# Chapter 9: Indirect and Mutual Holdings

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Parent
Subsidiary A
Subsidiary B
70%
80%
Parent
Subsidiary A
Subsidiary B
20%
80%
40%

## Controlling interest share of consolidated net income includes:

• Share for direct holding of son
• Share for indirect holding of grandson (by father through son)

## Earnings and dividends for 2010:

 Poe Saw Tub Separate earnings \$100 \$50 \$40 Dividends 60 30 20

## 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)

## Allocations to CI and NCI

This allocation may look like the "step-down method" allocation presented in cost accounting texts. Mathematically it is!
 Separate income Poe 100.0 Saw 50.0 Tub 40.0 CI NCI Total 190.0 Allocate: Tub  70% Saw: 30% NCI Saw  80% Poe: 20% NCI Poe's  100% CI 62.4 (162.4) 28.0 (78.0) (40.0) 162.4 12.0 15.6 Consolidated net income 162.4 27.6 190.0

## Noncontrolling interest share = 12.0 + 15.6 = \$27.6

 Poe Saw Tub CI NCI Total Separate income 100.0 50.0 40.0 190.0 Allocate: Tub  70% Saw: 30% NCI Saw  80% Poe: 20% NCI Poe  100% CI 62.4 (162.4) 28.0 (78.0) (40.0) 162.4 12.0 15.6 Consolidated net income 162.4 27.6 190.0

## Indirect holdings with connecting affiliates

• Handle similar to Father-son-grandson, but
• Father has direct holdings in both Son and Grandson

## 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.
 Pet Sal Tie Separate income \$70 \$35 \$20 Dividends 40 20 10

## Calculating Investment Balances

 Sal: Underlying equity Jan 1 Dec 31 Capital stock 200 200 Retained earnings 50 69 Goodwill 12 12 Unrealized profit in inventory (5) Subtotal (split 70:30) 276 Unrealized profit on land (10) Total 262 266 Split 70%:30% Investment in Sal (70%) 183.4 183.2 * (70% x 276) - 10 = 183.2 Noncontrolling interest (30%) 78.6 82.8 * 30% x 276 = 82.8
 Tie: Underlying equity Jan 1 Dec 31 Capital stock 100 100 Retained earnings 80 90 Goodwill 12 12 Total 192 202 Split 60%:20%:20% Investment in Tie (60%) 115.2 121.2 Investment in Tie (20%) 38.4 40.4 Noncontrolling interest (20%) 38.4 40.4
 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

## 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
 Income from Sal (-R, -SE) 13.8 Investment in Sal (+A) 0.2 Dividends (+SE) 14.0