Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter INDIRECT AND MUTUAL HOLDINGS Answers to Questions 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 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 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 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 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 (30,000) ($100,000  30%) Indirect noncontrolling interest in Stan’s income (14,000) ($100,000  70%  20%) Direct noncontrolling interest in Sam’s income (32,000) ($160,000  20%) Pat’s net income and controlling share of consolidated net income $384,000 Approach B Separate earnings Allocate Stan’s income to Sam ($100,000  70%) Allocate Sam’s income to Pat ($230,000  80%) Controlling share Noncontrolling interest share Pat $200,000 +184,000 $384,000 Sam $160,000 Stan $100,000 + 70,000 -70,000 -184,000 $ 46,000 $30,000 © 2011 Pearson Education, Inc publishing as Prentice Hall 9-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-2 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 Separate earnings Deduct: Unrealized profit Separate realized earnings Allocate S2’s income Allocate S1’s income P’s net income Noncontrolling int share P $20,000 S1 80% $10,000 - 1,000 S2 70% $5,000 20,000 9,000 + 3,500 -10,000 5,000 -3,500 $ 2,500 $1,500 +10,000 $30,000 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 A mutual holding situation exists because two affiliates hold ownership interests in each other The parent is mutually owned 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 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 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 15 9-3 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 $1,600 $1,000 $400 Separate earnings of the three affiliates (in thousands) Add: Dividend income from Sal’s investment in Win accounted for by the cost method ($200,000  15%) Allocate 60% of Tip’s earnings Allocate 60% of Sal’s earnings Controlling Share of Cons Income Noncontrolling interest share 762 $2,362 30 240 (762) (240) $160 $508 Solution E9-2 Pub Corporation and Subsidiaries Income Allocation Schedule for the year 2011 (in thousands) Sam Pub Separate earnings or loss $800 $300 Allocate Sam’s income: 180 (180) to Pub ($300,000  60%) (60) to Tim ($300,000  20%) Allocate Tim’s loss: (272) to Pub $(340,000)  80% Controlling Share of Consol Income $708 Noncontrolling interest share $ 60 Tim $(400) 60 272 $ (68) Solution E9-3 Place Corporation and Subsidiaries Income Allocation Schedule for the year 2011 Lake Place Separate incomes $200,000 $80,000 Less: Unrealized profit on land _ (20,000) Separate realized incomes 200,000 60,000 Allocate Lake’s income 60% to Place 36,000 (36,000) 20% to Marsh (12,000) Allocate Marsh’s income _ 70% to Place 57,400 Controlling Share of Consol Income $293,400 Noncontrolling interest share $12,000 Marsh $ 70,000 70,000 12,000 (57,400) $ 24,600 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-4 Solution E9-4 c Income from Son is equal to: 70% of Son’s $160,000 income 70% of Son’s 80% interest in Tan’s $100,000 income Income from Son $112,000 56,000 $168,000 d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Son’s $160,000 income 20% direct noncontrolling interest in Tan’s $100,000 income 30%  80% indirect noncontrolling interest in Tan’s $100,000 income Total noncontrolling interest share 24,000 $ 92,000 d Consolidated net income is equal to: Combined separate incomes of $360,000 + $160,000 + $100,000 Less: Noncontrolling interest share Controlling interest share of Consolidated net income $620,000 92,000 $528,000 Alternative computation: Pin’s separate income Add: 70% of Son’s $160,000 income Add: (70%  80%) of Tan’s $100,000 income Controlling interest share of Consolidated net income $360,000 112,000 56,000 $528,000 $ 48,000 20,000 Solution E9-5 Separate earnings Less: Unrealized profit Separate realized earnings Allocate Val’s income 70% to Tea Allocate Won’s income 10% to Tea 60% to Sal Allocate Tea’s income 80% to Pal 10% to Sal Allocate Sal’s income 80% to Pal Pal’s net income (or Controlling share of consolidated net income) Noncontrolling interest share Pal $ 50,000 Sal $30,000 50,000 30,000 Tea $35,000 - 5,000 30,000 Won $(20,000) _ (20,000) +28,000 - 2,000 -12,000 + 44,800 + 18,880 Val $40,000 40,000 - 28,000 + 2,000 + 12,000 + 5,600 -44,800 - 5,600 -18,880 _ $ 4,720 $ 5,600 $ (6,000) $12,000 $113,680 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-5 Solution E9-6 Separate earnings Unrealized profit