Solution manual advanced accounting 11th by beams chapter09

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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

$30,000

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9-1


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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)
____
$160

$508

Solution E9-2
Pub Corporation and Subsidiaries
Income Allocation Schedule
for the year 2011
(in thousands)
Sam
Pub
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
Lake
Place
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

50,000

30,000

Tea
$35,000
- 5,000
30,000

Won
$(20,000)
_______
(20,000)

+28,000
- 2,000
-12,000
+ 44,800

+ 18,880

Val
$40,000
________
40,000
- 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

14,000a

12,600

$1,400

Nun

28,000

+

2,000

30,000b

23,700

6,300

Oak

9,000

-

4,000

5,000c

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

a
Separate income = net income of Van
Noncontrolling interest (direct)
c
Total separate incomes
Less: Controlling share of Consolidated net
income
Pan $1,240,000  100%
Sin $350,000  90%
Tar $400,000  90%  70%
Win $(100,000)  90%  60%
Van $240,000  90%  80%

$ 120,000
28,000
$ 148,000

$240,000
20%
$ 48,000

$2,130,000
$1,240,000
315,000

252,000
(54,000)
172,800

Total noncontrolling interest share
Alternative solution
Sin $350,000 
Tar $400,000 
Won $(100,000)
Van $240,000 
Total noncontrolling

$400,000
(252,000)
$ 148,000

10%
37%
 46%
28%
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

(1,925,800)
$ 204,200
$

$

$

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

2

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
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
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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

500,000

300,000

______

130,000

(20,000)

(14,000)

Allocate Axe’s income
60% to Sal
Patent
Allocate Sal’s income
90% to Pad
Patent

Ban
$(20,000)

(20,000)

Less: Unrealized profit
Separate realized income (loss)
Allocate Ban’s loss
70% to Sal

Axe
$150,000

78,000
(12,000)
352,000
316,800
(40,000)

14,000

(78,000)

(316,800)

Controlling share of net income $776,800
Noncontrolling interest income

$ 35,200

$ 52,000

$ (6,000)

Check:
Income allocated: $776,800 consolidated net income + $35,200 noncontrolling
interest share in Sal + $52,000 noncontrolling interest share in Axe - $6,000
noncontrolling interest share (loss) in Ban = $858,000
Income to allocate: $500,000 Pad income + $300,000 Sal income + $130,000
realized income of Axe - $20,000 loss of Ban - $52,000 patent = $858,000
Controlling share of consolidated net income: $500,000 - $40,000 +
90%($300,000 - $12,000) + (90%  60%  $130,000) - (90%  70%  $20,000) =
$776,800

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Chapter 9

9-13

Solution P9-2
1

Sea’s books
Investment in Toy (70%)
294,000
Cash
294,000
To record purchase of a 70% interest in Toy Corporation.
Cash

14,000
Investment in Toy (70%)
To record dividends received from Toy ($20,000  70%).

Investment in Toy (70%)
35,000
Income from Toy
To record investment income computed as follows:
Share of Toy’s net income ($60,000  70%)
Less: Unrealized profit from upstream sale of
inventory items ($10,000  70%)

14,000

35,000

$ 42,000
(7,000)
$ 35,000

Pot’s books
Cash

48,000
Investment in Sea (80%)
To record dividends received from Sea ($60,000  80%).

48,000

Investment in Sea (80%)
88,000
Income from Sea
To record investment income computed as follows:
Share of Toy’s net income
($100,000 + $35,000)  80%
Less: Unrealized gain on land sold to Toy

88,000

$108,000
(20,000)
$ 88,000

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Indirect and Mutual Holdings

9-14

Solution P9-2 (Continued)
2

Schedule of income allocation
Separate earnings
Less: Unrealized profits
Separate realized earnings
Allocate Toy’s realized earnings
to Sea ($50,000  70%)
Sea’s net income
Allocate Sea’s net income to
Pot ($135,000  80%)
Pot’s net income and
Controlling share of net income
Noncontrolling interest share
Check:

3

Pot
$300,000
(20,000)

Sea

$100,000

Toy
$ 60,000
(10,000)

280,000

100,000

50,000
(35,000)

35,000
135,000
108,000

(108,000)

$388,000
$ 27,000

_______
$ 15,000

Realized earnings ($280,000 + $100,000 + $50,000) $430,000
Less: Noncontrolling interest share (27,000+15,000) (42,000)
Controlling share of net income
$388,000

