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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. 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. 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. 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. Approach A
Pat Sam Stan

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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 (30,000) ($100,000  30%) Indirect noncontrolling interest in Stan’s income (14,000) ($100,000  70%  20%) Direct noncontrolling interest in Sam’s income (32,000) ($160,000  20%) Pat’s net income and controlling share of consolidated net income $384,000 Approach B Separate earnings Allocate Stan’s income to Sam ($100,000  70%) Allocate Sam’s income to Pat ($230,000  80%) Controlling share Noncontrolling interest share Pat $200,000 Sam $160,000 + 70,000 +184,000 $384,000 -184,000 $ 46,000 Stan $100,000 -70,000 0 $30,000

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Indirect and Mutual Holdings

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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. P $20,000 S1 80% $10,000 - 1,000 9,000 + 3,500 -10,000 $ 2,500 S2 70% $5,000

7 Separate earnings Deduct: Unrealized profit Separate realized earnings Allocate S2’s income Allocate S1’s income P’s net income Noncontrolling int. share

20,000 +10,000 $30,000

5,000 -3,500 0 $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. 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. 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. No. Parent dividends paid to the subsidiary are eliminated. 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. Controlling share of consolidated net income is computed as follows: P = $50,000 + .8S S = $20,000 + .1P P = $50,000 + .8($20,000 + .1P) P = $71,739 Controlling share of consolidated net income = $71,739  90% = $64,565 14 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.

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000 60.000 30 240 (762) $508 $400 Sal Tip 762 $2. Income $708 Noncontrolling interest share $ 60 Solution E9-3 Place Corporation and Subsidiaries Income Allocation Schedule for the year 2011 Lake Place Separate incomes $200. Income $293.362 (240) ____ $160 Tim $(400) 60 272 $ (68) Marsh $ 70.000  20%) Allocate Tim’s loss: (272) to Pub $(340.000 $80.000 (36.000) 20% to Marsh (12.Chapter 9 9-3 15 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.400 Controlling Share of Consol.000  60%) (60) to Tim ($300.000 Less: Unrealized profit on land _______ (20.400) $ 24.000 (57.000 $1.400 Noncontrolling interest share $12. the noncontrolling interest can be determined without use of simultaneous equations. SOLUTIONS TO EXERCISES Solution E9-1 Pen Separate earnings of the three affiliates (in thousands) Add: Dividend income from Sal’s investment in Win accounted for by the cost method ($200.600 $1.000 Allocate Lake’s income 60% to Place 36.000 12.000 ______ 70.000  15%) Allocate 60% of Tip’s earnings Allocate 60% of Sal’s earnings Controlling Share of Cons.600 © 2011 Pearson Education. publishing as Prentice Hall .000) Separate realized incomes 200. Income Noncontrolling interest share Solution E9-2 Pub Corporation and Subsidiaries Income Allocation Schedule for the year 2011 (in thousands) Sam Pub Separate earnings or loss $800 $300 Allocate Sam’s income: 180 (180) to Pub ($300.000) Allocate Marsh’s income _______ 70% to Place 57. Inc.000)  80% Controlling Share of Consol.

2.000 20.000 .000 income 70% of Son’s 80% interest in Tan’s $100.720 $ 5.000 $168. Inc.28.000 50.000 $528.000) $12.000 92.000 Sal $30.600 ________ ________ _________ + 2.800 .000 2 $ 48.000 $528.000 $112.000) Val $40.000 income 30%  80% indirect noncontrolling interest in Tan’s $100.000 $ 92.680 $ 4.000 -12.000 + $160.000 24.880 -44.000 $113.000) _______ (20.000 30.000 +28.000 $360.000 56.000 30.600 + 18.000 ________ 40.000 112.600 $ (6.880 -18.000 + $100.000 income Add: (70%  80%) of Tan’s $100.000 Less: Noncontrolling interest share Controlling interest share of Consolidated net income Alternative computation: Pin’s separate income Add: 70% of Son’s $160.000 income Total noncontrolling interest share d Consolidated net income is equal to: Combined separate incomes of $360.000 + 12.000 Won $(20.5.000 3 $620.000 + 44.5.800 + 5.000 56.000 Tea $35.000 .000 .000 © 2011 Pearson Education. publishing as Prentice Hall .000 income 20% direct noncontrolling interest in Tan’s $100.9-4 Indirect and Mutual Holdings Solution E9-4 1 c Income from Son is equal to: 70% of Son’s $160.000 income Controlling interest share of Consolidated net income Solution E9-5 Separate earnings Less: Unrealized profit Separate realized earnings Allocate Val’s income 70% to Tea Allocate Won’s income 10% to Tea 60% to Sal Allocate Tea’s income 80% to Pal 10% to Sal Allocate Sal’s income 80% to Pal Pal’s net income (or Controlling share of consolidated net income) Noncontrolling interest share Pal $ 50.000 income Income from Son d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Son’s $160.

