Chp9 Beams

Chapter 9

INDIRECT AND MUTUAL HOLDINGS Answers to Questions 1

An indirect holding of the stock of an affiliate gives the investor an ability to control or significantly influence the decisions of an investee not directly owned through an investee that is directly owned. Two primary types of indirect ownership situations situat ions 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%  40%) of T. T should be included as an equity investment in in the consolidated statements of P Company and Subsidiaries.

3

An indirect holding involves the ability of one corporation to control another by virtue of its control over one or more other corporations. An investor has the ability ability to control or significantly influence an investee that is not directly owned through an investee that is directly owned. A mutual holding affiliation structure is a special special type of indirect holding where affiliates indirectly own themselves. themselves. In a mutual holding situation, the affiliates hold ownership interests in each other.

4

The parent’s direct and indirect ownership of Subsidiary B is 49 percent (70%  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 noncontrolling stockholders of B.

5

Approach A

Pat Sam Stan

Combi ned ned separ separ at e ear ear ni ngs ngs of Pat Pat , Sam Sam, and and St St an ( $200 $200,, 000 000 + $160, $160, 000 000 + $100, $100, 000) 000) $460, $460, 000 000 Less: Less: Noncon cont r ol l i ng i nt er est sha shar e com comput ed as f ol l ows: Di r ect noncon cont r ol l i ng i nt er est i n St an’ s i ncom come ( 30, 000) ( $100 $100,, 000 000  30%) I ndi r ect noncon cont r ol l i ng i nt er est i n St an’ s i ncom come ( 14, 000) ( $100 $100,, 000 000  70%  20%) Di r ect noncon cont r ol l i ng i nt er est i n Sam’ s i ncom come ( 32, 000) ( $160 $160,, 000 000  20%) Pat Pat ’ s net net i ncome and and cont cont r ol l i ng shar shar e of consol consol i dat ed net i ncome $38 $384, 000 Approach B

Sepa Separr at e ear ear ni ngs ngs Al l oc oc at e St an’ s i nc nc ome t o Sam ( $100 $100,, 000 000  70%) Al l ocat ocat e Sam Sam’ s i ncome t o Pat Pat ( $230 $230,, 000 000  80%) Cont ont r ol l i ng shar shar e Noncon oncontt r ol l i ng i nt erest sha shar e

Pat Pat $200 $200,, 000 000

+184, 184, 000 000 $384, 000

Sam $160 $160,, 000 000

St an $100 $100,, 000 000

+ 70, 70, 000 000

- 70, 70, 000 000

- 184, 184, 000 $ 46, 000

© 2011 Pearson Education, Inc. publishing as Prentice Hall 9-1

0 $30, 000

Indirect and and Mutual Holdings Holdings

9-2

6

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.

7

Sepa Separr at e ear ear ni ngs ngs Deduct : Unr eal i zed zed pr of i t Separ epar at e r eal eal i zed ear ear ni ngs Al l ocat ocat e S2’ s i ncome Al l ocat e S1’ S1’ s i ncom ncome P’ s net net i ncom ncome Noncon cont r ol l i ng i nt . sha shar e

P $20, $20, 000 000 20, 20, 000 +10, 10, 000 000 $30, $30, 000 000

S1 80% $10, $10, 000 000 - 1, 000

S2 70% $5, $5, 000 000

9, 000 + 3, 500 - 10, 10, 000 000

5, 000 000 - 3, 500 500 0

$ 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. 8

A mutual holding situation exists because two affiliates hold ownership interests in each other. The parent is mutually owned.

9

The treasury stock approach considers parent stock held by a subsidiary to be treasury stock of the consolidated entity. Accordingly, the subsidiary investment account is maintained on a cost basis and is deducted at cost from stockholders’ equity in the consolidated balance sheet.

10

In situations in which a subsidiary holds stock in the parent, both the conventional and treasury stock approaches are acceptable, but they do not result in equivalent consolidated financial statements. The consolidated retained earnings and noncontrolling interest amounts will usually be different because of different amounts of investment income. The treasury stock approach is not applicable when the mutually held stock involves subsidiaries holding the stock of each other.

11

No. Parent dividends paid to the subsidiary are eliminated.

12

The theory is that parent stock purchased by a subsidiary is, in effect, returned to the parent and constructively retired. By recording the constructive retirement of the parent stock on parent books, parent equity will reflect the equity of stockholders outside the consolidated entity. Also, recording the constructive retirement, by reducing parent stock and retained earnings to reflect amounts applicable to controlling stockholders outside the consolidated entity, will establish consistency between capital stock and retained earnings for the parent’s outside stockholders and parent net income, dividends, and earnings per share which also relate to the outside stockhold ers of the parent.

13

Controlling share of consolidated net income is computed as follows: P = $50,000 + .8S S = $20,000 + .1P P = $50,000 + .8($20,000 + .1 P) P = $71,739 Controlling share of consolidated net income = $71,739  90% = $64,565

14

For eliminating the effect of mutually held parent stock, two generally accepted approaches are used—the treasury stock approach and the conventional approach. But when the mutually held stock involves subsidiaries holding stock of each other, the treasury stock approach is not applicable.

© 2011 Pear son son Educat cat i on, I nc. publ i shi shi ng as Pr Pr ent i ce Hal l

Chapter 9

15

9-3

By adding beginning noncontrolling interest and noncontrolling interest share (determined by multiplying the company’s net income by the noncontrolling interest percentage) and subtracting the noncontrolling interest’s percentage of dividends, the noncontrolling interest can be determined without use of simultaneous equations.

