Chapter 9
INDIRECT AND MUTUAL HOLDINGS
Answers to Questions
1

An indirect holding of the stock of an affiliated company gives the investor an ability to control or
significantly influence the decisions of an investee not directly owned through an investee that is
directly owned. Two primary types of indirect ownership situations are the father-son-grandson
relationship and the connecting affiliates relationship.

2

No. Only 40 percent of T’s stock is held within the affiliation structure and P owns indirectly only 24
percent (60% ´ 40%) of T. T should be included as an equity investment in the consolidated statements
of P Company and Subsidiaries.

3a

Father-son-grandson

b

Connecting affiliates

Parent
Subsidiary Y

Parent
Subsidiary Y

Subsidiary Z

Subsidiary Z
Controlling stockholders
Direct ownership, 70% interest in Y. Indirect
ownership, 42% interest in Z (70% ´ 60%).

Controlling stockholders
Direct ownership, 30% interest in B and 70%
interest in A. Indirect ownership, 21% interest
in B (70% ´ 30%)

Noncontrolling stockholders
Direct ownership, 30% interest in Y and 40%
interest in Z. Indirect ownership, 18% interest
in Z (30% ´ 60%).

Noncontrolling stockholders
Direct ownership, 30% interest in A and 40%
interest in B. Indirect ownership, 9% interest in
B (30% ´ 30%).

4

An indirect holding involves the ability of one corporation to control another corporation by virtue of its
control over one or more other corporations. A mutual holding affiliation structure is a special type of
indirect holding where affiliates indirectly own themselves.

5

The parent’s direct and indirect ownership of Subsidiary B is 49 percent (70% ´ 70%). However,

consolidation of Subsidiary B is still appropriate because 70 percent of B’s stock is held within the
affiliation structure and only 30 percent is held by the noncontrolling stockholders of B.

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9-1


9-2

6

Indirect and Mutual Holdings

Approach A
Pat
Sam
Stan

Combined separate earnings of Pat, Sam, and Stan
($100,000 + $80,000 + $50,000)
Less: Noncontrolling interest share computed as follows:
Direct noncontrolling interest in Stan’s income
($50,000 ´ 30%)
Indirect noncontrolling interest in Stan’s income
($50,000 ´ 70% ´ 20%)
Direct noncontrolling interest in Sam’s income
($80,000 ´ 20%)
Pat’s net income and consolidated net income

$230,000

(15,000)
(7,000)
(16,000)
$192,000

Approach B
Separate earnings
Allocate Stan’s income to Sam
($50,000 ´ 70%)
Allocate Sam’s income to Pat
($115,000 ´ 80%)
Consolidated net income
Noncontrolling interest share
7

Pat
$100,000

+ 92,000
$192,000

Sam
$80,000

Stan
$50,000

+ 35,000

-35,000


-92,000

0

$ 23,000

$15,000

When the schedule approach for allocating income is used, investment income from the lowest
subsidiary must be added to the separate income of the next subsidiary to determine that subsidiary’s
net income before it can be allocated to the next subsidiary, and so on.

8
Separate earnings
Deduct: Unrealized profit
Separate realized earnings
Allocate S2’s income
Allocate S1’s income
P’s net income
Noncontrolling int. share

P
$20,000

S1 80%
$10,000
- 1,000

S2 70%

$5,000

20,000

9,000
+ 3,500
-10,000

5,000
-3,500
0

$ 2,500

$1,500

+10,000
$30,000

S1’s investment in S2 account was not adjusted for the unrealized profits because this would create a
disparity between S1’s investment in S2 account and S1’s share of S2’s equity.
9

A mutual holding situation exists because two affiliated companies hold ownership interests in each
other.

10

The treasury stock approach considers parent company stock held by a subsidiary to be treasury stock of
the consolidated entity. Accordingly, the subsidiary investment account is maintained on a cost basis and

is deducted at cost from stockholders’ equity in the consolidated balance sheet.

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Chapter 9

9-3

11

In situations in which a subsidiary holds stock in the parent, both the conventional and treasury stock
approaches are acceptable, but they do not result in equivalent consolidated financial statements. The
consolidated retained earnings and noncontrolling interest amounts will usually be different because of
different amounts of investment income. The treasury stock approach is not applicable when the
mutually held stock involves subsidiaries holding the stock of each other.

12

No. Parent company dividends paid to the subsidiary are eliminated.