940 $105.8%] and 10% + (10%  10%  20%) + (20%  20%) + (10%  70%) to NIS [21.2%] © 2011 Pearson Education.000 Man $18.4.300 1.000 5.240 $ 2.000 + 2.000a 30.3.000 -4.700 .000 + + - Pet Man Nun Oak Adjusted Adjustments = Income $ 65.000 14.000 divided 90% to consolidated net income (CNI) 10% to noncontrolling interest share (NIS) $30.000 28.000 12.700 3.100 + 18.100 ________ ________ Oak $9.000 -3.Chapter 9 9-5 Solution E9-6 Pet $ 65.000 $4.700 + 3.000 + 1. Inc.000 14.000 9.540 -21.540 $105.000b 5.000 - Consolidated Net Income $ 65.000 -1.000 divided (90%  70%) + (70%  20%) + (90%  10%  20%) to CNI [78.200 $ 500 -18.000 4.060 $ 6.000 .000 + 3.000 2.000 18.500 Separate earnings Unrealized profit Separate realized earnings Allocate Oak’s income 20% to Nun 70% to Man Allocate Nun’s income 70% to Pet 10% to Man Allocate Man’s income 90% to Pet Pet’s net income (or Controlling share of NI) Noncontrolling interest share Alternative solution Reported Income $65.400 6.060 $8.760 a b c $14.000 30.500 + 21.000c $114.000 Nun $28.600 23.000 divided 70% + (90%  10%) to CNI and 20% + (10%  10%) to NIS $5.240 Noncontrolling Interest = Share 0 $1. publishing as Prentice Hall .000 65.

000 $ 148.000) 2 a Separate income = net income of Van Noncontrolling interest (direct) c Total separate incomes Less: Controlling share of Consolidated net income Pan $1.000 280.200 $ 35.000  100% Sin $350.000 (252.7  $400. Inc.000 315.000 (54.200 10% 37%  46% 28% interest share $ a [See computations for question 3] d Net income of Sin Separate income Add: 70% of Tar’s $400.800 (1.000) $ 148.3  $400.000) Van $240.200 204.800 $ © 2011 Pearson Education.000 $ 762.800 (180.000 20% $ 48.000  90% Tar $400.000 3 $2.000 28.000 Deduct: 60% of Won’s $(100.000)  90%  60% Van $240.9  .240.000) $ 505.9-6 Indirect and Mutual Holdings Solution E9-7 1 b Separate income of Tar Included in consolidated net income (.000  90%  70% Win $(100.000 Net income of Sin Pan’s interest Investment increase Less: Dividends received from Sin ($200.000  90%) Net increase 5 350.000 $1.000  Tar $400.240.000 90% 685.130.000) Indirect noncontrolling interest (.000 $240.925.000 $ 120.000) 192. publishing as Prentice Hall .000  90%  80% Total noncontrolling interest share Alternative solution Sin $350.800) $ 204.000 148.000 252.000) Add: 80% of Van’s $240.000) 172.000 (60.000) Alternative solution Direct noncontrolling interest (.7  $400.000 (46.000  Total noncontrolling 4 $400.1  .000) 67.000  Won $(100.

