indirect and mutual holdings pertemuan 15-16 mata kuliah: f0074 - akuntansi keuangan lanjutan ii...

Indirect and Mutual Holdings Pertemuan 15-16

Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan IITahun : 2010

Affiliation Structures

The potential complexity of corporateaffiliation structure is limited only

by one’s imagination .

Direct Holdings

Parent

SubsidiaryA

80%

Direct Holdings

Parent

SubsidiaryB

70%

SubsidiaryA

80%

SubsidiaryC

90%

Indirect Holdings

Parent

SubsidiaryA

80%

SubsidiaryB

70%

Indirect Holdings

Parent

SubsidiaryA

SubsidiaryB

80% 20%

40%

Mutual Holdings

Parent

SubsidiaryA

80% 10%

Mutual Holdings

Parent

SubsidiaryA

SubsidiaryB

80% 20%

40%

20%

Father-Son-Grandson Structure

Poe Corporation acquires 80% of the stockof Shaw Corporation on January 1, 2003.

Shaw acquires 70% of the stock of TurkCorporation on January 1, 2004.

Both investments are made at book value.

Father-Son-Grandson Structure

Other assets $400 $195 $190Investment in Shaw: (80%) 200 – –Investment in Turk: (70%) – 105 –

$600 $300 $190Liabilities $100 $ 50 $ 40Capital stock 400 200 100Retained earnings 100 50 50

$600 $300 $190

(in thousands) Poe Shaw Turk

Separate earnings $100 $ 50 $ 40Dividends $ 60 $ 30 $ 20

Computational Approaches forConsolidated Net Income

Poe’s separate earnings $100,000Add: Poe’s share of Shaw’s separate earnings

($50,000 × 80%) 40,000Add: Poe’s share of Turk’s separate earnings

($40,000 × 80% × 70%) 22,400Poe’s net income and consolidated net income $162,400

Computational Approaches forConsolidated Net Income

Combined separate earnings:Poe $100,000Shaw 50,000Turk 40,000 $190,000Less: Minority interest expenses:

Direct minority interest inTurk’s income ($40,000 × 30%) $ 12,000

Indirect minority interest inTurk’s income ($40,000 × 70%) 5,600

Direct minority interest inShaw’s income ($50,000 × 20%) 10,000 – 27,600

Poe’s net income and consolidated net income $162,400

Computational Approaches forConsolidated Net Income

(in thousands) Poe Shaw Turk

Separate earnings $100.0 $ 50.0 $ 40.0Allocate Turk’s income to Shaw

($40,000 × 70%) – + 28.0 – 28.0Allocate Shaw’s income to Poe

($78,000 × 80%) + 62.4 – 62.4 –Consolidated net income $162.4Minority interest expense $ 15.6 $ 12.0

Indirect Holdings –Connecting Affiliates Structure

Pet

20%Sal

70%

Ty

60%

Accounting for Connecting Affiliates

Pet 70% Pet 60% Sal 20%(in thousands) in Sal in Ty in Ty

Cost $178 $100 $20Less: Book value –168 – 90 –20Goodwill $ 10 $ 10 –Investment Balance 12/31/09Cost $178 $100 $20Add: Share of investees’ pre-2008

income less dividends 7 18 16Balance 12/31/07 $185 $118 $36

Accounting for Connecting Affiliates

Pet Sal TyEarnings (2008) $70,000 $35,000 $20,000Dividends $40,000 $20,000 $10,000

Pet’s separate earnings of $70,000 included an unrealizedgain of $10,000 from the sale of land to Sal during 2008.

Sal’s separate earnings of $35,000 included unrealizedprofit of $5,000 on inventory items sold to Pet for $15,000during 2008, and remaining in Pet’s 12/31/2008 inventory.

Accounting for Connecting Affiliates

(in thousands) Pet Sal Ty Separate earnings $70.0 $35.0 $20.0Deduct unrealized profit –10.0 – 5.0 –Separate realized earnings $60.0 $30.0 $20.0Allocate Ty’s income:

20% to Sal – + 4.0 – 4.060% to Pet +12.0 – –12.0

Allocate Sal’s income:70% to Pet +23.8 –23.8 –

Consolidated net income $95.8Minority interest expense $10.2 $ 4.0

Accounting for Connecting Affiliates

Cash 6,000Investment in Ty 6,000

To record dividends received from Ty

Investment in Ty 12,000Income from Ty 12,000

To record income from Ty

Accounting for Connecting Affiliates

Reported income ($39,000 × 70%) $27,300Less: 70% of Sal’s unrealized

profit of $5,000 – 3,500Less: 100% of unrealized gain on land –10,000Total $13,800

Accounting for Connecting Affiliates

Cash 14,000Investment in Sal 14,000

To record dividends received from Sal

Investment in Sal 13,800Income from Sal 13,800

To record income from Sal

Accounting for Connecting Affiliates

Pet’s investment Investment Investmentaccounts at 12/31/08 in Sal (70%) in Ty (60%)

Balance 12/31/2007 $185,000 $118,000Add: Investment income 13,800 12,000Deduct: Dividends – 14,000 – 6,000Balance 12/31/2008 $183,800 $124,000

Learning Objective 2

Apply consolidated procedures of

indirect holdings to the special

case of mutual holdings.

