b. woods chapter 9

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)



$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


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


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


$ 7,000

To record dividends received from Thayer

($10,000 x 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%).


$ 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


$ 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)


$193,2003Schedule of assets and equities at December 31, 2004

Posey Seaton Thayer Assets

$ 924,000 $227,000 $270,000


219,200


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


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


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



| | | 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



| | | Adjustments and |Consolidated

| Prill |Skill 90%| Eliminations | Statements | | | | |


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 | | | | |


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.


Paroll Company and Subsidiary


for the year ended December 31, 2004 | | | Adjustments and |Consolidated

| Paroll |Scimp 90%| Eliminations | Statements | | | | |


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 | | | | |


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.


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.


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

b. woods chapter 9

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