Beams AdvAcc11 Chapter

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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.
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
Pat
Sam
Stan
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 -184,000 0
Controlling share $384,000
Noncontrolling interest share $ 46,000 $30,000
© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-1
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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 = $50,000 + .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.

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, 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

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
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 + 2,000
60% to Sal -12,000 + 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

Chapter 9 9-5
Solution E9-6
Pet Man Nun Oak

Separate earnings $ 65,000 $18,000 $28,000 $9,000
Unrealized profit - 4,000 + 2,000 -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 + 2,000 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%]

Solution E9-7
1 b
Separate income of Tar $400,000
Included in consolidated net income (.9  .7  $400,000) (252,000)
$ 148,000
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 $1,240,000  100% $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)
Sin $350,000  10% $ 35,000
Tar $400,000  37% 148,000
Won $(100,000)  46% (46,000)
Van $240,000  28% 67,200
4 a
[See computations for question 3]
5 d
Net income of Sin
Separate income $ 350,000
Add: 70% of Tar’s $400,000 280,000
Deduct: 60% of Won’s $(100,000) (60,000)
Add: 80% of Van’s $240,000 192,000
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

Chapter 9 9-7
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
Direct noncontrolling interest in Sam ($70,000  .1) $ 7,000
Indirect noncontrolling interest in Sam
($70,000  .3  .1) 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 $3,000,000 + 80% of S
S = Separate income of $1,500,000 + 30% of P
P = $3,000,000 + .8($1,500,000 + .3P) = $3,000,000 + $1,200,000 + .24P
.76P = $4,200,000
P = $5,526,316
Controlling Share of Consolidated net income = $5,526,316  70% =
$3,868,421

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 + .7S
S = $120,000 + .8T
T = $80,000 + .1S
Solve for S
S = $120,000 + .8($80,000 + .1S)
S = $184,000 + .08S
S = $200,000
Compute P and T
P = $200,000 + .7($200,000)
P = $340,000
T = $80,000 + .1($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

Chapter 9 9-9
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 = $190,000 + .8B + .7C

B = $170,000 + .15C
C = $230,000 + .25A
Solve for A
A = $190,000 + .8[$170,000 + .15($230,000 + .25A)] + .7($230,000 + .25A)
A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175A
A = $514,600 + .205A
.795A = $514,600
A = $647,295.59
Determine C
C = $230,000 + .25($647,295.59)
C = $391,823.89
Determine B
B = $170,000 + .15($391,823.90)
B = $228,773.58
Allocate income to controlling share of consolidated net income and

noncontrolling interest
Controlling Share of Consolidated net income ($647,295.59  75%) $485,471.69

Noncontrolling interest — Son ($228,773.58  20%) 45,754.72
Noncontrolling interest — Tin ($391,823.90  15%) 58,773.59
Total consolidated income $590,000.00

Solution E9-12
1 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)
2 b
P = $100,000 + .9($60,000 + .15P)
.865P = $154,000
P = $178,035
S = $60,000 + $26,705 = $86,705
Controlling Share of Consolidated net income = $178,035  $151,330

.85 =
Noncontrolling interest share = $86,705  .10 = 8,670
Total consolidated income $160,000
Solution E9-13
1 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 = ($120,000 + .7S) - $6,300

S = $50,000 + .1P
P = $120,000 + .7($50,000 + .1P) - $6,300

P = $120,000 + $35,000 + .07P - $6,300
.93P = $148,700
P = $159,892

Chapter 9 9-11
S = $50,000 + .1($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

Add: Income from Sat 23,903
Less: Dividends from Sat (21,000)

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) 500,000 300,000 130,000 (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 - $40,000 +

90%($300,000 - $12,000) + (90%  60%  $130,000) - (90%  70%  $20,000) =
$776,800

Chapter 9 9-13
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
To record dividends received from Toy ($20,000  70%).

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%).

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

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 280,000 100,000 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 Toy (70%) ___________ 315,000 ________
Total assets $ 2,288,000 $775,000 $540,000
Liabilities $ 300,000 $200,000 $100,000

Capital stock 1,200,000 400,000 300,000
Retained earnings 788,000 175,000 140,000
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.

Chapter 9 9-15
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 25,000 205,000
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 5,000 193,000
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 $171,100 171,100
Noncontrolling int. share $ 15,150 $ 500 15,650
$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

Solution P9-3 (continued)
Pen Corporation and Subsidiaries

Consolidation Working Papers
for the year ended December 31, 2011
Adjustments and Consolidated
Pen Sir Tip Eliminations Statements
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 50,000 412,000*
Other expenses 160,000* 70,000* 15,000* f 6,250 251,250*
Noncont.int.share — Sir c 15,150 15,150*
Noncont.int.share — Tip c 500 500*
Cont.int.shareof NI $184,500 $ 90,000 $ 25,000 $ 171,100
Retained Earnings
$115,500 f 12,500
Retained earnings — Pen
g 8,000 $ 95,000
160,000 e 160,000
Retained earnings — Sir
45,000 b 45,000
Retained earnings — Tip
Net income 184,500 90,000 25,000 171,100
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 10,000 130,000
Inventories 110,000 75,000 35,000 i 20,000 200,000
Plant and
equipment — net 140,000 425,000 115,000 e 25,000 f 18,750 686,250
Investment in d 40,000
Sir 80% 508,000 e 468,000
Investment in 95,000 a 7,500
Tip 50% b 87,500
Investment in 74,000 a 6,000
Tip 40% 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 5,000 115,000
Capital stock 600,000 400,000 100,000 b 100,000
e 400,000 600,000
Retained earnings 220,000 210,000 60,000 186,100
$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 6,650 143,150
$1,159,250
* Deduct

