Chapter 9: Indirect and Mutual Holdings



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Investment in Sal (+A)

38.7

 

Income from Sal (+R, +SE)

 

38.7

for income

 

 

Income from Sal (-R, -SE)

3.0

 

Dividends (+SE)

 

3.0

for Par dividends paid to Sal

Dividends (-SE)

27.0

 

Income from Sal (-R, -SE)

3.0

 

Cash (-A)

 

30.0

In place of the last entry, Par could record its dividend directly as:

Worksheet Entries


Income from Sal (-R, -SE)

35.7

 

Dividends (+SE)

 

18.0

Investment in Sal (-A)

 

17.7

Noncontrolling interest share (-SE)

4.3

 

Dividends (+SE)

 

2.0

Noncontrolling interest (+SE)

 

2.3

Common stock (-SE)

200.0

 

Retained earnings (-SE)

130.0

 

Investment in Sal (-A)

 

297.0

Noncontrolling interests (+SE)

 

33.0

Treasury stock (-SE)

70.0

 

Investment in Par (-A)

 

70.0

Parent Mutually Held - Data

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

    • Investment in Salt, $226,154
    • Investment in Part, $70,000
    • Noncontrolling interest, $33,846
    • Salt's total stockholders' equity
    • was $200,000 CS and $130,000 RE

      During 2012,

    • Separate income: Part $60,000, Salt $40,000
    • Dividends: Part $30,000 (including $3,000 paid to Salt), Salt $20,000

Investment and noncontrolling interest
= 226,154 + 33,846
equals underlying equity less mutual holding
= 200,000+130,000-70,000.

Part Uses Conventional Method


Solved, substituting 2nd equation into 1st:
P = 105,495
S = 50,550
CI share = 94,945
NCI share = 5,055

Allocation information:

Equations:

P = $60,000 + .9S

S = $40,000 + .1P

CI share = .9P

NCI share = .1S



Part

Salt

CI

NCI

Total

Separate Income

$60,000

$40,000



$100,000

Salt's allocation

.90S

.10S

Part's allocation

.10P

.90P

Conventional method is analogous to reciprocal cost allocation method.

Note on Results:

Results:

P = 105,495

S = 50,550

CI = 94,945

NCI = 5,055

CI + NCI = $100,000, the total separate income

Part's Income from Salt = .9S - .1P = $34,945

90% of Sal's income – 10% mutual holding

CI = Part's separate income + Income from Salt

$60,000 + $34,945 = $94,945 (as a check!)

Part's Equity Method Entries


Cash (+A)

18,000

 

Investment in Salt (-A)

 

18,000

for dividends

 

 

Investment in Salt (+A)

34,945

 

Income from Salt (R, +SE)

 

34,945

for income

 

 

Investment in Salt (+A)

3,000

 

Dividends (-SE)

 

3,000

for Part dividends paid to Salt

Worksheet Entries - Conventional


Income from Salt (-R, -SE)

34,945

 

Dividend Income (-R, -SE)

3,000

Dividends (+SE)

 

18,000

Investment in Salt (-A)

 

19,945

Noncontrolling interest share (-SE)

5,055

 

Dividends (+SE)

 

2,000

Noncontrolling interest (+SE)

 

3,055

Common stock (-SE)

200,000

 

Retained earnings (-SE)

130,000

 

Investment in Salt (-A)

 

296,154

Noncontrolling interests (+SE)

 

33,846

Investment in Salt (+A)

70,000

Investment in Part (-A)

70,000

Subsidiary Stock Mutually Held

Subsidiaries hold stock in each other

    • Use conventional approach
    • Treasury stock method is not appropriate
      • It is not parent's stock
      • Subsidiary stock is eliminated in consolidation

Subsidiary Mutual Holdings

Pal owns 80% of Set acquired at book value plus $25,000 goodwill. Set owns 70% of Ton acquired at book value plus $10,000 goodwill. Ton owns 10% of Set, cost method.

At the start of 2013:

    • Investment in Set (by Pal, 80%), $340,000
    • Investment in Ton (by Set, 70%), $133,000
    • Investment in Set (by Ton, 10%), $40,000
    • Noncontrolling interest, $102,000
    • For 2013:


 

Pal

Set

Ton

Separate income

112,000

51,000

40,000

Dividends

50,000

30,000

20,000

Allocate Income to CI and NCI

Equations:

P = 112,000 + .8S

S = 51,000 + .7T

T = 40,000 + .1S

CI = 1P

NCI = .3T + .1S

Solve, substituting 2nd equation

into 3rd (or 3rd into 2nd):

T = 48,495

S = 84,946

P = 179,957

CI share = 179,957

NCI share = 14,548 + 8,495 = 23,043


 Allocation Info.

Pal

Set

Ton

CI

NCI

Total

Separate income

112,000

51,000

40,000



203,000

Ton's allocation


.7T



.3T


Set's allocation

.8S


.1S


.1S


Pal's allocation




1.0P


A Look at the Results

Results:

T = 48,495

S = 84,946

P = 179,957

CI share = 179,957

NCI share = 14,548 + 8,495 = 23,043

Consolidated income

    • CI and NCI shares = 203,000, total separate income
    • Intercompany income

    • Pal's Income from Set = .8S = 67,957
    • Set's Income from Ton = .7T = 33,946
    • Ton's Dividend income = .1(Set's dividends) = 3,000
    • Individual reported income

    • Pal's separate income + income from Set = 179,957
    • Set's separate income + income from Ton = 84,946

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