Separate realized earnings Allocate Oak’s income 20% to Nun 70% to Man Allocate Nun’s income 70% to Pet 10% to Man Allocate Man’s income 90% to Pet Pet’s net income (or Controlling share of NI) Noncontrolling interest share Pet $ 65,000 65,000 Man $18,000 - 4,000 14,000 Nun $28,000 + 2,000 30,000 Oak $9,000 -4,000 5,000 + 1,000 -1,000 -3,500 + 3,500 + 21,700 + 18,540 + 3,100 -21,700 - 3,100 -18,540 $ 2,060 $ 6,200 $105,240 $ 500 Alternative solution Adjusted Adjustments = Income $ 65,000 + - Pet 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 $105,240 $8,760 $114,000 a b c - Consolidated Net Income $ 65,000 Noncontrolling Interest = Share Reported Income $65,000 $14,000 divided 90% to consolidated net income (CNI) 10% to noncontrolling interest share (NIS) $30,000 divided 70% + (90%  10%) to CNI and 20% + (10%  10%) to NIS $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%] © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-6 Solution E9-7 b Separate income of Tar Included in consolidated net income (.9   $400,000) Alternative solution Direct noncontrolling interest (.3  $400,000) Indirect noncontrolling interest (.1   $400,000) a Separate income = net income of Van Noncontrolling interest (direct) c Total separate incomes Less: Controlling share of Consolidated net income Pan $1,240,000  100% Sin $350,000  90% Tar $400,000  90%  70% Win $(100,000)  90%  60% Van $240,000  90%  80% $ 120,000 28,000 $ 148,000 $240,000 20% $ 48,000 $2,130,000 $1,240,000 315,000 252,000 (54,000) 172,800 Total noncontrolling interest share Alternative solution Sin $350,000  Tar $400,000  Won $(100,000) Van $240,000  Total noncontrolling $400,000 (252,000) $ 148,000 10% 37%  46% 28% interest share a [See computations for question 3] d Net income of Sin Separate income Add: 70% of Tar’s $400,000 Deduct: 60% of Won’s $(100,000) Add: 80% of Van’s $240,000 Net income of Sin Pan’s interest Investment increase Less: Dividends received from Sin ($200,000  90%) Net increase (1,925,800) $ 204,200 $ $ $ 35,000 148,000 (46,000) 67,200 204,200 350,000 280,000 (60,000) 192,000 $ 762,000 90% 685,800 (180,000) $ 505,800 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-7 Solution E9-8 b Separate income of Sam (net income) Separate income of Ten $40,000 - ($80,000  10%) Separate income of Pat $240,000 - ($40,000  70%) - ($80,000  80%) Total separate income $ 80,000 32,000 148,000 $260,000 d Separate income Unrealized profit on inventory Unrealized profit on land Separate realized income Pat $148,000 $148,000 Sam $80,000 (10,000) _ $70,000 Ten $32,000 (15,000) $17,000 a Pat’s separate income $148,000 56,000 Add: Investment income from Sam ($70,000  80%) Add: Investment income from Ten 16,800 [$17,000 + ($70,000  10%)]  70% Pat’s income (controlling share of consolidated net income) $220,800 d Total separate realized income Less: Controlling share of consolidated net income Noncontrolling interest share Alternative solution Direct noncontrolling interest in Sam ($70,000  1) Indirect noncontrolling interest in Sam ($70,000   1) Direct noncontrolling interest in Ten ($17,000  3) Noncontrolling interest share $235,000 220,800 $ 14,200 $ 7,000 2,100 5,100 $ 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 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-8 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) Noncontrolling interest share in Sad ($200,000  20%) Noncontrolling interest share in Two ($100,000  20%) Total consolidated income $340,000 40,000 20,000 $400,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-9 Solution E9-11 [AICPA adapted] b b d 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%) Noncontrolling interest — Son ($228,773.58  20%) Noncontrolling interest — Tin ($391,823.90  15%) Total consolidated income $485,471.69 45,754.72 58,773.59 $590,000.00 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-10 Solution E9-12 d Combined separate income Less: Noncontrolling interest share Controlling Share of Consolidated net income $160,000 6,750 $153,250 Alternatively: Pet’s separate income Add: Sod’s net income of $67,500  90% Less: Dividends received from Pet ($50,000  15%) Controlling interest share of Consolidated net income $100,000 60,750 (7,500) $153,250 b P 865P P S = = = = $100,000 + 9($60,000 + 15P) $154,000 $178,035 $60,000 + $26,705 = $86,705 Controlling Share of Consolidated net income = $178,035  85 = Noncontrolling interest share = $86,705  10 = Total consolidated income $151,330 8,670 $160,000 Solution E9-13 Treasury stock approach Investment