Schedule of assets and equities at December 31, 2012
Pot

Sea

Toy

Assets
Investment in Sea (80%)
Investment in Toy (70%)
Total assets

$ 1,848,000 $460,000
440,000
___________ 315,000
$ 2,288,000 $775,000

$540,000

Liabilities
Capital stock
Retained earnings
Total liabilities and equity

$

$100,000
300,000
140,000
$540,000

300,000 $200,000
1,200,000 400,000
788,000 175,000
$ 2,288,000 $775,000

________
$540,000

Note: Pot’s assets other than investments consist of $1,600,000 assets
at the beginning of the year, plus separate earnings of $300,000 and
dividend income of $48,000, less dividends paid of $100,000.
Sea’s assets other than investments consist of $700,000 assets at
the beginning of the period, plus separate earnings of $100,000 and
dividend income of $14,000, less investment cost of $294,000 and
dividends paid of $60,000.

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Chapter 9

9-15

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: Unrealized profit in
ending inventory
Separate realized incomes
Allocate Tip’s income
50% to Pen
40% to Sir
Sir’s net income
Allocate Sir’s income
80% to Pen
Less: Depreciation on excess
allocated to plant and
Equipment
Total income of consolidated
Entity
Controlling share of NI
Noncontrolling int. share

Pen
$184,500
(84,500)
100,000

Sir
$90,000
(10,000)
80,000

Tip
$25,000
25,000

Total
$299,500
(94,500)
205,000

8,000
_______
108,000

8,000
_______
80,000

2,500
2,000
82,000
65,600

(65,600)

(5,000)

( 1,250)

________

$171,100

(20,000)
5,000

(20,000)
193,000

(2,500)
(2,000)

(6,250)

________

_______

$ 15,150

$

500

$186,750
171,100
15,650
$186,750

Investment in Sir (80%)

$420,000

Implied total fair value of Sir ($420,000 / 80%)
Book value of Sir
Excess of fair value over book value

$ 525,000
(500,000)
$ 25,000

Excess allocated to equipment with a four year lfe
Amortization ($25,000 / 4 yrs)

$

Investment in Tip (50%)

$ 75,000

Implied total fair value of Tip ($75,000 / 50%)
Book value of Sir
Excess of fair value over book value – Goodwill

$ 150,000
(120,000)
$ 30,000

6,250

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Indirect and Mutual Holdings

9-16

Solution P9-3 (continued)
Pen Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2011
Pen
Income Statement
Sales
Income from Sir
Income from Tip
Cost of sales

$500,000
72,000
12,500
240,000*

Other expenses

Sir

Tip

$300,000

$100,000

10,000
150,000*

60,000*

70,000*

15,000*

160,000*

Noncont.int.share — Sir
Noncont.int.share — Tip
Cont.int.shareof NI

$184,500

$ 90,000

Adjustments and
Eliminations
h
d
a
i

50,000
72,000
22,500
20,000

f
c

6,250
15,150

c

500

Consolidated
Statements
$

g
h

8,000
50,000

850,000

412,000*
251,250*
15,150*

500*

$ 25,000

$

171,100

$

95,000

Retained Earnings
Retained earnings

Retained earnings
Retained earnings

— Pen

$115,500

45,000
184,500
80,000*

Dividends

Retained earnings
December 31

Balance Sheet
Cash
Accounts receivable
Inventories
Plant and
equipment — net
Investment in
Sir 80%
Investment in
Tip 50%
Investment in
Tip 40%
Goodwill

Accounts payable
Other liabilities
Capital stock
Retained earnings

90,000
40,000*

12,500

g
8,000
e 160,000

160,000

— Sir
— Tip

Net income

f

b

45,000
171,100

25,000
10,000*

$220,000

$210,000

$ 60,000

$ 67,000
70,000
110,000

$ 36,000
50,000
75,000

$ 10,000
20,000
35,000

140,000

425,000

115,000

a
c
d

e

25,000

74,000
b
$990,000

$660,000

$180,000

$ 70,000
100,000
600,000

$ 40,000
10,000
400,000

$ 15,000
5,000
100,000

$990,000

210,000
$660,000

$

186,100

$
j
i

10,000
20,000

113,000
130,000
200,000

f

18,750

686,250

30,000

30,000
$1,159,250

j

10,000

$

b 100,000
e 400,000

115,000
115,000
600,000
186,100

60,000
$180,000

Noncontrolling interest — Sir (beginning)

e 117,000

Noncontrolling interest — Tip (beginning)
Noncontrolling interest December 31

b

19,500

c

6,650

*

80,000*

d 40,000
e 468,000
a
7,500
b 87,500
a
6,000
b 68,000

508,000
95,000

220,000

9,000

9,000
32,000

143,150
$1,159,250

Deduct

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Chapter 9

9-17

Solution P9-4

1

Income allocation
Definitions
P = Par’s income on a consolidated basis
S = Sit’s income on a consolidated basis
T = Tot’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
Controlling share of consolidated net income = P =
Noncontrolling interest share in Sit ($112,245  .1)
Noncontrolling interest share in Tot ($61,224  .3)