SOLUTIONS TO EXERCISES Solution E9-1

Pen

Sal

Ti p

$1, 600

$1, 000

$400

30 240 ( 762)

( 240) ___ _

$508

$160

Separat e ear ni ngs of t he t hr ee af f i l i at es ( i n t housands) Add: Di vi dend i ncome f r om Sal ’ s i nvest ment i n Wi n account ed f or by t he cost met hod ( $200, 000  15%) Al l ocat e 60% of Ti p’ s ear ni ngs Al l ocat e 60% of Sal ’ s ear ni ngs Cont r ol l i ng Shar e of Cons. I ncome Noncont r ol l i ng i nt erest shar e

762 $2, 362

Solution E9-2 Pub Corporation and Subsidiaries

I ncome Al l ocat i on Schedul e f or t he year 2011 ( i n t housands) Pub Separ at e ear ni ngs or l oss $800 Al l ocat e Sam’ s i ncome: 180 t o Pub ( $300, 000  60%) t o Ti m ( $300, 000  20%) Al l ocat e Ti m’ s l oss: ( 272) t o Pub $( 340, 000)  80% Cont r ol l i ng Shar e of Consol . I ncome $708 Noncont r ol l i ng i nt er est shar e

Sam $300

Ti m $( 400)

( 180) ( 60)

60 272

$ 60

$ ( 68)

Solution E9-3 Place Corporation and Subsidiaries

I ncome Al l ocat i on Schedul e f or t he year 2011 Pl ace Separ at e i ncomes $200, 000 Less: Unr eal i zed pr of i t on l and _____ __ Separ at e r eal i zed i ncomes 200, 000 Al l ocat e Lake’ s i ncome 60% t o Pl ace 36, 000 20% t o Mar sh Al l ocat e Mar sh’ s i ncome 70% t o Pl ace 57, 400 Cont r ol l i ng Shar e of Consol . I ncome $293, 400 Noncont r ol l i ng i nt erest shar e

Lake $80, 000 ( 20, 000) 60, 000

Mar sh $ 70, 000 _____ _ 70, 000

( 36, 000) ( 12, 000)

12, 000

_____ __

( 57, 400)

$12, 000

$ 24, 600

© 2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Indirect and Mutual Holdings

9-4

Solution E9-4 1

2

3

c I ncome f r om Son i s equal t o: 70% of Son’ s $160, 000 i ncome 70% of Son’ s 80% i nt er est i n Tan’ s $100, 000 i ncome I ncome f r om Son

$112, 000 56, 000 $168, 000

d Noncont r ol l i ng i nt er est shar e i s equal t o: 30% di r ect noncont r ol l i ng i nt er est i n Son’ s $160, 000 i ncome 20% di r ect noncont r ol l i ng i nt er est i n Tan’ s $100, 000 i ncome 30%  80% i ndi r ect noncont r ol l i ng i nt er est i n Tan’ s $100, 000 i ncome Tot al noncont r ol l i ng i nt er est shar e

$ 48, 000 20, 000 24, 000 $ 92, 000

d Consolidated net income is equal to:

Combi ned separ at e i ncomes of $360, 000 + $160, 000 + $100, 000 Less: Noncont r ol l i ng i nt er est shar e Cont r ol l i ng i nt er est shar e of Consol i dat ed net i ncome

$620, 000 92, 000 $528, 000

Alternative computation:

Pi n’ s separ at e i ncome Add: 70% of Son’ s $160, 000 i ncome Add: ( 70%  80%) of Tan’ s $100, 000 i ncome Cont r ol l i ng i nt er est shar e of Consol i dat ed net i ncome

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

Solution E9-5

Separ at e ear ni ngs Less: Unr eal i zed pr of i t Separ at e r eal i zed ear ni ngs

Pal $ 50, 000

Sal $30, 000

Tea $35, 000 - 5, 000

Won $( 20, 000) _______

Val $40, 000 ________

50, 000

30, 000

30, 000

( 20, 000)

40, 000

Allocate Val’s income

70% t o Tea

+28, 000

- 28, 000

Allocate Won’s income

10% t o Tea 60% t o Sal

- 2, 000 - 12, 000

+ 2, 000 + 12, 000

Allocate Tea’s income

80% t o Pal 10% t o Sal

+ 44, 800 + 5, 600

- 44, 800 - 5, 600

- 18, 880

___ ___ __

___ ___ __

___ ___ ___

$ 4, 720

$ 5, 600

$ ( 6, 000)

$12, 000

Allocate Sal’s income

80% t o Pal Pal ’ s net i ncome (or Cont r ol l i ng shar e of consol i dat ed net i ncome) Noncont r ol l i ng i nt er est shar e

+ 18, 880

$113, 680


Chapter 9

9-5

Solution E9-6

Separ at e ear ni ngs Unr eal i zed pr of i t Separ at e r eal i zed ear ni ngs

Pet $ 65, 000 65, 000

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

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

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

+ 1, 000

- 1, 000 - 3, 500

Allocate Oak’s income

20% t o Nun 70% t o Man

+ 3, 500

Allocate Nun’s income

70% t o Pet 10% t o Man

+ 21, 700 + 3, 100

- 21, 700 - 3, 100

- 18, 540

__ __ __ __

$ 2, 060

$ 6, 200

Allocate Man’s income

90% t o Pet Pet ’ s net i ncome ( or Cont r ol l i ng shar e of NI ) Noncont r ol l i ng i nt erest shar e

+ 18, 540

__ __ __ __

$105, 240 $

500

Alternative solution

Pet

Report ed I ncome $65, 000

+ - Adj ust ment s =

Man

18, 000

-

Nun

28, 000

+

2, 000

Oak

9, 000

-

4, 000

$4, 000

Consol i dat ed Net I ncome = $ 65, 000

Noncont r ol l i ng I nt er est Shar e 0

14, 000a

12, 600

$1, 400

30, 000

23, 700

6, 300

3, 940

1, 060

$105, 240

$8, 760

Adj ust ed I ncome $ 65, 000

5, 000c $114, 000

a b c

-

$14, 000 di vi ded 90% t o consol i dat ed net i ncome ( CNI ) 10% t o noncont r ol l i ng i nt er est share ( NI S) $30, 000 di vi ded 70% + ( 90%  10%) t o CNI and 20% + ( 10%  10%) t o NI S $5, 000 di vi ded ( 90%  70%) + ( 70%  20%) + ( 90%  10%  20%) t o CNI [ 78. 8%] and 10% + ( 10%  10%  20%) + ( 20%  20%) + ( 10%  70%) t o NI S [ 21. 2%]