13

The theory is that parent company stock purchased by a subsidiary is, in effect, returned to the parent
company and constructively retired. By recording the constructive retirement of the parent company
stock on parent company books, parent company equity will reflect the equity of stockholders outside
the consolidated entity. Also, recording the constructive retirement, by reducing parent company stock
and retained earnings to reflect amounts applicable to controlling stockholders outside the consolidated
entity, will establish consistency between capital stock and retained earnings for the parent’s outside
stockholders and parent company net income, dividends, and earnings per share which also relate to the

outside stockholders of the parent.

14

Consolidated net income is computed as follows:
P = $50,000 + .8S
S = $20,000 + .1P
P = $50,000 + .8($20,000 + .1P)
P = $71,739
Consolidated net income = $71,739 ´ 90% = $64,565

15

For eliminating the effect of mutually held parent company stock, two generally accepted approaches are
used—the treasury stock approach and the traditional approach. But when the mutually held stock
involves subsidiaries holding stock of each other, the treasury stock approach is not applicable.

16

By adding beginning noncontrolling interest and noncontrolling interest share (determined by
multiplying the company’s net income by the noncontrolling interest percentage) and subtracting the
noncontrolling interest’s percentage of dividends, the noncontrolling interest can be determined without
use of simultaneous equations.

SOLUTIONS TO EXERCISES
Solution E9-1
Pent
Separate earnings of the
three affiliates (in thousands)
Add: Dividend income from Sal’s

investment in Wint accounted for by
the cost method ($100,000 ´ 15%)
Allocate 60% of Terp’s earnings
Allocate 60% of Sal’s earnings
Consolidated net income – Contr. Share
Noncontrolling interest share

$

800

381
$1,181

Sal

Terp

$500

$200

15
120
(381)

(120)

$254


$ 80

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9-4

Indirect and Mutual Holdings

Solution E9-2
Pumba Corporation and Subsidiaries
Income Allocation Schedule
for the year 2009
(in thousands)
Pumba
Simba
Separate earnings or loss
$400
Allocate Simba’s income:
to Pumba ($150,000 ´ 60%)
90
to Timon ($150,000 ´ 20%)
Allocate Timon’s loss:
to Pumba $(170,000) ´ 80%
(136)
Consolidated net income – Contr. Share
$354
Noncontrolling interest share

Timon

$150

$(200)

(90)
(30)

30
136

$ 30

$ (34)

Solution E9-3
Place Corporation and Subsidiaries
Income Allocation Schedule
for the year 2009
Place
Lake
Separate incomes
$200,000
$80,000
Less: Unrealized profit on land
(20,000)
Separate realized incomes
200,000
60,000
Allocate Lake’s income
60% to Place

36,000
(36,000)
20% to Marsh
(12,000)
Allocate Marsh’s income
70% to Place
57,400
Consolidated net income – Contr. Share
$293,400
Noncontrolling interest share
$12,000

Marsh
$ 70,000
70,000
12,000
(57,400)
$ 24,600

Solution E9-4
1

2

c
Income from Seron is equal to:
70% of Seron’s $160,000 income
70% of Seron’s 80% interest in Trane’s
$100,000 income
Income from Seron

d
Noncontrolling interest share is equal to:
30% direct noncontrolling interest in Seron’s
$160,000 income
20% direct noncontrolling interest in Trane’s
$100,000 income
30% ´ 80% indirect noncontrolling interest in
Trane’s $100,000 income
Total noncontrolling interest

$112,000
56,000
$168,000

$ 48,000
20,000
24,000
$ 92,000

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Chapter 9

9-5

Solution E9-4 (continued)
3

d

Consolidated net income is equal to:
Combined separate incomes of $360,000 + $160,000 +
$100,000
Less: Noncontrolling interest share
Controlling interest share of Consolidated net income

$620,000
92,000
$528,000

Alternative computation:
Paine’s separate income
Add: 70% of Seron’s $160,000 income
Add: (70% ´ 80%) of Trane’s $100,000 income
Controlling interest share of Consolidated net income

$360,000
112,000
56,000
$528,000

Solution E9-5
80%
Sal
60%

Parent
10%
10%


Ulti
Separate earnings
Less: Unrealized profit
Separate realized
earnings
Allocate Val’s income
70% to Tall
Allocate Ulti’s income
10% to Tall
60% to Sal
Allocate Tall’s income
80% to Pal
10% to Sal
Allocate Sal’s income
80% to Pal
Pal’s net income (or
consolidated net
income)
Noncontrolling interest
share

80%
Tall
70%
Val

Pal
$ 50,000

Sal

$30,000

Tall
$35,000
- 5,000

Ulti
$(20,000)

