Indirect and Mutual Holdings
Chapter 9
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-1
Learning Objective 1
Prepare consolidated statements
when the parent company
controls through indirect holdings.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-2
Affiliation Structures
The potential complexity of corporate
affiliation structure is limited only
by one’s imagination .
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-3
Direct Holdings
Parent
80%
Subsidiary
A
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-4
Direct Holdings
Parent
80%
Subsidiary
A
70%
Subsidiary
B
90%
Subsidiary
C
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-5
Indirect Holdings
Parent
80%
Subsidiary
A
70%
Subsidiary
B
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-6
Indirect Holdings
Parent
80%
20%
Subsidiary
A
Subsidiary
B
40%
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-7
Mutual Holdings
Parent
80%
10%
Subsidiary
A
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-8
Mutual Holdings
Parent
80%
Subsidiary
A
20%
40%
20%
Subsidiary
B
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9-9
Father-Son-Grandson Structure
Poe Corporation acquires 80% of the stock
of Shaw Corporation on January 1, 2003.
Shaw acquires 70% of the stock of Turk
Corporation on January 1, 2004.
Both investments are made at book value.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 10
Father-Son-Grandson Structure
(in thousands)
Poe
Other assets
$400
Investment in Shaw: (80%) 200
Investment in Turk: (70%)
–
$600
Liabilities
$100
Capital stock
400
Retained earnings
100
$600
Separate earnings
$100
Dividends
$ 60
Shaw
$195
–
105
$300
$ 50
200
50
$300
$ 50
$ 30
Turk
$190
–
–
$190
$ 40
100
50
$190
$ 40
$ 20
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 11
Computational Approaches for
Consolidated Net Income
Poe’s separate earnings
$100,000
Add: Poe’s share of Shaw’s separate earnings
($50,000 × 80%)
40,000
Add: Poe’s share of Turk’s separate earnings
($40,000 × 80% × 70%)
22,400
Poe’s net income and consolidated net income $162,400
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 12
Computational Approaches for
Consolidated Net Income
Combined separate earnings:
Poe
$100,000
Shaw
50,000
Turk
40,000
Less: Minority interest expenses:
Direct minority interest in
Turk’s income ($40,000 × 30%) $ 12,000
Indirect minority interest in
Turk’s income ($40,000 × 70%)
5,600
Direct minority interest in
Shaw’s income ($50,000 × 20%)
10,000
Poe’s net income and consolidated net income
$190,000
– 27,600
$162,400
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 13
Computational Approaches for
Consolidated Net Income
(in thousands)
Separate earnings
Allocate Turk’s income to Shaw
($40,000 × 70%)
Allocate Shaw’s income to Poe
($78,000 × 80%)
Consolidated net income
Minority interest expense
Poe
$100.0
Shaw
$ 50.0
Turk
$ 40.0
–
+ 28.0
– 28.0
– 62.4
–
$ 15.6
$ 12.0
+ 62.4
$162.4
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 14
Indirect Holdings –
Connecting Affiliates Structure
Pet
70%
Sal
60%
20%
Ty
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 15
Accounting for Connecting Affiliates
(in thousands)
Pet 70% Pet 60% Sal 20%
in Sal
in Ty
in Ty
Cost
Less: Book value
Goodwill
Investment Balance 12/31/09
Cost
Add: Share of investees’ pre-2008
income less dividends
Balance 12/31/07
$178
–168
$ 10
$100
– 90
$ 10
$20
–20
–
$178
$100
$20
7
$185
18
$118
16
$36
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 16
Accounting for Connecting Affiliates
Pet
Sal
Ty
Earnings (2008)
$70,000
$35,000
$20,000
Dividends
$40,000
$20,000
$10,000
Pet’s separate earnings of $70,000 included an unrealized
gain of $10,000 from the sale of land to Sal during 2008.
Sal’s separate earnings of $35,000 included unrealized
profit of $5,000 on inventory items sold to Pet for $15,000
during 2008, and remaining in Pet’s 12/31/2008 inventory.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 17
Accounting for Connecting Affiliates
(in thousands)
Separate earnings
Deduct unrealized profit
Separate realized earnings
Allocate Ty’s income:
20% to Sal
60% to Pet
Allocate Sal’s income:
70% to Pet
Consolidated net income
Minority interest expense
Pet
Sal
Ty
$70.0
–10.0
$60.0
$35.0
– 5.0
$30.0
$20.0
–
$20.0
–
+12.0
+ 4.0
–
– 4.0
–12.0
+23.8
$95.8
–23.8
–
$10.2
$ 4.0
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 18
Accounting for Connecting Affiliates
Cash
6,000
Investment in Ty
6,000
To record dividends received from Ty
Investment in Ty
12,000
Income from Ty
12,000
To record income from Ty
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 19
Accounting for Connecting Affiliates
Reported income ($39,000 × 70%)
Less: 70% of Sal’s unrealized
profit of $5,000
Less: 100% of unrealized gain on land
Total
$27,300
– 3,500
–10,000
$13,800
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 20
Accounting for Connecting Affiliates
Cash
14,000
Investment in Sal
14,000
To record dividends received from Sal
Investment in Sal
13,800
Income from Sal
13,800
To record income from Sal
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 21
Accounting for Connecting Affiliates
Pet’s investment
accounts at 12/31/08
Balance 12/31/2007
Add: Investment income
Deduct: Dividends
Balance 12/31/2008
Investment
Investment
in Sal (70%) in Ty (60%)
$185,000
13,800
– 14,000
$183,800
$118,000
12,000
– 6,000
$124,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 22
Learning Objective 2
Apply consolidated procedures of
indirect holdings to the special
case of mutual holdings.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 23
Mutual Holding – Parent Stock
Held by Subsidiary
Pace
90%
10%
Salt
The 10% interest held by Salt, and the 90%
interest held by Pace, are not outstanding
for consolidation purposes.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 24
Mutual Holding – Parent Stock
Held by Subsidiary
Treasury Stock Approach
Conventional Approach
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 25
Treasury Stock Approach
It considers parent company stock held
by a subsidiary to be treasury stock
of the consolidated entity.
