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. A mutual holding affiliation structure is a special type of indirect holding
where affiliates indirectly own themselves. If there are two affiliates, each affiliate holds 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
($100,000 ´ 30%) (30,000)
Indirect noncontrolling interest in Stan’s income
($100,000 ´ 70% ´ 20%) (14,000)
Direct noncontrolling interest in Sam’s income
($160,000 ´ 20%) (32,000)
Pat’s net income and controlling share of consolidated net income $384,000

Approach B
  Pat     Sam    Stan 
Separate earnings $200,000 $160,000 $100,000
Allocate Stan’s income to Sam
($100,000 ´ 70%) + 70,000 -70,000
Allocate Sam’s income to Pat
($230,000 ´ 80%) +184,000 -184,000 0
Controlling share $384,000
Noncontrolling interest share $ 46,000 $30,000

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9-1
9-2 Indirect and Mutual Holdings

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    P    S1 80% S2 70%

Separate earnings $20,000 $10,000 $5,000
Deduct: Unrealized profit - 1,000

Separate realized earnings 20,000 9,000 5,000

Allocate S2’s income + 3,500 -3,500
Allocate S1’s income +10,000 -10,000 0
P’s net income $30,000
Noncontrolling int. share $ 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.

8 A mutual holding situation exists because two affiliates hold ownership interests in each other.

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 = $100,000 + .8S
S = $40,000 + .1P
P = $100,000 + .8($40,000 + .1P)
P = $143,478
Controlling Share of Consolidated net income = $143,478 ´ 90% = $129,130

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.

15 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

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Chapter 9 9-3

interest’s percentage of dividends, the noncontrolling interest can be determined without use of
simultaneous equations.

SOLUTIONS TO EXERCISES

Solution E9-1

a. In 2013, Pandu Tbk only have indirect holdings of Dewa Tbk through Sunda
Tbk, so the structure is the father-son-grandson. The percentage of
ownership is calculated as follows:

Pandu’s ownership of Sunda  Sunda’s ownership of Dewa (90%  60%) = 54%

b. In 2014, Pandu Tbk has both indirect and direct ownership of Dewa Tbk,
so the structure is the connecting affiliates. The percentage of
ownership is calculated as follows:

Pandu’s indirect ownership of Dewa (a) + Pandu’s direct ownership of

Dewa = 74%

Solution E9-2

Computational approach

Penang's separate earnings $100,000

Add: Penang's share of Minang's separate earnings
(80%  $80,000) $ 64,000
Add: Penang's share of Kelang's separate earnings
(80%  60%  $50,000) $ 24,000
Controlling share of consolidated net income $188,000

Minang's direct noncontrolling interest share

(20%  $80,000) $ 16,000
Kelang's indirect noncontrolling interest share
(80%  40%  $50,000) $ 16,000
Kelang's direct noncontrolling interest share
(40%  $50,000) $ 20,000
Noncontrolling interest share $ 52,000

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9-4 Indirect and Mutual Holdings
Solution E9-3

a Under treasury stock approach, cost method is used, so:

Penn's separate earnings $50,000
Penn's share of Sinn's earnings
(80% x $25,000) $20,000
Controlling share of consolidated net income $70,000

b Under conventional approach, equity method is used, so:

Penn’s separate earnings $50,000
Penn's share of Sinn's earnings*
(80% x $41,667.67)-(20% x $83,888.33) $16,667
Controlling share of consolidated net income $66,667

*
Determine Penn’s and Sinn's income under consolidation
basis
P = Penn's income + Sinn's mutual income
S = Sinn's income + Penn's mutual income

P = $50,000 + 0.8S
S = $25,000 + 0.2P

P = $50,000 + 0.8($25,000 + 0.2P)

0.84P = $70,000
P = $83,333.33

S = $25,000 + 0.2($83,333.33)
S = $41,667.67

Solution E9-4

1 c
Income from Son is equal to:
70% of Son’s $160,000 income $112,000
70% of Son’s 80% interest in Tan’s
$100,000 income 56,000
Income from Son $168,000

2 d
Noncontrolling interest share is equal to:
30% direct noncontrolling interest in Son’s
$160,000 income $ 48,000
20% direct noncontrolling interest in Tan’s
$100,000 income 20,000
30% ´ 80% indirect noncontrolling interest in
Tan’s $100,000 income 24,000