Val
$40,000

50,000

30,000

30,000

(20,000)

40,000

+28,000
- 2,000
-12,000
+ 44,800
+ 5,600
+ 18,880

- 28,000

+ 2,000
+ 12,000

-44,800
- 5,600

-18,880

$113,680
$ 4,720

$ 5,600

$ (6,000)

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$12,000


9-6

Indirect and Mutual Holdings

Solution E9-6
90%

70%

10%


Mike
70%

Separate earnings
Unrealized profit
Separate realized earnings
Allocate Ople’s income
20% to Nina
70% to Mike
Allocate Nina’s income
70% to Pete
10% to Mike
Allocate Mike’s income
90% to Pete
Pete’s net income (or
Controlling share of NI)
Noncontrolling interest share

Pete

Ople

Pete
$ 65,000
65,000

Nina
20%
Mike

$18,000
- 4,000
14,000

Nina
$28,000
+ 2,000
30,000

Ople
$9,000
-4,000
5,000

+ 1,000

-1,000
-3,500

+ 3,500
+ 21,700
+ 3,100
+ 18,540

-21,700
- 3,100

-18,540

$105,240

$ 2,060

$ 6,200

$

500

Alternative solution
Adjusted
Adjustments =
Income
$ 65,000

+
-

Pete
Mike

18,000

-

$4,000

14,000a

12,600


$1,400

Nina

28,000

+

2,000

30,000b

23,700

6,300

Ople

9,000

-

4,000

5,000c

3,940

1,060


$105,240

$8,760

$114,000
a
b
c

-

Consolidated
Net Income
$ 65,000

Noncontrolling
Interest
=
Share
0

Reported
Income
$65,000

$14,000 divided 90% to consolidated net income (CNI)
10% to noncontrolling interest share (MIE)
$30,000 divided 70% + (90% ´ 10%) to CNI and 20% + (10% ´ 10%) to MIE
$5,000 divided (90% ´ 70%) + (70% ´ 20%) + (90% ´ 10% ´ 20%) to CNI [78.8%]
and 10% + (10% ´ 10% ´ 20%) + (20% ´ 20%) + (10% ´ 70%) to MIE [21.2%]


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Chapter 9

9-7

Solution E9-7
1

b
Separate income of Torry
Included in consolidated net income (.9 ´ .7 ´ $200,000)
Alternative solution
Direct noncontrolling interest (.3 ´ $200,000)
Indirect noncontrolling interest (.1 ´ .7 ´ $200,000)

2

3

a
Separate income = net income of Vance
Noncontrolling interest (direct)
c
Total separate incomes
Less: Consolidated net income
Pantela $620,000 ´ 100%
Sincock $175,000 ´ 90%

Torry $200,000 ´ 90% ´ 70%
Unger $(50,000) ´ 90% ´ 60%
Vance $120,000 ´ 90% ´ 80%
Total noncontrolling interest share

$200,000
(126,000)
$ 74,000
$ 60,000
14,000
$ 74,000
$120,000
20%
$ 24,000
$1,065,000

$620,000
157,500
126,000
(27,000)
86,400

Alternative solution
Sincock $175,000 ´ 10%
Torry $200,000 ´ 37%
Unger $(50,000) ´ 46%
Vance $120,000 ´ 28%
Total noncontrolling interest share
4


a
[See computations for question 3]

5

d
Net income of Sincock
Separate income
Add: 70% of Torry’s $200,000
Deduct: 60% of Unger’s $(50,000)
Add: 80% of Vance’s $120,000
Net income of Sincock
Pantela’s interest
Investment increase
Less: Dividends received from Sincock ($100,000 ´ 90%)
Net increase

(962,900)
102,100

$
$

$

$

$

$


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17,500
74,000
(23,000)
33,600
102,100

175,000
140,000
(30,000)
96,000
381,000
90%
342,900
(90,000)
252,900


9-8

Indirect and Mutual Holdings

Solution E9-8
Affiliation diagram
Pasko

80%
Savoy

1

2

4

Trent

b
Separate income of Savoy (net income)
Separate income of Trent $40,000 - ($80,000 ´ 10%)
Separate income of Pasko
$240,000 - ($40,000 ´ 70%) - ($80,000 ´ 80%)
Total separate income

$ 80,000
32,000
148,000
$260,000

d
Separate income
Unrealized profit on inventory
Unrealized profit on land
Separate realized income

3

70%


10%

Pasko
$148,000

Savoy
$80,000
(10,000)