The investment account on the books of the
subsidiary are maintained on a cost basis
and is deducted at cost from stockholders’
equity in the consolidated balance sheet.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 26
Mutual Holding – Parent Stock
Held by Subsidiary
Trail balances 12/31/2005
Debits
Other assets
Investment in Salt (90%)
Investment in Pace (10%)
Expenses
Credits
Capital stock, $10 par
Retained earnings
Sales
Pace
Salt
$480,000
270,000
–
70,000
$820,000
$260,000
–
70,000
50,000
$380,000
$500,000
200,000
120,000
$820,000
$200,000
100,000
80,000
$380,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 27
Treasury Approach:
Working Papers December 31, 2005
Income Statement
Sales
Investment income
Expenses
Minority interest expense
Net income
Retained earnings – Pace
Retained earnings – Salt
Add: Net income
Retained earnings
December 31, 2005
Adjustments/ ConsolPace Salt Eliminations idated
$120 $ 80
$200
27
a 27
(70) (50)
(120)
d 3
(3)
$ 77 $ 30
$ 77
$200
$200
$100 b 100
77
30
77
$277
$130
$277
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 28
Treasury Approach:
Working Papers December 31, 2005
Balance Sheet
Other assets
Investment in Salt (90%)
Pace
$480
297
Investment in Pace (10%)
Capital stock – Pace
Capital stock – Salt
Retained earnings
Treasury stock
Minority interest
$777
$500
277
$777
Salt
$260
Adjustments/
Eliminations
70
$330
Consolidated
$740
a 27
b 270
c 70
$740
$500
$200 b 200
130
$330
c 70
277
(70)
b 30
d 3
33
$740
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 29
Treasury Approach:
Working Papers December 31, 2006
Income Statement
Sales
Income from Salt
Dividend income
Expenses
Minority interest expense
Net income
Retained earnings – Pace
Retained earnings – Salt
Dividends
Add: Net income
Retained earnings
December 31, 2006
Pace
$140
35.7
(80)
$ 95.7
$277
(27)
95.7
Adjustments/ ConsolSalt Eliminations idated
$100
$240
a 35.7
3 a 3
(60)
(140)
d 4.3
(4.3)
$ 43
$ 95.7
$277
$130 b 130
(20)
a 18
d 2
(27)
43
95.7
$345.7 $153
$345.7
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 30
Treasury Approach:
Working Papers December 31, 2006
Balance Sheet
Pace Salt
Other assets
$528
$283
Investment in Salt (90%) 317.7
Investment in Pace (10%)
Capital stock – Pace
Capital stock – Salt
Retained earnings
Treasury stock
Minority interest
Adjustments/
Eliminations
70
$845.7 $353
$500
$200 b 200
345.7 153
$845.7 $353
c 70
Consolidated
$811
a 20.7
b 297
c 70
$811
$500
345.7
(70)
b 33
d 2.3
35.3
$811
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 31
Conventional Approach
It accounts for the subsidiary investment in
parent company stock on an equity basis.
Parent company stock held by a subsidiary
is constructively retired.
Capital stock and retained earnings applicable to
the interest held by the subsidiary do not appear
in the consolidated financial statements.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 32
Conventional Approach
January 1, 2005
Capital stock
Retained earnings
Stockholders’ equity
Pace
Consolidated
$500,000
200,000
$700,000
$450,000
180,000
$630,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 33
Conventional Approach
January 1, 2005
Investment in Salt
270,000
Cash
270,000
To record acquisition of a 90% interest in Salt at book value
January 5, 2005
Capital Stock, $10 par
50,000
Retained Earnings
20,000
Investment in Salt
70,000
To record the constructive retirement of 10% of Pace’s
outstanding stock
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 34
Allocation of Mutual Income
Determine income on a consolidated basis.
