Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Subsidiaries’ Preferred Stock
Pertemuan 17-18
Subsidiaries with Preferred
Stock Outstanding
When preferred stock has a call or
redemption price, this amount is used
in allocating the investee’s equity
to preferred stockholders.
Subsidiaries with Preferred
Stock Outstanding
1
If there is no redemption provision,
the equity is allocated on the basis of
par value plus any liquidation premium.
2
Any dividends in arrears on cumulative
preferred stock is allocated to the
preferred stockholders.
Subsidiary With Preferred Stock
Not Held by Parent
Poe acquired a 90% interest in Sol
on January 1, 2004, for $395,500.
There were no preferred dividends
in arrears as of January 1, 2004.
During 2004, Sol had income of
$50,000 and paid $30,000 dividends.
Dividends were $20,000 on common
stock and $10,000 on preferred stock.
Subsidiary With Preferred Stock
Not Held by Parent
Sol’s stockholders’ equity December 31, 2003
$10 preferred stock, $100 par,
cumulative, nonparticipating,
callable at $105 per share
Common stock, $10 par
Other paid-in capital
Retained earnings
Total stockholders’ equity
$100,000
200,000
40,000
160,000
$500,000
Subsidiary With Preferred Stock
Not Held by Parent
Total Sol stockholders’ equity
Less: Preferred stockholders’
equity (1,000 × $105)
Common stockholders’ equity
$500,000
–105,000
$395,000
Price paid for 90% interest
Less: Book and fair value
acquired ($395,000 × 90%)
Goodwill
$395,500
–355,500
$ 40,000
Subsidiary With Preferred Stock
Not Held by Parent
Sol’s stockholders’ equity December 31, 2004
Total stockholders’ equity
Less: Preferred stockholders’
equity (1,000 × $105)
Common stockholders’ equity
$520,000
–105,000
$415,000
Minority Interest in
Preferred Stock
Minority interest in Sol at December 31, 2004
$105,000 × 100% of preferred equity $105,000
$415,000 × 10% of common equity
41,500
Total
$146,500
Subsidiary Preferred Stock
Acquired by Parent
A parent company’s purchase of the
outstanding preferred stock of a subsidiary
results in a retirement of the stock purchased
from the viewpoint of the consolidated entity.
Subsidiary Preferred Stock
Acquired by Parent
Sol Corporation experienced
a loss of $40,000 in 2005.
No dividends were paid.
What is Sol’s stockholders’
equity at 12/31/2005?
$520,000 – $40,000 = $480,000
Subsidiary Preferred Stock
Acquired by Parent
What is Poe’s share of this loss?
($40,000 + $10,000 income to preferred) × 90%
What is Poe’s investment in Sol on 12/31/2005?
Subsidiary Preferred Stock
Acquired by Parent
1/1/2004
12/31/2004
1/1/2005
Poe’s Investment
395,500 18,000
36,000
413,500 45,000 loss
368,500
12/31/2005
Dividends
Constructive Retirement of
Subsidiary Preferred Stock
On January 1, 2006, Poe purchased 800 of Sol’s
preferred shares (80% interest) at $100 per share.
Sol reports net income of $20,000 for 2006.
$115,000 × 80% = $92,000 book value
$92,000 – $80,000 = $12,000
Constructive Retirement of
Subsidiary Preferred Stock
Investment in Sol Preferred
Cash
To record purchase of stock
80,000
Investment in Sol Preferred
12,000
Other Paid-in Capital
To adjust other paid-in capital to reflect
constructive retirement
80,000
12,000
Constructive Retirement of
Subsidiary Preferred Stock
1/1/2004
12/31/2004
1/1/2005
Income
Poe’s Investment
395,500 18,000
36,000
413,500 45,000 loss
368,500
9,000
377,500
12/31/2006
Dividends
Parent Company and Consolidated
Earnings Per Share
GAAP requires that all firms calculate and
report basic and diluted (where applicable)
earnings per share (EPS).
Consolidated entities disclose (EPS)
on a consolidated basis.
Parent Company and Consolidated
Earnings Per Share
A parent company’s net income and EPS
under the equity method are equal to
consolidated net income and consolidated EPS.
Parent Company procedures for computing EPS
depend on the subsidiary’s capital structure.
