Advanced Accounting: Indirect and Mutual Holdings

Advanced Accounting
Thirteenth Edition, Global Edition
Chapter 9
Indirect and Mutual
Holdings
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Indirect and Mutual Holdings: Objectives
9.1 Prepare consolidated statements when a parent
company controls a subsidiary company through
indirect holdings.
9.2 Apply consolidation procedures to the special case of
mutual holdings.

9.1: Indirect Holdings
Indirect and Mutual Holdings

Types of Indirect Holdings
Father-son-grandson Connecting Affiliates
Parent Parent
80%
80% 20%
Subsidiary A
Subsidiary A Subsidiary B
70%
40%
Subsidiary B
Parent owns 80% of A, 20% of B,

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

Example: Father-Son-Grandson
On 1/1/16 Pop acquires 80% of Son. On 1/1/17 Son

acquires 70% of Toy.
Earnings and dividends for 2017:
Blank Pop Son Toy

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

Equity Method Entries
Son APPLIES EQUITY METHOD (70%) blank blank
Cash (+A) 14
Investment in Toy (-A) blank 14
Investment in Toy (+A) 28 blank
Income from Toy (R, +SE) blank 28
for dividends and for income blank blank
Pop APPLIES EQUITY METHOD (80%) blank blank
Cash (+A) 24 blank
Investment in Son (-A) blank 24
Investment in Son (+A) 62.4 blank
Income from Son (R, +SE) blank 62.4
for dividends and for income = 80% x (50+28) blank blank

Allocations to CI and NCI
blank Pop Son Toy CI NCI Total
Separate income 100.0 50.0 40.0 blank blank 190.0
Allocate blank blank blank blank blank blank

Toy ➔ 28.0 (40.0) blank 12.0 blank
70% Son: 30% NCI blank
Son ➔ 62.4 (78.0) blank blank 15.6

80% Pop: 20% NCI blank
Pop's ➔ (162.4) blank blank 162.4 blank blank

100% CI
Consolidated net blank blank blank
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!

Allocation Results
blank
Pop Son Toy CI NCI Total
Allocate blank blank blank blank blank blank
Toy ➔ 28.0 (40.0) blank 12.0 blank
70% Son: 30% NCI blank
Son ➔
62.4 (78.0) blank blank 15.6 blank
80% Pop: 20% NCI
Pop's ➔ (162.4) blank blank 162.4 blank blank
100% CI
Consolidated net blank blank blank
162.4 27.6 190.0
income
● On separate income statements: ● For consolidated statements:

Pop's net income = $162.4 Noncontrolling interest share =
Son's "Income from Toy" = $28.0 12.0 + 15.6 = $27.6
Pop's "Income from Son" = $62.4

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.
blank Pet Sal Tie

Separate income $70 $35 $20
Dividends 40 20 10

Indirect Holdings with Connecting
Affiliates (continued)
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.

Calculating Investment Balances
Sal blank blank Tie blank blank
Underlying equity Jan 1 Dec 31
Underlying equity Jan 1 Dec 31
Capital stock 200 200
Retained earnings 50 69 Capital stock 100 100
Goodwill 12 12 Retained earnings 80 90

Unrealized profit in
inventory blank (5) Goodwill 12 12
Subtotal (split 70:30) blank 276 Total 192 202
Unrealized profit on land blank (10)
Split 60%:20%:20% blank blank
Total 262 266
Investment in Tie
Split 70%:30% blank blank (60%) 115.2 121.2
Investment in Sal (70%) 183.4 183.2 Investment in Tie
(20%) 38.4 40.4
* (70% x 276) - 10 = 183.2 blank blank Noncontrolling interest
Noncontrolling interest (20%) 38.4 40.4
(30%) 78.6 82.8
* 30% x 276 = 82.8 blank blank

Separate Income
Pet Sal Tie CI NCI Total
Unrealized $5 profit on inventory
(upstream) blank (5) blank blank blank (5)
Unrealized $10 gain on land (downstream) (10) blank blank blank blank (10)
Allocate: blank blank blank blank blank blank
Tie ➔ 60% Pet: 20% Sal: 20% NCI 12.0 4.0 (20.0) blank 4.0 blank
Sal ➔ 70% Pet: 30% NCI 23.8 (34.0) blank blank 10.2 blank
Pet ➔100% CI (95.8) blank blank 95.8 blank blank

Consolidated net income blank blank blank 95.8 14.2 110.0
Dividend distributions: blank blank blank blank blank blank
Tie ➔ 60% Pet: 20% Sal: 20% NCI 6 2 (10) blank 2 blank
Sal ➔ 70% Pet: 30% NCI 14 (20) blank blank 6 blank
Pet ➔ 100% CI (40) blank blank 40 blank blank
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

