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Indirect and Mutual HoldingsChapter 9
PRIVATE
Chapter 9
INDIRECT AND MUTUAL HOLDINGS
Answers to Questions1 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 Parent
Subsidiary Y Subsidiary A Subsidiary B
Subsidiary Z
Majority stockholders
Majority stockholders
Direct ownership, 70% interestDirect ownership, 30% interest in B and
in Y. Indirect ownership, 42%70% interest in A. Indirect ownership,
interest in Z (70% x 60%).
21% interest in B (70% x 30%).
Minority stockholders
Minority stockholders
Direct ownership, 30% interestDirect ownership, 30% interest in A and
in Y and 40% interest in Z.
40% interest in B. Indirect ownership,
Indirect ownership, 18% interest9% interest in B (30% x 30%).
in Z (30% x 60%).
4 An indirect holding involves the ability of one corporation to control another corporation 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.
5 The parent's direct and indirect ownership of Subsidiary B is 49 percent (70% x 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 minority stockholders of B.
6 Approach A
Pat
Sam
Stan
Combined separate earnings of Pat, Sam, and Stan ($100,000
+ $80,000 + $50,000)
$230,000
Less: Minority interest expense computed as follows:
Direct minority interest in Stan's income ($50,000 x 30%)
(15,000)
Indirect minority interest in Stan's income ($50,000
x 70% x 20%)
(7,000)
Direct minority interest in Sam's income ($80,000 x 20%)
(16,000)
Pat's net income and consolidated net income
$192,000Approach B
Pat Sam Stan Separate earnings
$100,000$80,000$50,000
Allocate Stan's income to Sam
($50,000 x 70%)
+35,000-35,000
Allocate Sam's income to Pat
($115,000 x 80%)
+ 92,000-92,000 Consolidated net income
$192,000Minority interest expense
$23,000$15,0007 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.
8
P S1 80%S2 70%Separate earnings
$20,000$10,000$5,000
Deduct: Unrealized profit
- 1,000 Separate realized earnings
20,000 9,000 5,000
Allocate S2's income
+ 3,500-3,500
Allocate S1's income
+10,000-10,000 P's net income
$30,000Minority interest expenses
$ 2,500$1,500S1'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% = $64,56515 For eliminating the effect of mutually held parent company stock, two generally accepted approaches are used -- the treasury stock approach and the traditional approach. But when the mutually held stock involves subsidiaries holding stock of each other, the treasury stock approach is not applicable.
16 By adding beginning minority interest and minority interest expense (determined by multiplying the company's net income by the minority interest percentage) and subtracting the minority interest's percentage of dividends, the minority interest can be determined without use of simultaneous equations.
SOLUTIONS TO EXERCISESSolution E9-1 Pent Sal Terp Separate earnings of the
three affiliates $ 800,000 $500,000 $200,000
Add: Dividend income from Sal's
investment in Wint accounted for by
the cost method ($100,000 x 15%) 15,000
Allocate 60% of Terp's earnings 120,000 (120,000)
Allocate 60% of Sal's earnings 381,000 (381,000) Consolidated net income $1,181,000Minority interest expense $254,000 $ 80,000Solution E9-2
Pumba Corporation and Subsidiaries
Income Allocation Schedule
for the year 2006
Pumba Simba Timon Separate earnings or loss
$400,000$150,000$(200,000)
Allocate Simba's income:
to Pumba ($150,000 x 60%)
90,000 (90,000)
to Timon ($150,000 x 20%)
(30,000) 30,000
Allocate Timon's loss:
