Chapter 9 INDIRECT AND MUTUAL HOLDINGS

Transcription

1 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 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 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 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 type of indirect holding where affiliates indirectly own 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 Combined separate earnings of Pat, Sam, and Stan ($200,000 + $160,000 + $100,000) $460,000 Less: Noncontrolling interest share computed as follows: Direct noncontrolling interest in Stan s income ($100,000 30%) (30,000) Indirect noncontrolling interest in Stan s income ($100,000 70% 20%) (14,000) Direct noncontrolling interest in Sam s income ($160,000 20%) (32,000) Pat s net income and controlling share of consolidated net income $384,000 Approach B Pat Sam Stan Separate earnings $200,000 $160,000 $100,000 Allocate Stan s income to Sam ($100,000 70%) + 70,000-70,000 Allocate Sam s income to Pat ($230,000 80%) +184, ,000 0 Controlling share $384,000 Noncontrolling interest share $ 46,000 $30,000 Pat Sam Stan 9-1

2 9-2 Indirect and Mutual Holdings 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 P S1 80% S2 70% Separate earnings $20,000 $10,000 $5,000 Deduct: Unrealized profit - 1,000 Separate realized earnings 20,000 9,000 5,000 Allocate S2 s income + 3,500-3,500 Allocate S1 s income +10,000-10,000 0 P s net income $30,000 Noncontrolling int. share $ 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 stockholders of the parent. 13 Controlling share of consolidated net income is computed as follows: P = $50, S S = $20, P P = $50, ($20, P) P = $71,739 Controlling share of consolidated net income = $71,739 90% = $64, 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.

3 Chapter 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 Tip Separate earnings of the three affiliates (in thousands) $1,600 $1,000 $400 Add: Dividend income from Sal s investment in Win accounted for by the cost method ($200,000 15%) 30 Allocate 60% of Tip s earnings 240 (240) Allocate 60% of Sal s earnings 762 (762) Controlling Share of Cons. Income $2,362 Noncontrolling interest share $508 $160 Solution E9-2 Pub Corporation and Subsidiaries Income Allocation Schedule for the year 2011 (in thousands) Pub Sam Tim Separate earnings or loss $800 $300 $(400) Allocate Sam s income: to Pub ($300,000 60%) 180 (180) to Tim ($300,000 20%) (60) 60 Allocate Tim s loss: to Pub $(340,000) 80% (272) 272 Controlling Share of Consol. Income $708 Noncontrolling interest share $ 60 $ (68) Solution E9-3 Place Corporation and Subsidiaries Income Allocation Schedule for the year 2011 Place Lake Marsh Separate incomes $200,000 $80,000 $ 70,000 Less: Unrealized profit on land (20,000) Separate realized incomes 200,000 60,000 70,000 Allocate Lake s income 60% to Place 36,000 (36,000) 20% to Marsh (12,000) 12,000 Allocate Marsh s income 70% to Place 57,400 (57,400) Controlling Share of Consol. Income $293,400 Noncontrolling interest share $12,000 $ 24,600

4 9-4 Indirect and Mutual Holdings Solution E9-4 1 c Income from Son is equal to: 70% of Son s $160,000 income $112,000 70% of Son s 80% interest in Tan s $100,000 income 56,000 Income from Son $168,000 2 d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Son s $160,000 income $ 48,000 20% direct noncontrolling interest in Tan s $100,000 income 20,000 30% 80% indirect noncontrolling interest in Tan s $100,000 income 24,000 Total noncontrolling interest share $ 92,000 3 d Consolidated net income is equal to: Combined separate incomes of $360,000 + $160,000 + $100,000 $620,000 Less: Noncontrolling interest share 92,000 Controlling interest share of Consolidated net income $528,000 Alternative computation: Pin s separate income $360,000 Add: 70% of Son s $160,000 income 112,000 Add: (70% 80%) of Tan s $100,000 income 56,000 Controlling interest share of Consolidated net income $528,000 Solution E9-5 Pal Sal Tea Won Val Separate earnings $ 50,000 $30,000 $35,000 $(20,000) $40,000 Less: Unrealized profit - 5,000 Separate realized earnings 50,000 30,000 30,000 (20,000) 40,000 Allocate Val s income 70% to Tea +28,000-28,000 Allocate Won s income 10% to Tea - 2, ,000 60% to Sal -12, ,000 Allocate Tea s income 80% to Pal + 44,800-44,800 10% to Sal + 5,600-5,600 Allocate Sal s income 80% to Pal + 18,880-18,880 Pal s net income (or Controlling share of consolidated net income) $113,680 Noncontrolling interest share $ 4,720 $ 5,600 $ (6,000) $12,000

