Beams11 ppt09 PDF

4/3/2017
Chapter 9
Indirect and Mutual

Holdings
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright ©2012 Pearson Education,

9-1
Inc. Publishing as Prentice Hall
Indirect and Mutual Holdings: Objectives

1. Prepare consolidated statements when the
parent controls through indirect holdings.
2. Apply consolidation procedures to the
special case of mutual holdings.

9-2
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Indirect and Mutual Holdings
1: INDIRECT HOLDINGS

9-3
Types of Indirect Holdings

Father-son-grandson Connecting Affiliates
Parent Parent
80% 80% 20%
Subsidiary A Subsidiary A Subsidiary B

40%
70%
Parent owns 80% of A,
Subsidiary B 20% of B,
and through A an additional
32% of B (80% x 40%).
Parent owns 80% of A, Parent owns a total of 52% of
and through A, B.
56% of B (80% x 70%).

9-4
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Equity Method for Father-Son-Grandson

Holdings
Son applies equity method for Investment in
Grandson
Father applies equity method for Investment in
Son
Controlling interest share of consolidated net
income includes:
 Share for direct holding of son
 Share for indirect holding of grandson (by father
through son)

9-5
Example: Father-Son-Grandson
On 1/1/11 Poe acquires 80% of Saw. On 1/1/12
Saw acquires 70% of Tub.
Earnings and dividends for 2012:
Poe Saw Tub

Separate earnings $100 $50 $40
Dividends 60 30 20

9-6
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Equity Method Entries

SAW APPLIES EQUITY METHOD (70%):
Cash (+A) 14
Investment in Tub (-A) 14
Investment in Tub (+A) 28
Income from Tub (R, +SE) 28
for dividends and for income
POE APPLIES EQUITY METHOD (80%):
Cash (+A) 24
Investment in Saw (-A) 24
Investment in Saw (+A) 62.4
Income from Saw (R, +SE) 62.4
for dividends and for income = 80% x (50+28)

9-7
Allocations to CI and NCI

Poe Saw Tub CI NCI Total
Separate income 100.0 50.0 40.0 190.0
Allocate:
Tub  28.0 (40.0) 12.0
70% Saw: 30% NCI
Saw  62.4 (78.0) 15.6
80% Poe: 20% NCI
Poe's  (162.4) 162.4
100% CI
Consolidated net
162.4 27.6 190.0
income
This allocation may look like the "step-down
method" allocation presented in cost accounting
texts. Mathematically it is!
9-8
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Allocation Results
Poe Saw Tub CI NCI Total
Separate income 100.0 50.0 40.0 190.0
Allocate:
Tub  28.0 (40.0) 12.0
70% Saw: 30% NCI
Saw  62.4 (78.0) 15.6
80% Poe: 20% NCI
Poe 
100% CI (162.4) 162.4
Consolidated net
income 162.4 27.6 190.0
On separate income statements: For consolidated statements:
Poe's net income = $162.4 Noncontrolling interest share =
Saw's "Income from Tub" = $28.0 12.0 + 15.6 = $27.6
Poe's "Income from Saw" = $62.4

9-9
Indirect Holdings with Connecting Affiliates

Indirect holdings with connecting affiliates
 Handle similar to Father-son-grandson, but
 Father has direct holdings in both Son and Grandson
Example: Pet holds 70% of Sal and 60% of Tie.
Sal holds an additional 20% of Tie.
Pet Sal Tie
Separate income $70 $35 $20
Dividends 40 20 10
Intercompany profit transactions:
 Downstream: Pet sold Sal land with a gain of $10. This will
be fully attributed to Pet.
 Upstream: Sal sold $15 inventory to Pet, and Pet holds
ending inventory with unrealized profit of $5. This will be
allocated between Pet and NCI.
9-10
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4/3/2017
Calculating Investment Balances

Sal: Tie:
Underlying equity Jan 1 Dec 31 Underlying equity Jan 1 Dec 31
Capital stock 200 200 Capital stock 100 100
Retained earnings 50 69 Retained earnings 80 90
Goodwill 12 12 Goodwill 12 12
Unrealized profit in Total 192 202
inventory (5) Split 60%:20%:20%
Subtotal (split 70:30) 276 Investment in Tie
Unrealized profit on land (10) (60%) 115.2 121.2
Total 262 266 Investment in Tie
Split 70%:30% (20%) 38.4 40.4
Investment in Sal (70%) 183.4 183.2 Noncontrolling
interest (20%) 38.4 40.4
* (70% x 276) - 10 = 183.2
Noncontrolling interest
(30%) 78.6 82.8
* 30% x 276 = 82.8