to Pumba $(170,000) x 80%
(136,000)
136,000
Consolidated net income
$354,000 Minority interest expense
$ 30,000$ (34,000)
Solution E9-3
Place Corporation and Subsidiaries
Income Allocation Schedule
for the year 2006
Place Lake Marsh Separate incomes
$200,000$80,000$70,000
Less: Unrealized profit on land
(20,000) Separate realized incomes
200,000 60,000 70,000
Allocate Lake's income
60% to Place
36,000(36,000)
20% to Marsh
(12,000) 12,000
Allocate Marsh's income
70% to Place
57,400
(57,400)
Consolidated net income
$293,400 Minority interest expense
$12,000$24,600Solution E9-41c
Income from Seron is equal to:
70% of Seron's $160,000 income
$112,000
70% of Seron's 80% interest in Trane's $100,000 income
56,000Income from Seron
$168,0002d
Minority interest expense is equal to:
30% direct minority interest in Seron's $160,000 income
$ 48,000
20% direct minority interest in Trane's $100,000 income
20,000
30% x 80% indirect minority interest in Trane's $100,000 income 24,000Total minority interest
$ 92,0003d
Consolidated net income is equal to:
Combined separate incomes of $360,000 + $160,000 + $160,000
$620,000
Less: Minority interest expense
92,000Consolidated net income
$528,000Alternative computation:
Paine's separate income
$360,000
Add: 70% of Seron's $160,000 income
112,000
Add: (70% x 80%) of Trane's $100,000 income
56,000Consolidated net income
$528,000Solution E9-5 Pal
80% 80%
10%
Sal Tall 10%
60% 70%
Ulti Val Pal Sal Tall Ulti Val Separate earnings $ 50,000 $30,000 $35,000 $(20,000) $40,000
Less: Unrealized profit - 5,000 Separate realized earnings 50,000 30,000 30,000 (20,000) 40,000
Allocate Val's income 70% to Tall +28,000 -28,000
Allocate Ulti's income 10% to Tall - 2,000 + 2,000
60% to Sal -12,000 + 12,000
Allocate Tall's income 80% to Pal + 44,800 -44,800
10% to Sal + 5,600 - 5,600
Allocate Sal's income 80% to Pal + 18,880 -18,880 Pal's net income (or
consolidated net income) $113,680Minority interest expense $ 4,720 $ 5,600 $ (6,000) $12,000Solution E9-6 90% Pete 70%
10%
Mike Nina
70% Ople 20%
Pete Mike Nina Ople Separate earnings
$ 65,000 $18,000 $28,000 $ 9,000
Unrealized profit
- 4,000 + 2,000 - 4,000Separate realized earnings
65,000 14,000 30,000 5,000
Allocate Ople's income 20% to Nina
+ 1,000 - 1,000
70% to Mike
+ 3,500 - 3,500
Allocate Nina's income 70% to Pete
+ 21,700 -21,700
10% to Mike
+ 3,100 - 3,100
Allocate Mike's income 90% to Pete
+ 18,540 -18,540 Pete's net income (or
consolidated net income)
$105,240Minority interest expense
$ 2,060 $ 6,200 $ 500Alternative solution:
Minority
Reported + Adjusted Consolidated Interest
Income - Adjustments = Income - Net Income = Expense Pete $65,000 $ 65,000 $ 65,000 0
Mike 18,000 - $4,000 14,000a 12,600 $ 1,400
Nina 28,000 + 2,000 30,000b 23,700 6,300
Ople 9,000 - 4,000 5,000c 3,940 1,060 $114,000 $105,240 $ 8,760a$14,000 divided 90% to consolidated net income (CNI)
10% to minority interest expense (MIE)
b$30,000 divided 70% + (90% x 10%) to CNI and 20% + (10% x 10%) to MIE
c$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%]
Solution E9-71b
Separate income of Torry
$200,000
Included in consolidated net income (.9 x .7 x $200,000)
(126,000)
$ 74,000Alternative solution
Direct minority interest (.3 x $200,000)
$ 60,000
Indirect minority interest (.1 x .7 x $200,000)
14,000
$ 74,0002a
Separate income = net income of Vance
$120,000
Minority interest (direct)
20%
$ 24,0003c
Total separate incomes
$1,065,000
Less: Consolidated net income
Pantela $620,000 x 100%