P = Pace’s separate earnings of $50,000 + 90%S
S = Salt’s separate earnings of $30,000 + 10%P
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 35
Allocation of Mutual Income
P = $50,000 + 0.9($30,000 + 0.1P)
P = $50,000 + $27,000 + 0.09P
0.91P = $77,000  P = $84,615
S = $30,000 + 0.1($84,615)
S = $30,000 + $8,462 = $38,462
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 36
Allocation of Mutual Income
P
Before allocation: $50,000
After allocation: $84,615
S
$30,000
$38,462
Total
$ 80,000
$123,077
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 37
Allocation of Mutual Income
Determine Pace’s net income on an
equity basis and minority interest.
P = 84,615 × 90% = $76,154
MI = 38,462 × 10% = $3,846
$76,154 + $3,846 = $80,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 38
Accounting for Mutual Income
($38,462 × 90%) – ($84,615 × 10%) = $26,154
How does Pace record its investment income?
Investment in Salt
Income from Salt
To record income from Salt
26,154
26,154
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 39
Conventional Approach:
Working Papers December 31, 2005
Adjustments/ ConsolIncome Statement
Pace
Salt
Eliminations idated
Sales
$120,000 $ 80,000
$200,000
Investment income
26,154
b 26,154
Expenses
(70,000) (50,000)
(120,000)
Minority interest
(3,846)
expense
d 3,846
Net income
$ 76,154 $ 30,000
$ 76,154
Retained earnings – P $180,000
$180,000
Retained earnings – S
$100,000 c 100,000
Add: Net income
76,154
30,000
76,154
Retained earnings
December 31, 2005
$256,154 $130,000
$256,154
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 40
Conventional Approach:
Working Papers December 31, 2005
Adjustments/
Eliminations
Balance Sheet
Other assets
Investment in S
Consolidated
$740,000
Pace
Salt
$480,000 $260,000
226,154
a 70,000 b 26,154
c 270,000
Investment in P
70,000
a 70,000
$756,154 $330,000
$740,000
Capital stock – P $450,000
$450,000
Capital stock – S
$200,000 c 200,000
Retained earnings 256,154 130,000
256,154
$706,154 $330,000
Minority interest
b 30,000
d 3,846
33,846
$740,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 41
Conversion to Equity Method on
Separate Company Book
Separate earnings 2005
Separate earnings 2006
Less dividends declared
Add dividends received
Increase in net assets
P
S
$ 50,000
+ 60,000
– 30,000
+ 18,000
$ 98,000
$ 30,000
+ 40,000
– 20,000
+ 3,000
$ 53,000
Total
$ 80,000
+ 100,000
– 50,000
+ 21,000
$ 151,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 42
Conversion to Equity Method on
Separate Company Book
P = $98,000 + 0.9S
S = $53,000 + 0.1P
P = $98,000 + 0.9($53,000 + 0.1P) = $160,110
S = $53,000 + (0.1 × $160,110) = $69,011
Pace’s RE increase: $160,110 × 90% = $144,099
MI RE increase: 69,011 × 10% = $6,901
Net asset increase: $144,099 + $6,901= $151,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 43
Subsidiary Stock Mutually Held
The mutually held stock involves subsidiaries
holding the stock of each other, and the
treasury stock approach is not applicable.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 44
Subsidiary Stock Mutually Held
Poly
80%
Seth
70%
10%
Uno
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 45
Subsidiary Stock Mutually Held
Poly acquired 80% interest in Seth on
January 2, 2005, for $260,000 ($20,000 goodwill).
Seth’s stockholders’ equity consisted of $200,000
capital stock and $100,000 retained earnings.
Seth acquired 70% interest in Uno on
January 3, 2006, for $115,000 ($10,000 goodwill).
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 46
Subsidiary Stock Mutually Held
Uno’s stockholders’ equity consisted of $100,000
capital stock and $50,000 retained earnings.
Uno acquired 10% interest in Seth on
December 31, 2006, for $40,000.
Seth’s stockholders’ equity consisted of $200,000
capital stock and $200,000 retained earnings.
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 47
Subsidiary Stock Mutually Held
(in thousands 12/31/2006)
Cash
Other current assets
Plant and equipment – net
Investment in Seth (80%)
Investment in Uno (70%)
Investment in Seth (10%)
Total
Liabilities
Capital stock
Retained earnings
Total
Poly
$ 64
200
500
336
–
–
$1,100
$ 200
500
400
$1,100
Seth
$ 40
85
240
–
135
–
$500
$100
200
200
$500
Uno
$ 20
80
110
–
–
40
$250
$ 70
100
80
$250
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 48
Subsidiary Stock Mutually Held
Cost
Add: Income less
dividends (2005)
Add: Income less
dividends (2006)
Balance 12/31/2006
Poly 80%
in Seth
$260,000
Seth 70% Uno 10%
in Uno
in Seth
$115,000 $40,000
32,000
–
–
48,000
$340,000
21,000
$136,000
–
$40,000
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 49
End of Chapter 9
©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
9 - 50