B. Woods Chapter 9

33
Chapter 9
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% x 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 A
Subsidiary B
Subsidiary Z
and
and
Majority stockholders
Direct ownership, 70% interest
Majority stockholders
Direct ownership, 30% interest in B
in Y. Indirect ownership, 42% 70% interest in A. Indirect ownership,

interest in Z (70% x 60%).
21% interest in B (70% x 30%).
Minority stockholders
Direct ownership, 30% interest
in Y and 40% interest in Z.

ownership,
Indirect ownership, 18% interest
in Z (30% x 60%).
Minority stockholders
Direct ownership, 30% interest in A
40% interest in B. Indirect
9% interest in B (30% x 30%).
34
Indirect and Mutual Holdings
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% x 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 minority stockholders of B.
6 Approach A
Pat
Sam
Stan
Combined separate earnings of Pat, Sam, and Stan ($100,000
+ $80,000 + $50,000)
Less: Minority interest expense computed as follows:
Direct minority interest in Stan's income ($50,000 x 30%)
Indirect minority interest in Stan's income ($50,000
x 70% x 20%)
Direct minority interest in Sam's income ($80,000 x 20%)
Pat's net income and consolidated net income
$230,000
(15,000)
(7,000)
(16,000)
$192,000
Approach B
Pat
Sam
Stan
Separate earnings
Allocate Stan's income to Sam
($50,000 x 70%)
Allocate Sam's income to Pat
($115,000 x 80%)
$100,000
$80,000
$50,000
+35,000
-35,000
Consolidated net income

Minority interest expense
$192,000
+ 92,000
-92,000
$23,000
$15,000
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's net income before it can be
allocated to the next subsidiary, and so on.
8
P
S1 80%
S2 70%
Separate earnings
Deduct: Unrealized profit
$20,000
$10,000
- 1,000
$5,000
Separate realized earnings

Allocate S2's income
Allocate S1's income
20,000
9,000
+ 3,500
-10,000
5,000
-3,500
+10,000
35
Chapter 9
P's net income

Minority interest expenses
$30,000
$ 2,500
$1,500
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.
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 minority 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 majority 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 x 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

36
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 minority interest and minority interest expense

(determined by multiplying the company's net income by the minority interest
percentage) and subtracting the minority interest's percentage of dividends,
the minority interest can be determined without use of simultaneous
equations.
37
Chapter 9
SOLUTIONS TO EXERCISES
Solution E9-1
Pent
Separate earnings of the
three affiliates
Sal
800,000
$500,000
Add: Dividend income from Sal's

investment in Wint accounted for by
the cost method ($100,000 x 15%)
$200,000
15,000
Allocate 60% of Terp's earnings

Allocate 60% of Sal's earnings
Terp
120,000
381,000
(120,000)
(381,000)
$1,181,000
$254,000
$ 80,000
Solution E9-2
Pumba Corporation and Subsidiaries
Income Allocation Schedule
for the year 2006
Separate earnings or loss

Allocate Simba's income:
to Pumba ($150,000 x 60%)
to Timon ($150,000 x 20%)
Pumba
Simba
Timon
$400,000
$150,000
$(200,000)
90,000
Allocate Timon's loss:

to Pumba $(170,000) x 80%
(136,000)
$354,000
(90,000)
(30,000)
30,000
136,000
$ 30,000
$ (34,000)
38
Solution E9-3
Place Corporation and Subsidiaries
Income Allocation Schedule
for the year 2006
Separate incomes
Less: Unrealized profit on land
Separate realized incomes
Place
Lake
$200,000
$80,000
(20,000)
$70,000
200,000
60,000
70,000
36,000
(36,000)
(12,000)
12,000
Allocate Lake's income

60% to Place
20% to Marsh
Allocate Marsh's income
70% to Place
57,400
$293,400
Marsh
(57,400)
$12,000
$24,600
Solution E9-4
1
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
2
$112,000
56,000
$168,000
Minority interest expense is equal to:

30% direct minority interest in Seron's $160,000 income
$
20% direct minority interest in Trane's $100,000 income
30% x 80% indirect minority interest in Trane's $100,000 income
Total minority interest
$
3
48,000
20,000
24,000
92,000
Consolidated net income is equal to:

Combined separate incomes of $360,000 + $160,000 + $160,000
Less: Minority interest expense
$620,000
92,000
$528,000
Alternative computation:
Paine's separate income
Add: 70% of Seron's $160,000 income
Add: (70% x 80%) of Trane's $100,000 income
$360,000
112,000
56,000
39
Chapter 9
$528,000
40
Solution E9-5
Pal
80%
80%
10%
Sal
Tall
10%
60%
70%
Ulti
Val
Pal
Separate earnings
Less: Unrealized profit
Sal
Val
$30,000
$35,000
- 5,000
$(20,000)
$40,000
50,000
30,000
30,000
(20,000)
40,000
+28,000
Allocate Ulti's income