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Chapter 9 9-5
Total noncontrolling interest share $ 92,000

3 d
Consolidated net income is equal to:
Combined separate incomes of $360,000 + $160,000 +
$100,000 $620,000
Less: Noncontrolling interest share 92,000
Controlling interest share of Consolidated net income $528,000

Alternative computation:
Pin’s separate income $360,000
Add: 70% of Son’s $160,000 income 112,000
Add: (70% ´ 80%) of Tan’s $100,000 income 56,000
Controlling interest share of Consolidated net income $528,000

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9-6 Indirect and Mutual Holdings
Solution E9-5

   Pal      Sal     Tea   Won     Val  

Separate earnings $ 50,000 $30,000 $35,000 $(20,000) $40,000
Less: Unrealized profit                   - 5,000 _________ ________
Separate realized
earnings 50,000 30,000 30,000 (20,000) 40,000
Allocate Val’s income
70% to Tea +28,000 (28,000)
Allocate Won’s income
10% to Tea (2,000) + 2,000
60% to Sal (12,000) + 12,000
Allocate Tea’s income
80% to Pal + 44,800 (44,800)
10% to Sal + 5,600 (5,600)
Allocate Sal’s income
80% to Pal + 18,880 (18,880)
Pal’s net income (or
Controlling share of
consolidated net
income) $113,680 _______ ________ _______
Noncontrolling interest
share $ 4,720 $ 5,600 $ (6,000) $12,000

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Chapter 9 9-7
Solution E9-6

 Pet   Man   Nun   Oak 

Separate earnings $130,000 $36,000 $56,000 $18,000
Unrealized profit           - 8,000 + 4,000 -8,000
Separate realized earnings 130,000 28,000 60,000 10,000
Allocate Oak’s income
20% to Nun + 2,000 (2,000)
70% to Man + 7,000 (7,000)
Allocate Nun’s income
70% to Pet + 43,400 (43,400)
10% to Man + 6,200 (6,200)
Allocate Man’s income
90% to Pet + 37,080 (37,080)
Pet’s net income (or
Controlling share of NI) $210,480 _______ ______
Noncontrolling interest share $ 4,120 $12,400 $1,000

Alternative solution

Noncontrolling
Reported + Adjusted Consolidated Interest
Income - Adjustments = Income - Net Income = Share
Pet $130,000 $130,000 $130,000 0

Man 36,000 - $8,000 28,000a 25,200 $ 2,800

Nun 56,000 + 4,000 60,000b 47,400 12,600

Oak 18,000 - 8,000 10,000c 7,880 2,120

$228,000 $210,480 $17,520

a
$28,000 divided 90% to consolidated net income (CNI)
10% to noncontrolling interest share (NIS)
b
$60,000 divided 70% + (90% ´ 10%) to CNI and 20% + (10% ´ 10%) to NIS
c
$10,000 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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9-8 Indirect and Mutual Holdings
Solution E9-7

1 a
Separate income of Tar $400,000
Direct noncontrolling interest X 30%
$120,000

2 a
Separate income = net income of Van $240,000
Noncontrolling interest (direct) X 20%
$ 48,000

3 c
Total separate incomes $2,130,000
Less: Controlling Share of Consolidated net
income
Pan $1,240,000 ´ 100% $1,240,000
Sin $350,000 ´ 90% 315,000
Tar $400,000 ´ 90% ´ 70% 252,000
Win $(100,000) ´ 90% ´ 60% (54,000)
Van $240,000 ´ 90% ´ 80% 172,800
(1,925,800)
Total noncontrolling interest share $ 204,200

Alternative solution
Sin $350,000 ´ 10% $ 35,000
Tar $400,000 ´ 37% 148,000
Won $(100,000) ´ 46% (46,000)
Van $240,000 ´ 28% 67,200
Total noncontrolling interest share $ 204,200

4 a
[See computations for question 3]