9-11
Pet Sal Tie CI NCI Total

Separate income 70.0 35.0 20.0 125.0
Unrealized $5 profit on
inventory (upstream) (5) (5)
Unrealized $10 gain on land
(downstream) (10) (10)
Allocate:
Tie  60% Pet: 20% Sal: 20% NCI 12.0 4.0 (20.0) 4.0
Sal  70% Pet: 30% NCI 23.8 (34.0) 10.2
Pet 100% CI (95.8) 95.8
Consolidated net income 95.8 14.2 110.0
Dividend distributions:
Tie  60% Pet: 20% Sal: 20% NCI 6 2 (10) 2
Sal  70% Pet: 30% NCI 14 (20) 6
Pet  100% CI (40) 40
Sal's Income from Tie = $4.0
Pet's Income from Tie = $12.0
Pet's Income from Sal = $23.8 - $10 unrealized gain = $13.8
9-12
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Worksheet Entries
Sales (-R, -SE) 15.0
Cost of sales (-E, +SE) 15.0
Cost of sales (+E, -SE) 5.0
Inventory (-A) 5.0
Gain on land (-Ga, -SE) 10.0
Plant assets (-A) 10.0
Income from Tie (-R, -SE) 16.0
Dividends (+SE) 8.0
Investment in Tie (-A) 8.0
both Sal's 20% and Pet's 80%
NCI share, Tie (-SE) 4.0
Dividends (+SE) 2.0
NCI, Tie (+SE) 2.0

9-13
Income from Sal (-R, -SE) 13.8

Investment in Sal (+A) 0.2
Dividends (+SE) 14.0
including 10 unrealized gain on land
NCI share, Sal (-SE) 10.2
Dividends (+SE) 6.0
NCI, Sal (+SE) 4.2
Capital stock, Tie (-SE) 100.0
Retained earnings, Tie (-SE) 80.0
Goodwill (+A) 12.0
Investment in Tie (Sal & Pet’s) (-A) 153.6
NCI, Tie (+SE) 38.4
Capital stock, Sal (-SE) 200.0
Retained earnings, Sal (-SE) 50.0
Goodwill (+A) 12.0
Investment in Sal (-A) 183.4
NCI, Sal (+SE) 78.6

9-14
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Consolidation Worksheet
Income statement: Pet Sal Tie DR CR Consol
Sales 200.0 150.0 100.0 15.0 435.0
Income from Sal 13.8 13.8 0.0
Income from Tie 12.0 4.0 16.0 0.0
Gain on land 10.0 10.0 0.0
Cost of sales (100.0) (80.0) (50.0) 5.0 15.0 (220.0)
Other expenses (40.0) (35.0) (30.0) (105.0)
NCI share, Sal 10.2 (10.2)
NCI share, Tie 4.0 (4.0)
Controlling interest
share 95.8 39.0 20.0 95.8

9-15
Statement of retained Pet Sal Tie DR CR Consol

earnings:
Beginning retained 223.0 50.0 80.0 80.0 223.0
earnings 50.0
Add net income 95.8 39.0 20.0 95.8
8.0
Deduct dividends (40.0) (20.0) (10.0) 2.0 (40.0)
14.0
6.0
Ending retained 278.8 69.0 90.0 278.8
earnings
Balance sheet: Pet Sal Tie DR CR Consol
Other assets 50.6 19.6 85.0 155.2
Inventories 50.0 40.0 15.0 5.0 100.0
Plant assets, net 400.0 200.0 100.0 10.0 690.0
Investment in Sal (70%) 183.2 0.2 183.4 0.0
Investment in Tie (60%, 121.2 40.4 8.0 0.0
20%) 153.6
Goodwill 12.0 24.0
12.0
Total 805.0 300.0 200.0 969.2
9-16
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4/3/2017
Pet Sal Tie DR CR Consol

Liabilities 126.2 31.0 10.0 167.2
Capital stock 400.0 200.0 100.0 100.0
200.0 400.0
Retained 278.8 69.0 90.0 278.8
earnings
2.0
Noncontrolling 4.2 123.2
interest 38.4
78.6
Total 805.0 300.0 200.0 969.2

9-17
Indirect and Mutual Holdings
2: MUTUAL HOLDINGS

9-18
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4/3/2017
Types of Mutual Holdings
Connecting affiliates
Parent mutually owned mutually owned
Parent Parent
80% 20%
80% 10%
20%
Subsidiary A Subsidiary A Subsidiary B
40%
Parent owns 80% of A and the Parent owns 80% of A and
consolidated entity holds 10% 20% of B. Subsidiary A has
of the Parent’s common stock 40% of B and Subsidiary B
in treasury has 20% of A. Simultaneous
equations will be used.