10% to Tall
60% to Sal
- 2,000
-12,000
+ 44,800
+ 5,600
Allocate Sal's income

80% to Pal
+ 18,880
Pal's net income (or

consolidated net income)
$113,680
Ulti
$ 50,000
Allocate Val's income

70% to Tall
Allocate Tall's income

80% to Pal
10% to Sal
Tall
-28,000
+ 2,000
+ 12,000
-44,800
- 5,600
-18,880
$ 4,720
$ 5,600
$ (6,000)
$12,000
41
Chapter 9
Solution E9-6
90%
Pete
70%
10%
Mike
Nina
70%
Ople
20%
Mike
Nina
Ople
$ 65,000
$18,000
$28,000
$ 9,000
- 4,000
+ 2,000
- 4,000
14,000
30,000
5,000
+ 1,000
- 1,000
- 3,500
Separate earnings
Pete
Unrealized profit
65,000
Allocate Ople's income

20% to Nina
70% to Mike
+ 3,500
Allocate Nina's income

70% to Pete
10% to Mike
+ 21,700
-21,700
- 3,100
+ 3,100
Allocate Mike's income

90% to Pete
+ 18,540
Pete's net income (or

consolidated net income)
$105,240
-18,540
$ 2,060
$ 6,200
500
Alternative solution:
Reported
Income
Pete
$65,000
Mike
18,000
Nina
Ople
28,000
9,000
+
-
Adjustments
Adjusted
Income
$ 65,000
+
-
Consolidated
Net Income
Minority
Interest
Expense
$ 65,000
$4,000
14,000a
12,600
$ 1,400
2,000
23,700
6,300
5,000
3,940
1,060
$114,000
$105,240
$ 8,760
4,000
30,000
$14,000 divided 90% to consolidated net income (CNI)

10% to minority interest expense (MIE)
$30,000 divided 70% + (90% x 10%) to CNI and 20% + (10% x 10%) to MIE
$5,000 divided (90% x 70%) + (70% x 20%) + (90% x 10% x 20%) to CNI [78.8%]
and 10% + (10% x 10% x 20%) + (20% x 20%) + (10% x 70%) to MIE [21.2%]
42
Solution E9-7
1
Separate income of Torry

Included in consolidated net income (.9 x .7 x $200,000)
$200,000
(126,000)
$ 74,000
Alternative solution
Direct minority interest (.3 x $200,000)
Indirect minority interest (.1 x .7 x $200,000)
2
$ 60,000
14,000
$ 74,000
Separate income = net income of Vance

Minority interest (direct)
3
$120,000
20%
$ 24,000
Total separate incomes

Less: Consolidated net income
Pantela $620,000 x 100%
Sincock $175,000 x 90%
Torry $200,000 x 90% x 70%
Unger $(50,000) x 90% x 60%
Vance $120,000 x 90% x 80%
Total minority interest expense
$1,065,000
$620,000
157,500
126,000
(27,000)
86,400
Sincock $175,000 x 10%
Torry $200,000 x 37%
Unger $(50,000) x 46%
Vance $120,000 x 28%
Total minority interest expense
4
(962,900)
102,100
$ 17,500
74,000
(23,000)
33,600
$102,100
[See computations for question 3]
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 x 90%)
Net increase
$175,000
140,000
(30,000)
96,000
$381,000
90%
342,900
(90,000)
$252,900
43
Chapter 9
Solution E9-8
Affiliation diagram
Pasko
80%
70%
10%
Savoy
1
Trent
Separate income of Savoy (net income)

Separate income of Trent $40,000 - ($80,000 x 10%)
Separate income of Pasko
$240,000 - ($40,000 x 70%) - ($80,000 x 80%)
$ 80,000
32,000
Total separate income
$260,000
148,000
d
Pasko
Savoy
Trent
Separate income
Unrealized profit on inventory
Unrealized profit on land
$148,000
$80,000
(10,000)
$32,000
Separate realized income
$148,000
(15,000)
$70,000
$17,000
Pasko's separate income

Add: Investment income from Savoy ($70,000 x 80%)
Add: Investment income from Trent
[$17,000 + ($70,000 x 10%)] x 70%
$148,000
56,000
Parent's income (consolidated net income)
$220,800
16,800
Total separate realized income