200 $ 7.3  .000  80%) Total separate income d Separate income Unrealized profit on inventory Unrealized profit on land Separate realized income Pat $148.8($1.800 [$17.000 + ($70.($80.000) $17.000 + 30% of P P = $3.421 © 2011 Pearson Education.000 + .200.000 3 a Pat’s separate income $148.000 2.000  70%) .100 5.000 220.1) Indirect noncontrolling interest in Sam ($70.000.000 P = $5.500.800 $ 14.000  10%)]  70% Pat’s income (controlling share of consolidated net income) $220.200.000 (10.000 $260.526.($80.3P) = $3.000 + 80% of S S = Separate income of $1.000 32.76P = $4.Chapter 9 9-7 Solution E9-8 1 b Separate income of Sam (net income) Separate income of Ten $40.500.000 (15.526. Inc.000 Add: Investment income from Sam ($70.000 + $1.000 $ 80.000 .316  70% = $3.200 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 $3.316 Controlling Share of Consolidated net income = $5.000 Sam $80.24P .1) Direct noncontrolling interest in Ten ($17.000  80%) Add: Investment income from Ten 16.868.000 56. publishing as Prentice Hall .000 148.3) Noncontrolling interest share 4 $235.800 d Total separate realized income Less: Controlling share of consolidated net income Noncontrolling interest share Alternative solution Direct noncontrolling interest in Sam ($70.000 .($40.000 2 Ten $32.000) _______ $70.000 + .000.000  .100 $ 14.000.000  .000  .000 ________ $148.000  10%) Separate income of Pat $240.000 + .

7S S = $120.000 Compute P and T P = $200.7($200.000 Income Allocation Controlling share of consolidated net income (equal to P) Noncontrolling interest share in Sad ($200.000 $400.9-8 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 = $200.000 + . publishing as Prentice Hall .000 + .000  20%) Noncontrolling interest share in Two ($100.000) P = $340.000 40. Inc.08S S = $200.000 + .000 + .1($200.000 20.000 + .000) T = $100.8T T = $80.1S) S = $184.8($80.000  20%) Total consolidated income $340.000 + .000 T = $80.000 + .1S Solve for S S = $120.000 + .000 © 2011 Pearson Education.

59  75%) Noncontrolling interest — Son ($228. Inc.58  20%) Noncontrolling interest — Tin ($391.773.8[$170.72 58.000 + .59 Determine C C = $230.000 + .15($230.600 + .59 $590.175A A = $514.90) B = $228.00 © 2011 Pearson Education.25A) A = $190.58 Allocate income to controlling share of consolidated net income and noncontrolling interest Controlling Share of Consolidated net income ($647.795A = $514.Chapter 9 9-9 Solution E9-11 [AICPA adapted] 1 2 3 4 b b d 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 = $190.471.295.773.000 + .15($391.600 A = $647.000 + . publishing as Prentice Hall .90  15%) Total consolidated income $485.295.000.000 + .000 + .000 + $27.823.25A)] + .000 + .89 Determine B B = $170.03A + $161.000 + .823.59) C = $391.7($230.773.000 + .69 45.754.295.15C C = $230.823.000 + .25A Solve for A A = $190.25($647.8B + .000 + $136.7C B = $170.600 + .205A .

000  10%) Less: Excess amortization ($9.93P P = = = = $120.000 + .000 + .000) (6.300 $120.200 (6.000 56.000 $160. publishing as Prentice Hall .892 © 2011 Pearson Education.865P P S = = = = $100.000 + .700 26.600 $ 50.900 (21.000 60.85 = Noncontrolling interest share = $86.000  15%) Controlling interest share of Consolidated net income 2 b P .035 $60.300) $ 26.330 8.07P .$6.$6.670 $160.000 $178.000 x 70%) Income from Sat 2 Conventional approach $245.900 Pug’s net income and consolidated net income P = ($120.1P P P .9($60.250 Controlling Share of Consolidated net income = $178.300 S = $50.000 + $26.750 (7.500) $153.035  .$6.300 $148.750 $153.7($50.700 $159.7S) .000) 6.9-10 Indirect and Mutual Holdings Solution E9-12 1 d Combined separate income Less: Noncontrolling interest share Controlling Share of Consolidated net income Alternatively: Pet’s separate income Add: Sod’s net income of $67.705 = $86.000 6.250 $100.10 = Total consolidated income Solution E9-13 1 Treasury stock approach Investment in Sat balance December 31. 2011 Supporting computations Computation of income from Sat: Sat’s separate income Add: Sat’s dividend income from Pug Sat’s net income Pug’s ownership interest Pug’s equity in Sat’s income Less: Dividends paid to Sat ($60.15P) $154. Inc.000 + $35.000 + . 2010 Add: Income from Sat Less: Dividends received from Sat Add: Dividends paid to Sat Investment in Sat December 31.000 + .500  90% Less: Dividends received from Pet ($50.705  . 2011 Investment balance December 31.705 $151.000 + .000 6.000 + .000 70% 39.000 $257.1P) .