$320,408
11,225
18,367
$350,000

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Indirect and Mutual Holdings

9-18

Solution P9-4 (continued)
2

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($110,204.08) + .5($51,020.41)
P = $293,673.48
Income allocation
Controlling share of consolidated net income = P =
Noncontrolling interest share in Sit ($110,204.08  10%)
Noncontrolling interest share in Tot ($51,020.41  30%)

$293,673.48
11,020.40
15,306.12
$320,000.00

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Chapter 9

9-19

Solution P9-5
Working paper entries
a
Income from Sun
27,000
Dividend income
10,000
Dividends
28,000
Investment in Sun
9,000
To eliminate income from Sun, dividend income, and 90% of Sun’s
dividends, and return the investment in Sun account to the
beginning-of-the-period balance under the equity method.
b

200,000
Capital stock — Sun
200,000
Retained earnings — Sun
Goodwill

50,000
Investment in Sun
405,000
45,000
Noncontrolling interest — beginning
To eliminate reciprocal investment and equity accounts, and enter
beginning-of-the-period goodwill and noncontrolling interest.

c

Treasury stock
80,000
Investment in Pin
To reclassify investment in Pin to treasury stock.

d

80,000

Noncontrolling Interest Share
3,000
Dividends
2,000
Noncontrolling Interest
1,000
To record noncontrolling interest share of subsidiary income and
dividends.

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Indirect and Mutual Holdings

9-20

Solution P9-5 (continued)
Treasury Stock approach
Pin Company and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2013
Pin
Income Statement
Sales
Income from Sun
Dividend income
Cost of sales
Expenses

$

400,000
27,000

$

$

177,000

Retained Earnings
Retained earnings — Pin

$

300,000

100,000
10,000
50,000*
30,000*

200,000*
50,000*

Consolidated NI
Noncontrolling share
Controlling share of NI

$

$

200,000
30,000

Dividends

100,000*

20,000*

Balance Sheet
Other assets
Investment in Sun 90%

250,000*
80,000*
170,000
3,000

$

377,000

$

210,000

$

486,000
414,000

$

420,000

$

167,000

$

300,000

b 200,000

a
d

900,000

$

123,000 $
400,000
377,000
900,000 $

$

90,000*
377,000

$

906,000

500,000

$

50,000
956,000

90,000
200,000 b 200,000
210,000
500,000

$

a
9,000
b 405,000
c 80,000
b

$

28,000
2,000
$

80,000

$

50,000

Noncontrolling interest January 1
Noncontrolling interest December 31
Treasury stock

3,000*

167,000

Investment in Pin 10%
Goodwill

Liabilities
Capital stock
Retained earnings

c

b

45,000

d

1,000

213,000
400,000
377,000

46,000

80,000
$

*

500,000

27,000
10,000

30,000

177,000

Consolidated
Statements
$

a
a

d

Retained earnings — Sun
Net income (Controlling
share in Consol. Column)

Retained earnings
December 31

Adjustments and
Eliminations

Sun 90%

80,000*
956,000

Deduct

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Chapter 9

9-21

Solution P9-6
Calculations
Income from Sip
Par separate income (140,000 - 80,000)
Sip separate income (100,000 + 3,000 - 60,000)

$ 60,000
$ 43,000

Formula:
P income = Adjusted Par income + % interest  S income
Adjusted Par income = $60,000 + $2,000 delayed gain on land
- $4,000 patent amortization (80%)
S income = Sip income + % interest  P income
P income = $58,000 + 80%  ($43,000 + 20%  P income)
P income = $92,400 + .16  P income
P income = $110,000
S income = $43,000 + 20%  $110,000
S income = $65,000
Controlling share of consolidated net income = P income  % outstanding
Controlling share = $88,000
Noncontrolling share = S income  % outstanding
Noncontrolling share = $12,000 [($65,000 - $5,000 amortiz.) x 20%]
Income from Sip = consolidated income less P separate income
Income from Sip = $28,000 ($88,000-$60,000)
Working paper entries
a
Investment in Sip
2,000
Gain on sale of land
To recognize previously deferred gain on sale of land.
b

2,000

Dividend income
4,000
Investment in Sip

To eliminate intercompany dividends paid to Sip

4,000

c

Income from Sip
28,000
Dividends
16,000
Investment in Sip
12,000
To eliminate income from Sip and 80% of Sip’s dividends, and
return the investment in Sip account to the beginning-of-theperiod balance under the equity method.

d

Investment in Sip
Investment in Par
To eliminate reciprocal investments.