9-19
Approaches for Mutual Holdings

Two general approaches
 Treasury stock approach
 Conventional approach
If parent stock is held by subsidiary
 Use either the treasury stock or conventional
approach
If subsidiary stock is mutually held
 Use the conventional approach only

9-20
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Treasury Stock or Conventional

Treasury stock method
 Treats parent mutually held stock as treasury stock
 Parent has fewer shares outstanding
 "Interdependency" assumed eliminated by treasury
stock treatment
Conventional method for mutual holding
 Treats stock as retired
 Parent has fewer shares outstanding
 Simultaneous set of equations
 Fully recognizes interdependencies

9-21
Parent Stock Mutually Held

One or more affiliates holds parent company
stock
Treasury stock method
 Recognize treasury stock at cost of subsidiary's
investment in parent
 Reduce Investment in subsidiary
Conventional method
 Parent treats stock as retired, reducing common
stock, and additional paid in capital or retained
earnings
 Reduce Investment in subsidiary
9-22
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4/3/2017
Comparison
Both methods reduce
 Income from Subsidiary for the parent dividends
paid to subsidiary
Methods result in different:
 Equity accounts
 Treasury stock
 Retired common stock
 Consolidated retained earnings
 Noncontrolling interest

9-23
Treasury Stock Method - Data

Par owns 90% of Sal acquired at fair value
equal to cost, no goodwill. Sal owns 10% of
Par. At the start of 2012:
Investment in Sal, $297
Noncontrolling interest, $33
Sal's total stockholders' equity
 Common stock $200
 Retained earnings $130
During 2012,
Separate income: Par $60, Sal $40
Dividends: Par $30, Sal $20
9-24
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4/3/2017
Par Uses Treasury Stock Method

Allocations of income to CI and NCI:
Par Sal CI NCI Total
Separate Income 60.0 40.0 100.0
Dividend income (3.0) 3.0
Allocate:
Sal 90% Par: 10%
NCI 38.7 (43.0) 4.3
Par 100% CI (95.7) 95.7
Totals 95.7 4.3 100.0
Controlling interest share $95.7
Noncontrolling interest share $4.3
Par's Income from Sal $38.7 – 3.0 = $35.7
9-25
Par's Equity Method Entries

Cash (+A) 18.0
for dividends
Investment in Sal (+A) 38.7
Income from Sal (+R, +SE) 38.7
for income
Dividends (+SE) 3.0
for Par dividends paid to Sal
In place of the last entry, Par could record its dividend directly as:
Dividends (-SE) 27.0
Cash (-A) 30.0

9-26
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4/3/2017
Worksheet Entries
Dividends (+SE) 18.0
Noncontrolling interest share (-SE) 4.3
Dividends (+SE) 2.0
Noncontrolling interest (+SE) 2.3
Common stock (-SE) 200.0
Retained earnings (-SE) 130.0
Noncontrolling interests (+SE) 33.0
Treasury stock (-SE) 70.0
Investment in Par (-A) 70.0
9-27
Parent Mutually Held - Data

Part owns 90% of Salt acquired at fair value
equal to cost, no goodwill. Salt owns 10% of
Part. At the start of 2012:
Investment and
 Investment in Salt, $226,154 noncontrolling interest
 Investment in Part, $70,000 = 226,154 + 33,846
 Noncontrolling interest, $33,846 equals underlying equity
 Salt's total stockholders' equity less mutual holding
was $200,000 CS and $130,000 RE = 200,000+130,000-70,000.
During 2012,
 Separate income: Part $60,000, Salt $40,000
 Dividends: Part $30,000 (including $3,000 paid to
Salt), Salt $20,000
9-28
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4/3/2017
Part Uses Conventional Method

Allocation information:
Part Salt CI NCI Total
Separate Income $60,000 $40,000 $100,000
Salt's allocation .90S .10S
Part's allocation .10P .90P
Equations: Solved, substituting 2nd
P = $60,000 + .9S equation into 1st:
S = $40,000 + .1P P = 105,495
CI share = .9P
S = 50,550
NCI share = .1S
CI share = 94,945
NCI share = 5,055
Conventional method is analogous to reciprocal cost allocation method.