5 d
Net income of Sin
Separate income $ 350,000
Add: 70% of Tar’s $400,000 280,000
Deduct: 60% of Won’s $(100,000) (60,000)
Add: 80% of Van’s $240,000 192,000
Net income of Sin $ 762,000
Pan’s interest 90%
Investment increase 685,800
Less: Dividends received from Sin ($200,000 ´ 90%) (180,000)
Net increase $ 505,800

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Chapter 9 9-9
Solution E9-8

1 b
Separate income of Sam (net income) $ 80,000
Separate income of Ten $40,000 - ($80,000 ´ 10%) 32,000
Separate income of Pat
$240,000 - ($40,000 ´ 70%) - ($80,000 ´ 80%) 148,000
Total separate income $260,000

2 d
 Pat   Sam   Ten 
Separate income $148,000 $80,000 $32,000
Unrealized profit on inventory (10,000)
Unrealized profit on land _________ ________ (15,000)
Separate realized income $148,000 $70,000 $17,000

3 a
Pat’s separate income $148,000
Add: Investment income from Sam ($70,000 ´ 80%) 56,000
Add: Investment income from Ten
[$17,000 + ($70,000 ´ 10%)] ´ 70% 16,800
Pat’s income (controlling share of consolidated net income) $220,800

4 d
Total separate realized income $235,000
Less: Controlling share of consolidated net income 220,800
Noncontrolling interest share $ 14,200

Alternative solution
Direct noncontrolling interest in Sam ($70,000 ´ .1) $ 7,000
Indirect noncontrolling interest in Sam
($70,000 ´ .3 ´ .1) 2,100
Direct noncontrolling interest in Ten ($17,000 ´ .3) 5,100
Noncontrolling interest share $ 14,200

Solution E9-9

Controlling Share of Consolidated net income

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 $6,000,000 + 80% of S
S = Separate income of $3,000,000 + 30% of P
P = $6,000,000 + .8($3,000,000 + .3P) = $6,000,000 + $2,400,000 + .24P
.76P = $8,400,000
P = $11,052,632
Controlling Share of Consolidated net income = $11,052,632 ´ 70% =
$7,736,842

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9-10 Indirect and Mutual Holdings
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 = $400,000 + .7S
S = $240,000 + .8T
T = $160,000 + .1S

Solve for S
S = $240,000 + .8($160,000 + .1S)
S = $368,000 + .08S
S = $400,000

Compute P and T
P = $400,000 + .7($400,000)
P = $680,000

T = $160,000 + .1($400,000)
T = $200,000

Income Allocation
Controlling Share of Consolidated net income (equal to P) $680,000
Noncontrolling interest share in Sad ($400,000 ´ 20%) 80,000
Noncontrolling interest share in Two ($200,000 ´ 20%) 40,000
Total consolidated income $800,000

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Chapter 9 9-11
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 = $647,295.60

Determine C
C = $230,000 + .25($647,295.60)
C = $391,823.90

Determine B
B = $170,000 + .15($391,823.90)
B = $228,773.59

Allocate income to controlling share of consolidated net income and

noncontrolling interest

Controlling Share of Consolidated net income ($647,295.60 ´ 75%) $485,471.70

Noncontrolling interest — Son ($228,773.59 ´ 20%) 45,754.72
Noncontrolling interest — Tin ($391,823.90 ´ 15%) 58,773.58
Total consolidated income $590,000.00

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9-12 Indirect and Mutual Holdings
Solution E9-12

1 d
Combined separate income $160,000
Less: Noncontrolling interest share 6,750
Controlling Share of Consolidated net income $153,250

Alternatively:
Pet’s separate income $100,000
Add: Sod’s net income of $67,500 ´ 90% 60,750
Less: Dividends received from Pet ($50,000 ´ 15%) (7,500)
Controlling interest share of Consolidated net income $153,250

2 b
P = $100,000 + .9($60,000 + .15P)
.865P = $154,000
P = $178,035
S = $60,000 + $26,705 = $86,705

Controlling Share of Consolidated net income = $178,035 ´ . $151,330

85 =
Noncontrolling interest share = $86,705 ´ .10 = 8,670
Total consolidated income $160,000

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Chapter 9 9-13
Solution E9-13

1 Treasury stock approach

Investment in Sat balance December 31, 2016
Investment balance December 31, 2015 $245,700
Add: Income from Sat 26,900
Less: Dividends received from Sat(70% x $30,000) (21,000)
Add: Dividends paid to Sat 6,000
Investment in Sat December 31, 2016 $257,600

