beams10e_ch09 indirect and mutual holdings

7/29/2019 Beams10e_Ch09 Indirect and Mutual Holdings

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Pearson Education, Inc. publishing as Prentice 9-1

Chapter 9: Indirect and Mutual

Holdings

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

to accompany

Advanced Accounting, 10th edition

by Floyd A. Beams, Robin P. Clement,Joseph H. Anthony, and Suzanne Lowensohn


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1: Indirect Holdings1: Indirect Holdings

Indirect and Mutual Holdings


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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 sonShare for indirect holding of grandson (by

father through son)


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Example: Father-Son-Grandson

On 1/1/09 Poe acquires 80% of Shaw. On 1/1/10

Shaw acquires 70% of Turk. Earnings and

dividends for 2010 are below:

Poe Shaw Turk

Separate earnings 100 50 40

Dividends 60 30 20


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Equity Method Entries

Shaw applies equity method (70%):

Cash 14Investment in Turk 14

for dividends

Investment in Turk 28Income from Turk 28

for income

Poe applies equity method (80%):

Cash 24Investment in Shaw 24

for dividends

Investment in Shaw 62.4Income from Shaw 62.4

for income 80%(50+28)



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 Total

Separate income 100.0 50.0 40.0 190.0

Allocate:

Turk ==>70% Shaw: 30% NCI 28.0 (40.0) 12.0Shaw ==>80% Poe: 20% NCI 62.4 (78.0) 15.6

Poe's ==>CI (162.4) 162.4

Total consolidatedincome 162.4 27.6 190.0



Allocation Results

Poe Shaw Turk CI NCI Total

Separate income 100.0 50.0 40.0 190.0

Allocate:

Turk ==>

70% Shaw: 30% NCI 28.0 (40.0) 12.0

Shaw ==>80% Poe: 20% NCI 62.4 (78.0) 15.6

Poe ==>CI (162.4) 162.4

Total consolidated

income 162.4 27.6 190.0On separate income statements:

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

For consolidated statements:

Noncontrolling interest share = 12.0 + 15.6 = $27.6


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Calculating Investment Balances

Sal:

Underlying equity Jan 1 Dec 31

Capital stock 200 200

Retained earnings 50 69

Goodwill 12 12Unrealized profit ininventory (5)

Subtotal (split 70:30) 276

Unrealized 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 31

Capital stock 100 100

Retained earnings 80 90

Goodwill 12 12Total 192 202

Investment in Ty(60%) 115.2 121.2

Investment in Ty(20%) 38.4 40.4

Noncontrollinginterest (20%) 38.4 40.4


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Consolidation Worksheet

Income statement: Pet Sal Ty DR CR Consol

Sales 200.0 150.0 100.0 15.0 435.0

Income 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 0.0

Cost 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 14.2

Controlling interestshare 95.8 39.0 20.0 95.8


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2: Mutual Holdings2: 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%) of

its 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, and

through B an additional 4%

(20% x 20%)of A.

Parent

Subsidiary A

10%80%

Parent

Subsidiary A Subsidiary B

20%20%80%

40%


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Treasury Stock or Conventional

Treasury stock method

Treats parent mutually held stock as

treasury stock

Parent has fewer shares outstanding"Interdependency" assumed eliminated by

treasury stock treatment

Conventional method for mutual holding

Treats stock as retiredParent has fewer shares outstandingSimultaneous set of equationsFully 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 capital

or retained earnings

Reduce Investment in subsidiary


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Treasury Stock Method - Data

Pace owns 90% of Salt acquired at fair value

equal to cost, no goodwill. Salt owns 10% of

Pace. At the start of 2010:

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

Common stock $200

Retained earnings $130During 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 95.7

Totals 95.7 4.3 100.0


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Worksheet Entries

Income from Salt 35.7Dividends 18.0Investment in Salt 17.7

Noncontrolling interest share 4.3Dividends 2.0Noncontrolling interest 2.3

Common stock 200.0Retained earnings 130.0

Investment in Salt 297.0Noncontrolling interests 33.0

Treasury stock 70.0Investment in Pace 70.0


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Parent Mutually Held - Data

Pace2 owns 90% of Salt2 acquired at fair value

equal to cost, no goodwill. Salt owns 10% of

Pace. 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 $130,000During 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 2nd

equation into 1st:

P = 105,495

S = 50,550CI share = 94,945

NCI share = 5,055

Pace2 Uses Conventional Method

Allocation information:

Equations:

P = $60,000 + .9S

S = $40,000 + .1P

CI share = .9P

NCI 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 = 105,495

S = 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 Entries

Cash 18,000Investment in Salt2 18,000

for dividends Investment in Salt2 37,945

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

Dividends 3,000

for Pace2 dividends paid to Salt2


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Worksheet Entries - Conventional

Income from Salt2 34,945Dividends 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 296,154Noncontrolling interests 33,846

Investment in Salt2 70,000Investment in Pace2 70,000


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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

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