9-6

Solution E9-7 1

b Separ at e i ncome of Tar I ncl uded i n consol i dat ed net i ncome ( . 9



.7



$400, 000)

Al t er nat i ve sol ut i on Di r ect noncont r ol l i ng i nt er est ( . 3  $400, 000) I ndi r ec t nonc ont r ol l i ng i nt er es t ( . 1  . 7  $400, 000) 2

3

a Separ at e i ncome = net i ncome of Van Noncont r ol l i ng i nt er est ( di r ect)

$400, 000 ( 252, 000) $ 148, 000 $ 120, 000 28, 000 $ 148, 000 $240, 000 20% $ 48, 000

c Tot al separ at e i ncomes Less: Cont r ol l i ng shar e of Consol i dat ed net i ncome Pan $1, 240, 000  100% Si n $350, 000  90% Tar $400, 000  90%  70% Wi n $( 100, 000)  90%  60% Van $240, 000  90%  80%

$2, 130, 000 $1, 240, 000 315, 000 252, 000 ( 54, 000) 172, 800 ( 1, 925, 800) $ 204, 200

Tot al noncont r ol l i ng i nt er est shar e Alternative solution

Si n $350, 000  Tar $400, 000  Won $( 100, 000) Van $240, 000  Tot al noncont r ol l i ng

$

10% 37%  46% 28% i nt er est shar e

4

a [ See comput at i ons f or quest i on 3]

5

d

$

35, 000 148, 000 ( 46, 000) 67, 200 204, 200

Net income of Sin

Separ at e i ncome Add: 70% of Tar ’ s $400, 000 Deduct : 60% of Won’ s $( 100, 000) Add: 80% of Van’ s $240, 000 Net i ncome of Si n Pan’ s i nt er est I nvest ment i ncr ease Less: Di vi dends r ecei ved f r om Si n ( $200, 000 Net i ncr ease

$



90%)

350, 000 280, 000 ( 60, 000) 192, 000 $ 762, 000 90% 685, 800 ( 180, 000) $ 505, 800


Chapter 9

9-7

Solution E9-8

1

2

b Separ at e i ncome of Sam ( net i ncome) Separ at e i ncome of Ten $40, 000 - ( $80, 000  10%) Separ at e i ncome of Pat $240, 000 - ( $40, 000  70%) - ( $80, 000  80%) Tot al separ at e i ncome

4

148, 000 $260, 000

d Separ at e i ncome Unr eal i zed pr of i t on i nvent or y Unr eal i zed pr of i t on l and Separ at e r eal i zed i ncome

3

$ 80, 000 32, 000

Pat $148, 000 _____ ___ $148, 000

Sam $80, 000 ( 10, 000) _____ __ $70, 000

Ten $32, 000 ( 15, 000) $17, 000

a Pat ’ s separ at e i ncome $148, 000 56, 000 Add: I nvest ment i ncome f r om Sam ( $70, 000  80%) Add: I nvest ment i ncome f r om Ten 16, 800 [ $17, 000 + ( $70, 000  10%) ]  70% Pat ’ s i ncome ( cont r ol l i ng shar e of consol i dat ed net i ncome) $220, 800 d Tot al separ at e r eal i zed i ncome Less: Cont r ol l i ng shar e of consol i dat ed net i ncome Noncont r ol l i ng i nt er est shar e

$235, 000 220, 800 $ 14, 200


Di r ect noncont r ol l i ng i nt er est i n Sam ( $70, 000 I ndi r ect noncont r ol l i ng i nt er est i n Sam ( $70, 000  . 3  . 1) Di r ect noncont r ol l i ng i nt er est i n Ten ($17, 000 Noncont r ol l i ng i nt er est shar e





. 1)

$

7, 000

. 3)

2, 100 5, 100 $ 14, 200

Solution E9-9

P = I ncome of Pan on a consol i dat ed basi s ( i ncl udi ng mut ual i ncome) S = I ncome of Sol on a consol i dat ed basi s ( i ncl udi ng mut ual i ncome) P = Separ at e i ncome of $3, 000, 000 + 80% of S S = Separ at e i ncome 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 Cont r ol l i ng Shar e of Consol i dat ed net i ncome = $5, 526, 316  70% = $3, 868, 421



9-8

Solution E9-10

P = Pad’ s i ncome on a consol i dat ed basi s S = Sad’ s i ncome on a consol i dat ed basi s T = Two’ s i ncome on a consol i dat ed basi s P = $200, 000 + . 7S S = $120, 000 + . 8T T = $80, 000 + . 1S Solve for S

S = $120, 000 + . 8( $80, 000 + . 1S) S = $184, 000 + . 08S S = $200, 000 Compute P and T

P = $200, 000 + . 7( $200, 000) P = $340, 000 T = $80, 000 + . 1( $200, 000) T = $100, 000 Income Allocation

Cont r ol l i ng share of consol i dat ed net i ncome ( equal t o P) Noncont r ol l i ng i nt er est shar e i n Sad ( $200, 000  20%) Noncont r ol l i ng i nt er est shar e i n Two ( $100, 000  20%) Tot al consol i dat ed i ncome

$340, 000 40, 000 20, 000 $400, 000


Chapter 9

9-9

Solution E9-11 [ AI CPA adapt ed] 1

b

2

b

3

d

4

c

Supporting computations

A = Pi n’ s i ncome on a consol i dat ed basi s B = Son’ s i ncome on a consol i dat ed basi s C = Ti n’ s i ncome on a consol i dat ed basi s A = $190, 000 + . 8B + . 7C B = $170, 000 + . 15C C = $230, 000 + . 25A Solve for A

A = $190, 000 + . 8[ $170, 000 + . 15( $230, 000 + . 25A) ] + . 7( $230, 000 + . 25A) A = $190, 000 + $136, 000 + $27, 600 + . 03A + $161, 000 + . 175A A = $514, 600 + . 205A . 795A = $514, 600 A = $647, 295. 59 Determine C