5 Chapter Solution E9-6 Pet Man Nun Oak Separate earnings $ 65,000 $18,000 $28,000 $9,000 Unrealized profit - 4, ,000-4,000 Separate realized earnings 65,000 14,000 30,000 5,000 Allocate Oak s income 20% to Nun + 1,000-1,000 70% to Man + 3,500-3,500 Allocate Nun s income 70% to Pet + 21,700-21,700 10% to Man + 3,100-3,100 Allocate Man s income 90% to Pet + 18,540-18,540 Pet s net income (or Controlling share of NI) $105,240 Noncontrolling interest share $ 2,060 $ 6,200 $ 500 Alternative solution Noncontrolling Reported + Adjusted Consolidated Interest Income - Adjustments = Income - Net Income = Share Pet $65,000 $ 65,000 $ 65,000 0 Man 18,000 - $4,000 14,000a 12,600 $1,400 Nun 28, ,000 30,000b 23,700 6,300 Oak 9,000-4,000 5,000c 3,940 1,060 $114,000 $105,240 $8,760 a $14,000 divided 90% to consolidated net income (CNI) 10% to noncontrolling interest share (NIS) b $30,000 divided 70% + (90% 10%) to CNI and 20% + (10% 10%) to NIS c $5,000 divided (90% 70%) + (70% 20%) + (90% 10% 20%) to CNI [78.8%] and 10% + (10% 10% 20%) + (20% 20%) + (10% 70%) to NIS [21.2%]

6 9-6 Indirect and Mutual Holdings Solution E9-7 1 b Separate income of Tar $400,000 Included in consolidated net income (.9.7 $400,000) (252,000) $ 148,000 Alternative solution Direct noncontrolling interest (.3 $400,000) $ 120,000 Indirect noncontrolling interest (.1.7 $400,000) 28,000 $ 148,000 2 a Separate income = net income of Van $240,000 Noncontrolling interest (direct) 20% $ 48,000 3 c Total separate incomes $2,130,000 Less: Controlling share of Consolidated net income Pan $1,240, % $1,240,000 Sin $350,000 90% 315,000 Tar $400,000 90% 70% 252,000 Win $(100,000) 90% 60% (54,000) Van $240,000 90% 80% 172,800 (1,925,800) Total noncontrolling interest share $ 204,200 Alternative solution Sin $350,000 10% $ 35,000 Tar $400,000 37% 148,000 Won $(100,000) 46% (46,000) Van $240,000 28% 67,200 Total noncontrolling interest share $ 204,200 4 a [See computations for question 3] 5 d Net income of Sin Separate income $ 350,000 Add: 70% of Tar s $400, ,000 Deduct: 60% of Won s $(100,000) (60,000) Add: 80% of Van s $240, ,000 Net income of Sin $ 762,000 Pan s interest 90% Investment increase 685,800 Less: Dividends received from Sin ($200,000 90%) (180,000) Net increase $ 505,800