in Sat balance December 31, 2011 Investment balance December 31, 2010 Add: Income from Sat Less: Dividends received from Sat Add: Dividends paid to Sat Investment in Sat December 31, 2011 $245,700 26,900 (21,000) 6,000 $257,600 Supporting computations Computation of income from Sat: Sat’s separate income Add: Sat’s dividend income from Pug Sat’s net income Pug’s ownership interest Pug’s equity in Sat’s income Less: Dividends paid to Sat ($60,000  10%) Less: Excess amortization ($9,000 x 70%) Income from Sat $ 50,000 6,000 56,000 70% 39,200 (6,000) (6,300) $ 26,900 Conventional approach Pug’s net income and consolidated net income P = ($120,000 + 7S) - $6,300 S = $50,000 + 1P P P 93P P = = = = $120,000 + 7($50,000 + 1P) - $6,300 $120,000 + $35,000 + 07P - $6,300 $148,700 $159,892 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-13 Solution P9-2 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 Investment in Toy (70%) To record dividends received from Toy ($20,000  70%) Investment in Toy (70%) 35,000 Income from Toy To record investment income computed as follows: Share of Toy’s net income ($60,000  70%) Less: Unrealized profit from upstream sale of inventory items ($10,000  70%) 14,000 35,000 $ 42,000 (7,000) $ 35,000 Pot’s books Cash 48,000 Investment in Sea (80%) To record dividends received from Sea ($60,000  80%) 48,000 Investment in Sea (80%) 88,000 Income from Sea To record investment income computed as follows: Share of Toy’s net income ($100,000 + $35,000)  80% Less: Unrealized gain on land sold to Toy 88,000 $108,000 (20,000) $ 88,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-14 Solution P9-2 (Continued) Schedule of income allocation Separate earnings Less: Unrealized profits Separate realized earnings Allocate Toy’s realized earnings to Sea ($50,000  70%) Sea’s net income Allocate Sea’s net income to Pot ($135,000  80%) Pot’s net income and Controlling share of net income Noncontrolling interest share Check: Pot $300,000 (20,000) Sea $100,000 Toy $ 60,000 (10,000) 280,000 100,000 50,000 (35,000) 35,000 135,000 108,000 (108,000) $388,000 $ 27,000 _ $ 15,000 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 Schedule of assets and equities at December 31, 2012 Pot Sea Toy Assets Investment in Sea (80%) Investment in Toy (70%) Total assets $ 1,848,000 $460,000 440,000 _ 315,000 $ 2,288,000 $775,000 $540,000 Liabilities Capital stock Retained earnings Total liabilities and equity $ $100,000 300,000 140,000 $540,000 300,000 $200,000 1,200,000 400,000 788,000 175,000 $ 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 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-15 Solution P9-3 Preliminary computations Check on consolidated net income Net income as stated Less: Investment income Separate income Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Separate realized incomes Allocate Tip’s income 50% to Pen 40% to Sir Sir’s net income Allocate Sir’s income 80% to Pen Less: Depreciation on excess allocated to plant and Equipment Total income of consolidated Entity Controlling share of NI Noncontrolling int share Pen $184,500 (84,500) 100,000 Sir $90,000 (10,000) 80,000 Tip $25,000 25,000 Total $299,500 (94,500) 205,000 8,000 _ 108,000 8,000 _ 80,000 2,500 2,000 82,000 65,600 (65,600) (5,000) ( 1,250) $171,100 (20,000) 5,000 (20,000) 193,000 (2,500) (2,000) (6,250) _ $ 15,150 $ 500 $186,750 171,100 15,650 $186,750 Investment in Sir (80%) $420,000 Implied total fair value of Sir ($420,000 / 80%) Book value of Sir Excess of fair value over book value $ 525,000 (500,000) $ 25,000 Excess allocated to equipment with a four year lfe Amortization ($25,000 / yrs) $ Investment in Tip (50%) $ 75,000 Implied total fair value of Tip ($75,000 / 50%) Book value of Sir Excess of fair value over book value – Goodwill $ 150,000 (120,000) $ 30,000 6,250 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-16 Solution P9-3 (continued) Pen Corporation and Subsidiaries Consolidation Working Papers for the year ended December 31, 2011 Pen Income Statement Sales Income from Sir Income from Tip Cost of sales $500,000 72,000 12,500 240,000* Other expenses Sir Tip $300,000 $100,000 10,000 150,000* 60,000* 70,000* 15,000* 160,000* Noncont.int.share — Sir Noncont.int.share — Tip Cont.int.shareof NI $184,500 $ 90,000 Adjustments and Eliminations h d a i 50,000 72,000 22,500 20,000 f c 6,250 15,150 c 500 Consolidated Statements $ g h 8,000 50,000 850,000 412,000* 251,250* 15,150* 500* $ 25,000 $ 171,100 $ 95,000 Retained Earnings Retained earnings Retained