Download - 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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Pearson Education, Inc. publishing as Prentice 9-5
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)
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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 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
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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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