892  10%) . 2011 $143.903 $ 23. 2010 Add: Income from Sat Less: Dividends from Sat Investment in Sat December 31.903 19.($159. 2011 Investment in Sat December 31. publishing as Prentice Hall .903 120.000 + .797 $163.892  90%) Noncontrolling interest share ($65.300 excess Investment in Sat December 31.1($159.700 23.989 Pug’s net income and controlling share ($159.Chapter 9 9-11 S = $50.$6.000) $248.892) S = $65.903 (21.603 © 2011 Pearson Education. ($65.989  70%) .903 $245. Inc.000 $ 23.989  30%) Total income Income from Sat Controlling Share of Consolidated net income Less: Pug’s separate income Income from Sat Or alternatively.700 $143.

000) = $776.800 $ 35.$20. publishing as Prentice Hall .000 .000) © 2011 Pearson Education.(90%  70%  $20.800 Noncontrolling interest income Check: Income allocated: $776.$6.000) .000 patent = $858.000) Controlling share of net income $776.000 Sal income + $130. Inc.000 Ban $(20.000 .200 $ 52.000) + (90%  60%  $130.000) 352.000) ______ (20.000) 130.$12.000 316.000 Pad income + $300.200 noncontrolling interest share in Sal + $52.000 Controlling share of consolidated net income: $500.000) Pad $500.000) (316.000) 14.800 (40.000 $ (6.000 + 90%($300.000 realized income of Axe .000 Axe $150.$40.000 loss of Ban .000 noncontrolling interest share in Axe .800 consolidated net income + $35.9-12 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 Separate income (loss) Less: Unrealized profit Separate realized income (loss) Allocate Ban’s loss 70% to Sal Allocate Axe’s income 60% to Sal Patent Allocate Sal’s income 90% to Pad Patent 500.000 300.800) (78.$52.000 Sal $300.000 (20.000 Income to allocate: $500.000 (14.000 noncontrolling interest share (loss) in Ban = $858.000 (12.000 78.

000 Income from Sea To record investment income computed as follows: Share of Toy’s net income ($100.000 To record purchase of a 70% interest in Toy Corporation.000 Investment in Sea (80%) To record dividends received from Sea ($60.000 (20.000) $ 88.000  70%).000 Investment in Toy (70%) 35. 14.000 Income from Toy To record investment income computed as follows: Share of Toy’s net income ($60.000 $ 42.000  80%).000 Investment in Sea (80%) 88. publishing as Prentice Hall .000 Cash 294.000) $ 35.000  70%) Pot’s books Cash 48.000 © 2011 Pearson Education. Cash 14.000)  80% Less: Unrealized gain on land sold to Toy 88.Chapter 9 9-13 Solution P9-2 1 Sea’s books Investment in Toy (70%) 294.000  70%) Less: Unrealized profit from upstream sale of inventory items ($10.000 Investment in Toy (70%) To record dividends received from Toy ($20.000 + $35.000 (7.000 48.000 $108. Inc. 35.