Worksheet Entries (1 of 2)
Sales (-R, -SE) 15.0 blank
Cost of sales (-E, +SE) blank 15.0
Cost of sales (+E, -SE) 5.0 blank
Inventory (-A) blank 5.0
Gain on land (-Ga, -SE) 10.0 blank
Plant assets (-A) blank 10.0
Income from Tie (-R, -SE) 16.0 blank
Dividends (+SE) blank 8.0
Investment in Tie (-A) blank 8.0
both Sal's 20% and Pet's 80% blank blank
NCI share, Tie (-SE) 4.0 blank
NCI, Tie (+SE) blank 2.0

Worksheet Entries (2 of 2)
Income from Sal (-R, -SE) 13.8 blank
Investment in Sal (+A) 0.2 blank
including 10 unrealized gain on land blank blank
NCI share, Sal (-SE) 10.2 blank
NCI, Sal (+SE) blank 4.2
Capital stock, Tie (-SE) 100.0 blank
Retained earnings, Tie (-SE) 80.0 blank
Goodwill (+A) 12.0 blank
Investment in Tie (Sal & Pet’s) (-A) blank 153.6
NCI, Tie (+SE) blank 38.4
Capital stock, Sal (-SE) 200.0 blank
Retained earnings, Sal (-SE) 50.0 blank
Goodwill (+A) 12.0 blank
Investment in Sal (-A) blank 183.4
NCI, Sal (+SE) blank 78.6

Consolidation Worksheet (1 of 3)
Income statement Pet Sal Tie DR CR Consol
Sales 200.0 150.0 100.0 15.0 blank 435.0
Income from Sal 13.8 blank blank 13.8 blank 0.0
Income from Tie 12.0 4.0 blank 16.0 blank 0.0
Gain on land 10.0 blank blank 10.0 blank 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) blank blank (105.0)
NCI share, Sal blank blank blank 10.2 blank (10.2)
NCI share, Tie blank blank blank 4.0 blank (4.0)
Controlling interest
share 95.8 39.0 20.0 blank blank 95.8

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

Blank Pet Sal Tie DR CR Consol
Liabilities 126.2 31.0 10.0 blank blank 167.2
100.0
Capital stock 400.0 200.0 100.0 200.0 blank 400.0
Retained earnings 278.8 69.0 90.0 blank blank 278.8
2.0
4.2
Noncontrolling 38.4
interest blank blank blank blank 78.6 123.2
Total 805.0 300.0 200.0 blank blank 969.2

9.2: Mutual Holdings
Indirect and Mutual Holdings

Types of Mutual Holdings
Parent mutually owned Connecting affiliates

mutually owned
Parent Parent
80% 10% 20%
80%
20%
Subsidiary A Subsidiary A Subsidiary B
40%
Parent owns 80% of A and Parent owns 80% of A and

the consolidated entity 20% of B. Subsidiary A has
holds 10% of the Parent’s 40% of B and Subsidiary B
common stock in treasury. has 20% of A. Simultaneous
equations will be used.

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 the
conventional approach
If subsidiary stock is mutually held
– Use the conventional approach only

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
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

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

Treasury Stock Method - Data
Pam owns 90% of Sun acquired at fair value equal to
cost, no goodwill. Sun owns 10% of Pam. At the
start of 2016:
Investment in Sun, $270
Sun's total stockholders' equity
– Common stock $200
– Retained earnings $100
During 2016,
Separate income: Pam $60, Sun $40
Dividends: Pam $30, Sun $20

Pam Uses Treasury Stock Method
Allocations of income to CI and NCI:
blank Pam Sun CI NCI Total
Separate Income 60.0 40.0 blank blank 100.0
Dividend income (3.0) 3.0 blank blank blank
Allocate blank blank blank blank blank
Sun➔ 90% Par: 10% 38.7 (43.0) blank 4.3 blank
Pam➔ 100% CI (95.7) blank 95.7 blank blank
Totals blank blank 95.7 4.3 100.0
Controlling interest share $95.7