C = $230, 000 + . 25( $647, 295. 59) C = $391, 823. 89 Determine B

B = $170, 000 + . 15( $391, 823. 90) B = $228, 773. 58 Allocate income to controlling share of consolidated net income and noncontrolling interest

Cont r ol l i ng Shar e of Consol i dat ed net i ncome ( $647, 295. 59 Noncont r ol l i ng i nt er est — Son ( $228, 773. 58  20%) Noncont r ol l i ng i nt er est — Ti n ( $391, 823. 90  15%) Tot al consol i dat ed i ncome



75%)

$485, 471. 69 45, 754. 72 58, 773. 59 $590, 000. 00



9-10

Solution E9-12

d Combi ned separ at e i ncome Less: Noncont r ol l i ng i nt er est shar e Cont r ol l i ng Shar e of Consol i dat ed net i ncome

1

$160, 000 6, 750 $153, 250

Alternatively:

Pet ’ s separ at e i ncome Add: Sod’ s net i ncome of $67, 500  90% Less: Di vi dends r ecei ved f r om Pet ( $50, 000  15%) Cont r ol l i ng i nt er est shar e of Consol i dat ed net i ncome

$100, 000 60, 750 ( 7, 500) $153, 250

b

2

P . 865P P S

= = = =

$100, 000 + . 9( $60, 000 + . 15P) $154, 000 $178, 035 $60, 000 + $26, 705 = $86, 705

Cont r ol l i ng Shar e of Consol i dat ed net i ncome = $178, 035 . 85 = Noncont r ol l i ng i nt erest shar e = $86, 705  . 10 = Tot al consol i dat ed i ncome



$151, 330 8, 670 $160, 000

Solution E9-13 1

Treasury stock approach

Investment in Sat balance December 31, 2011

I nvest ment bal ance December 31, 2010 Add: I ncome f r om Sat Less: Di vi dends r ecei ved f r om Sat Add: Di vi dends pai d t o Sat I nvest ment i n Sat December 31, 2011

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

Supporting computations

Comput at i on of i ncome f r om Sat : Sat ’ s separ at e i ncome Add: Sat ’ s di vi dend i ncome f r om Pug Sat ’ s net i ncome Pug’ s owners hi p i nt erest Pug’ s equi t y i n Sat ’ s i ncome Less: Di vi dends pai d t o Sat ( $60, 000  10%) Less: Excess amor t i zat i on ( $9, 000 x 70%) I ncome f r om Sat 2

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

Conventional approach

Pug’s net income and consolidated net income

P = ( $120, 000 + . 7S) - $6, 300 S = $50, 000 + . 1P P P . 93P P

= = = =

$120, 000 + . 7( $50, 000 + . 1P) - $6, 300 $120, 000 + $35, 000 + . 07P - $6, 300 $148, 700 $159, 892 © 2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Chapter 9

9-11

S = $50, 000 + . 1( $159, 892) S = $65, 989 Pug’ s net i ncome and cont r ol l i ng shar e ( $159, 892  90%) Noncont r ol l i ng i nt er est shar e ( $65, 989 Tot al i ncome



30%)

$143, 903 19, 797 $163, 700

Income from Sat

Cont r ol l i ng Shar e of Consol i dat ed net i ncome Less: Pug’ s separ at e i ncome I ncome f r om Sat

$143, 903 120, 000 $ 23, 903

Or al t er nat i vel y, ( $65, 989  70%) - ( $159, 892

$ 23, 903

10%) - $6, 300 excess



Investment in Sat December 31, 2011

I nvest ment i n Sat December 31, 2010 Add: I ncome f r om Sat Less: Di vi dends f r om Sat I nvest ment i n Sat December 31, 2011

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



9-12

SOLUTIONS TO PROBLEMS Solution P9-1 Pad Corporation and Subsidiaries

Schedul e t o Comput e Cont r ol l i ng Shar e of Consol i dat ed Net I ncome and Noncont r ol l i ng I nt er est Shar e f or t he year 2011 Separ at e i ncome ( l oss)

Pad $500, 000

Sal $300, 000

Less: Unr eal i zed pr of i t Separ at e r eal i zed i ncome ( l oss)

500, 000

300, 000

Axe $150, 000

Ban $( 20, 000)

( 20, 000)

_____ _

130, 000

( 20, 000)

Allocate Ban’s loss

70% t o Sal

( 14, 000)

14, 000

Allocate Axe’s income

60% t o Sal Pat ent

78, 000 ( 12, 000) 352, 000

( 78, 000)

Allocate Sal’s income

90% t o Pad Pat ent

316, 800 ( 40, 000)

( 316, 800)

Cont r ol l i ng shar e of net i ncome $776, 800 Noncont r ol l i ng i nt er est i ncome

$ 35, 200

$ 52, 000

$ ( 6, 000)

Check: I ncome al l ocat ed: $776, 800 consol i dat ed net i ncome + $35, 200 noncont r ol l i ng i nt er est shar e i n Sal + $52, 000 noncont r ol l i ng i nt er est shar e i n Axe - $6, 000 noncont r ol l i ng i nt er est shar e ( l oss) i n Ban = $858, 000 I ncome t o al l ocat e: $500, 000 Pad i ncome + $300, 000 Sal i ncome + $130, 000 r eal i zed i ncome of Axe - $20, 000 l oss of Ban - $52, 000 pat ent = $858, 000 Cont r ol l i ng shar e of consol i dat ed net i ncome: $500, 000 - $40, 000 + 90%( $300, 000 - $12, 000) + ( 90%  60%  $130, 000) - ( 90%  70%  $20, 000) = $776, 800


Chapter 9

9-13

Solution P9-2 1

Sea’s books

I nvest ment i n Toy ( 70%) 294, 000 Cash 294, 000 To r ecor d pur chase of a 70% i nt er est i n Toy Cor por at i on. Cash

14, 000 I nvest ment i n Toy ( 70%) To r ecor d di vi dends r ecei ved f r om Toy ( $20, 000  70%) .

