Chapter 9: Indirect and Mutual Holdings


including 10 unrealized gain on land



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including 10 unrealized gain on land

 

 

NCI share, Sal (-SE)

10.2

 

Dividends (+SE)

 

6.0

NCI, Sal (+SE)

 

4.2

Capital stock, Tie (-SE)

100.0

 

Retained earnings, Tie (-SE)

80.0

 

Goodwill (+A)

12.0

 

Investment in Tie (Sal & Pet’s) (-A)

 

153.6

NCI, Tie (+SE)

 

38.4

Capital stock, Sal (-SE)

200.0

 

Retained earnings, Sal (-SE)

50.0

 

Goodwill (+A)

12.0

 

Investment in Sal (-A)

 

183.4

NCI, Sal (+SE)

 

78.6

Consolidation Worksheet


Income statement:

Pet

Sal

Tie

DR

CR

Consol

Sales

200.0

150.0

100.0

15.0

 

435.0

Income from Sal

13.8

 

 

13.8

 

0.0

Income from Tie

12.0

4.0

 

16.0

 

0.0

Gain on land

10.0

 

 

10.0

 

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)

 

 

(105.0)

NCI share, Sal

10.2

(10.2)

NCI share, Tie

 

 

 

4.0

 

(4.0)

Controlling interest share

95.8

39.0

20.0

95.8

Statement of retained earnings:

Pet

Sal

Tie

DR

CR

Consol

Beginning retained earnings

223.0

50.0

80.0

80.0
50.0

 

223.0 

Add net income

95.8

39.0

20.0

 

 

95.8

Deduct dividends

(40.0)

(20.0)

(10.0)

 

8.0
2.0
14.0
6.0

 (40.0)

Ending retained earnings

278.8

69.0

90.0

278.8

Balance sheet:

Pet

Sal

Tie

DR

CR

Consol

Other assets

50.6

19.6

85.0

 

 

155.2

Inventories

50.0

40.0

15.0

 

5.0

100.0

Plant assets, net

400.0

200.0

100.0

 

10.0

690.0

Investment in Sal (70%)

183.2

 

 

0.2

183.4

0.0

Investment in Tie (60%, 20%)

121.2

40.4

 

 

8.0
153.6

0.0 

Goodwill

 

 

 

12.0
12.0

 

 24.0

Total

805.0

300.0

200.0

969.2

 

Pet

Sal

Tie

DR

CR

Consol

Liabilities

126.2

31.0

10.0

 

 

167.2

Capital stock

400.0

200.0

100.0

100.0
200.0

 

 400.0

Retained earnings

278.8

69.0

90.0

 

 

278.8

Noncontrolling interest

 

 

 

 

2.0
4.2
38.4
78.6

123.2

Total

805.0

300.0

200.0

969.2

2: Mutual Holdings

Indirect and Mutual Holdings

Types of Mutual Holdings


40%

Parent mutually owned

Parent owns 80% of A and the consolidated entity holds 10% of the Parent’s common stock in treasury

Connecting affiliates

mutually owned

Parent owns 80% of A and 20% of B. Subsidiary A has 40% of B and Subsidiary B has 20% of A. Simultaneous equations will be used.


Parent
Subsidiary A
10%
80%
Parent
Subsidiary A
Subsidiary B
20%
20%
80%

Approaches for Mutual Holdings

Ada dua pendekatan yang digunakan

    • Treasury stock approach
    • Conventional approach
    • If parent stock is held by subsidiary

    • Use either the treasury stock or conventional approach
    • If subsidiary stock is mutually held

    • Use the conventional approach only

Treasury Stock or Conventional

Treasury stock method

    • Treats parent mutually held stock as treasury stock
    • Parent has fewer shares outstanding
    • "Interdependency" assumed eliminated by treasury stock treatment
    • Conventional method for mutual holding

    • Treats stock as retired
    • Parent has fewer shares outstanding
    • Simultaneous set of equations
    • Fully recognizes interdependencies

Parent Stock Mutually Held

One or more affiliates holds parent company stock

Treasury stock method

    • Recognize treasury stock at cost of subsidiary's investment in parent
    • Reduce Investment in subsidiary
    • Conventional method

    • Parent treats stock as retired, reducing common stock, and additional paid in capital or retained earnings
    • Reduce Investment in subsidiary

Comparison

Both methods reduce

    • Income from Subsidiary for the parent dividends paid to subsidiary
    • Methods result in different:

    • Equity accounts
      • Treasury stock
      • Retired common stock
    • Consolidated retained earnings
    • Noncontrolling interest

Treasury Stock Method - Data

Par owns 90% of Sal acquired at fair value equal to cost, no goodwill. Sal owns 10% of Par. At the start of 2012:

Investment in Sal, $297

Noncontrolling interest, $33

Sal's total stockholders' equity

    • Common stock $200
    • Retained earnings $130
    • During 2012,

      Separate income: Par $60, Sal $40

      Dividends: Par $27, Sal $20

Par Uses Treasury Stock Method

Allocations of income to CI and NCI:

Controlling interest share $95.7

Noncontrolling interest share $4.3

Par's Income from Sal $38.7 – 3.0 = $35.7


 

Par

Sal

CI

NCI

Total

Separate Income

60.0

40.0

 

 

100.0

Dividend income

(3.0)

3.0

 

 

 

Allocate:

 

 

 

 

 

Sal 90% Par: 10% NCI

38.7

(43.0)

 

4.3

 

Par 100% CI

(95.7)

 

95.7

 

 

Totals

 

 

95.7

4.3

100.0

Par's Equity Method Entries


Cash (+A)

18.0

 

Investment in Sal (-A)

 

18.0

for dividends

 

 


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