Supporting computations
Computation of income from Sat:
Sat’s separate income $ 50,000
Add: Sat’s dividend income from Pug 6,000
Sat’s net income 56,000
Pug’s ownership interest 70%
Pug’s equity in Sat’s income 39,200
Less: Dividends paid to Sat ($60,000 ´ 10%) (6,000)
Less: Excess amortization ($9,000 x 70%) (6,300)
Income from Sat $ 26,900

2 Conventional approach
Pug’s net income and consolidated net income

P = ($120,000 + .7S) - $6,300

S = $50,000 + .1P

P = $120,000 + .7($50,000 + .1P) - $6,300

P = $120,000 + $35,000 + .07P - $6,300
.93P = $148,700
P = $159,892

S = $50,000 + .1($159,892)
S = $65,989

Pug’s net income and controlling share

($159,892 ´ 90%) $143,903
Noncontrolling interest share ($65,989 ´ 30%) 19,797
Total income $163,700

Income from Sat

Controlling Share of Consolidated net income $143,903
Less: Pug’s separate income 120,000
Income from Sat $ 23,903

Or alternatively,
($65,989 ´ 70%) - ($159,892 ´ 10%) - $6,300 excess $ 23,903

Investment in Sat December 31, 2016

Investment in Sat December 31, 2015 $245,700
Add: Income from Sat 23,903
Less: Dividends from Sat (21,000)
Investment in Sat December 31, 2016 $248,603

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9-14 Indirect and Mutual Holdings
SOLUTIONS TO PROBLEMS

Solution P9-1

Polly and Subsidiaries

Income Allocation Schedule
For the year 2014

Polly Sally Jolly Wally

Separate earnings $450,000 $250,000 $100,000 $50,000
Add: realized profit from sale
of land $10,000 $5,000
Less: unrealized profit from
sale of land $(15,000)
Less: unrealized profit at ending
inventory $(10,000) $(10,000)
       
Separate realized earnings $450,000 $235,000 $100,000 $45,000
Alllocate Wally's income
50% to Jolly $22,500 $(22,500)
10% to Sally $4,500 $(4,500)
30% to Polly $13,500   $(13,500)
Allocate Jolly's income $122,500
70% to Sally $85,750 $(85,750)
Allocate Sally''s income $325,250
80% to Polly $260,200 $(260,200)
Controlling share of consolidated $
net income 723,700
Noncontrolling interest share $65,050 $36,750 $4,500

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Chapter 9 9-15
Solution P9-2

1 Sea’s books

Investment in Toy (70%) 588,000

Cash 588,000
To record purchase of a 70% interest in Toy Corporation.

Cash 28,000
Investment in Toy (70%) 28,000
To record dividends received from Toy ($40,000 ´ 70%).

Investment in Toy (70%) 70,000

Income from Toy 70,000
To record investment income computed as follows:
Share of Toy’s net income ($120,000 ´ 70%) $ 84,000
Less: Unrealized profit from upstream sale of
inventory items ($20,000 ´ 70%) (14,000)
$ 70,000

Pot’s books

Cash 96,000
Investment in Sea (80%) 96,000
To record dividends received from Sea ($120,000 ´ 80%).

Investment in Sea (80%) 176,000

Income from Sea 176,000
To record investment income computed as follows:

Share of Toy’s net income

($200,000 + $70,000) ´ 80% $216,000
Less: Unrealized gain on land sold to Toy (40,000)
$176,000

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9-16 Indirect and Mutual Holdings
Solution P9-2 (Continued)

2 Schedule of income allocation

 Pot   Sea   Toy 
Separate earnings $600,000 $200,000 $120,000
Less: Unrealized profits (40,000)          (20,000)

Separate realized earnings 560,000 200,000 100,000

Allocate Toy’s realized earnings
to Sea ($100,000 ´ 70%) 70,000 (70,000)

Sea’s net income 270,000

Allocate Sea’s net income to
Pot ($270,000 ´ 80%) 216,000 (216,000)

Pot’s net income and

Controlling share of net income $776,000          _________
Noncontrolling interest share $ 54,000 $ 30,000