General Format for EPS Calculations
Numerator in Dollars ($)
Income to parent’s common stockholders
Add: Adjustments for parent’s dilutive securities
Add: Adjustments for subsidiary’s potentially
dilutive securities convertible into parent
company stock
Replacement calculation
Deduct: Parent’s equity in subsidiary’s
diluted earnings
Add: Parent’s equity in subsidiary’s
diluted earnings
Parent's diluted earnings = a
A
$$$
+$
N/A
N/A
N/A
$$$
A: Subsidiary does not have potentially dilutive securities outstanding
General Format for EPS Calculations
Numerator in Dollars ($)
Income to parent’s common stockholders
Add: Adjustments for parent’s dilutive securities
Add: Adjustments for subsidiary’s potentially
dilutive securities convertible into parent
company stock
Replacement calculation
Deduct: Parent’s equity in subsidiary’s
diluted earnings
Add: Parent’s equity in subsidiary’s
diluted earnings
Parent's diluted earnings = a
B: Subsidiary has potentially dilutive securities convertible into
subsidiary common stock
B
$$$
+$
N/A
–$
+$
$$$
General Format for EPS Calculations
Numerator in Dollars ($)
Income to parent’s common stockholders
Add: Adjustments for parent’s dilutive securities
Add: Adjustments for subsidiary’s potentially
dilutive securities convertible into parent
company stock
Replacement calculation
Deduct: Parent’s equity in subsidiary’s
diluted earnings
Add: Parent’s equity in subsidiary’s
diluted earnings
Parent's diluted earnings = a
C: Subsidiary has potentially dilutive securities convertible into
parent company common stock
C
$$$
+$
+$
N/A
N/A
$$$
General Format for EPS Calculations
Denominator in Shares (Y)
Parent’s common shares outstanding
Add: Shares represented by parent’s
potentially dilutive securities
Add: Shares represented by subsidiary’s
potentially dilutive securities convertible
into parent company common shares
Parent’s common shares and common
share equivalents = b
A
YYY
Parent Company and Consolidated Diluted EPS
a÷b
+Y
N/A
YYY
A: Subsidiary does not have potentially dilutive securities outstanding
General Format for EPS Calculations
Denominator in Shares (Y)
Parent’s common shares outstanding
Add: Shares represented by parent’s
potentially dilutive securities
Add: Shares represented by subsidiary’s
potentially dilutive securities convertible
into parent company common shares
Parent’s common shares and common
share equivalents = b
B
YYY
Parent Company and Consolidated Diluted EPS
a÷b
B: Subsidiary has potentially dilutive securities convertible into
subsidiary common stock
+Y
N/A
YYY
General Format for EPS Calculations
Denominator in Shares (Y)
Parent’s common shares outstanding
Add: Shares represented by parent’s
potentially dilutive securities
Add: Shares represented by subsidiary’s
potentially dilutive securities convertible
into parent company common shares
Parent’s common shares and common
share equivalents = b
C
YYY
Parent Company and Consolidated Diluted EPS
a÷b
C: Subsidiary has potentially dilutive securities convertible into
parent company common stock
+Y
+Y
YYY
Dilutive Securities of Subsidiary
Convertible into Subsidiary Shares
Diluted earnings of the parent company are
adjusted by excluding the parent’s equity in
subsidiary realized income and replacing
that equity with the parent’s share of
diluted earnings of the subsidiary.
Subsidiary With Convertible
Preferred Stock
Plant Corporation purchased 90% of Seed
Corporation’s outstanding voting common
stock for $328,000 on January 1, 2003.
During 2003, Seed reports $50,000 net
income and pays $25,000 dividends,
$10,000 to preferred and $15,000 to common.
Subsidiary With Convertible
Preferred Stock
January 1, 2003
Common stock, $5 par, 200,000
shares issued and outstanding
Common stock, $10 par,
20,000 shares outstanding
10% cumulative, convertible
preferred stock, $100 par,
1,000 shares outstanding
Retained earnings
Total stockholders’ equity
Plant
Seed
$1,000,000
$200,000
500,000
$1,500,000
100,000
120,000
$420,000
Subsidiary With Convertible
Preferred Stock
Plant’s Income for 2003
Income from Plant’s operations
Income from Seed
($50,000 – $10,000 preferred income) × 90%
Plant net income
$150,000
36,000
$186,000
Subsidiary Preferred Stock
Convertible into Subsidiary Common
Seed’s preferred stock is convertible into
12,000 shares of Seed’s common stock.
Neither Plant nor Seed has any other
potentially dilutive securities outstanding.