Less: Consolidated net income
Direct minority interest in Savoy
($70,000 x .1)
Indirect minority interest in Savoy ($70,000 x .3 x .1)
Direct minority interest in Trent
($17,000 x .3)
$235,000
220,800
$ 14,200
$
7,000
2,100
5,100
$ 14,200
44
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
P = $5,526,316
Consolidated net income = $5,526,316 x 70% =
$3,868,421
Solution E9-10
1
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
45
Chapter 9
T = $80,000 + .1($200,000)
T = $100,000
Income Allocation
Consolidated net income (equal to P)
Minority interest expense in Smedley ($200,000 x 20%)
Minority interest expense in Tweed ($100,000 x 20%)
Total income
Solution E9-11
1
$340,000
40,000
20,000
$400,000
[AICPA adapted]
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 minority interest
46
Consolidated net income ($647,295.59 x 75%)
$485,471.69
Minority interest-Benson ($228,773.58 x 20%)
45,754.72
Minority interest-Cashin ($391,823.90 x 15%)
58,773.59
Total income
$590,000.00
47
Chapter 9
Solution E9-12
1
Combined separate income

$160,000
6,750
$153,250
Alternatively:
Petty's separate
Add: Soma's net
Less: Dividends
Consolidated net
$100,000
60,750
(7,500)
$153,250
income
income of $67,500 x 90%
received from Petty ($50,000 x 15%)
income
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 x .85 =

Minority interest expense = $86,705 x .10 =
Total income
$151,330
8,670
$160,000
48
Solution E9-13
Separate earnings
Pusan
Skagg
Tabor
$50,000
$42,000
$20,000
Intercompany profit
3,000
(5,000)
$50,000
$40,000
$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 x .9)
$ 98,699.28
Minority interest expense of Skagg ($74,582.34 x .1)
7,458.24
Minority interest expense of Tabor ($38,424.82 x .1)
3,842.48
Total income
$110,000.00
49
Chapter 9
Solution E9-14
1
Treasury stock approach
Investment in Scat balance December 31, 2006

Investment balance December 31, 2005
Add:
Less:
Add:
Income from Scat

Dividends received from Scat
Dividends paid to Scat
Investment in Scat December 31, 2006
$247,500
26,700
(21,000)
6,000
$259,200
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
$ 50,000
6,000
56,000
70%
Pumel's equity in Scat's income
39,200
Less:
Dividends paid to Scat ($60,000 x 10%)
(6,000)
Less:
Excess amortization
(6,500)
Income from Scat
$ 26,700
50
Solution E9-14
2
(continued)
Conventional approach
Pumel's net income and consolidated net income

P = ($120,000 + .7S) - $6,500
S = $50,000 + .1P
P = $120,000 + .7($50,000 + .1P) - $6,500
P = $120,000 + $35,000 + .07P - $6,500
.93P = $148,500
P = $159,677
S = $50,000 + .1($159,677)
S = $65,968
Pumel's net income and consolidated net

income
($159,677 x 90%)
Minority interest expense ($65,968 x 30%)
Total income
$143,710
19,790
$163,500
Income from Scat

Less:
Pumel's separate income
Income from Scat
Or alternatively,
($65,968 x 70%) - ($159,677 x 10%) - $6,500 excess
$143,710
120,000
$ 23,710
$ 23,710

Add:
Income from Scat
Add: Dividend paid to Scat

Less:
Dividends from Scat
$247,500
23,710
6.000
(21,000)
$256,210
51
Chapter 9
SOLUTIONS TO PROBLEMS
Solution P9-1
Pida Corporation and Subsidiaries
Schedule to Compute Consolidated Net Income and Minority Interest Income
for the year 2008
Separate income (loss)

Less:
Pida
Staley
Axel
Bean
$500,000
$300,000
$150,000
$(20,000)
Unrealized profit
Separate realized income (loss)
(20,000)
500,000
Allocate Bean's loss

70% to Staley
300,000
130,000
(14,000)
Allocate Axel's income

60% to Staley
78,000
Patent
(20,000)
14,000
(78,000)
(14,000)
350,000
Allocate Staley's income

90% to Pida
315,000
Patent
(40,000)

Minority interest income
(315,000)
$775,000
$ 35,000
$ 52,000
$ (6,000)
Check:
Income allocated: $775,000 consolidated net income + $35,000 minority
interest expense in Staley + $52,000 minority interest expense in Axel $6,000 minority interest loss in Bean = $856,000
Income to allocate: $500,000 Pida income + $300,000 Staley income + $130,000
realized income of Axel - $20,000 loss of Bean - $54,000 patent = $856,000
Consolidated net income: $500,000 - $40,000 + 90%($300,000 - $14,000) + (90%
x 60% x $130,000) - (90% x 70% x $20,000) = $775,000
52
Solution P9-2
1
Seaton's books
Investment in Thayer (70%)
Assets
$150,000
$150,000
To record purchase of a 70% interest in

