retained earnings -Scimp|
|$180,000 |e 180,000|
|__________
Net income
| 88,000 | 47,000 |
|
|
88,000
Dividends
| 16,000*| 20,000*|
|c 16,000|
_____________________________________________________|g
4,000|
16,000*
Retained earnings
|
|
|
|
|
December 31, 2004
|$477,710 |$207,000 |
|
| $477,710
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Other assets
|$448,000 |$157,000 |
|
| $605,000
Investment in Scimp
| 109,710 |
|a
2,000|b
4,000|
|
|
|d 100,000|c 12,000|
|
|
|
|e 195,710|__________
Investment in Paroll
|
| 100,000 |
|d 100,000|__________
Patent
|
|
|e 16,000|f
4,000|
12,000
|$557,710 |$257,000 |
|
| $617,000
|
|
|
|
|
Capital stock
| 80,000 | 50,000 |e 50,000|
|
80,000
Retained earnings
| 477,710 |207,000 |
|
|
477,710
|$557,710 |$257,000 |
|
|
|
|
|
Minority interest January 1, 2004
|
|b 50,290|
Minority interest December 31, 2004
|
|g
9,000|
59,290
|
|
| $617,000
|
|
|__________
*Deduct
65
Chapter 9
Solution P9-7
1
Consolidated net income and minority interest expense (conventional
approach)
Definitions
P = Panco's income on a consolidated basis
S = Stoco's income on a consolidated basis
P = $100,000 separate earnings + .8S - $1,000 patent amortization
S = $40,000 separate earnings + .1P
Solve for P
P = $100,000 + .8($40,000 + .1P) - $1,000
P = $100,000 + $32,000 + .08P - $1,000
P = $142,391
Compute S
S = $40,000 + .1($142,391)
S = $54,239
Income allocation
Consolidated net income ($142,391 x 90% outside ownership)
Minority interest expense ($54,239 x 20%)
Total (separate incomes less patent amortization)
$128,152
10,848
$139,000
Panco's books
Capital stock
Retained earnings
Investment in Stoco
$60,000
20,000
$80,000
$28,152
$28,152
$16,000
Investment in Stoco
$16,000
$ 5,000
$ 5,000
66
67
Chapter 9
$80,000
$80,000
$14,239
$14,239
$ 5,000
Investment in Panco (10%)
$ 5,000
Panco
Stoco
$100,000
28,152
$128,152
$ 40,000
14,239
$ 54,239
Panco
Stoco
$208,000
(80,000)
28,152
5,000
(16,000)
$145,152
$ 80,000
Panco
Stoco
$720,000
128,152
(45,000)
$803,152
$250,000
54,239
(20,000)
$284,239
Separate incomes
Investment income
Net income
5
14,239
(5,000)
$ 89,239
$284,239
20%
$ 56,848
Alternative solution:
Minority interest January 1, 2005 ($250,000 x 20%)
Minority interest expense ($54,239 x 20%)
Minority interest dividends
Minority interest at December 31, 2005
$ 50,000
10,848
(4,000)
$ 56,848
68
Solution P9-7
(continued)
$ 14,239
$
5,000
9,239
Investment in Stoco
Investment in Panco
$ 80,000
$ 80,000
Dividends
5,000
Investment in Stoco
5,000
To eliminate dividends.
d
$ 28,152
$ 16,000
12,152
Capital stock-Stoco
Retained earnings-Stoco
Patent
Investment in Stoco
Minority interest
$150,000
100,000
8,000
$208,000
50,000
Expenses
1,000
Patent
1,000
4,000
6,848
$ 10,848
69
Chapter 9
Solution P9-7
(continued)
Investment in Stoco
Investment in Panco
$ 89,239
$ 89,239
Capital stock-Stoco
Retained earnings-Stoco
Patent
Investment in Stoco
Minority interest
$150,000
134,239
7,000
$234,391
56,848