Title | Solution Manual Advanced Accounting 11E by Beams 09 chapter |
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© 2011 Pearson Education, Inc. publishing as Prentice Hall 9-Chapter 9INDIRECT AND MUTUAL HOLDINGSAnswers to Questions1 An indirect holding of the stock of an affiliate gives the investor an ability to control or significantly influence the decisions of an investee not directly owned through an inve...
Chapter 9 INDIRECT AND MUTUAL HOLDINGS Answers to Questions 1
An indirect holding of the stock of an affiliate 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.
3
An indirect holding involves the ability of one corporation to control another by virtue of its control over one or more other corporations. An investor has the ability to control or significantly influence an investee that is not directly owned through an investee that is directly owned. A mutual holding affiliation structure is a special type of indirect holding where affiliates indirectly own themselves. In a mutual holding situation, the affiliates hold ownership interests in each other.
4
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.
5
Approach A Pat Sam Stan
Combined separate earnings of Pat, Sam, and Stan ($200,000 + $160,000 + $100,000) $460,000 Less: Noncontrolling interest share computed as follows: Direct noncontrolling interest in Stan’s income (30,000) ($100,000 30%) Indirect noncontrolling interest in Stan’s income (14,000) ($100,000 70% 20%) Direct noncontrolling interest in Sam’s income (32,000) ($160,000 20%) Pat’s net income and controlling share of consolidated net income $384,000 Approach B Separate earnings Allocate Stan’s income to Sam ($100,000 70%) Allocate Sam’s income to Pat ($230,000 80%) Controlling share Noncontrolling interest share
Pat $200,000
+184,000 $384,000
Sam $160,000
Stan $100,000
+ 70,000
-70,000
-184,000
0
$ 46,000
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$30,000
Indirect and Mutual Holdings
9-2
6
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.
7 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. 8
A mutual holding situation exists because two affiliates hold ownership interests in each other. The parent is mutually owned.
9
The treasury stock approach considers parent 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.
10
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.
11
No. Parent dividends paid to the subsidiary are eliminated.
12
The theory is that parent stock purchased by a subsidiary is, in effect, returned to the parent and constructively retired. By recording the constructive retirement of the parent stock on parent books, parent equity will reflect the equity of stockholders outside the consolidated entity. Also, recording the constructive retirement, by reducing parent 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 net income, dividends, and earnings per share which also relate to the outside stockholders of the parent.
13
Controlling share of 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 Controlling share of consolidated net income = $71,739 90% = $64,565
14
For eliminating the effect of mutually held parent stock, two generally accepted approaches are used—the treasury stock approach and the conventional approach. But when the mutually held stock involves subsidiaries holding stock of each other, the treasury stock approach is not applicable.
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Chapter 9
15
9-3
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 Pen
Sal
Tip
$1,600
$1,000
$400
Separate earnings of the three affiliates (in thousands) Add: Dividend income from Sal’s investment in Win accounted for by the cost method ($200,000 15%) Allocate 60% of Tip’s earnings Allocate 60% of Sal’s earnings Controlling Share of Cons. Income Noncontrolling interest share
762 $2,362
30 240 (762)
(240) ____
$508
$160
Solution E9-2 Pub Corporation and Subsidiaries Income Allocation Schedule for the year 2011 (in thousands) Pub Sam Separate earnings or loss $800 $300 Allocate Sam’s income: 180 (180) to Pub ($300,000 60%) (60) to Tim ($300,000 20%) Allocate Tim’s loss: (272) to Pub $(340,000) 80% Controlling Share of Consol. Income $708 Noncontrolling interest share $ 60
Tim $(400) 60 272 $ (68)