$620,000
Sincock $175,000 x 90%
157,500
Torry $200,000 x 90% x 70%
126,000
Unger $(50,000) x 90% x 60%
(27,000)
Vance $120,000 x 90% x 80%
86,400 (962,900)
Total minority interest expense
$ 102,100Alternative solution
Sincock $175,000 x 10%
$ 17,500
Torry $200,000 x 37%
74,000
Unger $(50,000) x 46%
(23,000)
Vance $120,000 x 28%
33,600Total minority interest expense
$102,1004a
[See computations for question 3]
5d
Net income of Sincock
Separate income
$175,000
Add: 70% of Torry's $200,000
140,000
Deduct: 60% of Unger's $(50,000)
(30,000)
Add: 80% of Vance's $120,000
96,000
Net income of Sincock
$381,000
Pantela's interest
90% Investment increase
342,900
Less: Dividends received from Sincock ($100,000 x 90%)
(90,000)
Net increase
$252,900Solution E9-8Affiliation diagram Pasko
80% 70%
10%
Savoy Trent
1b
Separate income of Savoy (net income)
$ 80,000
Separate income of Trent $40,000 - ($80,000 x 10%)
32,000
Separate income of Pasko
$240,000 - ($40,000 x 70%) - ($80,000 x 80%)
148,000Total separate income
$260,0002d
Pasko Savoy Trent Separate income
$148,000$80,000$32,000
Unrealized profit on inventory
(10,000)
Unrealized profit on land
(15,000)
Separate realized income
$148,000$70,000$17,0003a
Pasko's separate income
$148,000
Add: Investment income from Savoy ($70,000 x 80%)
56,000
Add: Investment income from Trent
[$17,000 + ($70,000 x 10%)] x 70%
16,800Parent's income (consolidated net income)
$220,8004d
Total separate realized income
$235,000
Less: Consolidated net income
220,800 Minority interest expense
$ 14,200Alternative solution
Direct minority interest in Savoy ($70,000 x .1)
$ 7,000
Indirect minority interest in Savoy ($70,000 x .3 x .1)
2,100
Direct minority interest in Trent ($17,000 x .3)
5,100 Minority interest expense
$ 14,200Solution E9-9
Pant
80% 30%
Solo
Consolidated net income:
P = Income of Pant on a consolidated basis (including mutual income)
S = Income of Solo 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
Consolidated net income = $5,526,316 x 70% = $3,868,421Solution E9-101Affiliation diagram
Packard
70%
Smedley
80% 10%
Tweed
2P = Packard's income on a consolidated basis
S = Smedley's income on a consolidated basis
T = Tweed's income on a consolidated basis
P = $200,000 + .7S
S = $120,000 + .8T
T = $80,000 + .1S
Solve for SS = $120,000 + .8($80,000 + .1S)
S = $184,000 + .08S
S = $200,000Compute P and TP = $200,000 + .7($200,000)
P = $340,000T = $80,000 + .1($200,000)
T = $100,000Income AllocationConsolidated net income (equal to P)
$340,000
Minority interest expense in Smedley ($200,000 x 20%)
40,000
Minority interest expense in Tweed ($100,000 x 20%)
20,000 Total income
$400,000Solution E9-11 [AICPA adapted]
1b
2b
3d
4c
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 AA = $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 = $647,295.59Determine CC = $230,000 + .25($647,295.59)
C = $391,823.90Determine BB = $170,000 + .15($391,823.90)
B = $228,773.58Allocate income to consolidated net income and minority interestConsolidated net income ($647,295.59 x 75%)
$485,471.69
Minority interest-Benson ($228,773.58 x 20%)
45,754.72
Minority interest-Cashin ($391,823.90 x 15%)
58,773.59Total income
$590,000.00Solution E9-121d
Combined separate income $160,000
Less: Minority interest expense 6,750
Consolidated net income $153,250Alternatively:
Petty's separate income $100,000
Add: Soma's net income of $67,500 x 90% 60,750
Less: Dividends received from Petty ($50,000 x 15%) (7,500)