Seed’s diluted EPS:
$50,000 ÷ (20,000 + 12,000) = $1.5625
Subsidiary Preferred Stock
Convertible into Subsidiary Common
Plant’s Diluted EPS
Net income of Plant
Replacement of Plant’s equity in Seed’s
realized income ($40,000 × 90%)
with Plant’s equity in Seed’s diluted
earnings (18,000 × $1.5625)
Plant’s diluted earnings = a
Plant’s outstanding shares = b
Plant’s diluted EPS = a ÷ b
$186,000
– 36,000
28,125
$178,125
200,000
$
0.89
Subsidiary Preferred Convertible
into Parent Company Common
Seed’s preferred stock is convertible into
24,000 shares of Plant’s common stock.
Neither Plant nor Seed had other
potentially dilutive securities outstanding.
Seed’s diluted EPS is $2 ($40,000 income
to common ÷ 20,000 common shares).
What is Plant’s diluted EPS?
Subsidiary Preferred Convertible
into Parent Company Common
Net income of Plant
Add: Income to preferred stockholders
of Seed assumed to be converted
Plant’s diluted earnings = a
Plant’s outstanding shares
Add: Seed’s preferred shares
assumed converted
Plant common shares and common
stock equivalents = b
Plant’s diluted EPS = a ÷ b
$186,000
10,000
$196,000
200,000
24,000
$
224,000
0.88
Subsidiary With Options
and Convertible Bonds
Paddy’s income 2003
Own operations
$1,500,000
Syd’s operations
$ 300,000
Syd is 80% owned by Paddy.
80% × $450,000 Syd net income
80% × $50,000 unrealized profit
Amortization
Income from Syd
$360,000
– 40,000
– 20,000
$300,000
Subsidiary With Options
and Convertible Bonds
Paddy: Common stock, 1,000,000 shares
Syd:
Common stock, 400,000 shares
Options to purchase 60,000 shares
of stock at $10 per share (average
market price is $15 per share)
7% convertible bonds, $1,000,000
par outstanding, convertible into
80,000 shares of common stock
Options and Bonds Convertible
into Subsidiary Common Stock
Syd’s income to common stockholders
Less: Unrealized profit on sale of land
Add: Net-of-tax interest expense assuming
bonds converted into subsidiary shares
($1,000,000 × 7% × 66% net of tax)
Subsidiary adjusted earnings = a
$450,000
– 50,000
46,200
$446,200
Options and Bonds Convertible
into Subsidiary Common Stock
Syd’s common shares outstanding
Incremental shares
60,000 – ($600,000 ÷ $15)
Additional shares assuming bonds
converted into subsidiary shares
Syd’s adjusted shares = b
Syd’s diluted EPS = a ÷ b
($446,200 ÷ 500,000)
400,000
20,000
80,000
500,000
$
0.89
Options and Bonds Convertible
into Subsidiary Common Stock
Paddy’s income to common stockholders
Replacement of Paddy’s equity in
Syd’s realized income ($400,000 × 80%)
with Paddy’s equity in Syd’s
diluted EPS (320,000 × $0.89)
Paddy adjusted earnings = a
Paddy outstanding shares = b
Paddy’s diluted EPS = a ÷ b
$1,800,000
– 320,000
284,800
$1,764,800
1,000,000
$
1.76
Options and Bonds Convertible
into Parent’s Common Stock
Paddy’s income to common stockholders
Add: Net-of-tax interest expense assuming
bonds were converted into shares
($1,000,000 × 7% × 66% net-of-tax effect)
Paddy’s adjusted earnings = a
$1,800,000
46,200
$1,846,200
Options and Bonds Convertible
into Parent’s Common Stock
Paddy’s common shares outstanding
Incremental shares
60,000 – ($600,000 ÷ $15)
Additional shares assuming bonds
are converted into parent shares
Paddy’s adjusted shares = b
Paddy’s diluted EPS = a ÷ b
($1,846,200 ÷ 1,100,000)
1,000,000
20,000
80,000
1,100,000
$
1.68
Accounting for Income Taxes
of Consolidated Entities
An affiliated group exists when a common
parent corporation owns at least 80% of the
voting power of all classes of stock and 80%
or more of the total value of all outstanding
stock of each of the includable corporations.
Accounting for Income Taxes
of Consolidated Entities
A consolidated entity that is an
affiliated group may elect to file
consolidated income tax returns.
All other consolidated entities must
file separate income tax returns for
each affiliated company.
Advantages of Filing
Consolidated Returns
1
Losses are offset against income
between members.
2
Intercorporate dividends are
excluded from taxable income.