000 35.000 (20.000 $ 2.000 $540.000 300.000+15. © 2011 Pearson Education.000 100.000 135.000 $ 27.000 $200.000 (10.000 (108. Inc.000 ___________ 315.000 108.000 300.600.000 and dividend income of $48.000) 50.000 assets at the beginning of the year.000 $460.000 $775.848.000 assets at the beginning of the period.000 + $50. plus separate earnings of $100.000) 280.288.000 (35. less investment cost of $294.000 $ 2. publishing as Prentice Hall .000 Less: Noncontrolling interest share (27.000 1.000 _______ $ 15.000. less dividends paid of $100.000) Controlling share of net income $388.9-14 Indirect and Mutual Holdings Solution P9-2 (Continued) 2 Schedule of income allocation Separate earnings Less: Unrealized profits Separate realized earnings Allocate Toy’s realized earnings to Sea ($50.000 3 Schedule of assets and equities at December 31.000) $430.000) (42.000 $ 1.000  70%) Sea’s net income Allocate Sea’s net income to Pot ($135.000) $388.000 and dividends paid of $60. 2012 Pot Assets Investment in Sea (80%) Investment in Toy (70%) Total assets Liabilities Capital stock Retained earnings Total liabilities and equity Sea Toy $540.000.000 and dividend income of $14. Sea’s assets other than investments consist of $700.000) Toy $ 60.200.000 ________ $540.000 $ Note: Pot’s assets other than investments consist of $1.000 Realized earnings ($280.000 788.288.000.000 Sea $100.000 440.000 175.000.000  80%) Pot’s net income and Controlling share of net income Noncontrolling interest share Check: Pot $300.000 + $100.000 $775.000 140. plus separate earnings of $300.000 400.000 $100.

500 (94.750 _______ 80.Chapter 9 9-15 Solution P9-3 Preliminary computations Check on consolidated net income Net income as stated Less: Investment income Separate income Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Separate realized incomes Allocate Tip’s income 50% to Pen 40% to Sir Sir’s net income Allocate Sir’s income 80% to Pen Less: Depreciation on excess allocated to plant and Equipment Total income of consolidated Entity Controlling share of NI Noncontrolling int.000) $ 30.000 (2.000 $ 150.000 / 50%) Book value of Sir Excess of fair value over book value – Goodwill Pen $184.500 2.650 $186.000) $ 25.000 65. Inc.000 / 4 yrs) Investment in Tip (50%) Implied total fair value of Tip ($75.100 (65.000 (6.100 15.250) ________ $ 15.750 171.000 _______ 108.000 (120.000 $ 525. publishing as Prentice Hall .000 (10.000) ________ $171.000 © 2011 Pearson Education.000 8.000 8.250) $186.600) ( 1.500) 205.000) 193.000 / 80%) Book value of Sir Excess of fair value over book value Excess allocated to equipment with a four year lfe Amortization ($25.000 $ 6.500 (84.000 (500.000 25.150 _______ $ 500 $420.000) 5.000 (20.250 $ 75.000) Sir $90.000 82.500) (2.000 2.000 (20.000 Tip $25. share Investment in Sir (80%) Implied total fair value of Sir ($420.000) 80.600 (5.000 Total $299.500) 100.

000 72.int.150* 500* 171.000* g h 8.000 5.int.000 $1.000 e 468.000 150.000 100. Inc.000 30. 2011 Pen Income Statement Sales Income from Sir Income from Tip Cost of sales Other expenses Noncont.000 j 10.150 $1.000 d 40.000 32.500 f 12.000 $660.000 600.000 6.159.000 50.000 12.500 a 6.000 $ 15.000* Tip $100.int.000* 90.000 508.000 140.000 $ 80.000 60.250 15.000 10.250 © 2011 Pearson Education.000 $180.000* 70.000 110.000 210.000 20.000 $210.000 130.000 72.000 220.000 $ 40.000 e 160.000 b 45.150 500 $ $ Consolidated Statements 850.000 $ 25.000 a 7.500 $ 95.shareof NI $500.000 $ 10.750 113.000 45.650 143.000 425.000 686.000 20.500 $ 90.000 Noncontrolling interest — Sir (beginning) Noncontrolling interest — Tip (beginning) Noncontrolling interest December 31 * Deduct e 117.000 b 68.9-16 Indirect and Mutual Holdings Solution P9-3 (continued) Pen Corporation and Subsidiaries Consolidation Working Papers for the year ended December 31.000 186.500 b 87.000 9.000 400.000 $ 60.000 10.000 h d a i f c c $184.250 74.000 Retained earnings Retained earnings Net income Dividends 160.000* 15.000 e 400.000 $ j i f 10.000 $ 36.000 e 25.000 70.000 100.100 a c d 9.000* g 8.share — Sir Noncont.000 171.000 200.100 Accounts payable Other liabilities Capital stock Retained earnings $ 70. publishing as Prentice Hall .000 10.000* 186.500 240.250 $ 115.000 412.500 20.500 6.000 $180.100 Retained Earnings Retained earnings — Pen — Sir — Tip $115.000 75.000 $660.000 40.000 95.000 b c 19.000 Adjustments and Eliminations 50.000 35.000 b $990.000 184.000 50.000* 160.000 30.000 115.000 Balance Sheet Cash Accounts receivable Inventories Plant and equipment — net Investment in Sir 80% Investment in Tip 50% Investment in Tip 40% Goodwill $ 67.share — Tip Cont.000 115.500 80.000* 25.000 b 100.000 $990.100 Retained earnings December 31 $220.000 18.000 60.000* Sir $300.159.250* 15.000 22.000* 251.000 600.