Consolidated net income $153,2502b
P = $100,000 + .9($60,000 + .15P)
.865P = $154,000
P = $178,035
S = $60,000 + $26,705 = $86,705
Consolidated net income = $178,035 x .85 = $151,330
Minority interest expense = $86,705 x .10 = 8,670Total income $160,000Solution E9-13
Pusan Skagg Tabor
Separate earnings
$50,000$42,000$20,000
Intercompany profit
3,000
(5,000)
Separate realized earnings$50,000$40,000$20,000P = Pusan's income on a consolidated basis
S = Skagg's income on a consolidated basis
T = Tabor's income on a consolidated basis
P = $50,000 + .8S
S = $40,000 + .9T
T = $20,000 + .1P + .1S
Solve for TT = $20,000 + .1($50,000 + .8S) + .1($40,000 + .9T)
T = $20,000 + $5,000 + .08($40,000 + .9T) + $4,000 + .09T
T = $25,000 + $3,200 + .072T + $4,000 + .09T
.838T = $32,200
T = $38,424.82S = $40,000 + .9($38,424.82)
S = $40,000 + $34,582.34
S = $74,582.34P = $50,000 + .8($74,582.34)
P = $50,000 + $59,665.87
P = $109,665.87Consolidated net income ($109,665.87 x .9)
$ 98,699.28
Minority interest expense of Skagg ($74,582.34 x .1)
7,458.24
Minority interest expense of Tabor ($38,424.82 x .1)
3,842.48 Total income
$110,000.00Solution E9-141Treasury stock approachInvestment in Scat balance December 31, 2006Investment balance December 31, 2005
$247,500Add: Income from Scat
26,700Less: Dividends received from Scat
(21,000)
Add: Dividends paid to Scat
6,000Investment in Scat December 31, 2006
$259,200Supporting computationsComputation of income from Scat:
Scat's separate income
$ 50,000
Add: Scat's dividend income from Pumel
6,000Scat's net income
56,000
Pumel's ownership interest
70%Pumel's equity in Scat's income
39,200Less: Dividends paid to Scat ($60,000 x 10%)
(6,000)
Less: Excess amortization
(6,500)
Income from Scat
$ 26,700Solution E9-14 (continued)
2Conventional approachPumel's net income and consolidated net income
P = ($120,000 + .7S) - $6,500
S = $50,000 + .1P
P = $120,000 + .7($50,000 + .1P) - $6,500
P = $120,000 + $35,000 + .07P - $6,500
.93P = $148,500
P = $159,677
S = $50,000 + .1($159,677)
S = $65,968Pumel's net income and consolidated net
income ($159,677 x 90%)
$143,710Minority interest expense ($65,968 x 30%)
19,790 Total income
$163,500Income from ScatConsolidated net income
$143,710Less: Pumel's separate income
120,000 Income from Scat
$ 23,710Or alternatively,
($65,968 x 70%) - ($159,677 x 10%) - $6,500 excess
$ 23,710Investment in Scat December 31, 2006Investment in Scat December 31, 2005
$247,500
Add: Income from Scat
23,710Add: Dividend paid to Scat
6.000Less: Dividends from Scat
(21,000)
Investment in Scat December 31, 2006
$256,210SOLUTIONS TO PROBLEMSSolution P9-1
Pida Corporation and Subsidiaries
Schedule to Compute Consolidated Net Income and Minority Interest Income
for the year 2008
Pida Staley Axel Bean Separate income (loss) $500,000 $300,000 $150,000 $(20,000)
Less: Unrealized profit (20,000) Separate realized income (loss) 500,000 300,000 130,000 (20,000) Allocate Bean's loss 70% to Staley (14,000) 14,000
Allocate Axel's income 60% to Staley 78,000 (78,000)
Patent (14,000)
350,000
Allocate Staley's income 90% to Pida 315,000 (315,000) Patent
(40,000) Consolidated net income $775,000
Minority interest income $ 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
Solution P9-21Seaton's books
Investment in Thayer (70%)
$150,000
Assets
$150,000
To record purchase of a 70% interest in
Thayer Corporation.
Cash
$ 7,000
Investment in Thayer (70%)
$ 7,000
To record dividends received from Thayer
($10,000 x 70%).