$148,000

$70,000

a
Pasko’s separate income
Add: Investment income from Savoy ($70,000 ´ 80%)
Add: Investment income from Trent
[$17,000 + ($70,000 ´ 10%)] ´ 70%
Parent’s income (consolidated net income)
d
Total separate realized income
Less: Consolidated net income
Noncontrolling interest share

Trent
$32,000
(15,000)
$17,000
$148,000
56,000

16,800
$220,800
$235,000
220,800
$ 14,200

Alternative solution
Direct noncontrolling interest in Savoy ($70,000 ´ .
1)
Indirect noncontrolling interest in Savoy
($70,000 ´ .3 ´ .1)
Direct noncontrolling interest in Trent ($17,000 ´ .
3)
Noncontrolling interest share

$

7,000
2,100
5,100

$ 14,200

Solution E9-9
Pant
80%

30%
Solo


Consolidated net income
P = Income of Pant on a consolidated basis (including mutual income)
S = Income of Solo on a consolidated basis (including mutual income)
P = Separate income of $3,000,000 + 80% of S
S = Separate income of $1,500,000 + 30% of P
P = $3,000,000 + .8($1,500,000 + .3P) = $3,000,000 + $1,200,000 + .24P
.76P = $4,200,000
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Chapter 9

9-9

P = $5,526,316
Consolidated net income = $5,526,316 ´ 70% = $3,868,421

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9-10

Indirect and Mutual Holdings

Solution E9-10
1

Affiliation diagram
Packard
70%

Smedley
80%

10%

Tweed
2

P = Packard’s income on a consolidated basis
S = Smedley’s income on a consolidated basis
T = Tweed’s income on a consolidated basis
P = $200,000 + .7S
S = $120,000 + .8T
T = $80,000 + .1S
Solve for S
S = $120,000 + .8($80,000 + .1S)
S = $184,000 + .08S
S = $200,000
Compute P and T
P = $200,000 + .7($200,000)
P = $340,000
T = $80,000 + .1($200,000)
T = $100,000

Income Allocation
Consolidated net income (equal to P)
Noncontrolling interest share in Smedley ($200,000 ´ 20%)
Noncontrolling interest share in Tweed ($100,000 ´ 20%)
Total income


$340,000
40,000
20,000
$400,000

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Chapter 9

9-11

Solution E9-11 [AICPA adapted]
1

b

2

b

3

d

4

c

Supporting computations

A = Akron’s income on a consolidated basis
B = Benson’s income on a consolidated basis
C = Cashin’s income on a consolidated basis
A = $190,000 + .8B + .7C
B = $170,000 + .15C
C = $230,000 + .25A
Solve for A
A = $190,000 + .8[$170,000 + .15($230,000 + .25A)] + .7($230,000 + .25A)
A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175A
A = $514,600 + .205A
.795A = $514,600
A = $647,295.59
Determine C
C = $230,000 + .25($647,295.59)
C = $391,823.90
Determine B
B = $170,000 + .15($391,823.90)
B = $228,773.58
Allocate income to consolidated net income and noncontrolling interest
Consolidated net income ($647,295.59 ´ 75%)
Noncontrolling interest — Benson ($228,773.58 ´ 20%)
Noncontrolling interest — Cashin ($391,823.90 ´ 15%)
Total income

$485,471.69
45,754.72
58,773.59
$590,000.00

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9-12

Indirect and Mutual Holdings

Solution E9-12
1

2

d
Combined separate income
Less: Noncontrolling interest share
Consolidated net income

$160,000
6,750
$153,250

Alternatively:
Petty’s separate income
Add: Soma’s net income of $67,500 ´ 90%
Less: Dividends received from Petty ($50,000 ´ 15%)
Controlling interest share of Consolidated net income

$100,000
60,750
(7,500)
$153,250


b
P
.865P
P
S

=
=
=
=

$100,000 + .9($60,000 + .15P)
$154,000
$178,035
$60,000 + $26,705 = $86,705

Consolidated net income = $178,035 ´ .85 =
Noncontrolling interest share = $86,705 ´ .10 =
Total income