7 Chapter Solution E9-8 1 b Separate income of Sam (net income) $ 80,000 Separate income of Ten $40,000 - ($80,000 10%) 32,000 Separate income of Pat $240,000 - ($40,000 70%) - ($80,000 80%) 148,000 Total separate income $260,000 2 d Pat Sam Ten Separate income $148,000 $80,000 $32,000 Unrealized profit on inventory (10,000) Unrealized profit on land (15,000) Separate realized income $148,000 $70,000 $17,000 3 a Pat s separate income $148,000 Add: Investment income from Sam ($70,000 80%) 56,000 Add: Investment income from Ten [$17,000 + ($70,000 10%)] 70% 16,800 Pat s income (controlling share of consolidated net income) $220,800 4 d Total separate realized income $235,000 Less: Controlling share of consolidated net income 220,800 Noncontrolling interest share $ 14,200 Alternative solution Direct noncontrolling interest in Sam ($70,000.1) $ 7,000 Indirect noncontrolling interest in Sam ($70, ) 2,100 Direct noncontrolling interest in Ten ($17,000.3) 5,100 Noncontrolling interest share $ 14,200 Solution E9-9 P = Income of Pan on a consolidated basis (including mutual income) S = Income of Sol on a consolidated basis (including mutual income) P = Separate income of $3,000, % of S S = Separate income of $1,500, % of P P = $3,000, ($1,500, P) = $3,000,000 + $1,200, P.76P = $4,200,000 P = $5,526,316 Controlling Share of Consolidated net income = $5,526,316 70% = $3,868,421

8 9-8 Indirect and Mutual Holdings Solution E9-10 P = Pad s income on a consolidated basis S = Sad s income on a consolidated basis T = Two s income on a consolidated basis P = $200, S S = $120, T T = $80, S Solve for S S = $120, ($80, S) S = $184, S S = $200,000 Compute P and T P = $200, ($200,000) P = $340,000 T = $80, ($200,000) T = $100,000 Income Allocation Controlling share of consolidated net income (equal to P) $340,000 Noncontrolling interest share in Sad ($200,000 20%) 40,000 Noncontrolling interest share in Two ($100,000 20%) 20,000 Total consolidated income $400,000

9 Chapter Solution E9-11 [AICPA adapted] 1 b 2 b 3 d 4 c Supporting computations A = Pin s income on a consolidated basis B = Son s income on a consolidated basis C = Tin s income on a consolidated basis A = $190, B +.7C B = $170, C C = $230, A Solve for A A = $190, [$170, ($230, A)] +.7($230, A) A = $190,000 + $136,000 + $27, A + $161, A A = $514, A.795A = $514,600 A = $647, Determine C C = $230, ($647,295.59) C = $391, Determine B B = $170, ($391,823.90) B = $228, Allocate income to controlling share of consolidated net income and noncontrolling interest Controlling Share of Consolidated net income ($647, %) $485, Noncontrolling interest Son ($228, %) 45, Noncontrolling interest Tin ($391, %) 58, Total consolidated income $590,000.00

10 9-10 Indirect and Mutual Holdings Solution E d Combined separate income $160,000 Less: Noncontrolling interest share 6,750 Controlling Share of Consolidated net income $153,250 Alternatively: Pet s separate income $100,000 Add: Sod s net income of $67,500 90% 60,750 Less: Dividends received from Pet ($50,000 15%) (7,500) Controlling interest share of Consolidated net income $153,250 2 b P = $100, ($60, P).865P = $154,000 P = $178,035 S = $60,000 + $26,705 = $86,705 Controlling Share of Consolidated net income = $178,035 $151, = Noncontrolling interest share = $86, = 8,670 Total consolidated income $160,000 Solution E Treasury stock approach Investment in Sat balance December 31, 2011 Investment balance December 31, 2010 $245,700 Add: Income from Sat 26,900 Less: Dividends received from Sat (21,000) Add: Dividends paid to Sat 6,000 Investment in Sat December 31, 2011 $257,600 Supporting computations Computation of income from Sat: Sat s separate income $ 50,000 Add: Sat s dividend income from Pug 6,000 Sat s net income 56,000 Pug s ownership interest 70% Pug s equity in Sat s income 39,200 Less: Dividends paid to Sat ($60,000 10%) (6,000) Less: Excess amortization ($9,000 x 70%) (6,300) Income from Sat $ 26,900 2 Conventional approach Pug s net income and consolidated net income P = ($120, S) - $6,300 S = $50, P P = $120, ($50, P) - $6,300 P = $120,000 + $35, P - $6,300.93P = $148,700 P = $159,892

