Chapter 9: Indirect and Mutual Holdings



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Chapter 9

Indirect and Mutual Holdings

1: Indirect Holdings

Indirect and Mutual Holdings

Types of Indirect Holdings

Father-son-grandson

Parent owns 80% of A,

and through A,

56% of B (80% x 70%).

Connecting Affiliates

Parent owns 80% of A,

20% of B,

and through A an additional

32% of B (80% x 40%).

Parent owns a total of 52% of B.


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

Equity Method for Father-Son-Grandson Holdings

Anak menggunakan equity method untuk investasi di perusahaan cucu

Induk menggunakan equity method untuk investasi di perusahaan anak

Controlling interest share of consolidated net income includes:

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

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

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

Allocation Results

On separate income statements:

Poe's net income = $162.4

Saw's "Income from Tub" = $28.0

Poe's "Income from Saw" = $62.4

For consolidated statements:

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

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.

      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


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