9-29
Note on Results:
Results:
P = 105,495
S = 50,550
CI = 94,945
NCI = 5,055
CI + NCI = $100,000, the total separate income

Part's Income from Salt = .9S - .1P = $34,945
90% of Sal's income – 10% mutual holding
CI = Part's separate income + Income from Salt
$60,000 + $34,945 = $94,945 (as a check!)
9-30
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4/3/2017
Part's Equity Method Entries
Cash (+A) 18,000

Investment in Salt (-A) 18,000
for dividends
Investment in Salt (+A) 34,945
Income from Salt (R, +SE) 34,945
for income
Dividends (-SE) 3,000
for Part dividends paid to Salt

9-31
Worksheet Entries - Conventional

Income from Salt (-R, -SE) 34,945
Dividend Income (-R, -SE) 3,000
Dividends (+SE) 18,000
Noncontrolling interest share (-SE) 5,055
Dividends (+SE) 2,000
Noncontrolling interest (+SE) 3,055
Common stock (-SE) 200,000
Retained earnings (-SE) 130,000
Noncontrolling interests (+SE) 33,846
Investment in Part (-A) 70,000
9-32
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Subsidiary Stock Mutually Held

Subsidiaries hold stock in each other
 Use conventional approach
 Treasury stock method is not appropriate
 It is not parent's stock
 Subsidiary stock is eliminated in consolidation

9-33
Subsidiary Mutual Holdings

Pal owns 80% of Set acquired at book value
plus $25,000 goodwill. Set owns 70% of Ton
acquired at book value plus $10,000 goodwill.
Ton owns 10% of Set, cost method.
At the start of 2013:

 Investment in Set (by Pal, 80%), $340,000
 Investment in Ton (by Set, 70%), $133,000
 Investment in Set (by Ton, 10%), $40,000
 Noncontrolling interest, $102,000
For 2013: Pal Set Ton
Separate income 112,000 51,000 40,000
Dividends 50,000 30,000 20,000
9-34
17
4/3/2017
Allocate Income to CI and NCI

Allocation Info. Pal Set Ton CI NCI Total
Separate income 112,000 51,000 40,000 203,000
Ton's allocation .7T .3T
Set's allocation .8S .1S .1S
Pal's allocation 1.0P
Equations: Solve, substituting 2nd equation
P = 112,000 + .8S into 3rd (or 3rd into 2nd):
S = 51,000 + .7T
T = 40,000 + .1S T = 48,495
CI = 1P S = 84,946
NCI = .3T + .1S P = 179,957
CI share = 179,957
NCI share = 14,548 + 8,495 = 23,043
9-35
A Look at the Results

Results:
T = 48,495
S = 84,946
P = 179,957
CI share = 179,957
NCI share = 14,548 + 8,495 = 23,043
Consolidated income
 CI and NCI shares = 203,000, total separate income
Intercompany income
 Pal's Income from Set = .8S = 67,957
 Set's Income from Ton = .7T = 33,946
 Ton's Dividend income = .1(Set's dividends) = 3,000
Individual reported income
 Pal's separate income + income from Set = 179,957
 Set's separate income + income from Ton = 84,946

9-36
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4/3/2017
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4/3/2017

Indirect and Mutual

Copyright ©2012 Pearson Education,

Indirect and Mutual Holdings: Objectives

Copyright ©2012 Pearson Education,

Indirect and Mutual Holdings

Copyright ©2012 Pearson Education,

Types of Indirect Holdings

80% 80% 20%

Subsidiary A Subsidiary A Subsidiary B

Copyright ©2012 Pearson Education,

Equity Method for Father-Son-Grandson

Copyright ©2012 Pearson Education,

Earnings and dividends for 2012:

Poe Saw Tub

Copyright ©2012 Pearson Education,

Equity Method Entries

Copyright ©2012 Pearson Education,

Allocations to CI and NCI

Copyright ©2012 Pearson Education,

Indirect Holdings with Connecting Affiliates

Calculating Investment Balances

Copyright ©2012 Pearson Education,

Pet Sal Tie CI NCI Total

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Income from Sal (-R, -SE) 13.8

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Copyright ©2012 Pearson Education,

Statement of retained Pet Sal Tie DR CR Consol

Pet Sal Tie DR CR Consol

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Indirect and Mutual Holdings

Copyright ©2012 Pearson Education,

Types of Mutual Holdings

Copyright ©2012 Pearson Education,

Approaches for Mutual Holdings

Copyright ©2012 Pearson Education,

Treasury Stock or Conventional

Copyright ©2012 Pearson Education,

Parent Stock Mutually Held

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Treasury Stock Method - Data

Par Uses Treasury Stock Method

Par's Equity Method Entries

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Parent Mutually Held - Data

Part Uses Conventional Method

Copyright ©2012 Pearson Education,

CI + NCI = $100,000, the total separate income

Part's Equity Method Entries

Cash (+A) 18,000

Copyright ©2012 Pearson Education,

Worksheet Entries - Conventional

Subsidiary Stock Mutually Held

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Subsidiary Mutual Holdings

At the start of 2013:

Allocate Income to CI and NCI

A Look at the Results

Copyright ©2012 Pearson Education,

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