Investment in Thayer (70%)
$ 16,500
Income from Thayer
$ 16,500
To record investment income computed as
follows:
Share of Thayer's net income ($30,000 x 70%)
$21,000
Less: Unrealized profit from upstream sale of
inventory items ($5,000 x 70%)
(3,500)
Less: Patent amortization [$150,000 -
($200,000 x 70%)]/10 years
(1,000)
$16,500
Posey's books
Cash
$ 24,000
Investment in Seaton (80%)
$ 24,000
To record dividends received from Seaton
($30,000 x 80%).
Investment in Seaton (80%)
$ 43,200
Income from Seaton
$ 43,200
To record investment income computed as
follows:
Share of Thayer's net income
($50,000 + $16,500) x 80%
$53,200
Less: Unrealized gain on land sold to Thayer
(10,000)
$43,200Solution P9-2 (continued)
2Schedule of income allocation
Posey Seaton Thayer Separate earnings
$150,000 $ 50,000 $ 30,000
Less: Unrealized profits
(10,000) (5,000)
Separate realized earnings
140,000 50,000 25,000
Allocate Thayer's realized earnings
to Seaton ($25,000 x 70%)
17,500 (17,500)
Deduct: Patent amortization
(1,000)
Seaton's net income
66,500
Allocate Seaton's net income to
Posey ($66,500 x 80%)
53,200 (53,200)
Posey's net income and
consolidated net income
$193,200 Minority interest expense
$ 13,300 $ 7,500Check: Realized earnings ($140,000 + $50,000 + $25,000)
$215,000
Less: Patent amortization
(1,000)
Less: Minority interest expense
(20,800)
Consolidated net income
$193,2003Schedule of assets and equities at December 31, 2004
Posey Seaton Thayer Assets
$ 924,000 $227,000 $270,000
Investment in Seaton (80%)
219,200
Investment in Thayer (70%)
159,500 Total assets
$1,143,200 $386,500 $270,000Liabilities
$ 150,000 $100,000 $ 50,000
Capital stock
600,000 200,000 150,000
Retained earnings
393,200 86,500 70,000 Total liabilities and equity
$1,143,200 $386,500 $270,000Note: 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.
Solution P9-3Preliminary computations
Check on consolidated net income
Pony Star Teel Total Net income as stated
$184,500$ 90,000$ 25,000$299,500Less: Investment income (84,500) (10,000) (94,500)Separate income
100,000 80,000 25,000 205,000Add: Unrealized profit in
beginning inventory
8,000
8,000
Less: Unrealized profit in
ending inventory
(20,000) (20,000)Separate realized incomes 108,000 80,000 5,000 193,000Allocate Teel's income 50% to Pony
2,500
(2,500)
40% to Star
2,000 (2,000)
Star's net income
82,000
Allocate Star's income 80% to Pony
65,600 (65,600)
Less: Depreciation on
excess allocated to
plant and equipment
(5,000)
(5,000)
Total income of consolidated
entity
$188,000Consolidated net income
$171,100 171,100Minority interest expense
$ 16,400$ 500 16,900
$188,000Solution 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 expenseStar| | | |c 16,400| | 16,400*
Minority expenseTeel| | | |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 interestStar (beginning) | |e 112,000| Minority interestTeel (beginning) | |b 14,500| Minority interest December 31, 2009 | |c 7,900| 134,400 | | |$1,153,000
*Deduct
Solution P9-41Affiliation diagram Parish
80% 50%
20%
Swift Tolbert
10%
2Income allocation
DefinitionsP = Parish's income on a consolidated basis
S = Swift's income on a consolidated basis
T = Tolbert's income on a consolidated basis
EquationsP = $200,000 + .8S + .5T
S = $100,000 + .2T
T = $50,000 + .1S
Solve for SS = $100,000 + .2($50,000 + .1S)
S = $110,000 + .02S
.98S = $110,000
S = $112,244.90 or $112,245Compute TT = $50,000 + .1($112,244.90)
T = $50,000 + $11,224.49
T = $61,224.49 or $61,224Compute PP = $200,000 + .8($112,244.90) + .5($61,224.49)
P = $320,408.16 or $320,408Income allocationConsolidated net income = P =
$320,408
Minority interest expense in Swift ($112,245 x .1)
11,225
Minority interest expense in Tolbert ($61,224 x .3)
18,367
$350,000Solution P9-4 (continued)
3P, S, and T are as defined in part 2.
