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Dr. M. D.

Chase
Long Beach State University
Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income
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I. DISTRIBUTIONS OF CONSOLIDATED NET INCOME
A. Basic Concept
1. Consolidated net income consists of:
--combined revenues of the parent and consolidated subsidiaries less
--combined expenses of the parent and consolidated subsidiaries adjusted by
--all nominal adjusting/elimination entries
2. Consolidated net income is then distributed to the minority interest and the controlling interest;

Note: The sum of minority interest income and controlling interest income must equal consolidated net income.

3.Minority Interest Income: That portion of the consolidated net income allocable to the minority interest shareholders. Minority
interest income may be computed as follows:
Computation of Minority Interest income

Minority Interest Income: MI% (SIGNI + Upstream Nominal Credit Adjustment - Upstream Nominal Debit Adjustments)
Where:
MI%: Minority Interest percentage of ownership of subsidiary company
SIGNI: Subsidiary Internally Generated Net Income (The income as computed by subsidiary; this computation is not

affected by any

intercompany considerations)
Upstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of upstream
(from subsidiary to parent) transactions
Upstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of upstream
(from subsidiary to parent) transactions
Note: Only upstream adjustments to nominal accounts cause any affect on these computations

4. Controlling Interest Net Income: That portion of the consolidated net income allocable to the controlling interest (Parent's)
shareholders. Controlling interest income may be computed as follows:
Computation of Controlling Interest income

Controlling Interest Income: PIGNI + P%("S" Adjusted net income) + Downstream Nominal Credit Adjustment - Downstream
Nominal Debit Adjustments
Where:
PIGNI: Parents Internally Generated Net Income (The income as computed by parent; this computation is not
intercompany considerations)
P%: Parent percentage of ownership of subsidiary company
"S" Adjusted Net Income: (SIGNI + Upstream Nominal Credit Adjustment - Upstream Nominal Debit Adjustments)
Note: This is the same computation made in MI income computation above
Downstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of

affected by any

. Investment in “S” PP&E Net 266. Include income distribution computations.....000 --Equipment is undervalued by $30. June 30.. D.000 50. M...000) Dividends Sales 4. Provide keyed explanations for all worksheet entries and key each amortization of excess separately... Any remaining excess is attributable to goodwill with a 20-year life. the nominal accounts are inside the parenthesis). 19X1....000 Goodwill “S” C/S (100......000 120. 19X1 ...000 80... Retained earnings.. for $260.. 19X1..... 3:Adjustments to nominal accounts are outside the parenthesis in Controlling Interest computations.000) (200..000 and has a 6-year remaining life.. 10.000 (600. these would typically include all elimination in the "C" and "D" entries discussed in 11B and 12B.000.000 Dividends paid. 19X1 .... the entire effect of the adjustment affects the income distribution (in the MI distribution. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 2 downstream (from parent to subsidiary) transactions Downstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of downstream (from subsidiary to parent) transactions Note 1:All elimination entries resulting from the analysis of the investment that affect nominal accounts are included.. Statement .. Illustrative Example: --Analyzing the investment --Distribution of net income "P" Company purchased an 80% interest in "S" Company on July 1.... $ 100... 2:Only downstream adjustments to nominal accounts cause any affect on these computations (the upstream adjustments affect the MI NI only).. "S" Company had the following information available: Common stock outstanding ($10 par) . 2.. P and Subsidiary “S” Partial Worksheet for Consolidated Financial Statements For Year Ended 12/31/x1 Partial Trial Balance P S Eliminations and Consolidated Minority Consolidated Adjustments Income Interest BS Dr.000 Other Expenses 100. (b) Complete the following partial worksheet for the year ended December 31.Dr. 19X1 ..000 Net income... January 1-June 30.000) “S” RE (120. On July 1.000) Cost of Sales 400. 19X1.000 150.. January 1.000) ConsNI MINI CINI Cr.. (a) Analyze the Investment (assuming the subsidiary books were not closed at the purchase date)...000 30.000 Subsidiary NI (8... Subsidiary books were not closed on the purchase date..