Check: Realized earnings ($560,000 + $200,000 + $100,000) $860,000

Less: Noncontrolling interest share (54,000+30,000) (84,000)
Controlling share of net income $776,000

3 Schedule of assets and equities at December 31, 2017

   Pot      Sea     Toy 

Assets $ 3,696,000 $ 920,000 $1,080,000

Investment in Sea (80%) 880,000
Investment in Toy (70%) ___________ 630,000 __________
Total assets $ 4,576,000 $1,550,000 $1,080,000

Liabilities $ 600,000 $ 400,000 $ 200,000

Capital stock 2,400,000 800,000 600,000
Retained earnings 1,576,000 350,000 280,000
Total liabilities and equity $ 4,576,000 $1,550,000 $1,080,000

Note: Pot’s assets other than investments consist of $3,200,000 assets

at the beginning of the year, plus separate earnings of $600,000 and
dividend income of $96,000, less dividends paid of $200,000.
Sea’s assets other than investments consist of $1,400,000 assets
at the beginning of the period, plus separate earnings of $200,000 and
dividend income of $28,000, less investment cost of $588,000 and
dividends paid of $120,000.

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Chapter 9 9-17
Solution P9-3

Preliminary computations

Check on consolidated net income

  Pen    Sir    Tip    Total 
Net income as stated $184,500 $90,000 $25,000 $299,500
Less: Investment income (84,500) (10,000)         (94,500)
Separate income 100,000 80,000 25,000 205,000
Add: Unrealized profit in
beginning inventory 8,000 8,000
Less: Unrealized profit in
ending inventory _________ ________ (20,000) (20,000)
Separate realized incomes 108,000 80,000 5,000 193,000
Allocate Tip’s income
50% to Pen 2,500 (2,500)
40% to Sir 2,000 (2,000)
Sir’s net income 82,000
Allocate Sir’s income
80% to Pen 65,600 (65,600)
Less: Depreciation on excess
allocated to plant and
Equipment (5,000) ( 1,250) (6,250)
Total income of consolidated
Entity _________ $186,750
Controlling share of NI $171,100 _________ ________ 171,100
Noncontrolling int. share $ 15,150 $ 500 15,650
$186,750

Investment in Sir (80%) $ 420,000

Implied total fair value of Sir ($420,000 / 80%) $ 525,000

Book value of Sir (500,000)
Excess of fair value over book value $ 25,000

Excess allocated to equipment with a four year lfe

Amortization ($25,000 / 4 yrs) $ 6,250

Investment in Tip (50%) $ 75,000

Implied total fair value of Tip ($75,000 / 50%) $ 150,000

Book value of Sir (120,000)
Excess of fair value over book value – Goodwill $ 30,000

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9-18 Indirect and Mutual Holdings
Solution P9-3 (continued)
Pen Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2016

Adjustments and Consolidated

Pen Sir Tip Eliminations Statements
Income Statement
Sales $500,000 $300,000 $100,000 h 50,000 $ 850,000
Income from Sir 72,000 d 72,000
Income from Tip 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 6,250 251,250*
Noncont.int.share — Sir c 15,150 15,150*
Noncont.int.share — Tip c 500 500*
Cont. share of net inc. $184,500 $ 90,000 $ 25,000 $ 171,100

Retained Earnings
$115,500 f 12,500
Retained earnings — Pen
g 8,000 $ 95,000
160,000 e 160,000
Retained earnings — Sir
45,000 b 45,000
Retained earnings — Tip
Cont. share of net inc. 184,500ü 90,000ü 25,000ü 171,100
Dividends 80,000* 40,000* 10,000* a 9,000
c 9,000
d 32,000 80,000*
Retained earnings
December 31 $220,000 $210,000 $ 60,000 $ 186,100

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 25,000 f 18,750 686,250
Investment in d 40,000
Sir 80% 508,000 e 468,000
Investment in 95,000 a 7,500
Tip 50% b 87,500
Investment in 74,000 a 6,000
Tip 40% b 68,000
Goodwill ________ ________ ________ b 30,000 30,000
$990,000 $660,000 $180,000 $1,159,250