Thayer Corporation.
Cash
7,000
7,000
To record dividends received from Thayer

($10,000 x 70%).
Income from Thayer
$ 16,500
$ 16,500
To record investment income computed as

follows:
Share of Thayer's net income ($30,000 x 70%)
Less: Unrealized profit from upstream sale of
inventory items ($5,000 x 70%)
Less: Patent amortization [$150,000 ($200,000 x 70%)]/10 years
$21,000
(3,500)
(1,000)
$16,500
Posey's books
Cash
$ 24,000
Investment in Seaton (80%)
$ 24,000
To record dividends received from Seaton

($30,000 x 80%).
Income from Seaton
$ 43,200
$ 43,200
To record investment income computed as

follows:
Share of Thayer's net income
($50,000 + $16,500) x 80%
Less: Unrealized gain on land sold to Thayer
$53,200
(10,000)
$43,200
53
Chapter 9
Solution P9-2
2
(continued)
Schedule of income allocation
Separate earnings
Less: Unrealized profits
Allocate Thayer's realized earnings
to Seaton ($25,000 x 70%)
Deduct: Patent amortization
Thayer
$150,000
(10,000)
$ 50,000
$ 30,000
(5,000)
50,000
25,000
17,500
(1,000)
(17,500)
66,500
53,200
Posey's net income and

consolidated net income
Seaton
140,000
Seaton's net income

Allocate Seaton's net income to
Posey ($66,500 x 80%)
Check:
Posey
(53,200)
$193,200
$ 13,300
Realized earnings ($140,000 + $50,000 + $25,000)

Less: Patent amortization
7,500
$215,000
(1,000)
(20,800)
$193,200
Schedule of assets and equities at December 31, 2004

Posey
Assets
Total assets
Liabilities
Capital stock
Retained earnings
Total liabilities and equity
924,000
219,200
$1,143,200
150,000
600,000
393,200
$1,143,200
Seaton
Thayer
$227,000
$270,000
159,500
$386,500
$270,000
$100,000
200,000
86,500
$386,500
$ 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 $150,000 and dividends paid of
$30,000.
54
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:
Pony
Star
Teel
Total
$184,500
$ 90,000
$ 25,000
$299,500
(84,500)
(10,000)
100,000
80,000
(94,500)
25,000
8,000
205,000
8,000
Unrealized profit in
ending inventory
Separate realized incomes
Allocate Teel's income
50% to Pony
40% to Star
Star's net income
108,000
(20,000)
5,000
193,000
80,000
(20,000)
2,500
(2,500)
(2,000)
2,000
82,000
Allocate Star's income

80% to Pony
Less: Depreciation on
excess allocated to
plant and equipment
65,600
(65,600)
(5,000)
(5,000)
Total income of consolidated