I nvest ment i n Toy ( 70%) 35, 000 I ncome f r om Toy To r ecor d i nvest ment i ncome comput ed as f ol l ows: Shar e of Toy’ s net i ncome ( $60, 000  70%) Less: Unr eal i zed pr of i t f r om upst r eam sal e of i nvent ory i t ems ( $10, 000  70%)

14, 000

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

Pot’s books

Cash

48, 000 I nvest ment i n Sea ( 80%) To r ecor d di vi dends r ecei ved f r om Sea ( $60, 000  80%) .

48, 000

I nvest ment i n Sea ( 80%) 88, 000 I ncome f r om Sea To r ecor d i nvest ment i ncome comput ed as f ol l ows: Shar e of Toy’ s net i ncome ( $100, 000 + $35, 000)  80% Less: Unr eal i zed gai n on l and sol d t o Toy

88, 000

$108, 000 ( 20, 000) $ 88, 000



9-14

Solution P9-2 ( Cont i nued) 2

Schedule of income allocation

Separ at e ear ni ngs Less: Unr eal i zed pr of i t s Separ at e r eal i zed ear ni ngs Al l ocat e Toy’ s r eal i zed ear ni ngs t o Sea ( $50, 000  70%) Sea’ s net i ncome Al l ocat e Sea’ s net i ncome t o Pot ( $135, 000  80%) Pot ’ s net i ncome and Cont r ol l i ng shar e of net i ncome Noncont r ol l i ng i nt erest shar e Check:

3

Pot $300, 000 ( 20, 000) 280, 000

Sea $100, 000 100, 000 35, 000

Toy $ 60, 000 ( 10, 000) 50, 000 ( 35, 000)

135, 000 108, 000

( 108, 000)

$388, 000 $ 27, 000

__ __ __ _ $ 15, 000

Real i zed ear ni ngs ( $280, 000 + $100, 000 + $50, 000) $430, 000 Less: Noncont r ol l i ng i nt er est shar e ( 27, 000+15, 000) ( 42, 000) Cont r ol l i ng shar e of net i ncome $388, 000

Schedule of assets and equities at December 31, 2012

Pot

Sea

Ass et s I nvest ment i n Sea ( 80%) I nvest ment i n Toy ( 70%) Tot al ass et s

$ 1, 848, 000 $460, 000 440, 000 __ __ __ __ __ _ 315, 000 $ 2, 288, 000 $775, 000

Li abi l i t i es Capi t al st ock Ret ai ned ear ni ngs Tot al l i abi l i t i es and equi t y

$

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

Toy $540, 000 ___ __ __ _ $540, 000 $100, 000 300, 000 140, 000 $540, 000

Not e: Pot ’ s asset s ot her t han i nvest ment s consi st of $1, 600, 000 asset s at t he begi nni ng of t he year , pl us separ at e ear ni ngs of $300, 000 and di vi dend i ncome of $48, 000, l ess di vi dends pai d of $100, 000. Sea’ s asset s ot her t han i nvest ment s consi st of $700, 000 asset s at t he begi nni ng of t he peri od, pl us s eparat e ear ni ngs of $100, 000 and di vi dend i ncome of $14, 000, l ess i nvest ment cost of $294, 000 and di vi dends pai d of $60, 000.


Chapter 9

9-15

Solution P9-3 Preliminary computations

Check on consolidated net income

Net i ncome as st at ed Less: I nvest ment i ncome Separ at e i ncome Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y Less: Unr eal i zed pr of i t i n endi ng i nvent or y Separ at e r eal i zed i ncomes

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

Si r $90, 000 ( 10, 000) 80, 000

Ti p $25, 000 25, 000

Tot al $299, 500 ( 94, 500) 205, 000

8, 000 ___ ___ _ 108, 000

8, 000 ___ ___ _ 80, 000

( 20, 000) 5, 000

( 20, 000) 193, 000

Allocate Tip’s income

50% t o Pen 40% t o Si r Si r ’ s net i ncome

2, 500 2, 000 82, 000

( 2, 500) ( 2, 000)

Allocate Sir’s income

80% t o Pen Less: Depr eci at i on on excess al l ocat ed t o pl ant and Equi pment Tot al i ncome of consol i dat ed Ent i t y Cont r ol l i ng shar e of NI Noncont r ol l i ng i nt . share

65, 600

( 65, 600)

( 5, 000)

( 1, 250)

_____ ___ $171, 100

( 6, 250)

_____ ___

_____ __

$ 15, 150

$

500

$186, 750 171, 100 15, 650 $186, 750

I nvest ment i n Si r ( 80%)

$420, 000

I mpl i ed t ot al f ai r val ue of Si r ( $420, 000 / 80%) Book val ue of Si r Excess of f ai r val ue over book val ue

$ 525, 000 ( 500, 000) $ 25, 000

Excess al l ocat ed t o equi pment wi t h a f our year l f e Amort i zat i on ( $25, 000 / 4 yr s)

$

I nvest ment i n Ti p ( 50%)

$ 75, 000

I mpl i ed t ot al f ai r val ue of Ti p ( $75, 000 / 50%) Book val ue of Si r Excess of f ai r val ue over book val ue – Goodwi l l

$ 150, 000 ( 120, 000) $ 30, 000

6, 250



9-16

Solution P9-3 ( cont i nued) Pen Corporation and Subsidiaries

Consol i dat i on Wor ki ng Paper s f or t he year ended December 31, 2011 Pen

Si r

Ti p

$300, 000

$100, 000

Adj ust ments and El i mi nat i ons

Consol i dat ed St at ements

Income Statement

Sal es I ncome f r om Si r I ncome f r om Ti p Cost of sal es Ot her expenses

$500, 000 72, 000 12, 500 240, 000*

10, 000 150, 000*

160, 000*

70, 000*

60, 000* 15, 000*

Noncont . i nt . share — Si r Noncont . i nt . share — Ti p Cont . i nt . shareof NI