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 220,000ü 210,000ü 60,000ü 186,100
$990,000 $660,000 $180,000
Noncontrolling interest — Sir (beginning) e 117,000
Noncontrolling interest — Tip (beginning) b 19,500
Noncontrolling interest December 31 _________ c 6,650 143,150
976,900 976,900 $1,159,250
*Deduct

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Chapter 9 9-19
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 = $400,000 + .8S + .5T
S = $200,000 + .2T
T = $100,000 + .1S

Solve for S
S = $200,000 + .2($100,000 + .1S)
S = $220,000 + .02S
.98S = $220,000
S = $224,489.80 or $224,490

Compute T
T = $100,000 + .1($224,489.80)
T = $100,000 + $22,448.98
T = $122,448.98 or $122,449

Compute P
P = $400,000 + .8($224,489.80) + .5($122,448.98)
P = $640,816.33
or $640,816

Income allocation
Controlling share of consolidated net income = P = $640,816
Noncontrolling interest share in Sit ($224,490 ´ .1) 22,449
Noncontrolling interest share in Tot ($122,449 ´ .3) 36,735
$700,000

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9-20 Indirect and Mutual Holdings
Solution P9-4 (continued)

2 P, S, and T are as defined in part 1.

Equation
P = ($400,000 - $40,000) + .8S + .5T
S = $200,000 + .2T
T = ($100,000 - $20,000) + .1S

Solve for S
S = $200,000 + .2($80,000 + .1S)
S = $216,000 + .02S
S = $220,408.16

Compute T
T = $80,000 + .1($220,408.16)
T = $102,040.82

Compute P
P = $360,000 + .8($220,408.16) + .5($102,040.82)
P = $587,346.94

Income allocation
Controlling share of consolidated net income = P = $587,346.94
Noncontrolling interest share in Sit ($220,408.16 ´ 10%) 22,040.82
Noncontrolling interest share in Tot ($102,040.82 ´ 30%) 30,612.25
$640,000.01

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Chapter 9 9-21
Solution P9-5

Preliminary computations

Shin's separate income (Sales - Expenses) $ 40,000

Shin's dividend income $ 4,000
Shin's income $ 44,000
Pamela's share of income (90%) $ 39,600
Intercompany dividend adjustment $ (4,000)
Income from Shin $ 35,6001

Pamela's dividend - beginning $ 40,000

Intercompany dividend adjustment $ (4,000)
Pamela's dividend - ending $ 36,0002

Investment in Shin - beginning $315,000

Add: Pamela's share of Shin's income $ 39,600
Less: Dividend from Shin (90%) $ 27,000
Investment in Shin - ending $327,6003

Implied fair value (100%) $350,000

Book value of equity $340,000
Goodwill $ 10,000

Consolidation workpaper entries

a Income from Shin $35,600

Dividend income $4,000
Dividends $27,000
Investment in Shin $12,600
To eliminate income from Shin
b Noncontrolling interest share $4,400
Dividends $3,000
Noncontrolling interest $1,400
c Common stock - Shin $200,000
Retained earnings - Shin $140,000
Goodwill $10,000
Investment in Shin $315,000
Noncontrolling interest $35,000
To eliminate equity accounts and
recognize goodwill
d Treasury stock $80,000
Investment in Pamela $80,000
To recognize treasury stock under
treasury stock approach

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9-22 Indirect and Mutual Holdings
Solution P9-5 (continued)

Pamela Incorporated and Subsidiary

Consolidated Workpaper
For year ended December 31, 2014

Consolidate
Adjustments d
Pamela Shin and eliminations Statements
Debits Credits
Income Statement
Sales $220,000 $110,000 $330,000
Income from Shin $35,600 a $35,600 $ -
Dividend income $4,000 a $4,000 $ -
Expenses including COGS $(100,000) $(70,000) $(170,000)
Noncontrolling interest share b $4,400 $(4,400)
Controlling share of net
income $155,600 $44,000 $155,600
Retained Earnings Statement
Retained earnings - Pamela $308,000 $308,000
Retained earnings - Shin $140,000 c $140,000
Dividends $(36,000) $(30,000) a $27,000 $(36,000)
b $3,000
Controlling share of net
income $155,600 $44,000 $155,600
Retained earnings - December
31 $427,600 $154,000 $427,600

