beams10e_ch09 indirect and mutual holdings (1)

8/13/2019 Beams10e_Ch09 Indirect and Mutual Holdings (1)

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Pearson Education, Inc. publishing as Prentice Hall 9-1

Chapter 9: Indirect and MutualHoldings

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting , 10 th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


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Indirect and Mutual Holdings:

Objectives1. Prepare consolidated statements when the parent

company controls through indirect holdings .2. Apply consolidation procedures of indirect

holdings to the special case of mutual holdings .


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1: Indirect Holdings

Indirect and Mutual Holdings


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Father-Son-Grandson

Parent owns 80% of A,and through A,

56% of B (80% x 70%) .

Types of Indirect Holdings

Connecting Affiliates

Parent owns 80% of A,20% of B,

and through A an additional32% of B (80% x 40%).

Parent owns a total of 52% of B.

Parent

Subsidiary A

Subsidiary B

70%

80%

Parent

Subsidiary A Subsidiary B

20%80%

40%


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Equity Method for Father-Son-

Grandson Holdings Son applies equity method for Investment in

Grandson Father applies equity method for Investment in

Son Controlling interest share of consolidated

income includes

Share for direct holding of son Share for indirect holding of grandson (byfather through son)


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Example: Father-Son-Grandson

On 1/1/09 Poe acquires 80% of Shaw. On 1/1/10Shaw acquires 70% of Turk. Earnings anddividends for 2010 are below:

Poe Shaw Turk Separate earnings 100 50 40Dividends 60 30 20


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Equity Method EntriesShaw applies equity method (70%):Cash 14

Investment in Turk 14 for dividends

Investment in Turk 28Income from Turk 28

for income Poe applies equity method (80%):Cash 24

Investment in Shaw 24 for dividends Investment in Shaw 62.4

Income from Shaw 62.4 for income 80%(50+28)


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Allocations to CI and NCI

This allocation may look like the "step-down method" allocation presented in costaccounting texts. Mathematically it is!

Poe Shaw Turk CI NCI TotalSeparate income 100.0 50.0 40.0 190.0Allocate :Turk ==>70% Shaw: 30% NCI 28.0 (40.0) 12.0Shaw ==>80% Poe: 20% NCI 62.4 (78.0) 15.6Poe's ==>CI (162.4) 162.4Total consolidatedincome 162.4 27.6 190.0


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Allocation ResultsPoe Shaw Turk CI NCI Total

Separate income 100.0 50.0 40.0 190.0Allocate:Turk ==>70% Shaw: 30% NCI 28.0 (40.0) 12.0Shaw ==>80% Poe: 20% NCI 62.4 (78.0) 15.6Poe ==>CI (162.4) 162.4Total consolidatedincome 162.4 27.6 190.0On separate income statements:

Poe's net income = $162.4 Shaw's "Income from Turk" = $28.0 Poe's "Income from Shaw" = $62.4

For consolidated statements:

Noncontrolling interest share = 12.0 + 15.6 = $27.6


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Indirect Holdings with Connecting

AffiliatesIndirect holdings with connecting affiliates Handle similar to Father-Son-Grandson, but Father has direct holdings in both Son and

GrandsonExample: Pet holds 70% of Sal and 60% of Ty. Sal holds

an additional 20% of Ty.

Intercompany profit transactions: Downstream: Pet sold Sal land with a gain of $10.This will be fully attributed to Pet.

Upstream: Sal sold $15 inventory to Pet, and Petholds ending inventory with unrealized profit of $5.This will be allocated between Pet and NCI.

Pet Sal TySeparate income 70 35 20Dividends 40 20 10


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Calculating Investment BalancesSal:

Underlying equity Jan 1 Dec 31Capital stock 200 200Retained earnings 50 69

Goodwill 12 12Unrealized profit ininventory (5)Subtotal (split 70:30) 276Unrealized profit onland (10)

Total 262 266Investment in Sal (70%) 183.4 183.2* (70% x 276) - 10 = 183.2

Noncontrolling interest(30%) 78.6 82.8* 30% x 276 = 82.8

Ty:Underlying equity Jan 1 Dec 31Capital stock 100 100Retained earnings 80 90

Goodwill 12 12Total 192 202Investment in Ty(60%) 115.2 121.2Investment in Ty(20%) 38.4 40.4

Noncontrollinginterest (20%) 38.4 40.4


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Pet Sal Ty CI NCI TotalSeparate income 70.0 35.0 20.0 125.0Unrealized $5 profit oninventory (upstream) (5) (5)Unrealized $10 gain on land(downstream) (10) (10)Allocate:Ty==> 60% Pet: 20% Sal: 20% NCI 12.0 4.0 (20.0) 4.0

Sal ==> 70% Pet: 30% NCI 23.8 (34.0) 10.2Pet ==> CI (95.8) 95.8Total consolidated income 95.8 14.2 110.0Dividend distributions:Ty==> 60% Pet: 20% Sal: 20% NCI 6 2 (10) 2