$151,330
8,670
$160,000

Solution E9-13
Separate earnings
Intercompany profit
Separate realized earnings


Pusan
$50,000
$50,000

Skagg
$42,000
3,000
(5,000)
$40,000

Tabor
$20,000
$20,000

P = Pusan’s income on a consolidated basis
S = Skagg’s income on a consolidated basis
T = Tabor’s income on a consolidated basis
P = $50,000 + .8S
S = $40,000 + .9T
T = $20,000 + .1P + .1S
Solve for T
T = $20,000 + .1($50,000 + .8S) + .1($40,000 + .9T)
T = $20,000 + $5,000 + .08($40,000 + .9T) + $4,000 + .09T
T = $25,000 + $3,200 + .072T + $4,000 + .09T
.838T = $32,200
T = $38,424.82
S = $40,000 + .9($38,424.82)
S = $40,000 + $34,582.34
S = $74,582.34
P = $50,000 + .8($74,582.34)

P = $50,000 + $59,665.87
P = $109,665.87
Consolidated net income ($109,665.87 ´ .9)
Noncontrolling interest share of Skagg ($74,582.34 ´ .1)
Noncontrolling interest share of Tabor ($38,424.82 ´ .1)

$ 98,699.28
7,458.24
3,842.48

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Chapter 9

9-13

Total income

$110,000.00

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9-14

Indirect and Mutual Holdings

Solution E9-14
1


Treasury stock approach

Investment in Scat balance December 31, 2009
Investment balance December 31, 2008
Add: Income from Scat
Less: Dividends received from Scat
Add: Dividends paid to Scat
Investment in Scat December 31, 2009

$245,700
26,900
(24,000)
6,000
$254,600

Supporting computations
Computation of income from Scat:
Scat’s separate income
Add: Scat’s dividend income from Pumel
Scat’s net income
Pumel’s ownership interest
Pumel’s equity in Scat’s income
Less: Dividends paid to Scat ($60,000 ´ 10%)
Less: Excess amortization ($9,000 x 70%)
Income from Scat

$ 50,000
6,000
56,000

70%
39,200
(6,000)
(6,300)
$ 26,900

2

Conventional approach

Pumel’s net income and consolidated net income
P = ($120,000 + .7S) - $6,300
S = $50,000 + .1P
P
P
.93P
P

=
=
=
=

$120,000 + .7($50,000 + .1P) - $6,300
$120,000 + $35,000 + .07P - $6,300
$148,700
$159,892

S = $50,000 + .1($159,892)
S = $65,989

Pumel’s net income and consolidated net income
($159,892 ´ 90%)
Noncontrolling interest share ($65,989 ´ 30%)
Total income

$143,903
19,797
$163,700

Income from Scat
Consolidated net income
Less: Pumel’s separate income
Income from Scat

$143,903
120,000
$ 23,903

Or alternatively,
($65,989 ´ 70%) - ($159,892 ´ 10%) - $6,300 excess

$ 23,903

Investment in Scat December 31, 2009
Investment in Scat December 31, 2008
Add: Income from Scat
Less: Dividends from Scat
Investment in Scat December 31, 2009

$245,700

23,903
(21,000)
$248,603

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Chapter 9

9-15

SOLUTIONS TO PROBLEMS
Solution P9-1
Pida Corporation and Subsidiaries
Schedule to Compute Consolidated Net Income and Noncontrolling Interest Share
for the year 2009
Separate income (loss)

Pida
$500,000

Staley
$300,000

Less: Unrealized profit
Separate realized income (loss)
Allocate Bean’s loss
70% to Staley

Bean

$(20,000)

(20,000)
500,000

300,000

130,000

(20,000)

(14,000)

Allocate Axel’s income
60% to Staley
Patent
Allocate Staley’s income
90% to Pida
Patent

Axel
$150,000

78,000
(12,000)
352,000
316,800
(40,000)

14,000

(78,000)

(316,800)

Controlling share of net income $776,800
Noncontrolling interest income

$ 35,200

$ 52,000

$ (6,000)

Check:
Income allocated: $776,800 consolidated net income + $35,200 noncontrolling
interest share in Staley + $52,000 noncontrolling interest share in Axel $6,000 noncontrolling interest share (loss) in Bean = $858,000
Income to allocate: $500,000 Pida income + $300,000 Staley income + $130,000
realized income of Axel - $20,000 loss of Bean - $52,000 patent = $858,000
Controlling share of consolidated net income: $500,000 - $40,000 + 90%
($300,000 - $12,000) + (90% ´ 60% ´ $130,000) - (90% ´ 70% ´ $20,000) =
$776,800

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9-16

Indirect and Mutual Holdings

Solution P9-2

1

Seaton’s books
Investment in Thayer (70%)
147,000
Cash
147,000
To record purchase of a 70% interest in Thayer Corporation.
Cash

7,000
Investment in Thayer (70%)
7,000
To record dividends received from Thayer ($10,000 ´ 70%).