$184, 500

$ 90, 000

h d a i

50, 000 72, 000 22, 500 20, 000

$

g h

8, 000 50, 000

850, 000

f c

6, 250 15, 150

412, 000* 251, 250* 15, 150*

c

500

500*

$ 25, 000

$

171, 100

$

95, 000

Retained Earnings

Ret ai ned ear ni ngs — Pen

$115, 500

f

45, 000

Ret ai ned ear ni ngs — Ti p Net i ncome

184, 500 80, 000*

Di vi dends

Ret ai ned ear ni ngs December 31

g 8, 000 e 160, 000

160, 000

Ret ai ned ear ni ngs — Si r

90, 000 40, 000*

12, 500

b

45, 000 171, 100

25, 000 10, 000*

$220, 000

$210, 000

$ 60, 000

$ 67, 000 70, 000 110, 000

$ 36, 000 50, 000 75, 000

$ 10, 000 20, 000 35, 000

140, 000

425, 000

115, 000

a c d

9, 000 9, 000 32, 000

80, 000* $

186, 100

$

Balance Sheet

Cash Accounts r ecei vabl e I nvent ori es Pl ant and equi pment — net I nvestment i n Si r 80% I nvestment i n Ti p 50% I nvestment i n Ti p 40% Goodwi l l

Account s payabl e Ot her l i abi l i t i es Capi t al st ock Ret ai ned ear ni ngs

e

25, 000

74, 000 b $990, 000

$660, 000

$180, 000

$ 70, 000 100, 000 600, 000

$ 40, 000 10, 000 400, 000

$ 15, 000 5, 000 100, 000

$990, 000

210, 000 $660, 000

10, 000 20, 000

113, 000 130, 000 200, 000

f

18, 750

686, 250

d 40, 000 e 468, 000 a 7, 500 b 87, 500 a 6, 000 b 68, 000

508, 000 95, 000

220, 000

j i

30, 000

30, 000 $1, 159, 250

j

10, 000

$

b 100, 000 e 400, 000

600, 000 186, 100

60, 000 $180, 000

Noncont r ol l i ng i nt erest — Si r ( begi nni ng)

e 117, 000

Noncont r ol l i ng i nt erest — Ti p ( begi nni ng) Noncont r ol l i ng i nter est December 31

b

19, 500

c

6, 650

*

115, 000 115,000

143, 150 $1, 159, 250

Deduct


Chapter 9

9-17

Solution P9-4

1

I ncome al l ocat i on Definitions

P = Par ’ s i ncome on a consol i dat ed basi s S = Si t ’ s i ncome on a consol i dat ed basi s T = Tot ’ s i ncome on a consol i dat ed basi s 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

Cont r ol l i ng shar e of consol i dat ed net i ncome = P = Noncont r ol l i ng i nt er est shar e i n Si t ( $112, 245  . 1) Noncont r ol l i ng i nt er est shar e i n Tot ( $61, 224  . 3)

$320, 408 11, 225 18, 367 $350, 000



9-18

Solution P9-4 ( cont i nued) 2

P, S, and T ar e as def i ned i n par t 2. Equation

P = ( $200, 000 - $20, 000) + . 8S + . 5T S = $100, 000 + . 2T T = ( $50, 000 - $10, 000) + . 1S Solve for S

S = $100, 000 + . 2( $40, 000 + . 1S) S = $108, 000 + . 02S S = $110, 204. 08 Compute T

T = $40, 000 + . 1( $110, 204. 08) T = $51, 020. 41 Compute P

P = $180, 000 + . 8( $110, 204. 08) + . 5( $51, 020. 41) P = $293, 673. 48 Income allocation

Cont r ol l i ng shar e of consol i dat ed net i ncome = P = Noncont r ol l i ng i nt er est shar e i n Si t ( $110, 204. 08  10%) Noncont r ol l i ng i nt er est shar e i n Tot ( $51, 020. 41  30%)

$293, 673. 48 11, 020. 40 15, 306. 12 $320, 000. 00


Chapter 9

9-19

Solution P9-5 Working paper entries

a

I ncome f r om Sun 27, 000 Di vi dend i ncome 10, 000 Di vi dends 28, 000 I nvest ment i n Sun 9, 000 To el i mi nat e i ncome f r om Sun, di vi dend i ncome, and 90% of Sun’ s di vi dends, and r et ur n t he i nvest ment i n Sun account t o t he begi nni ng- of - t heper i od bal ance under t he equi t y met hod.

b

200, 000 Capi t al st ock — Sun 200, 000 Ret ai ned ear ni ngs — Sun Goodwi l l 50, 000 I nvest ment i n Sun 405, 000 45, 000 Noncont r ol l i ng i nt er est — begi nni ng To el i mi nat e r eci pr ocal i nvest ment and equi t y account s, and ent er begi nni ng- of - t heper i od goodwi l l and noncont r ol l i ng i nt er est .

c

Tr easur y st ock 80, 000 I nvest ment i n Pi n To r ecl ass i f y i nvest ment i n Pi n t o t r easur y st ock.

d

80, 000

Noncont r ol l i ng I nt er est Shar e 3, 000 Di vi dends 2, 000 Noncont r ol l i ng I nt er est 1, 000 To r ecor d noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends.