Noncontrolling interest share $4.3
Pam's Income from Sun $38.7 – 3.0 = $35.7

Pam's Equity Method Entries (1 of 2)
Cash (+A) 18.0 blank
Investment in Sun (-A) blank 18.0
for dividends blank blank
Investment in Sun (+A) 38.7 blank
Income from Sun (+R, +SE) blank 38.7
for income blank blank
Income from Sun (-R, -SE) 3.0 blank
for Pam dividends paid to Sun blank blank
In place of the last entry, Pam could record its

dividend directly as:
Dividends (-SE) 27.0 blank
Cash (-A) blank 30.0

Worksheet Entries
Noncontrolling interest share (-SE) 4.3 blank
Noncontrolling interest (+SE) blank 2.3
Common stock (-SE) 200.0 blank
Retained earnings (-SE) 130.0 blank
Noncontrolling interests (+SE) blank 33.0
Treasury stock (-SE) 70.0 blank
Investment in Pam (-A) blank 70.0

Parent Mutually Held - Data
Pam owns 90% of Sun acquired at fair value equal to
cost, no goodwill. Sage owns 10% of Park. At the
start of 2016: Investment and noncontrolling
interest
– Investment in Sun, $226,154 = 226,154 + 33,846
– Investment in Pam, $70,000
equals underlying equity less
– Noncontrolling interest, $33,846 mutual holding
– Sun's total stockholders' equity = 200,000+130,000-70,000.
was $200,000 CS and $100,000 RE
During 2016,
– Separate income: Pam $60,000, Sun $40,000
– Dividends: Pam $30,000 (including $3,000 paid to Sun),
Sun $20,000

Pam Uses Conventional
Method
Allocation information:
blank Pam Sun CI NCI Total
Separate Income $60,000 $40,000 blank blank $100,000
Sun's allocation .90S blank blank .10S blank
Pam's allocation blank .10P .90P blank blank
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.

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

Pam's Income from Sun = .9S - .1P = $34,945
90% of Sun's income – 10% mutual holding
CI = Pam's separate income + Income from Sun
$60,000 + $34,945 = $94,945 (as a check!)

Pam's Equity Method Entries (2 of 2)
Cash (+A) 18,000 blank
Investment in Sun (-A) blank 18,000
for dividends blank blank
Investment in Sun (+A) 34,945 blank
Income from Sun (R, +SE) blank 34,945
for income blank blank
Dividends (-SE) blank 3,000
for Pam dividends paid to Sun blank blank

Worksheet Entries - Conventional
Income from Sun (-R, -SE) 34,945 blank
Dividend Income (-R, -SE) 3,000 blank
Dividends (+SE) blank 18,000
Noncontrolling interest share (-SE) 5,055 blank
Dividends (+SE) blank 2,000
Noncontrolling interest (+SE) blank 3,055
Common stock (-SE) 200,000 blank
Retained earnings (-SE) 130,000 blank
Noncontrolling interests (+SE) blank 33,846
Investment in Pam (-A) blank 70,000

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.

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 2016:

– 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 2016:
Blank Pal Set Ton
Separate income 112,000 51,000 40,000
Dividends 50,000 30,000 20,000

Allocate Income to CI and NCI
Allocation Info. Pal Set Ton CI NCI Total
Separate income 112,000 51,000 40,000 blank blank 203,000
Ton's allocation blank .7T blank blank .3T blank
Set's allocation .8S blank .1S blank .1S blank
Pal's allocation blank blank blank 1.0P blank blank
Equations: Solve, substituting 2nd equation

into 3rd (or 3rd into 2nd):
P = 112,000 + .8S
S = 51,000 + .7T T = 48,495
T = 40,000 + .1S S = 84,946
CI = 1P P = 179,957
NCI = .3T + .1S CI share = 179,957
NCI share = 14,548 + 8,495 =23,043

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

Advanced Accounting: Indirect and Mutual Holdings

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Advanced Accounting: Indirect and Mutual Holdings

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Advanced Accounting

Thirteenth Edition, Global Edition

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Parent owns 80% of A, 20% of B,

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On 1/1/16 Pop acquires 80% of Son. On 1/1/17 Son

Earnings and dividends for 2017:

Blank Pop Son Toy

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Allocate blank blank blank blank blank blank

Son ➔ 62.4 (78.0) blank blank 15.6

Pop's ➔ (162.4) blank blank 162.4 blank blank

This allocation may look like the "step-down

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

● On separate income statements: ● For consolidated statements:

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Example: Pet holds 70% of Sal and 60% of Tie. Sal

blank Pet Sal Tie

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Goodwill 12 12 Retained earnings 80 90

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Pet ➔100% CI (95.8) blank blank 95.8 blank blank

Sal's Income from Tie = $4.0

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Parent mutually owned Connecting affiliates

Parent owns 80% of A and Parent owns 80% of A and

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Controlling interest share $95.7

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In place of the last entry, Pam could record its

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Equations: Solved, substituting 2nd

Conventional method is analogous to reciprocal cost

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

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At the start of 2016:

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Equations: Solve, substituting 2nd equation

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