EquationP = ($200,000 - $20,000) + .8S + .5T
S = $100,000 + .2T
T = ($50,000 - $10,000) + .1S
Solve for SS = $100,000 + .2($40,000 + .1S)
S = $108,000 + .02S
S = $110,204.08
Compute TT = $40,000 + .1($110,204.08)
T = $51,020.41
Compute PP = $180,000 + .8($110,204) + .5($51,020.41)
P = $293,673.48
Income allocationConsolidated net income = P =
$293,673.48
Minority interest expense in Swift ($110,204.08 x 10%)
11,020.40
Minority interest expense in Tolbert ($51,020.41 x 30%)
15,306.12
$320,000.00Solution P9-5Conversion to equity method
Prill-Retained Investment Income Dividends
Earnings in Skill from Skill Prill Prior years' effectPatent amortization $(20,000) $(20,000)
Current year's effectPatent amortization (5,000) $ (5,000)
Dividends paid to Skill (10,000) $(10,000)
Adjustments
$(20,000) $(25,000) $(15,000) $(10,000)
Working paper entriesaRetained earnings-Prill
$ 20,000
Income from Skill
15,000
Investment in Skill
$ 25,000
Dividends-Prill
10,000
To convert to an equity basis (see schedule).
bIncome from Skill
$ 12,000
Dividend income
10,000
Dividends
$ 18,000
Investment in Skill
4,000
To eliminate income from Skill, dividend
income, and 90% of Skill's dividends, and
return the investment in Skill account to
the beginning-of-the-period balance under
the equity basis.
cCapital stock-Skill
$200,000
Retained earnings-Skill
200,000
Patent
20,000
Investment in Skill
$380,000
Minority interest-beginning
40,000
To eliminate reciprocal investment and
equity accounts, and enter beginning-of-
the-period patent and minority interest.
dExpenses
$ 5,000
Patent
$ 5,000
To record current year's amortization of
patent.
eTreasury stock
$ 80,000
Investment in Prill
$ 80,000
To reclassify investment in Prill to
treasury stock.
fMinority Interest Expense
$ 3,000
Dividends
$ 2,000
Minority Interest
1,000
To record minority interest share of subsidiary income and dividends.
Solution P9-5 (continued)
Conversion to equity 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 15,000| |
| | |b 12,000| | Dividend income | | 10,000 |b 10,000| | Cost of sales | 200,000*| 50,000*| | | 250,000* Expenses | 50,000*| 30,000*|d 5,000| | 85,000* Minority expense | | |f 3,000| | 3,000* Net income |$177,000 |$ 30,000 | | | $162,000 | | | | |
Retained Earnings | | | | |
Retained earningsPrill|$300,000 | |a 20,000| | $280,000 Retained earningsSkill| |$200,000 |c 200,000| | Net income | 177,000| 30,000| | | 162,000 Dividends | 100,000*| 20,000*| |a 10,000|
|f 2,000|
| | | |b 18,000| 90,000* 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 25,000|
| | | |b 4,000|
| | | |c 380,000| Investment in Prill 10%| | 80,000 | |e 80,000| Patent | | |c 20,000|d 5,000| 15,000 |$900,000 |$500,000 | | | $926,000 | | | | |
Liabilities |$123,000 |$ 90,000 | | | $213,000 Capital stock | 400,000 | 200,000 |c 200,000| | 400,000 Retained earnings | 377,000|210,000| | | 352,000 |$900,000 |$500,000 | | | | | |
Minority interest January 1, 2008 | |c 40,000| Minority interest December 31, 2008 | |f 1,000| 41,000 Treasury stock |e 80,000| | 80,000* | | | $926,000 | | |__________ *Deduct
Consolidated net income = $150,000 + $20,000 separate incomes - $5,000 patent amortization - $3,000 minority interest expense = $162,000Income from Skill = (90% x separate income of Skill) - $5,000 patent amortization - ($10,000 dividends paid to Skill that accrue to minority shareholders) = $12,000Solution 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 earningsPrill|$300,000 | |b 20,000| | $280,000 Retained earningsSkill| |$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
Solution P9-6Calculations
Income from Scimp
Paroll separate income (140,000 - 80,000)
$60,000
Scimp separate income (100,000 + 3,000 - 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 entriesaInvestment in Scimp
$ 2,000
Gain on sale of land
$ 2,000
To recognize previously deferred gain on sale of land.
