INDIRECT AND MUTUAL

HOLDING – Part 1

Puji Rahayu
pujirahayu06@ugm.ac.id
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 Learning 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.

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9.1: Indirect Holdings
Indirect and Mutual Holdings

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 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.

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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).

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 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

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 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

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 Allocations to CI and NCI

blank Pop Son Toy CI  NCI Total

Separate income 100.0 50.0 40.0 blank blank 190.0
blank blank blank blank blank blank
Allocate
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 income blank blank blank
162.4 27.6 190.0

This allocation may look like the "step-down

method" allocation presented in cost accounting
texts. Mathematically it is!

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 Allocation Results
blank
Pop Son Toy CI  NCI  Total
● On separate income
Separate income 100.0 statements:
50.0 40.0 blank blank 190.0
Allocate blank blank blank blank blank blank
Pop's net income = $162.4
28.0 (40.0) blank 12.0 blank
Toy ➔ blank
Son's
70% Son: 30% NCI "Income from Toy" = $28.0
Son ➔ Pop's "Income from 62.4 Son"
(78.0) = blank
$62.4blank 15.6 blank
80% Pop: 20% NCI
Pop's ➔ (162.4) blank blank 162.4 blank blank
100% CI
Consolidated net income blank blank blank
162.4 27.6 190.0

● For consolidated
statements:
Noncontrolling interest share =
12.0 + 15.6 = $27.6

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 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

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 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.

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 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

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 Separate Income
Pet Sal Tie CI NCI Total
Separate income 70.0 35.0 20.0 blank blank 125.0

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

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 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
Dividends (+SE)  blank 2.0
NCI, Tie (+SE)  blank 2.0

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 Worksheet Entries (2 of 2)
Income from Sal (-R, -SE) 13.8  blank
Investment in Sal (+A) 0.2  blank
Dividends (+SE)  blank 14.0
including 10 unrealized gain on land  blank  blank
NCI share, Sal (-SE) 10.2  blank
Dividends (+SE)  blank 6.0
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

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 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

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 Consolidation Worksheet (2 of 3)
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

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 Consolidation Worksheet (3 of 3)
 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
38.4
Noncontrolling interest  blank  blank  blank  blank 78.6 123.2
Total 805.0 300.0 200.0  blank  blank 969.2

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 Thank You

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