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Indirect and Mutual Holdings Pertemuan 15-16
Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan IITahun : 2010
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Affiliation Structures
The potential complexity of corporateaffiliation structure is limited only
by one’s imagination .
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Direct Holdings
Parent
SubsidiaryA
80%
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Direct Holdings
Parent
SubsidiaryB
70%
SubsidiaryA
80%
SubsidiaryC
90%
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Indirect Holdings
Parent
SubsidiaryA
80%
SubsidiaryB
70%
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Indirect Holdings
Parent
SubsidiaryA
SubsidiaryB
80% 20%
40%
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Mutual Holdings
Parent
SubsidiaryA
80% 10%
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Mutual Holdings
Parent
SubsidiaryA
SubsidiaryB
80% 20%
40%
20%
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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.
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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
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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
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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
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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
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Indirect Holdings –Connecting Affiliates Structure
Pet
20%Sal
70%
Ty
60%
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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
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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.
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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
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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
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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
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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
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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
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Learning Objective 2
Apply consolidated procedures of
indirect holdings to the special
case of mutual holdings.
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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.
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Mutual Holding – Parent StockHeld by Subsidiary
Treasury Stock Approach
Conventional Approach
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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.
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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
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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
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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
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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
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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
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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.
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Conventional Approach
Capital stock $500,000 $450,000Retained earnings 200,000 180,000Stockholders’ equity $700,000 $630,000
January 1, 2005 Pace Consolidated
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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
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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
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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
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Allocation of Mutual Income
P S TotalBefore allocation: $50,000 $30,000 $ 80,000After allocation: $84,615 $38,462 $123,077
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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
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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
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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
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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
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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
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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
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Subsidiary Stock Mutually Held
The mutually held stock involves subsidiariesholding the stock of each other, and the
treasury stock approach is not applicable.
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Subsidiary Stock Mutually Held
Poly
Seth
Uno
70% 10%
80%
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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).
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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.
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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
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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