Chp9 Beams

2011 Pearson Education, Inc. publishing as Prentice Hall 9-1

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 Ts 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 parents direct and indirect ownership of Subsidiary B is 49 percent (70% 70%). However,

consolidation of Subsidiary B is still appropriate because 70 percent of Bs 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 Stans income ($100,000 30%)

(30,000)

Indirect noncontrolling interest in Stans income ($100,000 70% 20%) (14,000) Direct noncontrolling interest in Sams income ($160,000 20%)

(32,000)

Pats 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 Stans income to Sam ($100,000 70%) + 70,000 -70,000 Allocate Sams income to Pat ($230,000 80%) +184,000 -184,000 0 Controlling share $384,000 Noncontrolling interest share $ 46,000 $30,000

9-2 Indirect and Mutual Holdings

2011 Pearson Education, Inc. publishing as Prentice Hall

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 subsidiarys 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 S2s income + 3,500 -3,500 Allocate S1s income +10,000 -10,000 0 Ps net income $30,000 Noncontrolling int. share $ 2,500 $1,500 S1s investment in S2 account was not adjusted for the unrealized profits because this would create a

disparity between S1s investment in S2 account and S1s share of S2s 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 parents 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 usedthe

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 companys net income by the noncontrolling interest percentage) and subtracting the noncontrolling interests 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 Sals investment in Win accounted for by the cost method ($200,000 15%) 30 Allocate 60% of Tips earnings 240 (240) Allocate 60% of Sals 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 Sams income: to Pub ($300,000 60%) 180 (180) to Tim ($300,000 20%) (60) 60Allocate Tims loss: to Pub $(340,000) 80% (272) 272Controlling 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 Lakes income 60% to Place 36,000 (36,000) 20% to Marsh (12,000) 12,000 Allocate Marshs 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 Sons $160,000 income $112,000 70% of Sons 80% interest in Tans $100,000 income 56,000 Income from Son $168,000 2 d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Sons $160,000 income $ 48,000 20% direct noncontrolling interest in Tans $100,000 income 20,000 30% 80% indirect noncontrolling interest in Tans $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: Pins separate income $360,000 Add: 70% of Sons $160,000 income 112,000 Add: (70% 80%) of Tans $100,000 income 56,000 Controlling interest share of Consolidated net income $528,000 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 Vals income 70% to Tea +28,000 - 28,000 Allocate Wons income 10% to Tea - 2,000 + 2,000 60% to Sal -12,000 + 12,000 Allocate Teas income 80% to Pal + 44,800 -44,800 10% to Sal + 5,600 - 5,600 Allocate Sals income 80% to Pal + 18,880 -18,880 ________ ________ _________Pals 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 Oaks income 20% to Nun + 1,000 -1,000 70% to Man + 3,500 -3,500 Allocate Nuns income 70% to Pet + 21,700 -21,700 10% to Man + 3,100 - 3,100 Allocate Mans income 90% to Pet + 18,540 -18,540 ________ ________ Pets 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 Alternative solution 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) Total noncontrolling interest share $ 204,200 Alternative solution Sin $350,000 10% $ 35,000 Tar $400,000 37% 148,000 Won $(100,000) 46% (46,000) Van $240,000 28% 67,200 Total noncontrolling interest share $ 204,200 4 a [See computations for question 3] 5 d Net income of Sin Separate income $ 350,000 Add: 70% of Tars $400,000 280,000 Deduct: 60% of Wons $(100,000) (60,000) Add: 80% of Vans $240,000 192,000 Net income of Sin $ 762,000 Pans 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 Pats 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 Pats 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 Alternative solution 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 = Pads income on a consolidated basis S = Sads income on a consolidated basis T = Twos 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 = Pins income on a consolidated basis B = Sons income on a consolidated basis C = Tins 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: Pets separate income $100,000 Add: Sods net income of $67,500 90% 60,750 Less: Dividends received from Pet ($50,000 15%) (7,500) Controlling interest share of Consolidated net income $153,250 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

.85 = $151,330

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: Sats separate income $ 50,000 Add: Sats dividend income from Pug 6,000 Sats net income 56,000 Pugs ownership interest 70% Pugs equity in Sats 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 Pugs 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 Pugs 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: Pugs 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 Investment in Sat December 31, 2010 $245,700 Add: Income from Sat 23,903 Less: Dividends from Sat (21,000) Investment in Sat December 31, 2011 $248,603