bDividend income
$ 4,000
Investment in Scimp
$ 4,000
To eliminate intercompany dividends paid to Scimp
cIncome from Scimp
$ 28,000
Dividends
$ 16,000
Investment in Scimp
$ 12,000
To eliminate income from Scimp and 80% of
Scimp's dividends, and return the investment
in Scimp account to the beginning-of-the-
period balance under the equity basis.
dInvestment in Scimp
$100,000
Investment in Paroll
$100,000
To eliminate reciprocal investments.
eCapital stock-Scimp
$ 50,000
Retained earnings-Scimp
180,000
Patent
16,000
Investment in Scimp
$195,710
Minority interest-beginning
50,290
To eliminate reciprocal investment and
equity accounts, and enter beginning-of-
the-period goodwill and minority interest.
fExpenses
$ 4,000
Patent
$ 4,000
To record current year's amortization of patent.
GMinority Interest Expense
$ 13,000
Dividends
$ 4,000
Minority Interest
9,000
To record the minority interest share of subsidiary income and dividends.
Solution P9-6 (continued)
Paroll Company and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2004 | | | Adjustments and |Consolidated
| Paroll |Scimp 90%| Eliminations | Statements | | | | |
Income Statement | | | | |
Sales |$140,000 |$100,000 | | | $240,000 Income from Scimp | 28,000 | |c 28,000| |__________
Dividend income | | 4,000 |b 4,000| |__________ Gain on sale of land | | 3,000 | |a 2,000| 5,000
Expenses | 80,000*| 60,000*|f 4,000| | 144,000* Minority expense | | |g 13,000| | 13,000* Net income | $88,000 |$ 47,000 | | | $ 88,000 | | | | |
RETAINED EARNINGS | | | | |
Retain. earningsParoll|$405,710 | | | | $405,710 Retained earningsScimp| |$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
Solution P9-71Consolidated net income and minority interest expense (conventional approach)
DefinitionsP = 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 PP = $100,000 + .8($40,000 + .1P) - $1,000
P = $100,000 + $32,000 + .08P - $1,000
P = $142,391
Compute SS = $40,000 + .1($142,391)
S = $54,239
Income allocationConsolidated net income ($142,391 x 90% outside ownership)
$128,152
Minority interest expense ($54,239 x 20%)
10,848 Total (separate incomes less patent amortization)
$139,0002Entries to account for investments on an equity basis
Panco's books
Capital stock
$60,000
Retained earnings
20,000
Investment in Stoco
$80,000
To record constructive retirement of 10%
of Panco's stock.
Investment in Stoco (80%)
$28,152
Income from Stoco
$28,152
To record income from Stoco computed as
follows: 80%($54,239) - 10%($142,391) - $1,000 = $28,152. Alternatively $128,152 - $100,000 separate income = $28,152.
Cash
$16,000
Investment in Stoco
$16,000
To record receipt of 80% of Stoco's dividends.
Investment in Stoco (80%)
$ 5,000
Dividends
$ 5,000
To eliminate dividends on stock that was
constructively retired and to adjust the
investment in Stoco account for the transfer
equal to 10% of Panco's dividends.