245 Compute T T = $50.000 + $11.98S = $110.8S + .49 T = $61.224. Inc.000 + .49 or $61.3) $320.244.000 + .224.90) + .5T S = $100.225 18.8($112.224  .5($61.000 S = $112.90) T = $50.Chapter 9 9-17 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 = $200.000 + .49) P = $320.1S Solve for S S = $100.408 11.90 or $112. publishing as Prentice Hall .408 Income allocation Controlling share of consolidated net income = P = Noncontrolling interest share in Sit ($112.224 Compute P P = $200.000 © 2011 Pearson Education.1S) S = $110.408.000 + .1($112.2($50.245  .000 + .16 or $320.224.244.000 + .244.1) Noncontrolling interest share in Tot ($61.02S .000 + .000 + .2T T = $50.367 $350.

000 .000.204.08) T = $51.5($51.000) + . publishing as Prentice Hall .9-18 Indirect and Mutual Holdings Solution P9-4 (continued) 2 P. S.8($110.020.020.673.000 + .08  10%) Noncontrolling interest share in Tot ($51.41 Compute P P = $180.673.020.000 + .8S + .02S S = $110. Equation P = ($200.12 $320.000) + .40 15.5T S = $100. Inc.1S Solve for S S = $100.2($40.2T T = ($50.48 11.204.000 + .000 + .08 Compute T T = $40.000 + .$10.48 Income allocation Controlling share of consolidated net income = P = Noncontrolling interest share in Sit ($110.$20.1S) S = $108.204.00 © 2011 Pearson Education.41  30%) $293.306.41) P = $293.08) + .000 . and T are as defined in part 2.020.204.000 + .1($110.

000 Investment in Pin To reclassify investment in Pin to treasury stock.000 Retained earnings — Sun Goodwill 50. and 90% of Sun’s dividends.000 Investment in Sun 9.000 Noncontrolling Interest 1.000 c d Noncontrolling Interest Share 3.000 Noncontrolling interest — beginning To eliminate reciprocal investment and equity accounts.000 45.000 Dividend income 10. Inc. Treasury stock 80. publishing as Prentice Hall .Chapter 9 9-19 Solution P9-5 Working paper entries a Income from Sun 27.000 Dividends 2. b 200. and enter beginning-of-the-period goodwill and noncontrolling interest. and return the investment in Sun account to the beginning-of-the-period balance under the equity method.000 Dividends 28. 80. dividend income.000 Capital stock — Sun 200. © 2011 Pearson Education.000 Investment in Sun 405.000 To eliminate income from Sun.000 To record noncontrolling interest share of subsidiary income and dividends.

000* 30.000 80.000 45.000 $ 377.000 200.000 100.000 210.9-20 Indirect and Mutual Holdings Solution P9-5 (continued) Treasury Stock approach Pin Company and Subsidiary Consolidation Working Papers for the year ended December 31.000 $ 486.000 956.000 $ 177.000 $ Noncontrolling interest January 1 Noncontrolling interest December 31 Treasury stock * Deduct b d c 80.000 $ 46.000 10.000 377.000 2.000* 170.000* a a 27.000 $ 3.000 3.000 213.000* 200.000 b 50.000* 167. Column) Dividends Retained earnings December 31 Balance Sheet Other assets Investment in Sun 90% Investment in Pin 10% Goodwill $ 300.000 414.000 $ 906.000 50.000 400.000 90.000 b 200.000 900.000 27.000 30.000 $ 300. 2013 Pin Income Statement Sales Income from Sun Dividend income Cost of sales Expenses $ 400.000 377.000* 377.000 $ 400.000* 50.000* $ Sun 90% 100.000* a d 28.000 20.000 a 9.000 b 405.000 d $ 177.000 Liabilities Capital stock Retained earnings $ $ 123.000 250.000 b 200.000 80.000 $ 420.000 $ 90. publishing as Prentice Hall .000 $ $ 50.000 Adjustments and Eliminations $ Consolidated Statements 500.000 10.000 © 2011 Pearson Education.000* 80.000 c 80.000* 956.000 $ 210.000 167.000 $ 30.000 500.000 1. Inc.000 Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pin Retained earnings — Sun Net income (Controlling share in Consol.000 $ 500.000 200.000 $ 900.