11 Chapter S = $50, ($159,892) S = $65,989 Pug s net income and controlling share ($159,892 90%) $143,903 Noncontrolling interest share ($65,989 30%) 19,797 Total income $163,700 Income from Sat Controlling Share of Consolidated net income $143,903 Less: Pug s separate income 120,000 Income from Sat $ 23,903 Or alternatively, ($65,989 70%) - ($159,892 10%) - $6,300 excess $ 23,903 Investment in Sat December 31, 2011 Investment in Sat December 31, 2010 $245,700 Add: Income from Sat 23,903 Less: Dividends from Sat (21,000) Investment in Sat December 31, 2011 $248,603

12 9-12 Indirect and Mutual Holdings SOLUTIONS TO PROBLEMS Solution P9-1 Pad Corporation and Subsidiaries Schedule to Compute Controlling Share of Consolidated Net Income and Noncontrolling Interest Share for the year 2011 Pad Sal Axe Ban Separate income (loss) $500,000 $300,000 $150,000 $(20,000) Less: Unrealized profit (20,000) Separate realized income (loss) 500, , ,000 (20,000) Allocate Ban s loss 70% to Sal (14,000) 14,000 Allocate Axe s income 60% to Sal 78,000 (78,000) Patent (12,000) 352,000 Allocate Sal s income 90% to Pad 316,800 (316,800) Patent (40,000) Controlling share of net income $776,800 Noncontrolling interest income $ 35,200 $ 52,000 $ (6,000) Check: Income allocated: $776,800 consolidated net income + $35,200 noncontrolling interest share in Sal + $52,000 noncontrolling interest share in Axe - $6,000 noncontrolling interest share (loss) in Ban = $858,000 Income to allocate: $500,000 Pad income + $300,000 Sal income + $130,000 realized income of Axe - $20,000 loss of Ban - $52,000 patent = $858,000 Controlling share of consolidated net income: $500,000 - $40, %($300,000 - $12,000) + (90% 60% $130,000) - (90% 70% $20,000) = $776,800

13 Chapter Solution P9-2 1 Sea s books Investment in Toy (70%) 294,000 Cash 294,000 To record purchase of a 70% interest in Toy Corporation. Cash 14,000 Investment in Toy (70%) 14,000 To record dividends received from Toy ($20,000 70%). Investment in Toy (70%) 35,000 Income from Toy 35,000 To record investment income computed as follows: Share of Toy s net income ($60,000 70%) $ 42,000 Less: Unrealized profit from upstream sale of inventory items ($10,000 70%) (7,000) $ 35,000 Pot s books Cash 48,000 Investment in Sea (80%) 48,000 To record dividends received from Sea ($60,000 80%). Investment in Sea (80%) 88,000 Income from Sea 88,000 To record investment income computed as follows: Share of Toy s net income ($100,000 + $35,000) 80% $108,000 Less: Unrealized gain on land sold to Toy (20,000) $ 88,000