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 + .8S + .5T
S = $100,000 + .2T
T = $50,000 + .1S
Solve for S
S = $100,000 + .2($50,000 + .1S)
S = $110,000 + .02S
.98S = $110,000
S = $112,244.90 or $112,245
Compute T
T = $50,000 + .1($112,244.90)
T = $50,000 + $11,224.49
T = $61,224.49 or $61,224
Compute P
P = $200,000 + .8($112,244.90) + .5($61,224.49)
P = $320,408.16 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

2 P, S, and T are as defined in part 2.
Equation
P = ($200,000 - $20,000) + .8S + .5T
S = $100,000 + .2T
T = ($50,000 - $10,000) + .1S
Solve for S
S = $100,000 + .2($40,000 + .1S)
S = $108,000 + .02S
S = $110,204.08
Compute T
T = $40,000 + .1($110,204.08)
T = $51,020.41
Compute P
P = $180,000 + .8($110,204.08) + .5($51,020.41)
P = $293,673.48
Income allocation
Controlling share of consolidated net income = P = $293,673.48
Noncontrolling interest share in Sit ($110,204.08  10%) 11,020.40
Noncontrolling interest share in Tot ($51,020.41  30%) 15,306.12
$320,000.00

Chapter 9 9-19
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.

Treasury Stock approach

Pin Company and Subsidiary

Pin Sun 90% Eliminations Statements
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 400,000 200,000 b 200,000 400,000
Retained earnings 377,000 210,000 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

Chapter 9 9-21
Solution P9-6
Calculations
Income from Sip
Par separate income (140,000 - 80,000) $ 60,000
Sip separate income (100,000 + 3,000 - 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 = $58,000 + 80%  ($43,000 + 20%  P income)
P income = $92,400 + .16  P income
P income = $110,000
S income = $43,000 + 20%  $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
To eliminate income from Sip and 80% of Sip’s dividends, and
return the investment in Sip account to the beginning-of-the-
period 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
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


To record the noncontrolling interest share of subsidiary income
and dividends.

Chapter 9 9-23
Par Company and Subsidiary


Par Sip 90% Eliminations Statements
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 5,000 145,000*
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 207,000 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

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 = $200,000 + .8($80,000 + .1P)
P = $200,000 + $64,000 + .08P
P = $286,957
Compute S
S = $80,000 + .1($286,957)
S = $108,696
Income allocation
Consolidated net income ($286,957  90% outside ownership) $258,261
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
To record receipt of 80% of Set’s dividends.
Investment in Set (80%) 10,000

Dividends 10,000

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.

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 258,261 108,696
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
Noncontrolling interest January 1, 2013 ($500,000  20%) $ 100,000
Noncontrolling interest dividends (8,000)
Noncontrolling interest at December 31, 2013 $ 113,739

Chapter 9 9-27
8 Adjustment and elimination entries
a Income from Pan 28,696

Dividends 10,000
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

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
To eliminate dividends.
d Income from Set 58,261

Dividends 32,000
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
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
To record the noncontrolling interest share of subsidiary
income and dividends.

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INDIRECT AND MUTUAL HOLDINGS

Combined separate earnings of Pat, Sam, and Stan

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-2 Indirect and Mutual Holdings

Separate realized earnings 20,000 9,000 5,000

11 No. Parent dividends paid to the subsidiary are eliminated.

13 Controlling share of consolidated net income is computed as follows:

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Pen Sal Tip

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-4 Indirect and Mutual Holdings

Pal Sal Tea Won Val

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Pet Man Nun Oak

Man 18,000 - $4,000 14,000a 12,600 $1,400

Nun 28,000 + 2,000 30,000b 23,700 6,300

Oak 9,000 - 4,000 5,000c 3,940 1,060

$114,000 $105,240 $8,760

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-6 Indirect and Mutual Holdings

© 2011 Pearson Education, Inc. publishing as Prentice Hall

P = Income of Pan on a consolidated basis (including mutual income)

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-8 Indirect and Mutual Holdings

P = Pad’s income on a consolidated basis

© 2011 Pearson Education, Inc. publishing as Prentice Hall

A = Pin’s income on a consolidated basis

A = $190,000 + .8B + .7C

Allocate income to controlling share of consolidated net income and

Controlling Share of Consolidated net income ($647,295.59  75%) $485,471.69

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-10 Indirect and Mutual Holdings

Controlling Share of Consolidated net income = $178,035  $151,330

1 Treasury stock approach

Investment in Sat balance December 31, 2011

Pug’s net income and consolidated net income

P = ($120,000 + .7S) - $6,300

P = $120,000 + .7($50,000 + .1P) - $6,300

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Pug’s net income and controlling share

Income from Sat

Investment in Sat December 31, 2011

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-12 Indirect and Mutual Holdings

Pad Corporation and Subsidiaries

Pad Sal Axe Ban

Less: Unrealized profit (20,000) ______

Separate realized income (loss) 500,000 300,000 130,000 (20,000)

Allocate Axe’s income

Controlling share of net income $776,800

Noncontrolling interest income $ 35,200 $ 52,000 $ (6,000)

Income allocated: $776,800 consolidated net income + $35,200 noncontrolling

Income to allocate: $500,000 Pad income + $300,000 Sal income + $130,000

Controlling share of consolidated net income: $500,000 - $40,000 +

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Investment in Toy (70%) 294,000

Investment in Toy (70%) 35,000

Investment in Sea (80%) 88,000

Share of Toy’s net income

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9-14 Indirect and Mutual Holdings

Solution P9-2 (Continued)

2 Schedule of income allocation