Noncontrolling Interest Share Dividends Noncontrolling Interest 12.000 [($65.000 To eliminate income from Sip and 80% of Sip’s dividends.000 + 20%  $110.$4.000 100.400 + . b Dividend income 4.000 ($88. publishing as Prentice Hall .Chapter 9 9-21 Solution P9-6 Calculations Income from Sip Par separate income (140.000 S income = $43.000 Gain on sale of land To recognize previously deferred gain on sale of land.000 .000 + 80%  ($43.000 Investment in Sip 195.000 d e 50.000 8.000-$60.000 c Income from Sip 28.000 + 3.000 . and enter beginning-of-the-period patent and noncontrolling interest.000) Sip separate income (100.000 Patent To record current year’s amortization of patent.000 4.000 S income = $65.000 .000 delayed gain on land .000 + 20%  P income) P income = $92.290 Noncontrolling interest — beginning To eliminate reciprocal investment and equity accounts.60.000 f g © 2011 Pearson Education.000 Noncontrolling share = S income  % outstanding Noncontrolling share = $12.000 Dividends 16.000 + $2.) x 20%] Income from Sip = consolidated income less P separate income Income from Sip = $28.000 Retained earnings — Sip Patent 20. Inc.000) Working paper entries a Investment in Sip 2.16  P income P income = $110.000 Investment in Sip To eliminate intercompany dividends paid to Sip 2.000 4.000 Controlling share of consolidated net income = P income  % outstanding Controlling share = $88. 100.000) $ 60.000 Capital stock — Sip 180.80.000 patent amortization (80%) S income = Sip income + % interest  P income P income = $58.710 54.000 Investment in Sip 12.000 5.$5.000 Formula: P income = Adjusted Par income + % interest  S income Adjusted Par income = $60. Investment in Sip Investment in Par To eliminate reciprocal investments. and return the investment in Sip account to the beginning-of-theperiod balance under the equity method.000 $ 43.000 amortiz. Expenses 5.

© 2011 Pearson Education.9-22 Indirect and Mutual Holdings To record the noncontrolling interest share of subsidiary income and dividends. publishing as Prentice Hall . Inc.

710 $ 88.000* 100.710 80.000 $ 62.710 $ 257.000 * Deduct © 2011 Pearson Education.000 4.000 c g 16.000 e 207.000 $ 605.000 $ 448.000 28.000 a 5.000* 180.710 $ 140.000 $ 15.000 109.290 620.000 12.000* $ 477.000 80.000 5. Inc.000 c 4.000 c 12.000 f 5.Chapter 9 9-23 Solution P9-6 (continued) Par Company and Subsidiary Consolidation Working Papers for the year ended December 31.000 d 100.710 $ 405.000 28.000 $ 47.000 20.000 620.000 477.000 80.000 e 195.710 $ 207.000 $ 16.710 d 100.000 Investment in Par Patent $ Capital stock Retained earnings $ 557.000 145.710 $ 157.710 $ Noncontrolling interest January 1 Noncontrolling interest December 31 e g 54.000 47.710 557.000 $ Sip 90% 100.290 8.000 50.000 Adjustments and Eliminations $ Consolidated Statements 240.000 b 3.000 257.000 20.000* f g $ 88.000 88.000 a 2.000 e b 4.000 100.000 16.000* e 180.000* 88.000 $ 2.000* 477.000 60.000 477. publishing as Prentice Hall .000 4.000 12.000 50. 2010 Par Income Statement Sales Income from Sip Dividend income Gain on sale of land Expenses Consolidated net income Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Par Retained earnings — Sip Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Other assets Investment in Sip $ 405.

