Ch09-Advance Accounting-Mutual Holding

Indirect and Mutual Holdings
Chapter 9
2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-1
Learning Objective 1
Prepare consolidated statements when the parent company controls through indirect holdings.
9-2
Affiliation Structures
The potential complexity of corporate affiliation structure is limited only by ones imagination .
9-3
Direct Holdings
Parent 80% Subsidiary A

9-4
Direct Holdings
Parent 80% Subsidiary A 70% Subsidiary B 90% Subsidiary C

9-5
Indirect Holdings
Parent
80% Subsidiary A 70% Subsidiary B

9-6
Indirect Holdings
Parent 80% Subsidiary A 20% Subsidiary B

9-7
40%
Mutual Holdings
Parent 80% 10% Subsidiary A

9-8
Mutual Holdings
Parent 80% Subsidiary A 40% 20% Subsidiary B

9-9
20%
Father-Son-Grandson Structure
Poe Corporation acquires 80% of the stock of Shaw Corporation on January 1, 2003. Shaw acquires 70% of the stock of Turk Corporation on January 1, 2004. Both investments are made at book value.
9 - 10
Father-Son-Grandson Structure
(in thousands) Poe Shaw Turk
Other assets $400 Investment in Shaw: (80%) 200 Investment in Turk: (70%) $600 Liabilities $100 Capital stock 400 Retained earnings 100 $600 Separate earnings $100 Dividends $ 60
$195 105 $300 $ 50 200 50 $300 $ 50 $ 30
$190 $190 $ 40 100 50 $190 $ 40 $ 20

9 - 11
Computational Approaches for Consolidated Net Income

Poes separate earnings $100,000 Add: Poes share of Shaws separate earnings ($50,000 80%) 40,000 Add: Poes share of Turks separate earnings ($40,000 80% 70%) 22,400 Poes net income and consolidated net income $162,400
9 - 12

Combined separate earnings: Poe $100,000 Shaw 50,000 Turk 40,000 Less: Minority interest expenses: Direct minority interest in Turks income ($40,000 30%) $ 12,000 Indirect minority interest in Turks income ($40,000 70%) 5,600 Direct minority interest in Shaws income ($50,000 20%) 10,000 Poes net income and consolidated net income
$190,000
27,600 $162,400
9 - 13

(in thousands) Separate earnings Allocate Turks income to Shaw ($40,000 70%) Allocate Shaws income to Poe ($78,000 80%) Consolidated net income Minority interest expense Poe $100.0 + 62.4 $162.4 Shaw $ 50.0 + 28.0 62.4 $ 15.6 Turk $ 40.0 28.0 $ 12.0
9 - 14
Indirect Holdings Connecting Affiliates Structure
Pet
70% 60%
Sal
20%
Ty
9 - 15
Accounting for Connecting Affiliates

(in thousands) Pet 70% Pet 60% Sal 20% in Sal in Ty in Ty
Cost Less: Book value Goodwill Investment Balance 12/31/09 Cost Add: Share of investees pre-2008 income less dividends Balance 12/31/07
$178 168 $ 10 $178 7 $185
$100 90 $ 10 $100 18 $118
$20 20 $20 16 $36

9 - 16

Pet Sal Ty Earnings (2008) $70,000 $35,000 $20,000 Dividends $40,000 $20,000 $10,000 Pets separate earnings of $70,000 included an unrealized gain of $10,000 from the sale of land to Sal during 2008.
Sals separate earnings of $35,000 included unrealized profit of $5,000 on inventory items sold to Pet for $15,000 during 2008, and remaining in Pets 12/31/2008 inventory.
9 - 17

(in thousands) Separate earnings Deduct unrealized profit Separate realized earnings Allocate Tys income: 20% to Sal 60% to Pet Allocate Sals income: 70% to Pet Consolidated net income Minority interest expense
Pet Sal Ty
$70.0 10.0 $60.0 +12.0

+23.8 $95.8
$35.0 5.0 $30.0 + 4.0

23.8 $10.2
$20.0 $20.0 4.0 12.0

$ 4.0
9 - 18
Cash 6,000 Investment in Ty 6,000 To record dividends received from Ty Investment in Ty 12,000 Income from Ty 12,000 To record income from Ty
9 - 19
Reported income ($39,000 70%) Less: 70% of Sals unrealized profit of $5,000 Less: 100% of unrealized gain on land Total
$27,300 3,500 10,000 $13,800

9 - 20
Cash 14,000 Investment in Sal 14,000 To record dividends received from Sal Investment in Sal 13,800 Income from Sal 13,800 To record income from Sal
9 - 21

Pets investment accounts at 12/31/08
Investment Investment in Sal (70%) in Ty (60%)
Balance 12/31/2007 Add: Investment income Deduct: Dividends Balance 12/31/2008
$185,000 13,800 14,000 $183,800
$118,000 12,000 6,000 $124,000
9 - 22
Learning Objective 2
Apply consolidated procedures of indirect holdings to the special case of mutual holdings.
9 - 23
Mutual Holding Parent Stock Held by Subsidiary