Balance Sheet
Other assets $600,000 $274,000 $874,000
Investment in Shin - 90% $327,600 a $12,600 $ -
c $315,000
Investment in Pamela - 10% $80,000 d $80,000 $ -
Goodwill c $10,000 $10,000
$927,600 $354,000 $884,000

Common stock - Pamela $500,000 $500,000

Common stock - Shin $200,000 c $200,000
Retained earnings $427,600 $154,000 $427,600
$927,600 $354,000
Treasury stock d $80,000 $(80,000)
Noncontrolling interest b $1,400 $36,400
c $35,000
$884,000

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Chapter 9 9-23
Solution P9-6

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

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9-24 Indirect and Mutual Holdings
Solution P9-6 (continued)

Working paper entries

a Investment in Sip 2,000
Gain on sale of land 2,000
To recognize previously deferred gain on sale of land.
b Dividend income 4,000
Investment in Sip 4,000
To eliminate intercompany dividends paid to Sip
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-the-
period balance under the equity method.
d Investment in Sip 100,000
Investment in Par 100,000
To eliminate reciprocal investments.
e Capital stock — Sip 50,000
Retained earnings — Sip 180,000
Patent 20,000
Investment in Sip 195,710
Noncontrolling interest — beginning 54,290
To eliminate reciprocal investment and equity accounts, and enter
beginning-of-the-period patent and noncontrolling interest.
f Expenses 5,000
Patent 5,000
To record current year’s amortization of patent.
g Noncontrolling Interest Share 12,000
Dividends 4,000
Noncontrolling Interest 8,000
To record the noncontrolling interest share of subsidiary income
and dividends.

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Chapter 9 9-25
Solution P9-6 (continued)

Par Company and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2017

Adjustments and Consolidated

Par Sip 80% Eliminations Statements
Income Statement
Sales $ 140,000 $ 100,000 $ 240,000
Income from Sip 28,000 c 28,000

Dividend income 4,000 b 4,000

Gain on sale of land 3,000 a 2,000 5,000
Expenses 80,000 * 60,000 * f 5,000 145,000 *
Consolidated net income 100,000
Noncontrolling share g 12,000 12,000 *
Controlling share of NI $ 88,000 $ 47,000 $ 88,000

Retained Earnings
Retained earnings — Par $ 405,710 $ 405,710
Retained earnings — Sip $ 180,000 e 180,000
Controlling share of NI 88,000ü 47,000ü 88,000
Dividends 16,000 * 20,000 * c 16,000
g 4,000 16,000 *
Retained earnings
December 31 $ 477,710 $ 207,000 $ 477,710

Balance Sheet
Other assets $ 448,000 $ 157,000 $ 605,000
Investment in Sip 109,710 a 2,000 b 4,000
d 100,000 c 12,000
e 195,710
Investment in Par 100,000 d 100,000
Patent __________ __________ e 20,000 f 5,000 15,000
$ 557,710 $ 257,000 $ 620,000

Capital stock 80,000 50,000 e 50,000 80,000

Retained earnings 477,710 ü 207,000 ü 477,710
$ 557,710 $ 257,000

Noncontrolling interest January 1 e 54,290

Noncontrolling interest December 31 _________ g 8,000 62,290
401,000 401,000 $ 620,000
*Deduct

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9-26 Indirect and Mutual Holdings
Solution P9-7

Preliminary Computations
Pop’s investment cost $170,000

Implied total fair value of Son ($170,000 / 80%) $212,500

Book value of Son (200,000)
Excess of fair value over book value – Goodwill $ 12,500

1 Consolidated net income and noncontrolling interest share (conventional

approach)
Definitions
P = Pop’s income on a consolidated basis
S = Son’s income on a consolidated basis

P = $100,000 separate earnings + .8S

S = $40,000 separate earnings + .1P

Solve for P
P = $100,000 + .8($40,000 + .1P)
P = $100,000 + $32,000 + .08P
P = $143,478

Compute S
S = $40,000 + .1($143,478)
S = $54,348

Income allocation
Controlling Share of Consolidated net income ($143,478 ´ 90% $129,130
outside ownership)
Noncontrolling interest share ($54,348 ´ 20%) 10,870

Total (separate incomes) $140,000

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Chapter 9 9-27
Solution P9-7 (continued)

2 Entries to account for investments on an equity basis

Pop’s books

Capital stock 60,000

Retained earnings 20,000
Investment in Son 80,000
To record constructive retirement of 10% of Pop’s stock.