entity
$188,000
$171,100
171,100
$ 16,400
500
16,900
$188,000
55
Chapter 9
Solution P9-3
(continued)
Pony Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2009
|
|
|
| Adjustments and |Consolidated
| Pony
| Star
| Teel
|
Eliminations
| Statements
|
|
|
|
|
|
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|
|
Cost of sales
| 240,000*| 150,000*| 60,000*|i 20,000|g
8,000|
|
|
|
|
|h 50,000|
412,000*
Other expenses
| 160,000*| 70,000*| 15,000*|f
5,000|
|
250,000*
Minority expense-Star|
|
|
|c 16,400|
|
16,400*
Minority expense-Teel|
|
|
|c
500|
|
500*
Net income
|$ 184,500|$ 90,000 |$ 25,000 |
|
|$ 171,100
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
Retained earnings
|$115,500 |
|
|f 10,000|
|
Pony
|
|
|
|g
8,000|
|$
97,500
Retained earnings
|
|
|
|
|
|
Star
|
| 160,000 |
|e 160,000|
|
Retained earnings
|
|
|
|
|
|
Teel
|
|
| 45,000 |b 45,000|
|
Net income
| 184,500| 90,000| 25,000|
|
|
171,100
Dividends
| 80,000*| 40,000*| 10,000*|
|a
9,000|
|c
9,000|
|
|
|
|
|d 32,000|
80,000*
Retained earnings
|
|
|
|
|
|
December 31, 2009 |$220,000 |$210,000 |$ 60,000 |
|
|$ 188,600
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Cash
|$ 67,000 |$ 36,000 |$ 10,000 |
|
|$ 113,000
Accounts receivable | 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 |e 20,000|f 15,000|
685,000
Investment in
| 508,000 |
|
|
|d 40,000|
Star 80%
|
|
|
|
|e 468,000|
Investment in
| 95,000 |
|
|
|a
7,500|
Teel 50%
|
|
|
|
|b 87,500|
Investment in
|
| 74,000 |
|
|a
6,000|
Teel 40%
|
|
|
|
|b 68,000|
Goodwill
|
|
|
|b 25,000|
|
25,000
|$990,000 |$660,000 |$180,000 |
|
|$1,153,000
|
|
|
|
|
|
Accounts payable
|$ 70,000 |$ 40,000 |$ 15,000 |j 10,000|
|$ 115,000
Other liabilities
| 100,000 | 10,000 |
5,000 |
|
|
115,000
Capital stock
| 600,000 | 400,000 | 100,000 |b 100,000|
|
|
|
|
|e 400,000|
|
600,000
Retained earnings
| 220,000|210,000| 60,000|
|
|
188,600
|$990,000 |$660,000 |$180,000 |
|
|
Minority interest-Star (beginning)
|
|e 112,000|
Minority interest-Teel (beginning)
|
|b 14,500|
Minority interest December 31, 2009
|
|c
7,900|
134,400
|
|
|$1,153,000
*Deduct
56
Solution P9-4
1
Affiliation diagram
Parish
80%
50%
20%
Swift
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 =
Minority interest expense in Swift ($112,245 x .1)
Minority interest expense in Tolbert ($61,224 x .3)
$320,408
11,225
18,367
$350,000
57
Chapter 9
Solution P9-4
3
(continued)
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 =
Minority interest expense in Swift ($110,204.08 x 10%)
Minority interest expense in Tolbert ($51,020.41 x 30%)
$293,673.48
11,020.40
15,306.12
$320,000.00
58
Solution P9-5
Conversion to equity method
Investment
in Skill
$(20,000)
$(20,000)
Prior years' effect

Patent amortization
Prill-Retained
Earnings
Current year's effect

Patent amortization
Dividends paid to Skill
Adjustments
Income
from Skill
Dividends
Prill
$ (5,000)
(10,000)
$(10,000)
(5,000)
$(20,000)
$(25,000)
$(15,000)
$(10,000)
Working paper entries

a
Retained earnings-Prill
Income from Skill
Investment in Skill
Dividends-Prill
$ 20,000
15,000
$ 25,000
10,000
To convert to an equity basis (see schedule).

b
Income from Skill

Dividend income
Dividends
Investment in Skill
$ 12,000
10,000
$ 18,000
4,000
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.
c
Capital stock-Skill
Retained earnings-Skill
Patent
Investment in Skill
Minority interest-beginning
$200,000
200,000
20,000
$380,000
40,000
To eliminate reciprocal investment and

equity accounts, and enter beginning-ofthe-period patent and minority interest.
d
Expenses
$
Patent
To record current year's amortization of

patent.
5,000
$
5,000
59
Chapter 9
Treasury stock
Investment in Prill
$ 80,000
$ 80,000
To reclassify investment in Prill to

treasury stock.
f
Minority Interest Expense

Dividends
Minority Interest
3,000
$
2,000
1,000
To record minority interest share of subsidiary income and