9-20

Solution P9-5 ( cont i nued) Treasury Stock approach

Pin Company and Subsidiary

Consol i dat i on Wor ki ng Paper s f or t he year ended December 31, 2013 Pi n

Adj ust ment s and El i mi nat i ons

Sun 90%

Consol i dat ed St at ement s

Income Statement

Sal es I ncome f r om Sun Di vi dend i ncome Cost of sal es Expenses

Consol i dat ed NI Noncont r ol l i ng shar e Cont r ol l i ng shar e of NI

$

400, 000 27, 000

$

200, 000* 50, 000*

$

177, 000

$

300, 000

$

100, 000

$

a 10, 000 a 50, 000* 30, 000*

27, 000 10, 000

d

3, 000

500, 000

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

30, 000

$

167, 000

$

300, 000

Retained Earnings

Ret ai ned earni ngs — Pi n

$

Ret ai ned earni ngs — Sun Net i ncome ( Cont r ol l i ng shar e i n Consol . Col umn)

177, 000

Di vi dends

100, 000*

Ret ai ned earni ngs December 31

200, 000

b 200, 000

30, 000 167, 000 20, 000*

$

377, 000

$

210, 000

$

486, 000 414, 000

$

420, 000

a d

28, 000 2, 000

90, 000* $

377, 000

$

906, 000

500, 000

$

50, 000 956, 000

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

$

Balance Sheet

Ot her asset s I nves t ment i n Sun 90% I nves t ment i n Pi n 10% Goodwi l l

Li abi l i t i es Capi t al st ock Ret ai ned earni ngs

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

80, 000 b $

900, 000

$

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

$

$

50, 000

Noncont r ol l i ng i nt er est J anuar y 1 Noncont r ol l i ng i nt er est December 31 Tr easur y st ock

c

b

45, 000

d

1, 000

80, 000 $

*

Deduct


213, 000 400, 000 377, 000

46, 000 80, 000* 956, 000

Chapter 9

9-21

Solution P9-6 Calculations Income from Sip

Par separ at e i ncome ( 140, 000 - 80, 000) Si p separ at e i ncome ( 100, 000 + 3, 000 - 60, 000)

$ 60, 000 $ 43, 000

For mul a: P i ncome = Adj ust ed Par i ncome + % i nt er est  S i ncome Adj ust ed Par i ncome = $60, 000 + $2, 000 del ayed gai n on l and - $4, 000 pat ent amor t i zat i on ( 80%) S i ncome = Si p i ncome + % i nt er est  P i ncome P i ncome = $58, 000 + 80%  ( $43, 000 + 20%  P i ncome) P i ncome = $92, 400 + . 16  P i ncome P i ncome = $110, 000 S i ncome = $43, 000 + 20%  $110, 000 S i ncome = $65, 000 Cont r ol l i ng shar e of consol i dat ed net i ncome = P i ncome  % out st andi ng Cont r ol l i ng shar e = $88, 000 Noncont r ol l i ng shar e = S i ncome  % out st andi ng Noncont r ol l i ng shar e = $12, 000 [ ( $65, 000 - $5, 000 amor t i z. ) x 20%] I ncome f r om Si p = consol i dat ed i ncome l ess P separ at e i ncome I ncome f r om Si p = $28, 000 ( $88, 000- $60, 000) Working paper entries

a

b

I nvest ment i n Si p 2, 000 Gai n on sal e of l and To r ecogni ze pr evi ousl y def er r ed gai n on sal e of l and.

2, 000

Di vi dend i ncome 4, 000 I nvest ment i n Si p To el i mi nat e i nt er company di vi dends pai d t o Si p

4, 000

c

I ncome f r om Si p 28, 000 Di vi dends 16, 000 I nvest ment i n Si p 12, 000 To el i mi nat e i ncome f r om Si p and 80% of Si p’ s di vi dends, and r et ur n t he i nvest ment i n Si p account t o t he begi nni ng- of - t heper i od bal ance under t he equi t y met hod.

d

I nvest ment i n Si p I nvest ment i n Par To el i mi nat e r eci pr ocal i nvest ment s.

100, 000 100, 000

e

50, 000 Capi t al st ock — Si p 180, 000 Ret ai ned ear ni ngs — Si p Pat ent 20, 000 I nvest ment i n Si p 195, 710 54, 290 Noncont r ol l i ng i nt er est — begi nni ng To el i mi nat e r eci pr ocal i nvest ment and equi t y account s, and ent er begi nni ng- of - t heper i od pat ent and noncont r ol l i ng i nt er est .

f

Expenses 5, 000 Pat ent To r ecor d cur r ent year ’ s amor t i zat i on of pat ent .

g

Noncont r ol l i ng I nt er est Share Di vi dends Noncont r ol l i ng I nt er est

5, 000

12, 000


4, 000 8, 000

9-22


To r ecor d t he noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends.


Chapter 9

9-23

Solution P9-6 ( cont i nued) Par Company and Subsidiary

Consol i dat i on Wor ki ng Paper s f or t he year ended December 31, 2010 Par

Adj ust ment s and El i mi nat i ons

Si p 90%

Consol i dat ed St at ement s

Income Statement

Sal es I ncome f r om Si p Di vi dend i ncome Gai n on sal e of l and Expenses Consol i dat ed net i ncome Noncont r ol l i ng shar e Cont r ol l i ng share of NI

$

140, 000 28, 000

$

80, 000*

$

88, 000

$

405, 710

$

100, 000 c

28, 000

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

4, 000

g

12, 000

a

$

240, 000

$

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

$

405, 710

2, 000

5, 000

47, 000

Retained Earnings

Ret ai ned ear ni ngs — Par

$

Ret ai ned ear ni ngs — Si p Cont r ol l i ng share of NI Di vi dends Ret ai ned earni ngs December 31

88, 000 16, 000*

180, 000

e 180, 000

47, 000 20, 000*

88, 000 c g

16, 000 4, 000

16, 000*

$

477, 710

$

207, 000

$

477, 710

$

448, 000 109, 710

$

157, 000

$

605, 000

$

15, 000 620, 000

Balance Sheet

Ot her ass et s I nvest ment i n Si p

I nvest ment i n Par Pat ent

100, 000 $

557, 710

$

80, 000 477, 710 557, 710 $

Capi t al st ock Ret ai ned earni ngs

Noncont r ol l i ng i nt erest J anuary 1 Noncont r ol l i ng i nt er est December 31