earnings Retained earnings — Pen $115,500 45,000 184,500 80,000* Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Inventories Plant and equipment — net Investment in Sir 80% Investment in Tip 50% Investment in Tip 40% Goodwill Accounts payable Other liabilities Capital stock Retained earnings 90,000 40,000* 12,500 g 8,000 e 160,000 160,000 — Sir — Tip Net income f b 45,000 171,100 25,000 10,000* $220,000 $210,000 $ 60,000 $ 67,000 70,000 110,000 $ 36,000 50,000 75,000 $ 10,000 20,000 35,000 140,000 425,000 115,000 a c d e 25,000 74,000 b $990,000 $660,000 $180,000 $ 70,000 100,000 600,000 $ 40,000 10,000 400,000 $ 15,000 5,000 100,000 $990,000 210,000 $660,000 $ 186,100 $ j i 10,000 20,000 113,000 130,000 200,000 f 18,750 686,250 30,000 30,000 $1,159,250 j 10,000 $ b 100,000 e 400,000 115,000 115,000 600,000 186,100 60,000 $180,000 Noncontrolling interest — Sir (beginning) e 117,000 Noncontrolling interest — Tip (beginning) Noncontrolling interest December 31 b 19,500 c 6,650 * 80,000* d 40,000 e 468,000 a 7,500 b 87,500 a 6,000 b 68,000 508,000 95,000 220,000 9,000 9,000 32,000 143,150 $1,159,250 Deduct © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-17 Solution P9-4 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 = Noncontrolling interest share in Sit ($112,245  1) Noncontrolling interest share in Tot ($61,224  3) $320,408 11,225 18,367 $350,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-18 Solution P9-4 (continued) P, S, and T are as defined in part 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 = Noncontrolling interest share in Sit ($110,204.08  10%) Noncontrolling interest share in Tot ($51,020.41  30%) $293,673.48 11,020.40 15,306.12 $320,000.00 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 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 200,000 Capital stock — Sun 200,000 Retained earnings — Sun Goodwill 50,000 Investment in Sun 405,000 45,000 Noncontrolling interest — beginning 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 To reclassify investment in Pin to treasury stock d 80,000 Noncontrolling Interest Share 3,000 Dividends 2,000 Noncontrolling Interest 1,000 To record noncontrolling interest share of subsidiary income and dividends © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-20 Solution P9-5 (continued) Treasury Stock approach Pin Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2013 Pin Income Statement Sales Income from Sun Dividend income Cost of sales Expenses $ 400,000 27,000 $ $ 177,000 Retained Earnings Retained earnings — Pin $ 300,000 100,000 10,000 50,000* 30,000* 200,000* 50,000* Consolidated NI Noncontrolling share Controlling share of NI $ $ 200,000 30,000 Dividends 100,000* 20,000* Balance Sheet Other assets Investment in Sun 90% 250,000* 80,000* 170,000 3,000 $ 377,000 $ 210,000 $ 486,000 414,000 $ 420,000 $ 167,000 $ 300,000 b 200,000 a d 900,000 $ 123,000 $ 400,000 377,000 900,000 $ $ 90,000* 377,000 $ 906,000 500,000 $ 50,000 956,000 90,000 200,000 b 200,000 210,000 500,000 $ a 9,000 b 405,000 c 80,000 b $ 28,000 2,000 $ 80,000 $ 50,000 Noncontrolling interest January Noncontrolling interest December 31 Treasury stock 3,000* 167,000 Investment in Pin 10% Goodwill Liabilities Capital stock Retained earnings c b 45,000 d 1,000 213,000 400,000 377,000 46,000 80,000 $ * 500,000 27,000 10,000 30,000 177,000 Consolidated Statements $ a a d Retained earnings — Sun Net income (Controlling share in Consol Column) Retained earnings December 31 Adjustments and Eliminations Sun 90% 80,000* 956,000 Deduct © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-21 Solution P9-6 Calculations Income from Sip Par separate income (140,000 - 80,000) Sip separate income (100,000 + 3,000 - 60,000) $ 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 To recognize previously deferred gain on sale of land b 2,000 Dividend income 4,000 Investment in Sip To eliminate intercompany dividends paid to Sip 4,000 c Income from Sip 28,000 Dividends 16,000 Investment in Sip 12,000 To eliminate income from Sip and 80% of Sip’s dividends, and return the investment in Sip account to the beginning-of-theperiod balance under the equity method d Investment in Sip Investment in Par To eliminate reciprocal investments 100,000 100,000 e 50,000 Capital stock — Sip 180,000 Retained earnings — Sip Patent 20,000 Investment in Sip 195,710 54,290 Noncontrolling interest — beginning To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest f Expenses 5,000 Patent To record current year’s amortization of patent g