dividends.
60
Solution P9-5
(continued)
Conversion to equity approach

Prill Company and Subsidiary
|
|
| Prill |Skill 90%|
Eliminations
| Statements
|
|
|
|
|
Income Statement
|
|
|
|
|
Sales
|$400,000 |$100,000 |
|
| $500,000
Income from Skill
| 27,000 |
|a 15,000|
|
|
|
|b 12,000|
|
Dividend income
|
| 10,000 |b 10,000|
|
Cost of sales
| 200,000*| 50,000*|
|
|
250,000*
Expenses
| 50,000*| 30,000*|d
5,000|
|
85,000*
Minority expense
|
|
|f
3,000|
|
3,000*
Net income
|$177,000 |$ 30,000 |
|
| $162,000
|
|
|
|
|
Retained Earnings
|
|
|
|
|
Retained earnings -Prill|$300,000 |
|a 20,000|
| $280,000
Retained earnings -Skill|
|$200,000 |c 200,000|
|
Net income
| 177,000 | 30,000 |
|
|
162,000
Dividends
| 100,000*| 20,000*|
|a 10,000|
|f
2,000|
|
|
|
|b 18,000|
90,000*
Retained earnings
|
|
|
|
|
December 31, 2008
|$377,000 |$210,000 |
|
| $352,000
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Other assets
|$491,000 |$420,000 |
|
| $911,000
Investment in Skill 90%| 409,000 |
|
|a 25,000|
|
|
|
|b
4,000|
|
|
|
|c 380,000|
Investment in Prill 10%|
| 80,000 |
|e 80,000|
Patent
|
|
|c 20,000|d
5,000|
15,000
|$900,000 |$500,000 |
|
| $926,000
|
|
|
|
|
Liabilities
|$123,000 |$ 90,000 |
|
| $213,000
Capital stock
| 400,000 | 200,000 |c 200,000|
|
400,000
Retained earnings
| 377,000 |210,000 |
|
|
352,000
|$900,000 |$500,000 |
|
|
|
|
|
Minority interest January 1, 2008
|
|c 40,000|
|
|f
1,000|
41,000
Treasury stock
|e 80,000|
|
80,000*
|
|
| $926,000
|
|
|__________
*Deduct
Consolidated net income = $150,000 + $20,000 separate incomes - $5,000 patent
amortization - $3,000 minority interest expense = $162,000
Income from Skill = (90% x separate income of Skill) - $5,000 patent
amortization - ($10,000 dividends paid to Skill that accrue to minority
shareholders) = $12,000
61
Chapter 9
Solution P9-5
(continued)
Traditional approach
Prill Company and Subsidiary
|
|
| Prill |Skill 90%|
Eliminations
| Statements
|
|
|
|
|
Income Statement
|
|
|
|
|
Sales
|$400,000 |$100,000 |
|
| $500,000
Income from Skill
| 27,000 |
|a 27,000|
|
Dividend income
|
| 10,000 |d 10,000|
|
Cost of sales
| 200,000*| 50,000*|
|
|
250,000*
Expenses
| 50,000*| 30,000*|c
5,000|
|
85,000*
Minority expense
|
|
|f
3,000|
|
3,000*
Net income
|$177,000 |$ 30,000 |
|
| $162,000
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
Retained earnings -Prill|$300,000 |
|b 20,000|
| $280,000
Retained earnings -Skill|
|$200,000 |b 200,000|
|
Net income
| 177,000 | 30,000 |
|
|
162,000
Dividends
| 100,000*| 20,000*|
|d 10,000|
|f
2,000|
90,000*
|
|
|
|a 18,000|___________
Retained earnings
|
|
|
|
|
December 31, 2008
|$377,000 |$210,000 |
|
| $352,000
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Other assets
|$491,000 |$420,000 |
|
| $911,000
Investment in Skill 90%| 409,000 |
|
|a
9,000|
|
|
|
|b 400,000|
Investment in Prill 10%|
| 80,000 |
|e 80,000|
Patent
|
|
|b 20,000|c
5,000|
15,000
|$900,000 |$500,000 |
|
| $926,000
|
|
|
|
|
Liabilities
|$123,000 |$ 90,000 |
|
| $213,000
Capital stock
| 400,000 | 200,000 |b 200,000|
|
400,000
Retained earnings
| 377,000 |210,000 |
|
|
352,000
|$900,000 |$500,000 |
|
|
|
|
|
|
|b 40,000|
|
|f
1,000|
41,000
Treasury stock
|e 80,000|
|
80,000*
|
|
| $926,000
|
|
|__________
*Deduct
62
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 x S income
Adjusted Paroll income = $60,000 + $2,000 delayed gain on land
- $4,000 patent amortization
S income = Scimp income + % interest x P income
P income = $58,000 + 80% x ($43,000 + 20% x P income)
P income = $92,400 + .16 x P income
P income = $110,000
S income = $43,000 + 20% x $110,000
S income = $65,000
Consolidated income = P income x % outstanding
Consolidated income = $88,000
Minority expense = S income x % outstanding
Minority expense = $13,000
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.
2,000
Dividend income
$ 4,000
Investment in Scimp
To eliminate intercompany dividends paid to Scimp
4,000
Income from Scimp

Dividends
Investment in Scimp
$ 28,000
$ 16,000
$ 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
Capital stock-Scimp
Retained earnings-Scimp
Patent
Investment in Scimp
Minority interest-beginning
$ 50,000
180,000
16,000
To eliminate reciprocal investment and

equity accounts, and enter beginning-ofthe-period goodwill and minority interest.
$100,000
$195,710
50,290
63
Chapter 9
Expenses
4,000
Patent
4,000
4,000
9,000
To record current year's amortization of patent.