Mutual Holding – Parent StockHeld by Subsidiary

Pace

Salt

90% 10%

The 10% interest held by Salt, and the 90%interest held by Pace, are not outstanding

for consolidation purposes.

Mutual Holding – Parent StockHeld by Subsidiary

Treasury Stock Approach

Conventional Approach

Treasury Stock Approach

It considers parent company stock heldby a subsidiary to be treasury stock

of the consolidated entity.

The investment account on the books of thesubsidiary are maintained on a cost basis

and is deducted at cost from stockholders’equity in the consolidated balance sheet.

Mutual Holding – Parent StockHeld by Subsidiary

Trail balances 12/31/2005 Pace SaltDebitsOther assets $480,000 $260,000Investment in Salt (90%) 270,000 –Investment in Pace (10%) – 70,000Expenses 70,000 50,000

$820,000 $380,000CreditsCapital stock, $10 par $500,000 $200,000Retained earnings 200,000 100,000Sales 120,000 80,000

$820,000 $380,000

DebitsOther assets $480,000 $260,000Investment in Salt (90%) 270,000 –Investment in Pace (10%) – 70,000Expenses 70,000 50,000

$820,000 $380,000CreditsCapital stock, $10 par $500,000 $200,000Retained earnings 200,000 100,000Sales 120,000 80,000

$820,000 $380,000

Treasury Approach:Working Papers December 31, 2005

Adjustments/ Consol- Pace Salt Eliminations idated

SalesInvestment incomeExpensesMinority interest expenseNet incomeRetained earnings – PaceRetained earnings – Salt Add: Net incomeRetained earningsDecember 31, 2005

$120 27 (70)

$ 77 $200

77

$277

$ 80

(50)

$ 30

$100 30

$130

a 27

d 3

b 100

$200

(120) (3) $ 77 $200

77

$277

Income Statement

Treasury Approach:Working Papers December 31, 2005

Other assetsInvestment in Salt (90%)

Investment in Pace (10%)

Capital stock – PaceCapital stock – SaltRetained earnings

Treasury stockMinority interest

$480 297

$777 $500

277 $777

$260

70 $330

$200 130 $330

a 27b 270c 70

b 200

c 70b 30d 3

$740

$740 $500

277

(70)

33 $740

Balance Sheet Adjustments/ Consol-

Pace Salt Eliminations idated

Treasury Approach:Working Papers December 31, 2006

Adjustments/ Consol- Pace Salt Eliminations idated

SalesIncome from SaltDividend incomeExpensesMinority interest expenseNet incomeRetained earnings – PaceRetained earnings – SaltDividends

Add: Net incomeRetained earningsDecember 31, 2006

$140 35.7

(80)

$ 95.7$277

(27)

95.7

$345.7

$100

3 (60)

$ 43

$130 (20)

43

$153

a 35.7a 3

d 4.3

b 130 a 18 d 2

$240

(140) (4.3) $ 95.7 $277

(27) 95.7 $345.7

Income Statement

Treasury Approach:Working Papers December 31, 2006

Other assetsInvestment in Salt (90%)

Investment in Pace (10%)

Capital stock – PaceCapital stock – SaltRetained earnings

Treasury stockMinority interest

$528 317.7

$845.7 $500

345.7 $845.7

$283

70 $353

$200 153 $353

a 20.7b 297c 70

b 200

c 70b 33d 2.3

$811

$811$500

345.7

(70)

35.3$811

Balance Sheet Adjustments/ Consol-

Pace Salt Eliminations idated

Conventional Approach

It accounts for the subsidiary investment inparent company stock on an equity basis.

Parent company stock held by a subsidiaryis constructively retired.

Capital stock and retained earnings applicable tothe interest held by the subsidiary do not appear

in the consolidated financial statements.

Conventional Approach

Capital stock $500,000 $450,000Retained earnings 200,000 180,000Stockholders’ equity $700,000 $630,000

January 1, 2005 Pace Consolidated

Conventional Approach

January 1, 2005Investment in Salt 270,000

Cash 270,000To record acquisition of a 90% interest in Salt at book value

January 5, 2005Capital Stock, $10 par 50,000Retained Earnings 20,000

Investment in Salt 70,000To record the constructive retirement of 10% of Pace’soutstanding stock

Allocation of Mutual Income

Determine income on a consolidated basis.