Noncontrolling Interest Share Dividends Noncontrolling Interest 5,000 12,000 © 2011 Pearson Education, Inc publishing as Prentice Hall 4,000 8,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 9-22 Indirect and Mutual Holdings To record the noncontrolling interest share of subsidiary income and dividends © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-23 Solution P9-6 (continued) Par Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Par Income Statement Sales Income from Sip Dividend income Gain on sale of land Expenses Consolidated net income Noncontrolling share Controlling share of NI $ 140,000 28,000 $ 80,000* $ 88,000 $ 405,710 Adjustments and Eliminations Sip 90% $ 100,000 c 28,000 4,000 b 3,000 60,000* f 4,000 g 12,000 a Consolidated Statements $ 240,000 $ 5,000 145,000* 100,000 12,000* 88,000 $ 405,710 2,000 5,000 47,000 Retained Earnings Retained earnings — Par $ Retained earnings — Sip Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Other assets Investment in Sip 88,000 16,000* 180,000 e 180,000 88,000 47,000 20,000* $ 477,710 $ 207,000 $ 448,000 109,710 $ 157,000 c g 100,000 e $ 557,710 $ 80,000 477,710 557,710 $ Noncontrolling interest January Noncontrolling interest December 31 16,000* $ 477,710 $ 605,000 $ 15,000 620,000 a 2,000 d 100,000 Investment in Par Patent Capital stock Retained earnings 16,000 4,000 $ b 4,000 c 12,000 e 195,710 d 100,000 20,000 f 5,000 257,000 50,000 e 207,000 257,000 50,000 80,000 477,710 e g 54,290 8,000 $ * 62,290 620,000 Deduct © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-24 Solution P9-7 Preliminary Computations Pan’s investment cost $340,000 Implied total fair value of Set ($340,000 / 80%) Book value of Set Excess of fair value over book value - Goodwill $425,000 (400,000) $ 25,000 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) Noncontrolling interest share ($108,696  20%) Total (separate incomes) $258,261 21,739 $280,000 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 Investment in Set To record receipt of 80% of Set’s dividends Investment in Set (80%) Dividends 32,000 10,000 © 2011 Pearson Education, Inc publishing as Prentice Hall 10,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 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 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-26 Solution P9-7 (continued) 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%) Set 80,000 28,696 $ 108,696 Net income for 2013 Separate incomes Investment income Net income Pan $200,000 58,261 $258,261 Investment balance December 31, 2013 Investments beginning of 2013 Less: Constructive retirement of Pan’s stock Add: Investment income Add: Dividends paid to Set Less: Dividends received Investment balances December 31, 2013 Pan $416,000 (160,000) 58,261 10,000 (32,000) $292,261 Stockholders’ equity December 31, 2013 Stockholders’ equity January 1, 2013 Add: Net income Less: Dividends Stockholders’ equity December 31, 2013 Set Pan $1,440,000 $500,000 258,261 108,696 (90,000) (40,000) $1,608,261 $568,696 Noncontrolling interest at December 31, 2013 Set’s equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31, 2013 $568,696 20% $ 113,739 Alternative solution Noncontrolling interest January 1, 2013 ($500,000  20%) Noncontrolling interest share ($108,696  20%) Noncontrolling interest dividends Noncontrolling interest at December 31, 2013 $ 100,000 21,739 (8,000) $ 113,739 $ Set $ 160,000 28,696 (10,000) $ 178,696 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 9-27 Solution P9-7 (continued) 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 Pan’s stock that was charged to the investment in Set account c Dividends Investment in Set To eliminate dividends 10,000 10,000 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 300,000 Capital stock — Set 200,000 Retained earnings — Set Goodwill 25,000 Investment in Set 416,000 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 Noncontrolling Interest 13,739 To record the noncontrolling interest share of subsidiary income and dividends © 2011 Pearson Education, Inc publishing as Prentice Hall ... slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 15 9-3 By adding beginning noncontrolling interest and noncontrolling interest share (determined by multiplying the... Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-12 SOLUTIONS TO PROBLEMS Solution P9-1 Pad Corporation and Subsidiaries... publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Indirect and Mutual Holdings 9-4 Solution E9-4 c Income from Son is equal to: 70% of