14 9-14 Indirect and Mutual Holdings Solution P9-2 (Continued) 2 Schedule of income allocation Pot Sea Toy Separate earnings $300,000 $100,000 $ 60,000 Less: Unrealized profits (20,000) (10,000) Separate realized earnings 280, ,000 50,000 Allocate Toy s realized earnings to Sea ($50,000 70%) 35,000 (35,000) Sea s net income 135,000 Allocate Sea s net income to Pot ($135,000 80%) 108,000 (108,000) Pot s net income and Controlling share of net income $388,000 Noncontrolling interest share $ 27,000 $ 15,000 Check: Realized earnings ($280,000 + $100,000 + $50,000) $430,000 Less: Noncontrolling interest share (27,000+15,000) (42,000) Controlling share of net income $388,000 3 Schedule of assets and equities at December 31, 2012 Pot Sea Toy Assets $ 1,848,000 $460,000 $540,000 Investment in Sea (80%) 440,000 Investment in Toy (70%) 315,000 Total assets $ 2,288,000 $775,000 $540,000 Liabilities $ 300,000 $200,000 $100,000 Capital stock 1,200, , ,000 Retained earnings 788, , ,000 Total liabilities and equity $ 2,288,000 $775,000 $540,000 Note: Pot s assets other than investments consist of $1,600,000 assets at the beginning of the year, plus separate earnings of $300,000 and dividend income of $48,000, less dividends paid of $100,000. Sea s assets other than investments consist of $700,000 assets at the beginning of the period, plus separate earnings of $100,000 and dividend income of $14,000, less investment cost of $294,000 and dividends paid of $60,000.

15 Chapter Solution P9-3 Preliminary computations Check on consolidated net income Pen Sir Tip Total Net income as stated $184,500 $90,000 $25,000 $299,500 Less: Investment income (84,500) (10,000) (94,500) Separate income 100,000 80,000 25, ,000 Add: Unrealized profit in beginning inventory 8,000 8,000 Less: Unrealized profit in ending inventory (20,000) (20,000) Separate realized incomes 108,000 80,000 5, ,000 Allocate Tip s income 50% to Pen 2,500 (2,500) 40% to Sir 2,000 (2,000) Sir s net income 82,000 Allocate Sir s income 80% to Pen 65,600 (65,600) Less: Depreciation on excess allocated to plant and Equipment (5,000) ( 1,250) (6,250) Total income of consolidated Entity $186,750 Controlling share of NI $171, ,100 Noncontrolling int. share $ 15,150 $ ,650 $186,750 Investment in Sir (80%) $420,000 Implied total fair value of Sir ($420,000 / 80%) $ 525,000 Book value of Sir (500,000) Excess of fair value over book value $ 25,000 Excess allocated to equipment with a four year lfe Amortization ($25,000 / 4 yrs) $ 6,250 Investment in Tip (50%) $ 75,000 Implied total fair value of Tip ($75,000 / 50%) $ 150,000 Book value of Sir (120,000) Excess of fair value over book value Goodwill $ 30,000

16 9-16 Indirect and Mutual Holdings Solution P9-3 (continued) Pen Corporation and Subsidiaries Consolidation Working Papers for the year ended December 31, 2011 Adjustments and Eliminations Consolidated Statements Pen Sir Tip Income Statement Sales $500,000 $300,000 $100,000 h 50,000 $ 850,000 Income from Sir 72,000 d 72,000 Income from Tip 12,500 10,000 a 22,500 Cost of sales 240,000* 150,000* 60,000* i 20,000 g 8,000 h 50, ,000* Other expenses 160,000* 70,000* 15,000* f 6, ,250* Noncont.int.share Sir c 15,150 15,150* Noncont.int.share Tip c * Cont.int.shareof NI $184,500 $ 90,000 $ 25,000 $ 171,100 Retained Earnings Retained earnings Pen Retained earnings Sir Retained earnings Tip $115,500 f 12, ,000 e 160,000 45,000 b 45,000 g 8,000 $ 95,000 Net income 184,500 90,000 25, ,100 Dividends 80,000* 40,000* 10,000* a 9,000 c 9,000 d 32,000 80,000* Retained earnings December 31 $220,000 $210,000 $ 60,000 $ 186,100 Balance Sheet Cash $ 67,000 $ 36,000 $ 10,000 $ 113,000 Accounts receivable 70,000 50,000 20,000 j 10, ,000 Inventories 110,000 75,000 35,000 i 20, ,000 Plant and equipment net 140, , ,000 e 25,000 f 18, ,250 Investment in Sir 80% 508,000 Investment in Tip 50% Investment in Tip 40% d 40,000 e 468,000 95,000 a 7,500 b 87,500 74,000 a 6,000 b 68,000 Goodwill b 30,000 30,000 $990,000 $660,000 $180,000 $1,159,250 Accounts payable $ 70,000 $ 40,000 $ 15,000 j 10,000 $ 115,000 Other liabilities 100,000 10,000 5, ,000 Capital stock 600, , ,000 b 100,000 e 400, ,000 Retained earnings 220, ,000 60, ,100 $990,000 $660,000 $180,000 Noncontrolling interest Sir (beginning) e 117,000 Noncontrolling interest Tip (beginning) b 19,500 Noncontrolling interest December 31 c 6, ,150 * Deduct $1,159,250