Investment in Thayer (70%)
17,500
Income from Thayer
To record investment income computed as follows:
Share of Thayer’s net income ($30,000 ´ 70%)
Less: Unrealized profit from upstream sale of
inventory items ($5,000 ´ 70%)

17,500
$ 21,000
(3,500)
$ 17,500

Posey’s books
Cash


24,000
Investment in Seaton (80%)
24,000
To record dividends received from Seaton ($30,000 ´ 80%).

Investment in Seaton (80%)
44,000
Income from Seaton
To record investment income computed as follows:
Share of Thayer’s net income
($50,000 + $17,500) ´ 80%
Less: Unrealized gain on land sold to Thayer

44,000

$ 54,000
(10,000)
$ 44,000

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Chapter 9

9-17

Solution P9-2 (Continued)
2


Schedule of income allocation
Separate earnings
Less: Unrealized profits

Posey
$150,000
(10,000)

Seaton
$50,000

Thayer
$30,000
(5,000)

140,000

50,000

25,000

17,500

(17,500)

Separate realized earnings
Allocate Thayer’s realized earnings
to Seaton ($25,000 ´ 70%)
Seaton’s net income
Allocate Seaton’s net income to

Posey ($67,500 ´ 80%)
Posey’s net income and
Controlling share of net income
Noncontrolling interest share
Check:

3

67,500
54,000

(54,000)

$194,000
$13,500

$ 7,500

Realized earnings ($140,000 + $50,000 + $25,000)
$215,000
Less: Noncontrolling interest share (13,500+7,500) (21,000)
Controlling share of net income
$194,000

Schedule of assets and equities at December 31, 2010
Posey
Assets
Investment in Seaton (80%)
Investment in Thayer (70%)
Total assets


$

Liabilities
Capital stock
Retained earnings
Total liabilities and equity

$

924,000
220,000

$1,144,000
150,000
600,000
394,000
$1,144,000

Seaton

Thayer

$230,000

$270,000

157,500
$387,500


$270,000

$100,000
200,000
87,500
$387,500

$ 50,000
150,000
70,000
$270,000

Note: Posey’s assets other than investments consist of $800,000 assets
at the beginning of the year, plus separate earnings of $150,000 and
dividend income of $24,000, less dividends paid of $50,000.
Seaton’s assets other than investments consist of $350,000 assets
at the beginning of the period, plus separate earnings of $50,000 and
dividend income of $7,000, less investment cost of $147,000 and
dividends paid of $30,000.

© 2009 Pearson Education, Inc. publishing as Prentice Hall


9-18

Indirect and Mutual Holdings

Solution P9-3
Preliminary computations
Check on consolidated net income

Net income as stated
Less: Investment income
Separate income
Add: Unrealized profit in
beginning inventory
Less: Unrealized profit in
ending inventory
Separate realized incomes
Allocate Teel’s income
50% to Pony
40% to Star
Star’s net income
Allocate Star’s income
80% to Pony
Less: Depreciation on excess
allocated to plant and
Equipment
Total income of consolidated
Entity
Controlling share of NI
Noncontrolling int. share

Pony
$184,500
(84,500)
100,000

Star
$90,000
(10,000)

80,000

Teel
$25,000
25,000

Total
$299,500
(94,500)
205,000

8,000
108,000

8,000
80,000

(20,000)
5,000

2,500

(2,500)
(2,000)

2,000
82,000
65,600

(65,600)


(5,000)

( 1,250)

(6,250)

$171,100
$ 15,150

(20,000)
193,000

$

500

$186,750
171,100
15,650
$186,750

Investment in Star (80%)

$420,000

Implied total fair value of Star ($420,000 / 80%)
Book value of Star
Excess of fair value over book value


$ 525,000
(500,000)
$ 25,000

Excess allocated to equipment wit a four year lfe
Amortization ($25,000 / 4 yrs)

$

Investment in Teel (50%)

$ 75,000

Implied total fair value of Teel ($75,000 / 50%)
Book value of Star
Excess of fair value over book value – Goodwill

$ 150,000
(120,000)
$ 30,000

6,250

© 2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 9

9-19


Solution P9-3 (continued)
Pony Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2009
Pony
Income Statement
Sales

