Indirect and Mutual Holdings: To Accompany Advanced Accounting, 11th Edition by Beams, Anthony, Bettinghaus, and Smith

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
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
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 2010:
Poe Saw Tub

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

9-6
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
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 = 12.0
Saw's "Income from Tub" = $28.0 + 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
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
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
Consolidation Worksheet

9-15
9-16
9-17
Example: Father-Son-Grandson
On 1 jan 2014 P memperoleh 90% dari S. pada
1/1/15 S memperoleh 70% T.
Earnings and dividends for 2015:
Keterangan P S T
Laba 50 juta 30 jt 20 jt
Deviden 10 juta 7,5 jt 5 jt

9-18
diminta
1. Buatlah perhitungan pengakuan laba dan
deviden T dan S oleh induknya
2. buatlah alokasi pada laporan laba ruginya
3. Hitunglah pengakuan laba dan deviden oleh
perusahaan induk jika kepemilikan T oleh S
dilakukan pada tanggal 1 juli 2015

9-19
Test of Indirect Holdings with Connecting
Affiliates
Pet holds 80% of Sal and 40% of Tie in
1/1/2017. Sal holds an additional 40% of Tie.
Pet Sal Tie
Separate income $80 $50 $40
Dividends 50 30 20
Intercompany profit transactions:
 Downstream: Pet sold Sal machine that have remains age 5
year with a gain of $20. This will be fully attributed to Pet.
 Upstream: Sal sold $50 inventory to Pet, and Pet holds ending
inventory with unrealized profit of $10. This will be allocated
between Pet and NCI.

9-20
Beginning Balances in
P
Sal T
Underlying equity Jan 1 1 jan
Capital stock 500 200 100

Retained earnings 100 50 30
Goodwill ? ?
Investment P in S 210
Investment P in T 60
Investment S inT 55
Coount the goodwill
1. Count the interest P dan S of earnings
and devidend T
2. Count The Interest P of earnings and
dividend S
3. Make the allocation of earnings and dividend
to the afiliation
4. Make the elimination journal
9-21
Indirect and Mutual Holdings
2: MUTUAL HOLDINGS

9-22
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.

9-23
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

9-24
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

9-25
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

9-26
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

9-27
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 $27, Sal $20
9-28
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
9-29
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

9-30
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
9-31
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 less
 Salt's total stockholders' equity 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
9-32
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.

9-33
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!)
9-34
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

9-35
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
9-36
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

9-37
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
9-38
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

9-39
Part's Equity Method Entries
18,000
Cash (+A)
for dividends
Income from Salt (R, +SE) 34,945
for income
Dividends (-SE) 3,000
for Part dividends paid to Salt

9-40
Jurnal pengakuan deviden
Dev S yg diakui T
invest pd S 10% x 30.000 = 3000
deviden S 3000
Dev T yg diakui oleh S 70% x 20 = 14

kas 14.000
inv pd T 14.000
Dev S yg diakui P = 80% x 30.000 = 24.000

Kas 24.000
inv pd S 24.000
9-41
Pengakuan laba
S atas laba T 70% x 48.495 = 33.946
inv pd T 33. 946
laba T 33.946
P atas laba S 80% x84.946 = 67.957

inv pd S 67.957
laba S 67.957

9-42
Jurnal eliminasi
Eliminasi s ke T
Pendapatan T 33.946
Pendpt dev T 3.000
deviden T 14.000
investasi pada T 22.946
NCI 14.548
DEVIDEN 2
NCI 12 548
Eliminasi P ke S
Pendptn S 67.957
deviden 24.000
inv pd S 43.957
NCI 8.495
deviden 3000
nci 5.495

9-43
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9-44

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Chapter 9

Indirect and Mutual

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

80% 80% 20%

Subsidiary A Subsidiary A Subsidiary B

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Earnings and dividends for 2010:

Poe Saw Tub

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

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Earnings and dividends for 2015:

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Capital stock 500 200 100

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Copyright ©2012 Pearson Education,

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

Cash (+A) 18,000

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

Dev T yg diakui oleh S 70% x 20 = 14

Dev S yg diakui P = 80% x 30.000 = 24.000

P atas laba S 80% x84.946 = 67.957

Copyright ©2012 Pearson Education,

Copyright ©2012 Pearson Education,

All rights reserved. No part of this publication may be reproduced,

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