17 Chapter Solution P9-4 1 Income allocation Definitions P = Par s income on a consolidated basis S = Sit s income on a consolidated basis T = Tot s income on a consolidated basis Equations P = $200, S +.5T S = $100, T T = $50, S Solve for S S = $100, ($50, S) S = $110, S.98S = $110,000 S = $112, or $112,245 Compute T T = $50, ($112,244.90) T = $50,000 + $11, T = $61, or $61,224 Compute P P = $200, ($112,244.90) +.5($61,224.49) P = $320, or $320,408 Income allocation Controlling share of consolidated net income = P = $320,408 Noncontrolling interest share in Sit ($112,245.1) 11,225 Noncontrolling interest share in Tot ($61,224.3) 18,367 $350,000

18 9-18 Indirect and Mutual Holdings Solution P9-4 (continued) 2 P, S, and T are as defined in part 2. Equation P = ($200,000 - $20,000) +.8S +.5T S = $100, T T = ($50,000 - $10,000) +.1S Solve for S S = $100, ($40, S) S = $108, S S = $110, Compute T T = $40, ($110,204.08) T = $51, Compute P P = $180, ($110,204.08) +.5($51,020.41) P = $293, Income allocation Controlling share of consolidated net income = P = $293, Noncontrolling interest share in Sit ($110, %) 11, Noncontrolling interest share in Tot ($51, %) 15, $320,000.00

19 Chapter Solution P9-5 Working paper entries a Income from Sun 27,000 Dividend income 10,000 Dividends 28,000 Investment in Sun 9,000 To eliminate income from Sun, dividend income, and 90% of Sun s dividends, and return the investment in Sun account to the beginning-of-the-period balance under the equity method. b Capital stock Sun 200,000 Retained earnings Sun 200,000 Goodwill 50,000 Investment in Sun 405,000 Noncontrolling interest beginning 45,000 To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period goodwill and noncontrolling interest. c Treasury stock 80,000 Investment in Pin 80,000 To reclassify investment in Pin to treasury stock. d Noncontrolling Interest Share 3,000 Dividends 2,000 Noncontrolling Interest 1,000 To record noncontrolling interest share of subsidiary income and dividends.

20 9-20 Indirect and Mutual Holdings Solution P9-5 (continued) Treasury Stock approach Pin Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2013 Adjustments and Eliminations Consolidated Statements Pin Sun 90% Income Statement Sales $ 400,000 $ 100,000 $ 500,000 Income from Sun 27,000 a 27,000 Dividend income 10,000 a 10,000 Cost of sales 200,000* 50,000* 250,000* Expenses 50,000* 30,000* 80,000* Consolidated NI 170,000 Noncontrolling share d 3,000 3,000* Controlling share of NI $ 177,000 $ 30,000 $ 167,000 Retained Earnings Retained earnings Pin $ 300,000 $ 300,000 Retained earnings Sun $ 200,000 b 200,000 Net income (Controlling 177,000 30,000 share in Consol. Column) 167,000 Dividends 100,000* 20,000* a 28,000 d 2,000 90,000* Retained earnings December 31 $ 377,000 $ 210,000 $ 377,000 Balance Sheet Other assets $ 486,000 $ 420,000 $ 906,000 Investment in Sun 90% 414,000 a 9,000 b 405,000 Investment in Pin 10% 80,000 c 80,000 Goodwill b 50,000 50,000 $ 900,000 $ 500,000 $ 956,000 Liabilities $ 123,000 $ 90,000 $ 213,000 Capital stock 400, ,000 b 200, ,000 Retained earnings 377, , ,000 $ 900,000 $ 500,000 Noncontrolling interest January 1 b 45,000 Noncontrolling interest December 31 d 1,000 46,000 Treasury stock c 80,000 80,000* $ 956,000 * Deduct