$500,000

Income from Star

72,000

Income from Teel

Star
$300,000

Adjustments and
Eliminations

Teel
$100,000

h

50,000

d


72,000

Consolidated
Statements
$

850,000

12,500

10,000

a

22,500

Cost of sales

240,000*

150,000*

60,000*

i

20,000

Other expenses


160,000*

70,000*

15,000*

f

6,250

251,250*

Noncont.int.share — Star

c

15,150

15,150*

Noncont.int.share — Teel

c

500

500*

Cont.int.shareof NI


$184,500

$ 90,000

g
h

8,000
50,000

$ 25,000

412,000*

$

171,100

$

95,000

Retained Earnings
Retained earnings — Pony $115,500
160,000

— Star
earnings — Teel


Retained earnings
Retained

f

12,500

g

8,000

e 160,000
45,000

Net income

184,500ü

90,000ü

25,000ü

Dividends

80,000*

40,000*

10,000*


b

45,000
171,100
a
c
d

9,000
9,000
32,000

80,000*

Retained earnings
December 31

$220,000

$210,000

$ 60,000

Balance Sheet
Cash

$ 67,000

$ 36,000


$ 10,000

70,000

50,000

20,000

j

10,000

130,000

Inventories

110,000

75,000

35,000

i

20,000

200,000

Plant and
equipment — net


140,000

425,000

115,000

f

18,750

686,250

Accounts receivable

Investment in
Star 80%

$

$

e

25,000

95,000

Investment in
Teel 40%


74,000

Goodwill

b

Accounts payable

$990,000

$660,000

$180,000

$ 70,000

$ 40,000

$ 15,000

Other liabilities

100,000

10,000

5,000

Capital stock


600,000

400,000

100,000

Retained earnings

220,000ü

210,000ü

$990,000

113,000

d 40,000
e 468,000

508,000

Investment in
Teel 50%

186,100

$660,000

a

b

7,500
87,500

a
b

6,000
68,000

30,000

30,000
$1,159,250

j

10,000

$

115,000
115,000

b 100,000
e 400,000

600,000


60,000ü

186,100

$180,000

Noncontrolling interest — Star (beginning)

e 117,000

Noncontrolling interest — Teel (beginning)

b

19,500

Noncontrolling interest December 31

c

6,650

143,150
$1,159,250

*

Deduct

© 2009 Pearson Education, Inc. publishing as Prentice Hall



9-20

Indirect and Mutual Holdings

Solution P9-4
1

Affiliation diagram
80%
Swift

Parish

50%

20%

Tolbert

10%
2

Income allocation
Definitions
P = Parish’s income on a consolidated basis
S = Swift’s income on a consolidated basis
T = Tolbert’s income on a consolidated basis
Equations

P = $200,000 + .8S + .5T
S = $100,000 + .2T
T = $50,000 + .1S
Solve for S
S = $100,000 + .2($50,000 + .1S)
S = $110,000 + .02S
.98S = $110,000
S = $112,244.90 or $112,245
Compute T
T = $50,000 + .1($112,244.90)
T = $50,000 + $11,224.49
T = $61,224.49 or $61,224
Compute P
P = $200,000 + .8($112,244.90) + .5($61,224.49)
P = $320,408.16 or $320,408

Income allocation
Consolidated net income = P =
Noncontrolling interest share in Swift ($112,245 ´ .1)
Noncontrolling interest share in Tolbert ($61,224 ´ .3)

$320,408
11,225
18,367
$350,000

© 2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 9


9-21

Solution P9-4 (continued)
3

P, S, and T are as defined in part 2.
Equation
P = ($200,000 - $20,000) + .8S + .5T
S = $100,000 + .2T
T = ($50,000 - $10,000) + .1S
Solve for S
S = $100,000 + .2($40,000 + .1S)
S = $108,000 + .02S
S = $110,204.08
Compute T
T = $40,000 + .1($110,204.08)
T = $51,020.41
Compute P
P = $180,000 + .8($110,204) + .5($51,020.41)
P = $293,673.48
Income allocation
Consolidated net income = P =
$293,673.48
Noncontrolling interest share in Swift ($110,204.08 ´ 10%)
11,020.40
Noncontrolling interest share in Tolbert ($51,020.41 ´ 30%)
15,306.12
$320,000.00


© 2009 Pearson Education, Inc. publishing as Prentice Hall


9-22

Indirect and Mutual Holdings

Solution P9-5
Working paper entries
a
Income from Skill
27,000
Dividend income
10,000
Dividends
28,000
Investment in Skill
9,000
To eliminate income from Skill, dividend income, and 90% of
Skill’s dividends, and return the investment in Skill account to
the beginning-of-the-period balance under the equity basis.
b

200,000
Capital stock — Skill
200,000
Retained earnings — Skill
Goodwill
50,000
Investment in Skill

405,000
45,000
Noncontrolling interest — beginning
To eliminate reciprocal investment and equity accounts, and enter
beginning-of-the-period patent and noncontrolling interest.

c

Treasury stock
80,000
Investment in Prill
To reclassify investment in Prill to treasury stock.

d

80,000

Noncontrolling Interest Share
3,000
Dividends
2,000
Noncontrolling Interest
1,000
To record noncontrolling interest share of subsidiary income and
dividends.