Solution E9-3 Place Corporation and Subsidiaries Income Allocation Schedule for the year 2011 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 _______ Controlling Share of Consol. Income $293,400 Noncontrolling interest share $12,000
Marsh $ 70,000 ______ 70,000 12,000 (57,400) $ 24,600
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Indirect and Mutual Holdings
9-4
Solution E9-4 1
2
3
c Income from Son is equal to: 70% of Son’s $160,000 income 70% of Son’s 80% interest in Tan’s $100,000 income Income from Son
$112,000 56,000 $168,000
d Noncontrolling interest share is equal to: 30% direct noncontrolling interest in Son’s $160,000 income 20% direct noncontrolling interest in Tan’s $100,000 income 30% 80% indirect noncontrolling interest in Tan’s $100,000 income Total noncontrolling interest share
24,000 $ 92,000
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: Pin’s separate income Add: 70% of Son’s $160,000 income Add: (70% 80%) of Tan’s $100,000 income Controlling interest share of Consolidated net income
$360,000 112,000 56,000 $528,000
$ 48,000 20,000
Solution E9-5 Separate earnings Less: Unrealized profit Separate realized earnings Allocate Val’s income 70% to Tea Allocate Won’s income 10% to Tea 60% to Sal Allocate Tea’s income 80% to Pal 10% to Sal Allocate Sal’s income 80% to Pal Pal’s net income (or Controlling share of consolidated net income) Noncontrolling interest share
Pal $ 50,000
Sal $30,000
Tea $35,000 - 5,000
Won $(20,000) _______
Val $40,000 ________
50,000
30,000
30,000
(20,000)
40,000
+28,000 - 2,000 -12,000 + 44,800 + 18,880
- 28,000 + 2,000 + 12,000
+ 5,600
-44,800 - 5,600
-18,880
________
________
_________
$ 4,720
$ 5,600
$ (6,000)
$12,000
$113,680
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Chapter 9
9-5
Solution E9-6
Separate earnings Unrealized profit Separate realized earnings Allocate Oak’s income 20% to Nun 70% to Man Allocate Nun’s income 70% to Pet 10% to Man Allocate Man’s income 90% to Pet Pet’s net income (or Controlling share of NI) Noncontrolling interest share
Pet $ 65,000 65,000
Man $18,000 - 4,000 14,000
Nun $28,000 + 2,000 30,000
Oak $9,000 -4,000 5,000
+ 1,000
-1,000 -3,500
+ 3,500 + 21,700 + 18,540
+ 3,100
-21,700 - 3,100
-18,540
________
$ 2,060
$ 6,200
________
$105,240 $
500
Alternative solution Adjusted Adjustments = Income $ 65,000
+ -
Pet Man
18,000
-
$4,000
14,000 a
12,600
$1,400
Nun
28,000
+
2,000
30,000 b
23,700
6,300
Oak
9,000
-
4,000
5,000 c
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 (NIS) $30,000 divided 70% + (90% 10%) to CNI and 20% + (10% 10%) to NIS $5,000 divided (90% 70%) + (70% 20%) + (90% 10% 20%) to CNI [78.8%] and 10% + (10% 10% 20%) + (20% 20%) + (10% 70%) to NIS [21.2%]
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Indirect and Mutual Holdings
9-6
Solution E9-7 1
b Separate income of Tar Included in consolidated net income (.9 .7 $400,000) Alternative solution Direct noncontrolling interest (.3 $400,000) Indirect noncontrolling interest (.1 .7 $400,000)
2
3
$ 120,000 28,000 $ 148,000
a Separate income = net income of Van Noncontrolling interest (direct)
$240,000 20% $ 48,000
c Total separate incomes Less: Controlling share of Consolidated net income $1,240,000 Pan $1,240,000 100% 315,000 Sin $350,000 90% 252,000 Tar $400,000 90% 70% (54,000) Win $(100,000) 90% 60% 172,800 Van $240,000 90% 80%
$2,130,000
(1,925,800) $ 204,200
Total noncontrolling interest share Alternative solution Sin $350,000 10% Tar $400,000 37% Won $(100,000) 46% Van $240,000 28% Total noncontrolling interest share 4
a [See computations for question 3]
5
d Net income of Sin Separate income Add: 70% of Tar’s $400,000 Deduct: 60% of Won’s $(100,000) Add: 80% of Van’s $240,000 Net income of Sin Pan’s interest Investment increase Less: Dividends received from Sin ($200,000 90%) Net increase
$400,000 (252,000) $ 148,000
$
35,000 148,000 (46,000) 67,200 $ 204,200
$
350,000 280,000 (60,000) 192,000 $ 762,000 90% 685,800 (180,000) $ 505,800
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Chapter 9
9-7
Solution E9-8
1
2
b Separate income of Sam (net income) Separate income of Ten $40,000 - ($80,000 10%) Separate income of Pat $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
Pat $148,000 ________ $148,000
Sam $80,000 (10,000) _______ $70,000
Ten $32,000 (15,000) $17,000
3
a Pat’s separate income $148,000 56,000 Add: Investment income from Sam ($70,000 80%) Add: Investment income from Ten 16,800 [$17,000 + ($70,000 10%)] 70% Pat’s income (controlling share of consolidated net income) $220,800