21 Chapter Solution P9-6 Calculations Income from Sip Par separate income (140,000-80,000) $ 60,000 Sip separate income (100, ,000-60,000) $ 43,000 Formula: P income = Adjusted Par income + % interest S income Adjusted Par income = $60,000 + $2,000 delayed gain on land - $4,000 patent amortization (80%) S income = Sip income + % interest P income P income = $58, % ($43, % P income) P income = $92, P income P income = $110,000 S income = $43, % $110,000 S income = $65,000 Controlling share of consolidated net income = P income % outstanding Controlling share = $88,000 Noncontrolling share = S income % outstanding Noncontrolling share = $12,000 [($65,000 - $5,000 amortiz.) x 20%] Income from Sip = consolidated income less P separate income Income from Sip = $28,000 ($88,000-$60,000) Working paper entries a Investment in Sip 2,000 Gain on sale of land 2,000 To recognize previously deferred gain on sale of land. b Dividend income 4,000 Investment in Sip 4,000 To eliminate intercompany dividends paid to Sip c Income from Sip 28,000 Dividends 16,000 Investment in Sip 12,000 To eliminate income from Sip and 80% of Sip s dividends, and return the investment in Sip account to the beginning-of-theperiod balance under the equity method. d Investment in Sip 100,000 Investment in Par 100,000 To eliminate reciprocal investments. e Capital stock Sip 50,000 Retained earnings Sip 180,000 Patent 20,000 Investment in Sip 195,710 Noncontrolling interest beginning 54,290 To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest. f Expenses 5,000 Patent 5,000 To record current year s amortization of patent. g Noncontrolling Interest Share 12,000 Dividends 4,000 Noncontrolling Interest 8,000

22 9-22 Indirect and Mutual Holdings To record the noncontrolling interest share of subsidiary income and dividends.

23 Chapter Solution P9-6 (continued) Par Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Adjustments and Eliminations Consolidated Statements Par Sip 90% Income Statement Sales $ 140,000 $ 100,000 $ 240,000 Income from Sip 28,000 c 28,000 Dividend income 4,000 b 4,000 Gain on sale of land 3,000 a 2,000 5,000 Expenses 80,000* 60,000* f 5, ,000* Consolidated net income 100,000 Noncontrolling share g 12,000 12,000* Controlling share of NI $ 88,000 $ 47,000 $ 88,000 Retained Earnings Retained earnings Par $ 405,710 $ 405,710 Retained earnings Sip $ 180,000 e 180,000 Controlling share of NI 88,000 47,000 88,000 Dividends 16,000* 20,000* c 16,000 g 4,000 16,000* Retained earnings December 31 $ 477,710 $ 207,000 $ 477,710 Balance Sheet Other assets $ 448,000 $ 157,000 $ 605,000 Investment in Sip 109,710 a 2,000 b 4,000 d 100,000 c 12,000 e 195,710 Investment in Par 100,000 d 100,000 Patent e 20,000 f 5,000 15,000 $ 557,710 $ 257,000 $ 620,000 Capital stock 80,000 50,000 e 50,000 80,000 Retained earnings 477, , ,710 $ 557,710 $ 257,000 Noncontrolling interest January 1 e 54,290 Noncontrolling interest December 31 g 8,000 62,290 $ 620,000 * Deduct