© 2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 9


9-23

Solution P9-5 (continued)
Treasury Stock approach
Prill Company and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2011
Prill
Income Statement
Sales
Income from Skill
Dividend income
Cost of sales
Expenses

Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings — Prill
Retained earnings — Skill
Net income (Controlling
share in Consol. Column)

$

400,000
27,000


$

177,000

$

300,000

$

$
177,000ü

250,000 *
80,000 *
170,000
3,000

3,000 *

30,000

$

167,000

$

300,000


200,000 b 200,000
30,000ü
20,000 *

$

377,000

$

210,000

$

486,000
414,000

$

420,000

a
d

900,000

$

$


123,000 $
400,000
377,000ü
900,000 $

90,000 *
377,000

$

906,000

500,000

$

50,000
956,000

90,000
200,000 b 200,000
210,000ü
500,000

$

a
9,000
b 405,000
c 80,000

b

$

28,000
2,000
$

80,000

$

50,000

Noncontrolling interest January 1
Noncontrolling interest December 31
Treasury stock

c

b

45,000

d

1,000

213,000
400,000

377,000

46,000

80,000
$

*

500,000

27,000
10,000

167,000

Investment in Prill 10%
Goodwill

Liabilities
Capital stock
Retained earnings

Consolidated
Statements
$

a
a


d
$

100,000 *

Balance Sheet
Other assets
Investment in Skill 90%

100,000
10,000
50,000 *
30,000 *

200,000 *
50,000 *

Dividends
Retained earnings
December 31

Adjustments and
Eliminations

Skill 90%

80,000*
956,000

Deduct


© 2009 Pearson Education, Inc. publishing as Prentice Hall


9-24

Indirect and Mutual Holdings

Solution P9-6
Calculations
Income from Scimp
Paroll separate income (140,000 - 80,000)
Scimp separate income (100,000 + 3,000 - 60,000)

$ 60,000
$ 43,000

Formula:
P income = Adjusted Paroll income + % interest ´ S income
Adjusted Paroll income = $60,000 + $2,000 delayed gain on land
- $4,000 patent amortization (80%)
S income = Scimp income + % interest ´ P income
P income = $58,000 + 80% ´ ($43,000 + 20% ´ P income)
P income = $92,400 + .16 ´ P income
P income = $110,000
S income = $43,000 + 20% ´ $110,000
S income = $65,000
Controlling share of consolidated net income = P income ´ % outstanding
Controlling share = $88,000
Noncontrolling share = S income ´ % outstanding

Noncontrolling share = $12,000 [($65,000 - $5,000 amortiz.) x 20%]
Income from Scimp = consolidated income less P separate income
Income from Scimp = $28,000 ($88,000-$60,000)
Working paper entries
a
Investment in Scimp
2,000
Gain on sale of land
To recognize previously deferred gain on sale of land.
b

2,000

Dividend income
4,000
Investment in Scimp
To eliminate intercompany dividends paid to Scimp

4,000

c

Income from Scimp
28,000
Dividends
16,000
Investment in Scimp
12,000
To eliminate income from Scimp and 80% of Scimp’s dividends, and
return the investment in Scimp account to the beginning-of-theperiod balance under the equity basis.


d

Investment in Scimp
Investment in Paroll
To eliminate reciprocal investments.

100,000
100,000

e

50,000
Capital stock — Scimp
180,000
Retained earnings — Scimp
Patent
20,000
Investment in Scimp
195,710
54,290
Noncontrolling interest — beginning
To eliminate reciprocal investment and equity accounts, and enter
beginning-of-the-period patent and noncontrolling interest.

f

Expenses
5,000
Patent

To record current year’s amortization of patent.

g

Noncontrolling Interest Share

12,000

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5,000


Chapter 9

9-25

Dividends
4,000
Noncontrolling Interest
8,000
To record the noncontrolling interest share of subsidiary income
and dividends.

© 2009 Pearson Education, Inc. publishing as Prentice Hall