Solution P9-7 (continued)
3Journal entries on Stoco's books
Investment in Panco (10%)
$80,000
Assets
$80,000
To record acquisition of a 10% interest in
Panco at book value.
Investment in Panco
$14,239
Income from Panco
$14,239
To record 10% of Panco's $142,391 income
on a consolidated basis.
Cash
$ 5,000
Investment in Panco (10%)
$ 5,000
To record receipt of dividends from Panco
($50,000 x 10%).
4Net income for 2005
Panco Stoco Separate incomes
$100,000$ 40,000
Investment income
28,152 14,239 Net income
$128,152$ 54,2395Investment balance December 31, 2005
Panco Stoco Investments beginning of 2005
$208,000$ 80,000
Less: Constructive retirement of Panco's stock
(80,000)
Add: Investment income
28,152 14,239
Add: Dividends paid to Stoco
5,000
Less: Dividends received
(16,000) (5,000)
Investment balances December 31, 2005
$145,152$ 89,2396Stockholders' equity December 31, 2005
Panco Stoco Stockholders' equity January 1, 2005
$720,000$250,000
Add: Net income
128,152 54,239
Less: Dividends
(45,000) (20,000)
Stockholders' equity December 31, 2005
$803,152$284,2397Minority interest at December 31, 2005
Stoco's equity on a consolidated basis
$284,239
Minority interest percentage
20% Minority interest at December 31, 2005
$ 56,848Alternative solution:
Minority interest January 1, 2005 ($250,000 x 20%)
$ 50,000
Minority interest expense ($54,239 x 20%)
10,848
Minority interest dividends
(4,000)
Minority interest at December 31, 2005
$ 56,848Solution P9-7 (continued)
8Adjustment and elimination entries
aIncome from Panco
$ 14,239
Dividends
$ 5,000
Investment in Panco
9,239
To eliminate investment income and dividends
from Panco and return the investment account
to its beginning-of-the-period balance.
bInvestment in Stoco
$ 80,000
Investment in Panco
$ 80,000
To eliminate investment in Panco balance
and increase the investment in Stoco for
the constructive retirement of Panco's
stock that was charged to the investment
in Stoco account.
cDividends
$ 5,000
Investment in Stoco
$ 5,000
To eliminate dividends.
dIncome from Stoco
$ 28,152
Dividends
$ 16,000
Investment in Stoco
12,152
To eliminate income and dividends from
Stoco and return the investment in Stoco
to its beginning-of-the-period balance.
eCapital stock-Stoco
$150,000
Retained earnings-Stoco
100,000
Patent
8,000
Investment in Stoco
$208,000
Minority interest
50,000
To eliminate Stoco's equity account balances
and the investment in Stoco, enter beginning-
of-the-period patent and minority interest.
fExpenses
$ 1,000
Patent
$ 1,000
To enter patent amortization for the period.
gMinority Interest Expense
$ 10,848
Dividends
$ 4,000
Minority Interest
6,848
To record the minority interest share of subsidiary income and dividends.
Solution P9-7 (continued)
9Adjustment and elimination entries to consolidate balance sheets
aInvestment in Stoco
$ 89,239
Investment in Panco
$ 89,239
To eliminate the investment in Panco
balance and increase the investment in
Stoco balance for the constructively
retired Panco stock.
bCapital stock-Stoco
$150,000
Retained earnings-Stoco
134,239
Patent
7,000
Investment in Stoco
$234,391
Minority interest
56,848
To eliminate the investment in Stoco and
Stoco's equity account balances, enter
end-of-the-period patent and minority
interest amounts.
Note: Panco's and Stoco's net asset increases, excluding changes in investment account balances, were $66,000 ($100,000 separate income, plus $16,000 dividends received, less $50,000 dividends paid) and $25,000 ($40,000 separate income, plus $5,000 dividends received, less $20,000 dividends paid).
P = $66,000 + .8S - $1,000 patent amortization = $92,391
S = $25,000 + .1P = $34,239
Increase in consolidated retained earnings: $92,391 x 90% = $83,152Increase in minority interest: $34,239 x 20% = $6,848