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 Bans loss 70% to Sal (14,000) 14,000 Allocate Axes income 60% to Sal 78,000 (78,000) Patent (12,000) 352,000 Allocate Sals 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 Seas books Investment in Toy (70%) 294,000 Cash 294,000

To record purchase of a 70% interest in Toy Corporation. Cash 14,000 Investment in Toy (70%) 14,000

To record dividends received from Toy ($20,000 70%). Investment in Toy (70%) 35,000 Income from Toy 35,000

To record investment income computed as follows: Share of Toys net income ($60,000 70%) $ 42,000 Less: Unrealized profit from upstream sale of inventory items ($10,000 70%) (7,000) $ 35,000 Pots books Cash 48,000 Investment in Sea (80%) 48,000

To record dividends received from Sea ($60,000 80%). Investment in Sea (80%) 88,000 Income from Sea 88,000

To record investment income computed as follows:

Share of Toys 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 Toys realized earnings to Sea ($50,000 70%) 35,000 (35,000) Seas net income 135,000 Allocate Seas net income to Pot ($135,000 80%) 108,000 (108,000) Pots 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 Sea (80%) 440,000 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: Pots 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. Seas 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 Tips income 50% to Pen 2,500 (2,500) 40% to Sir 2,000 (2,000) Sirs net income 82,000 Allocate Sirs 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

Pen

Sir

Tip

Adjustments and Eliminations

Consolidated 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 Retained earnings Pen

$115,500

f 12,500

g 8,000 $ 95,000 Retained earnings Sir 160,000 e 160,000

Retained earnings Tip 45,000 b 45,000 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 Sir 80%

508,000

d 40,000 e 468,000

Investment in Tip 50%

95,000 a 7,500 b 87,500

Investment in Tip 40%

74,000 a 6,000 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 = Pars income on a consolidated basis S = Sits income on a consolidated basis T = Tots 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



Solution P9-4 (continued) 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 Suns 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.



Solution P9-5 (continued) Treasury Stock approach

Pin Company and Subsidiary Consolidation Working Papers


Pin

Sun 90% Adjustments and Eliminations



$ 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 share in Consol. Column)

177,000 30,000 167,000

Dividends 100,000* 20,000* a 28,000 d 2,000

90,000*


$ 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 Investment in Sip 12,000

To eliminate income from Sip and 80% of Sips 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 Investment in Sip 195,710 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 years amortization of patent. g Noncontrolling Interest Share 12,000 Dividends 4,000 Noncontrolling Interest 8,000



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

Chapter 9 9-23


Solution P9-6 (continued)

Par Company and Subsidiary Consolidation Working Papers


Par

Sip 90% Adjustments and Eliminations



$ 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*


$ 477,710

$ 207,000

$ 477,710

Balance Sheet Other assets $ 448,000 $ 157,000 $ 605,000 Investment in Sip 109,710 a 2,000

d 100,000 b 4,000 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 Pans 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 = Pans income on a consolidated basis S = Sets 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 Noncontrolling interest share ($108,696 20%) 21,739 Total (separate incomes) $280,000 2 Entries to account for investments on an equity basis Pans books Capital stock 120,000 Retained earnings 40,000 Investment in Set 160,000

To record constructive retirement of 10% of Pans 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 Investment in Set 32,000

To record receipt of 80% of Sets 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 Pans dividends.



Solution P9-7 (continued) 3 Journal entries on Sets 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 Pans $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 Pans 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 Sets equity on a consolidated basis $568,696 Noncontrolling interest percentage 20% Noncontrolling interest at December 31, 2013 $ 113,739 Alternative solution Noncontrolling interest January 1, 2013 ($500,000 20%) $ 100,000 Noncontrolling interest share ($108,696 20%) 21,739 Noncontrolling interest dividends (8,000) Noncontrolling interest at December 31, 2013 $ 113,739

Chapter 9 9-27


Solution P9-7 (continued) 8 Adjustment and elimination entries a Income from Pan 28,696 Dividends 10,000 Investment in Pan 18,696

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 Investment in Pan 160,000

To eliminate investment in Pan balance and increase the investment in Set for the constructive retirement of Pans stock that was charged to the investment in Set account.

c Dividends 10,000 Investment in Set 10,000

To eliminate dividends. d Income from Set 58,261 Dividends 32,000 Investment in Set 26,261

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 Investment in Set 416,000 Noncontrolling interest 109,000

To eliminate Sets 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 Noncontrolling Interest 13,739

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

Chp9 Beams

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