3
Intercompany profits are deferred
from income until realized.
Disadvantages of Filing
Consolidated Returns
1
Decrease in flexibility.
2
Commitment to consolidated
returns year after year.
3
Deconsolidated corporations
cannot rejoin the group for 5 years.
Income Tax Allocation
FASB Statement No. 109, “Accounting for
Income Taxes,” is the primary source of
GAAP for accounting for income taxes.
Events that have future tax consequences
are designated temporary differences.
Income Tax Allocation
The objectives of accounting for
income taxes are to recognize the amount
of taxes payable or refundable for the
current year and to recognize deferred tax
liabilities and assets for the tax consequences
of events that have been recognized in the
financial statements or tax returns.
Accounting for Distributed
and Undistributed Income
Parson owns a 30% interest in Seaton
Corporation, a domestic corporation.
Seaton reports $600,000 net income
and pays dividends of $200,000.
The income tax rate is 34%.
What is Parson’s share
of Seaton’s income?
Accounting for Distributed
and Undistributed Income
Share of distributed earnings (dividends)
($200,000 × 30%)
Share of undistributed earnings
(retained earnings increase)
($400,000 × 30%)
Equity in Seaton’s earnings
$ 60,000
120,000
$180,000
Accounting for Distributed
and Undistributed Income
The income tax expense equals income tax
liability for the dividends received.
$60,000 × 20% taxable × 34% tax rate = $4,080
December 31, 2003
Income Tax Expense
8,160
Deferred Income Taxes
8,160
To provide for taxes on undistributed earnings
($120,000 × 20% × 34% = $8,160)
Unrealized Gains and Losses
from Intercompany Transactions
Unrealized and constructive gains and losses create
temporary differences that may affect deferred tax
calculations when filing separate income tax returns.
This is not the case when filing consolidated returns.
Separate Company Tax Returns
with Intercompany Gain
Paco Corporation paid $375,000 for a 75%
interest in Step on January 1, 2003.
Step’s equity consisted of $300,000 capital
stock and $200,000 retained earnings.
Separate Company Tax Returns
with Intercompany Gain
Paco had a deferred tax liability of
$10,200, consisting of $30,000 tax/book
depreciation differences that reverse in
equal ($7,500) amounts over the years.
On January 8, 2003, Paco sold equipment
to Step at a gain of $20,000.
Step is depreciating the equipment
over five years (S/L).
Separate Company Tax Returns
with Intercompany Gain
12/31/2003
Sales
Gain on equipment sale
Income from Step
Cost of sales
Operating expenses
Income tax expense
Net income
Add: Beginning retained earnings
Deduct: Dividends (December)
Retained earnings 12/31/2003
Paco
Step
$380,000 $300,000
20,000
–
23,600
–
–200,000 –180,000
–100,000 – 40,000
– 31,253 – 27,200
$ 92,347 $ 52,800
357,653 200,000
– 50,000 – 28,000
$400,000 $224,800
One-Line Consolidation
January 1, 2003
Investment in Step
375,000
Cash
To record purchase of 75% interest
December 2003
Cash
Investment in Step
To record dividends received
375,000
21,000
21,000
One-Line Consolidation
December 31, 2003
Investment in Step
23,600
Income from Step
To record income from Step
23,600
Paco’s share of Step net income
($52,800 × 75%)
Less: Unrealized profit
Add: Piecemeal recognition of gain
Income from Step
$39,600
–20,000
4,000
$23,600
Schedule of Deferred
Income Tax Liability
Temporary
Difference
2003
Depreciation
Gain on equipment
$20,000
Piecemeal recognition – 4,000
Future dividends
– 3,720
Taxable in future years
Enacted tax rate
Deferred tax liability
2004-7
$ 7,500
Future
Years
– 4,000
–
$3,720
$ 3,500
$3,720
34%
34%
$ 1,190
$1,265
Business Combination
Taxable combination
Tax-free reorganization
Business Combination
In a purchase business combination,
the cost/book value differential is
allocated to the assets and liabilities
acquired at gross fair values, and
a deferred tax asset or liability is
recorded for the related tax effect.
Financial Statement Disclosures
for Income Taxes
GAPP divides deferred assets or liabilities.
Current
Noncurrent
Financial Statement Disclosures
for Income Taxes
GAPP requires disclosure for income
tax expense and benefits allocated to:
Continuing operations
Discontinued operations
Extraordinary items
Cumulate effect type
Prior period adjustments