4
d Total separate realized income Less: Controlling share of consolidated net income Noncontrolling interest share Alternative solution Direct noncontrolling interest in Sam ($70,000 .1) Indirect noncontrolling interest in Sam ($70,000 .3 .1) Direct noncontrolling interest in Ten ($17,000 .3) Noncontrolling interest share
$235,000 220,800 $ 14,200 $
7,000
2,100 5,100 $ 14,200
Solution E9-9
P = Income of Pan on a consolidated basis (including mutual income) S = Income of Sol 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 Controlling Share of Consolidated net income = $5,526,316 70% = $3,868,421
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Indirect and Mutual Holdings
9-8
Solution E9-10
P = Pad’s income on a consolidated basis S = Sad’s income on a consolidated basis T = Two’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 Controlling share of consolidated net income (equal to P) Noncontrolling interest share in Sad ($200,000 20%) Noncontrolling interest share in Two ($100,000 20%) Total consolidated income
$340,000 40,000 20,000 $400,000
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Chapter 9
9-9
Solution E9-11 [AICPA adapted] 1
b
2
b
3
d
4
c
Supporting computations A = Pin’s income on a consolidated basis B = Son’s income on a consolidated basis C = Tin’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 = $391,823.89 Determine B B = $170,000 + .15($391,823.90) B = $228,773.58 Allocate income to controlling share of consolidated net income and noncontrolling interest Controlling Share of Consolidated net income ($647,295.59 75%) Noncontrolling interest — Son ($228,773.58 20%) Noncontrolling interest — Tin ($391,823.90 15%) Total consolidated income
$485,471.69 45,754.72 58,773.59 $590,000.00
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Indirect and Mutual Holdings
9-10
Solution E9-12 1
d Combined separate income Less: Noncontrolling interest share Controlling Share of Consolidated net income
$160,000 6,750 $153,250
Alternatively: Pet’s separate income Add: Sod’s net income of $67,500 90% Less: Dividends received from Pet ($50,000 15%) Controlling interest share of Consolidated net income
$100,000 60,750 (7,500) $153,250
b
2
P .865P P S
= = = =
$100,000 + .9($60,000 + .15P) $154,000 $178,035 $60,000 + $26,705 = $86,705
Controlling Share of Consolidated net income = $178,035 .85 = Noncontrolling interest share = $86,705 .10 = Total consolidated income
$151,330 8,670 $160,000
Solution E9-13 1
Treasury stock approach
Investment in Sat balance December 31, 2011 Investment balance December 31, 2010 Add: Income from Sat Less: Dividends received from Sat Add: Dividends paid to Sat Investment in Sat December 31, 2011
$245,700 26,900 (21,000) 6,000 $257,600
Supporting computations Computation of income from Sat: Sat’s separate income Add: Sat’s dividend income from Pug Sat’s net income Pug’s ownership interest Pug’s equity in Sat’s income Less: Dividends paid to Sat ($60,000 10%) Less: Excess amortization ($9,000 x 70%) Income from Sat
$ 50,000 6,000 56,000 70% 39,200 (6,000) (6,300) $ 26,900
2
Conventional approach
Pug’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 © 2011 Pearson Education, Inc. publishing as Prentice Hall
Chapter 9
9-11
S = $50,000 + .1($159,892) S = $65,989 Pug’s net income and controlling share ($159,892 90%) Noncontrolling interest share ($65,989 30%) Total income
$143,903 19,797 $163,700
Income from Sat Controlling Share of Consolidated net income Less: Pug’s separate income Income from Sat
$143,903 120,000 $ 23,903
Or alternatively, ($65,989 70%) - ($159,892 10%) - $6,300 excess
$ 23,903
Investment in Sat December 31, 2011 Investment in Sat December 31, 2010 Add: Income from Sat Less: Dividends from Sat Investment in Sat December 31, 2011
$245,700 23,903 (21,000) $248,603
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Indirect and Mutual Holdings
9-12
SOLUTIONS TO PROBLEMS Solution P9-1 Pad Corporation and Subsidiaries Schedule to Compute Controlling Share of Consolidated Net Income and Noncontrolling Interest Share for the year 2011 Separate income (loss)
Pad $500,000
Sal $300,000
Less: Unrealized profit Separate realized income (loss) Allocate Ban’s loss 70% to Sal
Ban $(20,000)
(20,000) 500,000
300,000
______
130,000
(20,000)
(14,00...