000 Add: Purchased Net income (.........000)+0-0 (4...000 Less: Dividends (2...000) 550..400 (b)1.000) (200....600 Accounted for as follows: To Fair Market Value Accounts: Inventory.000) ........000)...... M......400 (c) 77.000 (d) 2..000 (c) 53.000)(.000 152...2)(20.600 PP&E Net 80.000 Subsidiary NI (8..... Balance to GW 24...400 Minority Interest Consolidated BS Cr.. (a) 6..000) (114. Include income distribution computations.000+(. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 3 Requirement a: Analyze the Investment Price paid ........000 MINI (.... the purchased net income must be eliminated 182.600 2...000 150.. 19X1.........................000 Dividends 4...000 132....... Investment in “S” 266...000) (b) 96. P and Subsidiary “S” Partial Worksheet for Consolidated Financial Statements For Year Ended 12/31/x1 Partial Trial Balance P S Eliminations and Consolidated Adjustments I/S Dr.000) (b) 80.............. -0- Excess Available to non-current accounts...... $ Note: Income less dividends times percentage of ownership equals net change to retained earnings.....000 (a) 1..000 53.000 “S” RE (120....000 96....... D....600)* Interest acquired. 80.000 (b) 8.....000)+0-2...... Note: Because the investment account is being carried at cost plus the purchased net income......600 20.. -0- Liabilities...... -0- Total..000 (d)2........................000 Other Expenses 100.....600 $ 77... $ 77.....400 -0- (b) 182....8)(20.000 30..000)..600 Sales (600.. Subsidiary books were not closed on the purchase date.600 Requirement (b):Complete the following partial worksheet for the year ended December 31..000 (4...8)(10.....000 276.. -0- Adjusted Excess to account for: $ 77..000 114..000 Less interest acquired: Common stock (.600 ConsNI 110. $ 77...... Requirement (c): Present income distribution schedules for minority interest income and controlling interest income..000 x ..000) Purchased NI (800...................600 Add back pre-existing goodwill.. -0- Marketable equity securities....8) [6 yr life]...8)(120....000 Goodwill (c) 24........ therefore the percentage must taken against dividends even though "P" will not receive any of the distribution 260.......000 50........600 “S” C/S (100..000). Provide keyed explanations for all worksheet entries and key each amortization of excess separately.........600 Total accounted for...000 (a) 8.8)........... To equipment: ($30.. $ Retained earnings (1/1/x1) (...............000) CINI 100...400 Excess cost over book value ... 8....000 271......000) Cost of Sales 400. (1.........Dr....600 8.000 24..8)(100.000 53...

D. M.Dr. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 4 .

..600 (d) Amortize the excess of cost over bookvalue per the analysis: Depreciation expense-Equipment (24..... 80.................... 2.000 Goodwill............... 8..000)(.....8) [last 1/2 year only].....600 Investment in "S"...000)(..8) [first 1/2 year only].. 53.............8) (income for last 1/2 year).............. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 5 Journal entries: (a) Eliminate current year net income effects: Subsidiary Net Income (10............000) = 20..Dr...............5 yr).000 Purchased net income.............8)......8)..................000)(..400 (c) Eliminate the excess of cost over book value per the analysis: Accumulated Depreciation-Equipment.000 Dividends declared (2.................................000 Upstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of upstream (from subsidiary to parent) transactions None exist in this problem Upstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of upstream (from subsidiary to parent) transactions None exist in this problem Note: Only upstream adjustments to nominal accounts cause any affect on these computations 4.600 Investment in "S"..... M............. 96..000))(........ Controlling Interest Net Income: That portion of the consolidated net income allocable to the controlling interest (Parent's) shareholders...000 .......... 2....000 + 30...........(150..Upstream Nominal Debit Adjustments) Where: MI%: 20% SIGNI: 200........ Computation of Minority Interest income Minority Interest Income: MI% (SIGNI + Upstream Nominal Credit Adjustment ...........Downstream Nominal Debit Adjustments Where: .......................000 Dividends declared (2......................400 (b) Eliminate pro-rata share of the investment account per the analysis: "S" Common Stock (100.......... 182.............000)(...... 8........... 1.......8)..............................600 Investment in "S".......000 Accumulated depreciation-PP&E.000 "S" Retained Earnings (120............000 Requirement (c): Present income distribution schedules for minority interest income and controlling interest income.......000)(......(10.......... 1......... Controlling interest income may be computed as follows: Computation of Controlling Interest income Controlling Interest Income: PIGNI + P%("S" Adjusted net income) + Downstream Nominal Credit Adjustment ..... 24.............. D.....000/6)(.. 6...... 77.............................

M...... Purchased net income.0] = 20.400 Depreciation expense-PP&E.. the nominal accounts are inside the parenthesis)...000 + 0 ..000 . 2....(400....000) = 100.Upstream Nominal Debit Adjustments) Note: This is the same computation made in MI income computation above [20.000 Downstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of downstream (from parent to subsidiary) transactions None in this example Downstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of downstream (from subsidiary to parent) transactions Note 1:All elimination entries resulting from the analysis of the investment that affect nominal accounts are included.000 + 100.. 3:Adjustments to nominal accounts are outside the parenthesis in Controlling Interest computations....000 . Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 6 PIGNI: 600.... 6. these would typically include all elimination in the "C" and "D" entries 2:Only downstream adjustments to nominal accounts cause any affect on these computations (the upstream adjustments affect the MI NI only).. the entire effect of the adjustment affects the income distribution (in the MI distribution. D...000 P%: 80% "S" Adjusted Net Income: (SIGNI + Upstream Nominal Credit Adjustment .Dr.