Sal ==> 70% Pet: 30% NCI 14 (20) 6Pet ==> CI (40) 40

Sal's Income from Ty = $4.0Pet's Income from Ty = $12.0Pet's Income from Sal = $23.8 - $10 unrealized gain = $13.8


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Worksheet EntriesSales 15.0

Cost of sales 15.0Cost of sales 5.0

Inventory 5.0Gain on sale of land 10.0

Land 10.0Income from Ty 16.0

Dividends 8.0Investment in Ty 8.0both Sal's and Pet's

Noncontrolling interest share (Ty) 4.0Dividends 2.0

Noncontrolling interest (Ty) 2.0


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Income from Sal 13.8Investment in Sal 0.2

Dividends 14.0

including 10 unrealized gain on land Noncontrolling interest share (Sal) 10.2Dividends 6.0

Noncontrolling interest (Sal) 4.2Capital stock (Ty) 100.0

Retained earnings (Ty) 80.0Goodwill 12.0

Investment in Ty (Sal & Pet) 153.6 Noncontrolling interest (Ty) 38.4

Capital stock (Sal) 200.0

Retained earnings (Sal) 50.0Goodwill 12.0

Investment in Sal 183.4 Noncontrolling interest (Sal) 78.6


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Consolidation Worksheet Income statement: Pet Sal Ty DR CR ConsolSales 200.0 150.0 100.0 15.0 435.0Income from Sal 13.8 13.8 0.0

Income from Ty 12.0 4.0 16.0 0.0Gain on land 10.0 10.0 0.0Cost of sales (100.0) (80.0) (50.0) 5.0 15.0 (220.0)Other expenses (40.0) (35.0) (30.0) (105.0)

Noncontrollinginterest share 10.24.0 14.2Controlling interestshare 95.8 39.0 20.0 95.8


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Statement of retainedearnings: Pet Sal Ty DR CR ConsolBeginning retainedearnings 223.0 50.0 80.0

80.050.0 223.0

Add net income 95.8 39.0 20.0 95.8Deduct dividends (40.0) (20.0) (10.0) 8.0

2.014.0

6.0 (40.0)Ending retainedearnings 278.8 69.0 90.0 278.8

Balance sheet: Pet Sal Ty DR CR ConsolOther assets 50.6 19.6 85.0 155.2Inventories 50.0 40.0 15.0 5.0 100.0Plant assets, net 400.0 200.0 100.0 10.0 690.0Investment in Sal (70%) 183.2 0.2 183.4 0.0Investment in Ty (60%,20%)

121.2 40.4 8.0153.6 0.0

Goodwill 12.012.0 24.0

Total 805.0 300.0 200.0 969.2


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Pet Sal Ty DR CR ConsolLiabilities 126.2 31.0 10.0 167.2Capital stock 400.0 200.0 100.0 100.0

200.0Retained earnings 278.8 69.0 90.0 278.8

Noncontrollinginterest

2.04.2

38.478.6 123.2

Total 805.0 300.0 200.0 969.2


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2: Mutual Holdings

Indirect and Mutual Holdings


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Parent Mutually Owned

Parent owns 80% of A,

and through A,has 8% (80% x 10%) ofits own (treasury) stock .

Types of Mutual HoldingsConnecting Affiliates

Mutually Owned

Parent owns 80% of A,

20% of B,through A an additional

32% (80% x 40%) of B , andthrough B an additional

4% (20% x 20%) of A.

Parent

Subsidiary A

10%80%

Parent

Subsidiary A Subsidiary B20%20%80%

40%


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Treasury Stock or ConventionalTreasury stock method

Treats parent mutually held stock astreasury stock

Parent has fewer shares outstanding "Interdependency" assumed eliminated by

treasury stock treatmentConventional method for mutual holding

Treats stock as retired Parent has fewer shares outstanding Simultaneous set of equations Fully recognizes interdependencies


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Parent Stock Mutually Held One or more affiliates holds parent company

stock Treasury stock method

Recognize treasury stock at cost ofsubsidiary's investment in parent

Reduce Investment in subsidiary Conventional method

Parent treats stock as retired, reducingcommon stock, and additional paid in capitalor retained earnings

Reduce Investment in subsidiary


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Comparison Both methods reduce

Income from Subsidiary for the Parent dividends paid to subsidiary

Methods result in different Equity accounts

Treasury stock Reti red common stock

Consolidated retained earnings Noncontrolling interest


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Treasury Stock Method - DataPace owns 90% of Salt acquired at fair value

equal to cost, no goodwill. Salt owns 10% ofPace. At the start of 2010:

Investment in Salt, $297 Noncontrolling interest, $33 Salt's total stockholders' equity

Common stock $200 Retained earnings $130

During 2010, Separate income: Pace $60, Salt $40 Dividends: Pace $30, Salt $20


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Pace Uses Treasury Stock Method

Allocations of income to CI and NCI:

Controlling interest share $95.7 Noncontrolling interest share $4.3 Pace's Income from Salt $38.7 3.0 = $35.7

