Solution manual advanced accounting 10e by beams ch09

Chapter INDIRECT AND MUTUAL HOLDINGS Answers to Questions 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 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%) 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 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 © 2009 Pearson Education, Inc publishing as Prentice Hall 9-1 9-2 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 Pat $100,000 + 92,000 $192,000 Sam $80,000 Stan $50,000 + 35,000 -35,000 -92,000 $ 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 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 $ 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 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 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 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 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 © 2009 Pearson Education, Inc publishing as Prentice Hall 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 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 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 9-5 Solution E9-4 (continued) 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) © 2009 Pearson Education, Inc publishing as Prentice Hall $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 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%] © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 9-7 Solution E9-7 b Separate income of Torry Included in consolidated net income (.9 ´ ´ $200,000) Alternative solution Direct noncontrolling interest (.3 ´ $200,000) Indirect noncontrolling interest (.1 ´ ´ $200,000) 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 a [See computations for question 3] 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 $ $ $ $ $ $ © 2009 Pearson Education, Inc publishing as Prentice Hall 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 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 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 ´ ´ 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 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 9-9 P = $5,526,316 Consolidated net income = $5,526,316 ´ 70% = $3,868,421 © 2009 Pearson Education, Inc publishing as Prentice Hall 9-10 Indirect and Mutual Holdings Solution E9-10 Affiliation diagram Packard 70% Smedley 80% 10% Tweed 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 © 2009 Pearson Education, Inc publishing as Prentice Hall 9-16 Indirect and Mutual Holdings Solution P9-2 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 © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 9-17 Solution P9-2 (Continued) 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: 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 / 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 9-19 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 Affiliation diagram 80% Swift Parish 50% 20% Tolbert 10% 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 9-21 Solution P9-4 (continued) P, S, and T are as defined in part 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 9-23 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 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 © 2009 Pearson Education, Inc publishing as Prentice Hall 5,000 Chapter 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 9-26 Indirect and Mutual Holdings Solution P9-6 (continued) Prill Company and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Paroll Income Statement Sales Income from Scimp $ Dividend income Gain on sale of land Expenses Consolidated net income Noncontrolling share Controlling share of NI 140,000 28,000 $ 80,000 * $ 88,000 Retained Earnings Retained earnings — Paroll $ 405,710 Retained earnings — Scimp $ $ 100,000 c 28,000 4,000 b 3,000 60,000 * f 4,000 g 12,000 180,000 Controlling share of NI 47,000ü Dividends 16,000 * 20,000 * Balance Sheet Other assets Investment in Scimp $ 477,710 $ 207,000 $ 448,000 109,710 $ 157,000 Investment in Paroll Patent 100,000 $ 557,710 $ 80,000 477,710ü 557,710 $ Capital stock Retained earnings Noncontrolling interest January Noncontrolling interest December 31 $ a Consolidated Statements $ 240,000 $ 5,000 145,000 * 100,000 12,000 * 88,000 $ 405,710 2,000 5,000 47,000 88,000ü Retained earnings December 31 Adjustments and Eliminations Scimp 90% e 180,000 88,000 c g 16,000 4,000 16,000 * $ 477,710 $ 605,000 $ 15,000 620,000 a 2,000 b 4,000 d 100,000 c 12,000 e 195,710 d 100,000 e 20,000 f 5,000 257,000 50,000 e 207,000ü 257,000 50,000 80,000 477,710 b g 54,290 8,000 $ * 62,290 620,000 Deduct © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 9-27 Solution P9-7 Preliminary Computations Panco’s investment cost $170,000 Implied total fair value of Stoker ($170,000 / 80%) Book value of Stoker Excess of fair value over book value - Goodwill $212,500 (200,000) $ 12,500 Consolidated net income and noncontrolling interest share (conventional approach) Definitions P = Panco’s income on a consolidated basis S = Stoco’s income on a consolidated basis P = $100,000 separate earnings + 8S S = $40,000 separate earnings + 1P Solve for P P = $100,000 + 8($40,000 + 1P) P = $100,000 + $32,000 + 08P P = $143,478 Compute S S = $40,000 + 1($143,478) S = $54,348 Income allocation Consolidated net income ($143,478 ´ 90% outside ownership) Noncontrolling interest share ($54,348 ´ 20%) Total (separate incomes) $129,130 10,870 $140,000 Entries to account for investments on an equity basis Panco’s books Capital stock 60,000 Retained earnings 20,000 Investment in Stoco 80,000 To record constructive retirement of 10% of Panco’s stock Investment in Stoco (80%) 29,130 Income from Stoco 29,130 To record income from Stoco computed as follows: 80%($54,348) 10%($143,478) = $29,130 Alternatively $129,130 - $100,000 separate income = $29,130 Cash 16,000 Investment in Stoco To record receipt of 80% of Stoco’s dividends Investment in Stoco (80%) 5,000 16,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 9-28 Indirect and Mutual Holdings Dividends 5,000 To eliminate dividends on stock that was constructively retired and to adjust the investment in Stoco account for the transfer equal to 10% of Panco’s dividends © 2009 Pearson Education, Inc publishing as Prentice Hall Chapter 9-29 Solution P9-7 (continued) Journal entries on Stoco’s books Investment in Panco (10%) 80,000 Assets 80,000 To record acquisition of a 10% interest in Panco at book value Investment in Panco 14,348 Income from Panco 14,348 To record 10% of Panco’s $143,478 income on a consolidated basis Cash 5,000 Investment in Panco (10%) 5,000 To record receipt of dividends from Panco ($50,000 ´ 10%) Net income for 2011 Separate incomes Investment income Net income Panco $100,000 29,130 $129,130 Stoco $ 40,000 14,348 $ 54,348 Investment balance December 31, 2011 Investments beginning of 2011 Less: Constructive retirement of Panco’s stock Add: Investment income Add: Dividends paid to Stoco Less: Dividends received Investment balances December 31, 2011 Panco $208,000 (80,000) 29,130 5,000 (16,000) $146,130 Stoco $ 80,000 Stockholders’ equity December 31, 2011 Stockholders’ equity January 1, 2011 Add: Net income Less: Dividends Stockholders’ equity December 31, 2011 Panco $720,000 129,130 (45,000) $804,130 Stoco $250,000 54,348 (20,000) $284,348 Noncontrolling interest at December 31, 2011 Stoco’s equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31, 2011 $284,348 20% $ 56,870 Alternative solution Noncontrolling interest January 1, 2011 ($250,000 ´ 20%) Noncontrolling interest share ($54,348 ´ 20%) Noncontrolling interest dividends Noncontrolling interest at December 31, 2011 $ 50,000 10,870 (4,000) $ 56,870 14,348 (5,000) $ 89,348 © 2009 Pearson Education, Inc publishing as Prentice Hall 9-30 Indirect and Mutual Holdings Solution P9-7 (continued) Adjustment and elimination entries a Income from Panco 14,348 Dividends 5,000 Investment in Panco 9,348 To eliminate investment income and dividends from Panco and return the investment account to its beginning-of-the-period balance b Investment in Stoco 80,000 Investment in Panco 80,000 To eliminate investment in Panco balance and increase the investment in Stoco for the constructive retirement of Panco’s stock that was charged to the investment in Stoco account c Dividends Investment in Stoco To eliminate dividends 5,000 5,000 d Income from Stoco 29,130 Dividends 16,000 Investment in Stoco 13,130 To eliminate income and dividends from Stoco and return the investment in Stoco to its beginning-of-the-period balance e 150,000 Capital stock — Stoco 100,000 Retained earnings — Stoco Patent 12,500 Investment in Stoco 208,000 Noncontrolling interest 54,500 To eliminate Stoco’s equity account balances and the investment in Stoco, enter beginning-of-the-period patent and noncontrolling interest f Noncontrolling interest share 10,870 Dividends 4,000 Noncontrolling Interest 6,870 To record the noncontrolling interest share of subsidiary income and dividends © 2009 Pearson Education, Inc publishing as Prentice Hall ... 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... 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... 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