G

Dividends
Minority Interest
$ 13,000
To record the minority interest share of subsidiary income and

dividends.
64
Solution P9-6
(continued)
Paroll Company and Subsidiary

Income Statement
Sales
Income from Scimp
Dividend income
Gain on sale of land
Expenses
Minority expense
Net income
|
| Paroll
|
|
|$140,000
| 28,000
|
| Adjustments and
|Scimp 90%|
Eliminations
|
|
|
|
|
|
|$100,000 |
|
|
|c 28,000|
|Consolidated
| Statements
|
|
| $240,000
|__________
|
|
4,000 |b
4,000|
|__________
|
|
3,000 |
|a
2,000|
5,000
| 80,000*| 60,000*|f
4,000|
|
144,000*
|
|
|g 13,000|
|
13,000*
| $88,000 |$ 47,000 |
|
| $ 88,000
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
Retain. earnings -Paroll|$405,710 |
|
|
| $405,710
Retained earnings -Scimp|
|$180,000 |e 180,000|
|__________
Net income
| 88,000 | 47,000 |
|
|
88,000
Dividends
| 16,000*| 20,000*|
|c 16,000|
_____________________________________________________|g
4,000|
16,000*
Retained earnings
|
|
|
|
|
December 31, 2004
|$477,710 |$207,000 |
|
| $477,710
|
|
|
|
|
Balance Sheet
|
|
|
|
|
Other assets
|$448,000 |$157,000 |
|
| $605,000
Investment in Scimp
| 109,710 |
|a
2,000|b
4,000|
|
|
|d 100,000|c 12,000|
|
|
|
|e 195,710|__________
Investment in Paroll
|
| 100,000 |
|d 100,000|__________
Patent
|
|
|e 16,000|f
4,000|
12,000
|$557,710 |$257,000 |
|
| $617,000
|
|
|
|
|
Capital stock
| 80,000 | 50,000 |e 50,000|
|
80,000
Retained earnings
| 477,710 |207,000 |
|
|
477,710
|$557,710 |$257,000 |
|
|
|
|
|
|
|b 50,290|
|
|g
9,000|
59,290
|
|
| $617,000
|
|
|__________
*Deduct
65
Chapter 9
Solution P9-7
1
Consolidated net income and minority interest expense (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 - $1,000 patent amortization
S = $40,000 separate earnings + .1P
Solve for P
P = $100,000 + .8($40,000 + .1P) - $1,000
P = $100,000 + $32,000 + .08P - $1,000
P = $142,391
Compute S
S = $40,000 + .1($142,391)
S = $54,239
Income allocation
Consolidated net income ($142,391 x 90% outside ownership)
Total (separate incomes less patent amortization)
$128,152
10,848
$139,000
Entries to account for investments on an equity basis
Panco's books
Capital stock
Retained earnings
Investment in Stoco
$60,000
20,000
$80,000
To record constructive retirement of 10%

of Panco's stock.
Investment in Stoco (80%)
Income from Stoco
$28,152
$28,152
To record income from Stoco computed as

follows: 80%($54,239) - 10%($142,391) - $1,000 = $28,152.
Alternatively $128,152 - $100,000 separate income = $28,152.
Cash
$16,000
Investment in Stoco
$16,000
To record receipt of 80% of Stoco's dividends.

Investment in Stoco (80%)
Dividends
$ 5,000
To eliminate dividends on stock that was

constructively retired and to adjust the
investment in Stoco account for the transfer
$ 5,000
66
equal to 10% of Panco's dividends.
67
Chapter 9
Solution P9-7 (continued)

3
Journal entries on Stoco's books

Investment in Panco (10%)
Assets
$80,000
$80,000
To record acquisition of a 10% interest in

Panco at book value.
Investment in Panco
Income from Panco
$14,239
$14,239
To record 10% of Panco's $142,391 income

on a consolidated basis.
Cash
$ 5,000
Investment in Panco (10%)
$ 5,000
To record receipt of dividends from Panco

($50,000 x 10%).
Net income for 2005
Panco
Stoco
$100,000
28,152
$128,152
$ 40,000
14,239
$ 54,239
Investment balance December 31, 2005
Panco
Stoco
Investments beginning of 2005

Less: Constructive retirement of Panco's stock
Add: Investment income
Add: Dividends paid to Stoco
Less: Dividends received
Investment balances December 31, 2005
$208,000
(80,000)
28,152
5,000
(16,000)
$145,152
$ 80,000
Panco
Stoco
$720,000
128,152
(45,000)
$803,152
$250,000
54,239
(20,000)
$284,239
Separate incomes
Investment income
Net income
5
Stockholders' equity December 31, 2005
Stockholders' equity January 1, 2005