Pace Salt CI NCI TotalSeparate Income 60.0 40.0 100.0

Parent dividends (3.0) 3.0Allocate:Salt => 90%:10% 38.7 (43.0) 4.3Pace => 100% 95.7 95.7Totals 95.7 4.3 100.0


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Pace's Equity Method EntriesCash 18.0

Investment in Salt 18.0 for dividends Investment in Salt 38.7

Income from Salt 38.7 for income Income from Salt 3.0

Dividends 3.0

for Pace dividends paid to Salt

Dividends 27.0 Income from Salt 3.0

Cash 30.0

In place of the last entry, the Pace could record its dividend directly as:


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Worksheet EntriesIncome from Salt 35.7

Dividends 18.0Investment in Salt 17.7

Noncontrolling interest share 4.3Dividends 2.0

Noncontrolling interest 2.3Common stock 200.0Retained earnings 130.0

Investment in Salt 297.0 Noncontrolling interests 33.0Treasury stock 70.0

Investment in Pace 70.0


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Parent Mutually Held - DataPace2 owns 90% of Salt2 acquired at fair value

equal to cost, no goodwill. Salt owns 10% ofPace. At the start of 2010:

Investment in Salt2, $226,154 Noncontrolling interest, $33,846 Salt2's total stockholders' equity

Common stock $200,000 Retained earnings $130,000

During 2010, Separate income: Pace2 $60,000, Salt2 $40,000 Dividends: Pace2 $30,000, Salt2 $20,000

Investment andnoncontrolling interest

= 226,154 + 33,846

equals underlyingequity less mutualholding

= 200,000 + 100,000 70,000.


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Solved, substituting 2 nd equation into 1 st :

P = 105,495S = 50,550CI share = 94,945NCI share = 5,055

Pace2 Uses Conventional Method

Allocation information:

Equations:P = $60,000 + .9SS = $40,000 + .1PCI share = .9PNCI share = .1S

Pace2 Salt2 CI NCI TotalSeparate Income $60,000 $40,000 $100,000

Salt2's allocation .90S .10SPace2's allocation .10P .90P

Conventional method is analogous to reciprocal cost allocation method.


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Note on Results:Results:

P = 105,495S = 50,550

CI = 94,945NCI = 5,055

CI + NCI = $100,000, the total separate income Pace2's Income from Salt2 = .9S - .1P = $34,945

90% of Salt's income 10% mutual holding CI = Pace2's separate income + Income from Salt2

$60,000 + $34,945 = $94,945 (as a check!)


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Pace2's Equity Method EntriesCash 18,000

Investment in Salt2 18,000 for dividends Investment in Salt2 37,945

Income from Salt2 37,945 for income Income from Salt2 3,000

Dividends 3,000

for Pace2 dividends paid to Salt2


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Worksheet Entries - ConventionalIncome from Salt2 34,945

Dividends 18,000Investment in Salt2 15,945

Noncontrolling interest share 5,055Dividends 2,000

Noncontrolling interest 3,055Common stock 200,000Retained earnings 130,000

Investment in Salt2 296,154 Noncontrolling interests 33,846Investment in Salt2 70,000

Investment in Pace2 70,000


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Subsidiary Stock Mutually Held

Subsidiaries hold stock in each other Use conventional approach Treasury stock method is not appropriate

I t i s not parent' s stock Subsidiary stock is eliminated in

consolidation


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Subsidiary Mutual HoldingsPoly owns 80% of Seth acquired at book value

plus $25,000 goodwill. Seth owns 70% of Unoacquired at book value plus $10,000 goodwill.Uno owns 10% of Seth, cost method.

At the start of 2010: Investment in Seth (by Poly, 80%), $340,000 Investment in Uno (by Seth, 70%), $133,000 Investment in Seth (by Uno, 10%), $40,000

Noncontrolling interest, $102,000For 2010:Poly Seth Uno

Separate income 112,000 51,000 40,000Dividends 50,000 30,000 20,000


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Allocate income to CI and NCI

Equations:P = 112,000 + .8SS = 51,000 + .7UU = 40,000 + .1SCI = 1PNCI = .3U + .1S

Solving, substituting 2 nd equation

into 3rd

(or 3rd

into 2nd

):U = 48,495S = 84,946P = 179,957CI share = 179,957

NCI share = 14,548 + 8,495 = 23,043

Allocation Info. Poly Seth Uno CI NCI Total Separate income 112,000 51,000 40,000 203,000Uno's allocation => .7U .3U Seth's allocation => .8S .1S .1S Poly's allocation => 1.0P


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A Look at the ResultsResults:

U = 48,495S = 84,946P = 179,957CI share = 179,957

NCI share = 14,548 + 8,495 = 23,043Consolidated income CI and NCI shares = 203,000, total separate income.Intercompany income Poly's Income from Seth = .8S = 67,957

Seth's Income from Uno = .7U = 33,946 Uno's Dividend income = .1(Seth's dividends) = 3,000Individual reported income Poly's separate income + income from Seth = 179,957 Seth's separate income + income from Uno = 84,946


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beams10e_ch09 indirect and mutual holdings (1)

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