100,000
100,000

e

50,000
Capital stock — Sip
180,000
Retained earnings — Sip

Patent
20,000
Investment in Sip
195,710
54,290
Noncontrolling interest — beginning
To eliminate reciprocal investment and equity accounts, and enter
beginning-of-the-period patent and noncontrolling interest.

f

Expenses
5,000
Patent
To record current year’s amortization of patent.

g

Noncontrolling Interest Share
Dividends
Noncontrolling Interest

5,000

12,000

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4,000
8,000

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9-22

Indirect and Mutual Holdings

To record the noncontrolling interest share of subsidiary income
and dividends.

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Chapter 9

9-23

Solution P9-6 (continued)
Par Company and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2010
Par
Income Statement
Sales
Income from Sip
Dividend income
Gain on sale of land

Expenses
Consolidated net income
Noncontrolling share
Controlling share of NI

$

140,000
28,000

$

80,000*

$

88,000

$

405,710

Adjustments and
Eliminations

Sip 90%

$

100,000

c

28,000

4,000 b
3,000
60,000* f

4,000

g

12,000

a

Consolidated
Statements
$

240,000

$

5,000
145,000*
100,000
12,000*
88,000

$

405,710

2,000

5,000

47,000

Retained Earnings
Retained earnings — Par

$

Retained earnings — Sip
Controlling share of NI
Dividends
Retained earnings
December 31
Balance Sheet
Other assets
Investment in Sip

88,000
16,000*

180,000

e 180,000

88,000

47,000
20,000*

$

477,710

$

207,000

$

448,000
109,710

$

157,000

c
g

100,000
e
$

557,710

$

80,000
477,710
557,710 $

Noncontrolling interest January 1
Noncontrolling interest December 31

16,000*
$

477,710

$

605,000

$

15,000
620,000

a
2,000
d 100,000

Investment in Par
Patent

Capital stock
Retained earnings

16,000
4,000

$

b
4,000
c 12,000
e 195,710
d 100,000
20,000 f
5,000

257,000
50,000 e
207,000
257,000

50,000

80,000
477,710

e
g

54,290
8,000
$

*

62,290
620,000

Deduct

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Indirect and Mutual Holdings

9-24

Solution P9-7
Preliminary Computations
Pan’s investment cost

$340,000

Implied total fair value of Set ($340,000 / 80%)
Book value of Set
Excess of fair value over book value - Goodwill

$425,000
(400,000)
$ 25,000

1

Consolidated net income and noncontrolling interest share (conventional
approach)
Definitions
P = Pan’s income on a consolidated basis
S = Set’s income on a consolidated basis
P = $200,000 separate earnings + .8S
S = $80,000 separate earnings + .1P
Solve for P
P = $200,000 + .8($80,000 + .1P)
P = $200,000 + $64,000 + .08P
P = $286,957
Compute S
S = $80,000 + .1($286,957)
S = $108,696
Income allocation
Consolidated net income ($286,957  90% outside ownership)
Noncontrolling interest share ($108,696  20%)
Total (separate incomes)

2

$258,261
21,739
$280,000

Entries to account for investments on an equity basis
Pan’s books
Capital stock
120,000
Retained earnings
40,000
Investment in Set
160,000
To record constructive retirement of 10% of Pan’s stock.
Investment in Set (80%)
58,261
Income from Set
58,261
To record income from Set computed as follows: 80%($108,696) 10%($286,957) = $58,261. Alternatively $258,261 - $200,000
separate income = $58,261.
Cash

32,000
Investment in Set
To record receipt of 80% of Set’s dividends.

Investment in Set (80%)
Dividends

32,000

10,000

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10,000


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Chapter 9

9-25

To eliminate dividends on stock that was constructively retired
and to adjust the investment in Set account for the transfer equal
to 10% of Pan’s dividends.

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