P = Pace’s separate earnings of $50,000 + 90%S

S = Salt’s separate earnings of $30,000 + 10%P

Allocation of Mutual Income

P = $50,000 + 0.9($30,000 + 0.1P)

P = $50,000 + $27,000 + 0.09P

0.91P = $77,000 P = $84,615

S = $30,000 + 0.1($84,615)

S = $30,000 + $8,462 = $38,462

Allocation of Mutual Income

P S TotalBefore allocation: $50,000 $30,000 $ 80,000After allocation: $84,615 $38,462 $123,077

Allocation of Mutual Income

Determine Pace’s net income on anequity basis and minority interest.

P = 84,615 × 90% = $76,154

MI = 38,462 × 10% = $3,846

$76,154 + $3,846 = $80,000

Accounting for Mutual Income

($38,462 × 90%) – ($84,615 × 10%) = $26,154

How does Pace record its investment income?

Investment in Salt 26,154Income from Salt 26,154

To record income from Salt

Conventional Approach:Working Papers December 31, 2005 Adjustments/ Consol-

Pace Salt Eliminations idatedSalesInvestment incomeExpensesMinority interest expenseNet incomeRetained earnings – PRetained earnings – SAdd: Net incomeRetained earningsDecember 31, 2005

$120,000 26,154 (70,000)

$ 76,154$180,000

76,154

$256,154

$ 80,000

(50,000)

$ 30,000

$100,000 30,000

$130,000

b 26,154

d 3,846

c 100,000

$200,000

(120,000) (3,846)

$ 76,154$180,000 76,154

$256,154

Income Statement

Conventional Approach:Working Papers December 31, 2005

Other assetsInvestment in S

Investment in P

Capital stock – PCapital stock – SRetained earnings

Minority interest

$480,000 226,154

$756,154$450,000

256,154

$706,154

$260,000

70,000$330,000

$200,000 130,000

$330,000

a 70,000 b 26,154 c 270,000 a 70,000

c 200,000

b 30,000 d 3,846

$740,000

$740,000$450,000

256,154

33,846$740,000

Balance Sheet Adjustments/ Consol-

Pace Salt Eliminations idated

Conversion to Equity Method onSeparate Company Book

P S TotalSeparate earnings 2005 $ 50,000 $ 30,000 $ 80,000Separate earnings 2006 + 60,000 + 40,000 + 100,000Less dividends declared – 30,000 – 20,000 – 50,000Add dividends received + 18,000 + 3,000 + 21,000Increase in net assets $ 98,000 $ 53,000 $ 151,000

Conversion to Equity Method onSeparate Company Book

P = $98,000 + 0.9S S = $53,000 + 0.1P

P = $98,000 + 0.9($53,000 + 0.1P) = $160,110

Pace’s RE increase: $160,110 × 90% = $144,099

MI RE increase: 69,011 × 10% = $6,901

Net asset increase: $144,099 + $6,901= $151,000

S = $53,000 + (0.1 × $160,110) = $69,011

Subsidiary Stock Mutually Held

The mutually held stock involves subsidiariesholding the stock of each other, and the

treasury stock approach is not applicable.

Subsidiary Stock Mutually Held

Poly

Seth

Uno

70% 10%

80%

Subsidiary Stock Mutually Held

Poly acquired 80% interest in Seth onJanuary 2, 2005, for $260,000 ($20,000 goodwill).

Seth’s stockholders’ equity consisted of $200,000capital stock and $100,000 retained earnings.

Seth acquired 70% interest in Uno onJanuary 3, 2006, for $115,000 ($10,000 goodwill).

Subsidiary Stock Mutually Held

Uno’s stockholders’ equity consisted of $100,000capital stock and $50,000 retained earnings.

Uno acquired 10% interest in Seth onDecember 31, 2006, for $40,000.

Seth’s stockholders’ equity consisted of $200,000capital stock and $200,000 retained earnings.

Subsidiary Stock Mutually Held

Cash $ 64 $ 40 $ 20Other current assets 200 85 80Plant and equipment – net 500 240 110Investment in Seth (80%) 336 – –Investment in Uno (70%) – 135 –Investment in Seth (10%) – – 40 Total $1,100 $500 $250Liabilities $ 200 $100 $ 70Capital stock 500 200 100Retained earnings 400 200 80 Total $1,100 $500 $250

(in thousands 12/31/2006) Poly Seth Uno

Subsidiary Stock Mutually Held

Poly 80% Seth 70% Uno 10% in Seth in Uno in Seth

Cost $260,000 $115,000 $40,000Add: Income less dividends (2005) 32,000 – –Add: Income less dividends (2006) 48,000 21,000 – Balance 12/31/2006 $340,000 $136,000 $40,000