Add: Net income
Less: Dividends
Stockholders' equity December 31, 2005
7
14,239
(5,000)
$ 89,239
Minority interest at December 31, 2005
Stoco's equity on a consolidated basis

Minority interest percentage
$284,239
20%
$ 56,848
Alternative solution:
Minority interest January 1, 2005 ($250,000 x 20%)
Minority interest dividends
$ 50,000
10,848
(4,000)
$ 56,848
68
Solution P9-7
(continued)
Adjustment and elimination entries
Income from Panco

Dividends
Investment in Panco
$ 14,239
$
5,000
9,239
To eliminate investment income and dividends

from Panco and return the investment account
to its beginning-of-the-period balance.
b
Investment in Stoco
Investment in Panco
$ 80,000
$ 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
5,000
Investment in Stoco
5,000
To eliminate dividends.
d
Income from Stoco

Dividends
Investment in Stoco
$ 28,152
$ 16,000
12,152
To eliminate income and dividends from

Stoco and return the investment in Stoco
to its beginning-of-the-period balance.
e
Capital stock-Stoco
Retained earnings-Stoco
Patent
Investment in Stoco
Minority interest
$150,000
100,000
8,000
$208,000
50,000
To eliminate Stoco's equity account balances

and the investment in Stoco, enter beginningof-the-period patent and minority interest.
f
Expenses
1,000
Patent
1,000
4,000
6,848
To enter patent amortization for the period.

g

Dividends
Minority Interest
$ 10,848
To record the minority interest share of subsidiary income and

dividends.
69
Chapter 9
Solution P9-7
(continued)
Adjustment and elimination entries to consolidate balance sheets
Investment in Stoco
Investment in Panco
$ 89,239
$ 89,239
To eliminate the investment in Panco

balance and increase the investment in
Stoco balance for the constructively
retired Panco stock.
b
Capital stock-Stoco
Retained earnings-Stoco
Patent
Investment in Stoco
Minority interest
$150,000
134,239
7,000
$234,391
56,848
To eliminate the investment in Stoco and

Stoco's equity account balances, enter
end-of-the-period patent and minority
interest amounts.
Note: Panco's and Stoco's net asset increases, excluding changes in
investment account balances, were $66,000 ($100,000 separate income, plus
$16,000 dividends received, less $50,000 dividends paid) and $25,000 ($40,000
separate income, plus $5,000 dividends received, less $20,000 dividends paid).
P = $66,000 + .8S - $1,000 patent amortization = $92,391
S = $25,000 + .1P = $34,239
Increase in consolidated retained earnings:
Increase in minority interest:
$92,391 x 90% = $83,152
$34,239 x 20% = $6,848

B. Woods Chapter 9

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B. Woods Chapter 9

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33

in Y. Indirect ownership, 42% 70% interest in A. Indirect ownership,

in Y and 40% interest in Z.

Indirect and Mutual Holdings

4 An indirect holding involves the ability of one corporation to control another

Consolidated net income

7 When the schedule approach for allocating income is used, investment

Separate realized earnings

P's net income

Indirect and Mutual Holdings

16 By adding beginning minority interest and minority interest expense

Add: Dividend income from Sal's

Consolidated net income

Allocate 60% of Terp's earnings

Minority interest expense

Separate earnings or loss

Allocate Timon's loss:

Consolidated net income

Minority interest expense

Indirect and Mutual Holdings

Allocate Lake's income

Consolidated net income

Minority interest expense

Income from Seron is equal to:

Minority interest expense is equal to:

Consolidated net income is equal to:

Consolidated net income

Indirect and Mutual Holdings

Allocate Ulti's income

Allocate Sal's income

Pal's net income (or

Minority interest expense

Allocate Val's income

Allocate Tall's income

Allocate Ople's income

Allocate Nina's income

Allocate Mike's income

Pete's net income (or

Minority interest expense

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

Indirect and Mutual Holdings

Separate income of Torry

Separate income = net income of Vance

Total separate incomes

[See computations for question 3]

Net income of Sincock

Separate income of Savoy (net income)

Total separate income

Separate realized income

Pasko's separate income

Parent's income (consolidated net income)

Total separate realized income

Indirect and Mutual Holdings

Consolidated net income:

P = Packard's income on a consolidated basis

Allocate income to consolidated net income and minority interest

Indirect and Mutual Holdings

Minority interest-Benson ($228,773.58 x 20%)

Minority interest-Cashin ($391,823.90 x 15%)

Combined separate income

$100,000 + .9($60,000 + .15P)

Consolidated net income = $178,035 x .85 =

Indirect and Mutual Holdings