Pace 90% 10%
Salt
The 10% interest held by Salt, and the 90% interest held by Pace, are not outstanding for consolidation purposes.
9 - 24

Treasury Stock Approach
Conventional Approach
9 - 25
Treasury Stock Approach

It considers parent company stock held by a subsidiary to be treasury stock of the consolidated entity. The investment account on the books of the subsidiary are maintained on a cost basis and is deducted at cost from stockholders equity in the consolidated balance sheet.
9 - 26

Trail balances 12/31/2005 Debits Other assets Investment in Salt (90%) Investment in Pace (10%) Expenses Credits Capital stock, $10 par Retained earnings Sales Pace $480,000 270,000 70,000 $820,000 Salt $260,000 70,000 50,000 $380,000
$500,000 200,000 120,000 $820,000
$200,000 100,000 80,000 $380,000

9 - 27
Treasury Approach: Working Papers December 31, 2005

Income Statement Sales Investment income Expenses Minority interest expense Net income Retained earnings Pace Retained earnings Salt Add: Net income Retained earnings December 31, 2005
Adjustments/ ConsolPace Salt Eliminations idated $120 $ 80 $200 27 a 27 (70) (50) (120) d 3 (3) $ 77 $ 30 $ 77 $200 $200 $100 b 100 77 30 77
$277 $130 $277
9 - 28

Balance Sheet Other assets Investment in Salt (90%) Investment in Pace (10%)
Pace $480 297

$777 $500 277 $777
Salt $260
70 $330
Adjustments/ Eliminations a 27 b 270 c 70
Consolidated $740
Capital stock Pace Capital stock Salt Retained earnings Treasury stock Minority interest
$740 $500 277
$200 b 200 130 $330 c 70 b 30 d 3
(70)
33 $740
9 - 29

Income Statement Sales Income from Salt Dividend income Expenses Minority interest expense Net income Retained earnings Pace Retained earnings Salt Dividends Pace $140 35.7 (80)
$ 95.7 $277
(27)
Add: Net income Retained earnings December 31, 2006
95.7
Adjustments/ ConsolSalt Eliminations idated $100 $240 a 35.7 3 a 3 (60) (140) d 4.3 (4.3) $ 43 $ 95.7 $277 $130 b 130 (20) a 18 d 2 (27) 43 95.7
$345.7
9 - 30
$345.7 $153

Balance Sheet Pace Salt Other assets $528 $283 Investment in Salt (90%) 317.7 Investment in Pace (10%) Adjustments/ Eliminations a 20.7 b 297 c 70 $811 $500 345.7 Consolidated $811
Capital stock Pace Capital stock Salt Retained earnings Treasury stock Minority interest
70 $845.7 $353 $500 $200 b 200 345.7 153 $845.7 $353 c 70
(70)
b 33 d 2.3 35.3 $811
9 - 31
It accounts for the subsidiary investment in parent company stock on an equity basis. Parent company stock held by a subsidiary is constructively retired. Capital stock and retained earnings applicable to the interest held by the subsidiary do not appear in the consolidated financial statements.
9 - 32
January 1, 2005
Pace
Consolidated
Capital stock Retained earnings Stockholders equity
$500,000 200,000 $700,000
$450,000 180,000 $630,000
9 - 33
January 1, 2005 Investment in Salt 270,000 Cash 270,000 To record acquisition of a 90% interest in Salt at book value
January 5, 2005 Capital Stock, $10 par 50,000 Retained Earnings 20,000 Investment in Salt 70,000 To record the constructive retirement of 10% of Paces outstanding stock
9 - 34
Allocation of Mutual Income
Determine income on a consolidated basis.
P = Paces separate earnings of $50,000 + 90%S

S = Salts separate earnings of $30,000 + 10%P
9 - 35

P = $50,000 + 0.9($30,000 + 0.1P)
P = $50,000 + $27,000 + 0.09P 0.91P = $77,000 P = $84,615 S = $30,000 + 0.1($84,615) S = $30,000 + $8,462 = $38,462
9 - 36
P Before allocation: $50,000 After allocation: $84,615
S $30,000 $38,462
Total $ 80,000 $123,077
9 - 37
Determine Paces net income on an equity basis and minority interest. P = 84,615 90% = $76,154 MI = 38,462 10% = $3,846
$76,154 + $3,846 = $80,000

9 - 38
Accounting for Mutual Income

($38,462 90%) ($84,615 10%) = $26,154
How does Pace record its investment income? Investment in Salt Income from Salt To record income from Salt 26,154 26,154
9 - 39
Conventional Approach: Working Papers December 31, 2005

Adjustments/ ConsolIncome Statement Pace Salt Eliminations idated Sales $120,000 $ 80,000 $200,000 Investment income 26,154 b 26,154 Expenses (70,000) (50,000) (120,000) Minority interest (3,846) expense d 3,846 Net income $ 76,154 $ 30,000 $ 76,154 Retained earnings P $180,000 $180,000 Retained earnings S $100,000 c 100,000 Add: Net income 76,154 30,000 76,154 Retained earnings December 31, 2005 $256,154 $130,000 $256,154
9 - 40
Conventional Approach: Working Papers December 31, 2005

