Solution manual advanced accounting 10e by beams ch09

PatSamStanCombined separate earnings of Pat, Sam, and Stan Less: Noncontrolling interest share computed as follows: Direct noncontrolling interest in Stan’s income Consolidated net incom

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 isdirectly owned Two primary types of indirect ownership situations are the father-son-grandsonrelationship 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

ParentSubsidiary YSubsidiary Z

ParentSubsidiary Y Subsidiary Z

Direct ownership, 30% interest in Y and 40%

interest in Z Indirect ownership, 18% interest

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 ofindirect 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 theaffiliation structure and only 30 percent is held by the noncontrolling stockholders of B

PatSamStanCombined separate earnings of Pat, Sam, and Stan

Less: Noncontrolling interest share computed as follows:

Direct noncontrolling interest in Stan’s income

Consolidated net income $192,000

7 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’snet income before it can be allocated to the next subsidiary, and so on

Separate realized earnings 20,000 9,000 5,000

Allocate S1’s income +10,000 -10,000 0

S1’s investment in S2 account was not adjusted for the unrealized profits because this would create adisparity 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

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 Theconsolidated retained earnings and noncontrolling interest amounts will usually be different because ofdifferent amounts of investment income The treasury stock approach is not applicable when themutually 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 companystock on parent company books, parent company equity will reflect the equity of stockholders outsidethe consolidated entity Also, recording the constructive retirement, by reducing parent company stockand retained earnings to reflect amounts applicable to controlling stockholders outside the consolidatedentity, will establish consistency between capital stock and retained earnings for the parent’s outsidestockholders and parent company net income, dividends, and earnings per share which also relate to theoutside 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 stockinvolves 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 thenoncontrolling interest’s percentage of dividends, the noncontrolling interest can be determined withoutuse of simultaneous equations

investment in Wint accounted for by

the cost method ($100,000 ´ 15%) 15

Allocate 60% of Sal’s earnings 381 (381)

Consolidated net income – Contr Share $1,181

Pumba Corporation and Subsidiaries

Income Allocation Schedulefor the year 2009(in thousands)

Pumba Simba Timon

Allocate Simba’s income:

Allocate Timon’s loss:

Consolidated net income – Contr Share $354

Solution E9-3

Place Corporation and Subsidiaries

Income Allocation Schedulefor the year 2009

Place Lake Marsh

Separate realized incomes 200,000 60,000 70,000Allocate Lake’s income

Allocate Marsh’s income

Consolidated net income – Contr Share $293,400

Noncontrolling interest share is equal to:

30% direct noncontrolling interest in Seron’s

Solution E9-4 (continued)

Consolidated net income is equal to:

Combined separate incomes of $360,000 + $160,000 +

Less: Noncontrolling interest share 92,000Controlling interest share of Consolidated net income $528,000

Alternative computation:

Add: (70% ´ 80%) of Trane’s $100,000 income 56,000Controlling interest share of Consolidated net income $528,000

Allocate Ople’s income

Pete’s net income (or

Controlling share of NI) $105,240

Noncontrolling interest share $ 2,060 $ 6,200 $ 500

Alternative solution

Noncontrolling

Income - Adjustments = Income - Net Income = Share

a $14,000 divided 90% to consolidated net income (CNI)

10% to noncontrolling interest share (MIE)

b $30,000 divided 70% + (90% ´ 10%) to CNI and 20% + (10% ´ 10%) to MIE

c $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%]

Solution E9-7

Included in consolidated net income (.9 ´ 7 ´ $200,000) (126,000)

$ 74,000Alternative solution

Direct noncontrolling interest (.3 ´ $200,000) $ 60,000Indirect noncontrolling interest (.1 ´ 7 ´ $200,000) 14,000

$ 74,000

Separate income = net income of Vance $120,000

$ 24,000

Less: Consolidated net income

Torry $200,000 ´ 90% ´ 70% 126,000Unger $(50,000) ´ 90% ´ 60% (27,000)Vance $120,000 ´ 90% ´ 80% 86,400 (962,900)

Unrealized profit on inventory (10,000)

Separate realized income $148,000 $70,000 $17,000

Add: Investment income from Savoy ($70,000 ´ 80%) 56,000Add: Investment income from Trent

[$17,000 + ($70,000 ´ 10%)] ´ 70% 16,800Parent’s income (consolidated net income) $220,800

Alternative solution

Direct noncontrolling interest in Savoy ($70,000 ´ 1)

$ 7,000Indirect noncontrolling interest in Savoy

Direct noncontrolling interest in Trent ($17,000 ´ 3)

5,100

Solution E9-9

Pant

Solo80% 30%

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

P = $5,526,316

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

1 Affiliation diagram

Packard

Smedley70%

Tweed80% 10%

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

Noncontrolling interest share in Smedley ($200,000 ´ 20%) 40,000Noncontrolling interest share in Tweed ($100,000 ´ 20%) 20,000

Solution E9-11 [AICPA adapted]

A = Akron’s income on a consolidated basis

B = Benson’s income on a consolidated basis

C = Cashin’s income on a consolidated basis

Allocate income to consolidated net income and noncontrolling interest

Consolidated net income ($647,295.59 ´ 75%) $485,471.69Noncontrolling interest — Benson ($228,773.58 ´ 20%) 45,754.72Noncontrolling interest — Cashin ($391,823.90 ´ 15%) 58,773.59

1 d

Less: Noncontrolling interest share 6,750

Alternatively:

Add: Soma’s net income of $67,500 ´ 90% 60,750Less: Dividends received from Petty ($50,000 ´ 15%) (7,500)Controlling interest share of Consolidated net income $153,250

P = Pusan’s income on a consolidated basis

S = Skagg’s income on a consolidated basis

T = Tabor’s income on a consolidated basis

Total income $110,000.00

1 Treasury stock approach

Investment in Scat balance December 31, 2009

Supporting computations

Computation of income from Scat:

Add: Scat’s dividend income from Pumel 6,000

Less: Dividends paid to Scat ($60,000 ´ 10%) (6,000)Less: Excess amortization ($9,000 x 70%) (6,300)

Income from Scat

Or alternatively,

($65,989 ´ 70%) - ($159,892 ´ 10%) - $6,300 excess $ 23,903

Investment in Scat December 31, 2009

Investment in Scat December 31, 2009 $248,603

SOLUTIONS TO PROBLEMS

Solution P9-1

Pida Corporation and Subsidiaries

Schedule to Compute Consolidated Net Income and Noncontrolling Interest Share

for the year 2009 Pida Staley Axel Bean Separate income (loss) $500,000 $300,000 $150,000 $(20,000)Less: Unrealized profit (20,000)

Separate realized income (loss) 500,000 300,000 130,000 (20,000)

Allocate Bean’s loss

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 = $858,000Controlling share of consolidated net income: $500,000 - $40,000 + 90%

($300,000 - $12,000) + (90% ´ 60% ´ $130,000) - (90% ´ 70% ´ $20,000) =

$776,800

To record investment income computed as follows:

Share of Thayer’s net income ($30,000 ´ 70%) $ 21,000Less: Unrealized profit from upstream sale of

To record investment income computed as follows:

Share of Thayer’s net income

Less: Unrealized gain on land sold to Thayer (10,000)

$ 44,000

Solution P9-2 (Continued)

2 Schedule of income allocation

Posey Seaton Thayer

Less: Unrealized profits (10,000) (5,000)Separate realized earnings 140,000 50,000 25,000Allocate Thayer’s realized earnings

Allocate Seaton’s net income to

Posey ($67,500 ´ 80%) 54,000 (54,000)

Posey’s net income and

Controlling share of net income $194,000

Check: 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

3 Schedule of assets and equities at December 31, 2010

Posey Seaton Thayer

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

Preliminary computations

Check on consolidated net income

Pony Star Teel Total Net income as stated $184,500 $90,000 $25,000 $299,500Less: Investment income (84,500) (10,000) (94,500)Separate income 100,000 80,000 25,000 205,000Add: Unrealized profit in

Less: Unrealized profit in

Separate realized incomes 108,000 80,000 5,000 193,000

Allocate Teel’s income

Allocate Star’s income

Less: Depreciation on excess

allocated to plant and

Implied total fair value of Star ($420,000 / 80%) $ 525,000

Excess of fair value over book value $ 25,000

Excess allocated to equipment wit a four year lfe

Implied total fair value of Teel ($75,000 / 50%) $ 150,000

Excess of fair value over book value – Goodwill $ 30,000

Solution P9-3 (continued)

Pony Corporation and Subsidiaries

Consolidation Working Papersfor the year ended December 31, 2009

Pony Star Teel Adjustments andEliminations ConsolidatedStatements

Income Statement

Sales $500,000 $300,000 $100,000 h 50,000 $ 850,000 Income from Star 72,000 d 72,000

Income from Teel 12,500 10,000 a 22,500

Retained earnings — Teel 45,000 b 45,000

Net income 184,500ü 90,000ü 25,000ü 171,100 Dividends 80,000 * 40,000 * 10,000 * a 9,000

equipment — net 140,000 425,000 115,000 e 25,000 f 18,750 686,250 Investment in

Star 80% 508,000

d 40,000

e 468,000 Investment in

Teel 50%

b 87,500 Investment in

P = Parish’s income on a consolidated basis

S = Swift’s income on a consolidated basis

T = Tolbert’s income on a consolidated basis

Noncontrolling interest share in Swift ($112,245 ´ 1) 11,225Noncontrolling interest share in Tolbert ($61,224 ´ 3) 18,367

$350,000

Noncontrolling interest share in Swift ($110,204.08 ´ 10%) 11,020.40Noncontrolling interest share in Tolbert ($51,020.41 ´ 30%) 15,306.12

$320,000.00

Working paper entries

Noncontrolling interest — beginning 45,000

To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest

To reclassify investment in Prill to treasury stock

d Noncontrolling Interest Share 3,000

To record noncontrolling interest share of subsidiary income and dividends

Solution P9-5 (continued)

Treasury Stock approach

Prill Company and Subsidiary

Consolidation Working Papersfor the year ended December 31, 2011

Prill Skill 90% Adjustments andEliminations ConsolidatedStatements

Net income (Controlling

share in Consol Column)

Income from Scimp

Paroll separate income (140,000 - 80,000) $ 60,000Scimp separate income (100,000 + 3,000 - 60,000) $ 43,000Formula:

P income = Adjusted Paroll income + % interest ´ S income

Adjusted Paroll income = $60,000 + $2,000 delayed gain on land

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

To recognize previously deferred gain on sale of land

To eliminate intercompany dividends paid to Scimp

To eliminate income from Scimp and 80% of Scimp’s dividends, and return the investment in Scimp account to the beginning-of-the-period balance under the equity basis

To eliminate reciprocal investments

Noncontrolling interest — beginning 54,290

To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest

To record current year’s amortization of patent