24 9-24 Indirect and Mutual Holdings Solution P9-7 Preliminary Computations Pan s investment cost $340,000 Implied total fair value of Set ($340,000 / 80%) $425,000 Book value of Set (400,000) Excess of fair value over book value - Goodwill $ 25,000 1 Consolidated net income and noncontrolling interest share (conventional approach) Definitions P = Pan s income on a consolidated basis S = Set s income on a consolidated basis P = $200,000 separate earnings +.8S S = $80,000 separate earnings +.1P Solve for P P = $200, ($80, P) P = $200,000 + $64, P P = $286,957 Compute S S = $80, ($286,957) S = $108,696 Income allocation Consolidated net income ($286,957 90% outside ownership) $258,261 Noncontrolling interest share ($108,696 20%) 21,739 Total (separate incomes) $280,000 2 Entries to account for investments on an equity basis Pan s books Capital stock 120,000 Retained earnings 40,000 Investment in Set 160,000 To record constructive retirement of 10% of Pan s stock. Investment in Set (80%) 58,261 Income from Set 58,261 To record income from Set computed as follows: 80%($108,696) - 10%($286,957) = $58,261. Alternatively $258,261 - $200,000 separate income = $58,261. Cash 32,000 Investment in Set 32,000 To record receipt of 80% of Set s dividends. Investment in Set (80%) 10,000 Dividends 10,000

25 Chapter To eliminate dividends on stock that was constructively retired and to adjust the investment in Set account for the transfer equal to 10% of Pan s dividends.

26 9-26 Indirect and Mutual Holdings Solution P9-7 (continued) 3 Journal entries on Set s books Investment in Pan (10%) 160,000 Assets 160,000 To record acquisition of a 10% interest in Pan at book value. Investment in Pan 28,696 Income from Pan 28,696 To record 10% of Pan s $286,957 income on a consolidated basis. Cash 10,000 Investment in Pan (10%) 10,000 To record receipt of dividends from Pan ($100,000 10%). 4 Net income for 2013 Pan Set Separate incomes $200,000 $ 80,000 Investment income 58,261 28,696 Net income $258,261 $ 108,696 5 Investment balance December 31, 2013 Pan Set Investments beginning of 2013 $416,000 $ 160,000 Less: Constructive retirement of Pan s stock (160,000) Add: Investment income 58,261 28,696 Add: Dividends paid to Set 10,000 Less: Dividends received (32,000) (10,000) Investment balances December 31, 2013 $292,261 $ 178,696 6 Stockholders equity December 31, 2013 Pan Set Stockholders equity January 1, 2013 $1,440,000 $500,000 Add: Net income 258, ,696 Less: Dividends (90,000) (40,000) Stockholders equity December 31, 2013 $1,608,261 $568,696 7 Noncontrolling interest at December 31, 2013 Set s equity on a consolidated basis $568,696 Noncontrolling interest percentage 20% Noncontrolling interest at December 31, 2013 $ 113,739 Alternative solution Noncontrolling interest January 1, 2013 ($500,000 20%) $ 100,000 Noncontrolling interest share ($108,696 20%) 21,739 Noncontrolling interest dividends (8,000) Noncontrolling interest at December 31, 2013 $ 113,739

27 Chapter Solution P9-7 (continued) 8 Adjustment and elimination entries a Income from Pan 28,696 Dividends 10,000 Investment in Pan 18,696 To eliminate investment income and dividends from Pan and return the investment account to its beginning-of-the-period balance. b Investment in Set 160,000 Investment in Pan 160,000 To eliminate investment in Pan balance and increase the investment in Set for the constructive retirement of Pan s stock that was charged to the investment in Set account. c Dividends 10,000 Investment in Set 10,000 To eliminate dividends. d Income from Set 58,261 Dividends 32,000 Investment in Set 26,261 To eliminate income and dividends from Set and return the investment in Set to its beginning-of-the-period balance. e Capital stock Set 300,000 Retained earnings Set 200,000 Goodwill 25,000 Investment in Set 416,000 Noncontrolling interest 109,000 To eliminate Set s equity account balances and the investment in Set, enter beginning-of-the-period goodwill and noncontrolling interest. f Noncontrolling interest share 21,739 Dividends 8,000 Noncontrolling Interest 13,739 To record the noncontrolling interest share of subsidiary income and dividends.