Balance Sheet Other assets Investment in S
Pace Salt $480,000 $260,000 226,154 a 70,000 b 26,154 c 270,000 Investment in P 70,000 a 70,000 $756,154 $330,000 $740,000 Capital stock P $450,000 $450,000 Capital stock S $200,000 c 200,000 Retained earnings 256,154 130,000 256,154 $706,154 $330,000
Minority interest b 30,000 d 3,846 33,846 $740,000
9 - 41
Adjustments/ Eliminations
Consolidated $740,000
Conversion to Equity Method on Separate Company Book
P
Separate earnings 2005 Separate earnings 2006 Less dividends declared Add dividends received Increase in net assets $ 50,000 + 60,000 30,000 + 18,000 $ 98,000
S
$ 30,000 + 40,000 20,000 + 3,000 $ 53,000
Total $ 80,000 + 100,000 50,000 + 21,000 $ 151,000
9 - 42
Conversion to Equity Method on Separate Company Book

P = $98,000 + 0.9S S = $53,000 + 0.1P P = $98,000 + 0.9($53,000 + 0.1P) = $160,110 S = $53,000 + (0.1 $160,110) = $69,011 Paces RE increase: $160,110 90% = $144,099 MI RE increase: 69,011 10% = $6,901
Net asset increase: $144,099 + $6,901= $151,000

9 - 43
Subsidiary Stock Mutually Held
The mutually held stock involves subsidiaries holding the stock of each other, and the treasury stock approach is not applicable.
9 - 44

Poly
80%
Seth
70%
Uno
10%
9 - 45

Poly acquired 80% interest in Seth on January 2, 2005, for $260,000 ($20,000 goodwill). Seths stockholders equity consisted of $200,000 capital stock and $100,000 retained earnings. Seth acquired 70% interest in Uno on January 3, 2006, for $115,000 ($10,000 goodwill).
9 - 46

Unos stockholders equity consisted of $100,000 capital stock and $50,000 retained earnings. Uno acquired 10% interest in Seth on December 31, 2006, for $40,000. Seths stockholders equity consisted of $200,000 capital stock and $200,000 retained earnings.
9 - 47

(in thousands 12/31/2006) Cash Other current assets Plant and equipment net Investment in Seth (80%) Investment in Uno (70%) Investment in Seth (10%) Total Liabilities Capital stock Retained earnings Total Poly $ 64 200 500 336 $1,100 $ 200 500 400 $1,100 Seth $ 40 85 240 135 $500 $100 200 200 $500 Uno $ 20 80 110 40 $250 $ 70 100 80 $250
9 - 48

Poly 80% in Seth $260,000 Seth 70% Uno 10% in Uno in Seth $115,000 $40,000
Cost Add: Income less dividends (2005) Add: Income less dividends (2006) Balance 12/31/2006
32,000
48,000 $340,000
21,000 $136,000
$40,000
9 - 49
End of Chapter 9
9 - 50

Ch09-Advance Accounting-Mutual Holding

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Indirect and Mutual Holdings

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Parent 80% Subsidiary A

Parent 80% Subsidiary A 70% Subsidiary B 90% Subsidiary C

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

80% Subsidiary A 70% Subsidiary B

Parent 80% Subsidiary A 20% Subsidiary B

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Parent 80% 10% Subsidiary A

Parent 80% Subsidiary A 40% 20% Subsidiary B

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

$195 105 $300 $ 50 200 50 $300 $ 50 $ 30

$190 $190 $ 40 100 50 $190 $ 40 $ 20

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Computational Approaches for Consolidated Net Income

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Computational Approaches for Consolidated Net Income

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Computational Approaches for Consolidated Net Income

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Indirect Holdings Connecting Affiliates Structure

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Accounting for Connecting Affiliates

$178 168 $ 10 $178 7 $185

$100 90 $ 10 $100 18 $118

$20 20 $20 16 $36

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Accounting for Connecting Affiliates

Accounting for Connecting Affiliates

$70.0 10.0 $60.0 +12.0

$35.0 5.0 $30.0 + 4.0

$20.0 $20.0 4.0 12.0

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Accounting for Connecting Affiliates

Accounting for Connecting Affiliates

$27,300 3,500 10,000 $13,800

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Accounting for Connecting Affiliates

Accounting for Connecting Affiliates

Investment Investment in Sal (70%) in Ty (60%)

Balance 12/31/2007 Add: Investment income Deduct: Dividends Balance 12/31/2008

$185,000 13,800 14,000 $183,800

$118,000 12,000 6,000 $124,000

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Mutual Holding Parent Stock Held by Subsidiary

Mutual Holding Parent Stock Held by Subsidiary

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Treasury Stock Approach

Mutual Holding Parent Stock Held by Subsidiary

$500,000 200,000 120,000 $820,000

$200,000 100,000 80,000 $380,000

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Treasury Approach: Working Papers December 31, 2005

2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

Treasury Approach: Working Papers December 31, 2005

Pace $480 297

Adjustments/ Eliminations a 27 b 270 c 70

$740 $500 277

$200 b 200 130 $330 c 70 b 30 d 3