Investment in Son (80%) 29,130

Income from Son 29,130
To record income from Son computed as follows: 80%($54,348) - 10%
($143,478) = $29,130. Alternatively $129,130 - $100,000 separate
income = $29,130.

Cash 16,000
Investment in Son 16,000
To record receipt of 80% of Son’s dividends.

Investment in Son (80%) 5,000

Dividends 5,000
To eliminate dividends on stock that was constructively retired
and to adjust the investment in Son account for the transfer equal
to 10% of Pop’s dividends.

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9-28 Indirect and Mutual Holdings
Solution P9-7 (continued)

3 Journal entries on Son’s books

Investment in Pop (10%) 80,000

Assets 80,000
To record acquisition of a 10% interest in Pop at book value.

Investment in Pop 14,348

Income from Pop 14,348
To record 10% of Pop’s $143,478 income on a consolidated basis.

Cash 5,000
Investment in Pop (10%) 5,000
To record receipt of dividends from Pop ($50,000 ´ 10%).

4 Net income for 2018   Pop     Son  

Separate incomes $100,000 $ 40,000
Investment income 29,130 14,348
Net income $129,130 $ 54,348

5 Investment balance December 31, 2018   Pop     Son  

Investments beginning of 2018 $208,000 $ 80,000
Less: Constructive retirement of Pop’s stock (80,000)
Add: Investment income 29,130 14,348
Add: Dividends paid to Son 5,000
Less: Dividends received (16,000) (5,000)
Investment balances December 31, 2018 $146,130 $ 89,348

6 Stockholders’ equity December 31, 2018   Pop     Son  

Stockholders’ equity January 1, 2018 $720,000 $250,000
Add: Net income 129,130 54,348
Less: Dividends (45,000) (20,000)
Stockholders’ equity December 31, 2018 $804,130 $284,348

7 Noncontrolling interest at December 31, 2018

Son’s equity on a consolidated basis $284,348
Noncontrolling interest percentage 20%
Noncontrolling interest at December 31, 2018 $ 56,870

Alternative solution
Noncontrolling interest January 1, 2018 ($250,000 ´ 20%) $ 50,000
Noncontrolling interest share ($54,348 ´ 20%) 10,870
Noncontrolling interest dividends (4,000)
Noncontrolling interest at December 31, 2018 $ 56,870

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Chapter 9 9-29
Solution P9-7 (continued)

8 Adjustment and elimination entries

a Income from Pop 14,348

Dividends 5,000
Investment in Pop 9,348
To eliminate investment income and dividends from Pop and
return the investment account to its beginning-of-the-period
balance.

b Investment in Son 80,000

Investment in Pop 80,000
To eliminate investment in Pop balance and increase the
investment in Son for the constructive retirement of Pop’s
stock that was charged to the investment in Son account.

c Dividends 5,000
Investment in Son 5,000
To eliminate dividends.

d Income from Son 29,130

Dividends 16,000
Investment in Son 13,130
To eliminate income and dividends from Son and return the
investment in Son to its beginning-of-the-period balance.

e Capital stock — Son 150,000

Retained earnings — Son 100,000
Goodwill 12,500
Investment in Son 208,000
Noncontrolling interest 54,500
To eliminate Son’s equity account balances and the
investment in Son, enter beginning-of-the-period goodwill
and noncontrolling interest.

f Noncontrolling interest share 10,870

Dividends 4,000
Noncontrolling Interest 6,870
To record the noncontrolling interest share of subsidiary
income and dividends.

Solution PR 9-1
According to ASC 323-10-40-1, “An
share issuance by an investee as
share of its investment. Any gain
investee’s share issuance shall be
equity method investor shall account for a
if the investor had sold a proportionate
or loss to the investor resulting from an
recognized in earnings.”

Solution PR 9-2
No. According to ASC 855-10-25-3, there is no need to disclose evidence about
conditions that did not exist at the balance sheet date.

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