publishing as Prentice Hall .000 Retained earnings 40. Inc.$200.000 separate earnings + .000 separate income = $58.000 + .261 21.000 32.261 Income from Set 58.1P) P = $200.000 $425.1P Solve for P P = $200.000 + $64.9-24 Indirect and Mutual Holdings Solution P9-7 Preliminary Computations Pan’s investment cost Implied total fair value of Set ($340.000 separate earnings + .957) = $58.957 Compute S S = $80.261 .000 (400.000 + .739 $280.8($80.Goodwill 1 $340.000 / 80%) Book value of Set Excess of fair value over book value .000 10.696 Income allocation Consolidated net income ($286.000 2 Entries to account for investments on an equity basis Pan’s books Capital stock 120.261 To record income from Set computed as follows: 80%($108. Cash 32.000 + .000 To record constructive retirement of 10% of Pan’s stock.000 Investment in Set 160.000 + .957) S = $108.8S S = $80.696) 10%($286. 10.261.000 Investment in Set (80%) Dividends © 2011 Pearson Education. Alternatively $258.261.000 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 Investment in Set To record receipt of 80% of Set’s dividends.1($286.957  90% outside ownership) Noncontrolling interest share ($108. Investment in Set (80%) 58.696  20%) Total (separate incomes) $258.08P P = $286.000) $ 25.

publishing as Prentice Hall . © 2011 Pearson Education.Chapter 9 9-25 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. Inc.

000) $ 178.000 To record receipt of dividends from Pan ($100.000) 58.696 20% $ 113. Pan $200.608. publishing as Prentice Hall .696 (10.000 28.000 (160. 2013 Set’s equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31.696 7 Noncontrolling interest at December 31.000 Assets 160.739 © 2011 Pearson Education. Investment in Pan 28. 2013 Add: Net income Less: Dividends Stockholders’ equity December 31. 2013 Alternative solution Noncontrolling interest January 1.261 10.440.261 108.000) $ 113. 2013 Stockholders’ equity January 1.739 $ 100.696 To record 10% of Pan’s $286.000 21.9-26 Indirect and Mutual Holdings Solution P9-7 (continued) 3 Journal entries on Set’s books Investment in Pan (10%) 160.000  10%).000) $292.739 (8.000 $500.000 58.000 28.696 4 Net income for 2013 Separate incomes Investment income Net income Investment balance December 31.000 Investment in Pan (10%) 10.000 258.261 Pan $416.000 To record acquisition of a 10% interest in Pan at book value.261 $258.696 $ 108. Cash 10. 2013 ($500.696  20%) Noncontrolling interest dividends Noncontrolling interest at December 31. 2013 5 Set $ 160.000  20%) Noncontrolling interest share ($108.000) (40. Inc.261 $ Set 80.000) $1.696 (90. 2013 Investments beginning of 2013 Less: Constructive retirement of Pan’s stock Add: Investment income Add: Dividends paid to Set Less: Dividends received Investment balances December 31.696 Income from Pan 28.957 income on a consolidated basis. 2013 $568.000 (32.261 $568.696 6 Set Pan $1. 2013 Stockholders’ equity December 31.

000 Investment in Pan 160.000 Investment in Set 26.000 Noncontrolling interest 109. e f © 2011 Pearson Education. 300. 10. Investment in Set 160.000 Retained earnings — Set Goodwill 25.000 Capital stock — Set 200.261 Dividends 32.261 To eliminate income and dividends from Set and return the investment in Set to its beginning-of-the-period balance.739 To record the noncontrolling interest share of subsidiary income and dividends.000 To eliminate Set’s equity account balances and the investment in Set. enter beginning-of-the-period goodwill and noncontrolling interest.000 10.000 b c d Income from Set 58.696 Dividends 10.000 Investment in Pan 18.000 Investment in Set 416.696 To eliminate investment income and dividends from Pan and return the investment account to its beginning-of-the-period balance. Noncontrolling interest share 21.000 Noncontrolling Interest 13.Chapter 9 9-27 Solution P9-7 (continued) 8 Adjustment and elimination entries a Income from Pan 28. Inc. publishing as Prentice Hall . Dividends Investment in Set To eliminate dividends.739 Dividends 8.000 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.