$

a 2, 000 b 4, 000 d 100, 000 c 12, 000 e 195, 710 d 100, 000 e 20, 000 f 5, 000

257, 000 50, 000 e 207, 000 257, 000

50, 000

80, 000 477, 710

e g

54, 290 8, 000 $

*

Deduct


62, 290 620, 000


9-24

Solution P9-7 Preliminary Computations

Pan’ s i nvest ment cost

$340, 000

I mpl i ed t ot al f ai r val ue of Set ( $340, 000 / 80%) Book val ue of Set Excess of f ai r val ue over book val ue - Goodwi l l

$425, 000 ( 400, 000) $ 25, 000

1

Consol i dat ed net i ncome and noncont r ol l i ng i nt erest shar e ( convent i onal appr oach) Definitions

P = Pan’ s i ncome on a consol i dat ed basi s S = Set ’ s i ncome on a consol i dat ed basi s P = $200, 000 separ at e ear ni ngs + . 8S S = $80, 000 separ at e ear ni ngs + . 1P Solve for P

P = $200, 000 + . 8( $80, 000 + . 1P) P = $200, 000 + $64, 000 + . 08P P = $286, 957 Compute S

S = $80, 000 + . 1( $286, 957) S = $108, 696 Income allocation

Consol i dat ed net i ncome ( $286, 957  90% out si de owner shi p) Noncont r ol l i ng i nt er est shar e ( $108, 696  20%) Tot al ( separ at e i ncomes) 2

$258, 261 21, 739 $280, 000

Ent r i es t o account f or i nvest ment s on an equi t y basi s Pan’s books

Capi t al st ock 120, 000 Ret ai ned ear ni ngs 40, 000 I nvest ment i n Set 160, 000 To r ecor d const r uct i ve r et i r ement of 10% of Pan’ s st ock. I nvest ment i n Set ( 80%) 58, 261 I ncome f r om Set 58, 261 To r ecor d i ncome f r om Set comput ed as f ol l ows: 80%( $108, 696) 10%( $286, 957) = $58, 261. Al t er nat i vel y $258, 261 - $200, 000 separ at e i ncome = $58, 261. Cash

32, 000 I nvest ment i n Set To r ecor d r ecei pt of 80% of Set ’ s di vi dends.

I nvest ment i n Set ( 80%) Di vi dends

32, 000

10, 000


10, 000

Chapter 9

9-25

To el i mi nat e di vi dends on st ock t hat was const r uct i vel y r et i r ed and t o adj ust t he i nvest ment i n Set account f or t he t r ansf er equal t o 10% of Pan’ s di vi dends.



9-26


Journal entries on Set’s books

I nvest ment i n Pan ( 10%) 160, 000 Ass et s 160, 000 To r ecor d acqui si t i on of a 10% i nt er est i n Pan at book val ue. I nvest ment i n Pan 28, 696 I ncome f r om Pan 28, 696 To r ecor d 10% of Pan’ s $286, 957 i ncome on a consol i dat ed basi s. Cash

10, 000 I nvest ment i n Pan ( 10%) To r ecor d r ecei pt of di vi dends f r om Pan ( $100, 000

4

Net income for 2013

Separ at e i ncomes I nvest ment i ncome Net i ncome 5

Investment balance December 31, 2013

I nvest ment s begi nni ng of 2013 Less: Const r uct i ve r et i r ement of Pan’ s st ock Add: I nvest ment i ncome Add: Di vi dends pai d t o Set Less: Di vi dends r ecei ved I nvest ment bal ances December 31, 2013 6

Stockholders’ equity December 31, 2013

St ockhol der s’ equi t y J anuar y 1, 2013 Add: Net i ncome Less: Di vi dends St ockhol der s’ equi t y December 31, 2013 7

10, 000 10%) .



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

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

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

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

Pan Set $1, 440, 000 $500, 000 258, 261 108, 696 ( 90, 000) ( 40, 000) $1, 608, 261 $568, 696

Noncontrolling interest at December 31, 2013

Set ’ s equi t y on a consol i dat ed basi s Noncont r ol l i ng i nt er est per cent age Noncont r ol l i ng i nt er est at December 31, 2013

$568, 696 20% $ 113, 739


Noncont r ol l i ng i nt erest J anuar y 1, 2013 ( $500, 000  20%) Noncont r ol l i ng i nt er est shar e ( $108, 696  20%) Noncont r ol l i ng i nt er est di vi dends Noncont r ol l i ng i nt er est at December 31, 2013

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


Chapter 9

9-27


Adjustment and elimination entries

a

I ncome f r om Pan 28, 696 Di vi dends 10, 000 I nvest ment i n Pan 18, 696 To el i mi nat e i nvest ment i ncome and di vi dends f r om Pan and r et ur n t he i nvest ment account t o i t s begi nni ng- of - t heper i od bal ance.

b

I nvest ment i n Set 160, 000 I nvest ment i n Pan 160, 000 To el i mi nat e i nvest ment i n Pan bal ance and i ncr ease t he i nvest ment i n Set f or t he const r uct i ve r et i r ement of Pan’ s st ock t hat was char ged t o t he i nvest ment i n Set account .

c

Di vi dends I nvest ment i n Set To el i mi nat e di vi dends.

10, 000 10, 000

d

I ncome f r om Set 58, 261 Di vi dends 32, 000 I nvest ment i n Set 26, 261 To el i mi nat e i ncome and di vi dends f r om Set and r et ur n t he i nvest ment i n Set t o i t s begi nni ng- of - t heper i od bal ance.

e

300, 000 Capi t al st ock — Set 200, 000 Ret ai ned ear ni ngs — Set Goodwi l l 25, 000 I nvest ment i n Set 416, 000 Noncont r ol l i ng i nt er est 109, 000 To el i mi nat e Set ’ s equi t y account bal ances and t he i nvest ment i n Set , ent er begi nni ng- of - t heper i od goodwi l l and noncont r ol l i ng i nt er est .

f

Noncont r ol l i ng i nt er est shar e 21, 739 Di vi dends 8, 000 Noncont r ol l i ng I nt er est 13, 739 To r ecor d t he noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and di vi dends.


Chp9 Beams

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