ch09-advance accounting-mutual holding
DESCRIPTION
Advanced Financial Acccounting-Mutual Holding Slide PresentationTRANSCRIPT
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9 - 1©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Indirect and Mutual Holdings
Chapter 9
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9 - 2©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 1
Prepare consolidated statements
when the parent company
controls through indirect holdings.
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9 - 3©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Affiliation Structures
The potential complexity of corporate
affiliation structure is limited only by one’s imagination .
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9 - 4©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Direct Holdings
Parent
SubsidiaryA
80%
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9 - 5©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Direct Holdings
Parent
SubsidiaryB
70%
SubsidiaryA
80%
SubsidiaryC
90%
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9 - 6©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Indirect Holdings
Parent
Subsidiary
A
80%
SubsidiaryB
70%
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9 - 7©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Indirect Holdings
Parent
SubsidiaryA
SubsidiaryB
80% 20%
40%
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9 - 8©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Mutual Holdings
Parent
SubsidiaryA
80% 10%
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9 - 9©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Mutual Holdings
Parent
SubsidiaryA
SubsidiaryB
80% 20%
40%
20%
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9 - 10©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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.
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9 - 11©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Father-Son-Grandson Structure
Other assets $400 $195 $190Investment in Shaw: (80%) 200 – –
Investment in Turk: (70%) – 105 – $600 $300 $190
Liabilities $100 $ 50 $ 40Capital stock 400 200 100
Retained earnings 100 50 50$600 $300 $190
(in thousands) Poe Shaw Turk
Separate earnings $100 $ 50 $ 40Dividends $ 60 $ 30 $ 20
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9 - 12©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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
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9 - 13©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Computational Approaches for
Consolidated Net Income
Combined separate earnings:Poe $100,000Shaw 50,000
Turk 40,000 $190,000Less: Minority interest expenses:Direct minority interest inTurk’s income ($40,000 × 30%) $ 12,000
Indirect minority interest inTurk’s income ($40,000 × 70%) 5,600
Direct minority interest inShaw’s income ($50,000 × 20%) 10,000 – 27,600
Poe’s net income and consolidated net income $162,400
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9 - 14©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Computational Approaches for
Consolidated Net Income
(in thousands) Poe Shaw Turk
Separate earnings $100.0 $ 50.0 $ 40.0
Allocate Turk’s income to Shaw ($40,000 × 70%) – + 28.0 – 28.0
Allocate Shaw’s income to Poe
($78,000 × 80%) + 62.4 – 62.4 –
Consolidated net income $162.4Minority interest expense $ 15.6 $ 12.0
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9 - 15©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Indirect Holdings –
Connecting Affiliates Structure
Pet
20%Sal
70%
Ty
60%
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9 - 16©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accounting for Connecting Affiliates
Pet 70% Pet 60% Sal 20%(in thousands) in Sal in Ty in Ty
Cost $178 $100 $20
Less: Book value – 168 – 90 – 20Goodwill $ 10 $ 10 –
Investment Balance 12/31/09
Cost $178 $100 $20
Add: Share of investees’ pre-2008income less dividends 7 18 16
Balance 12/31/07 $185 $118 $36
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Accounting for Connecting Affiliates
Pet Sal Ty
Earnings (2008) $70,000 $35,000 $20,000
Dividends $40,000 $20,000 $10,000Pet’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.
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Accounting for Connecting Affiliates
(in thousands) Pet Sal Ty
Separate earnings $70.0 $35.0 $20.0Deduct unrealized profit – 10.0 – 5.0 –
Separate realized earnings $60.0 $30.0 $20.0Allocate Ty’s income:
20% to Sal – + 4.0 – 4.060% to Pet +12.0 – – 12.0
Allocate Sal’s income: 70% to Pet +23.8 – 23.8 –
Consolidated net income $95.8Minority interest expense $10.2 $ 4.0
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9 - 19©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accounting for Connecting Affiliates
Cash 6,000Investment 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
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Accounting for Connecting Affiliates
Reported income ($39,000 × 70%) $27,300
Less: 70% of Sal’s unrealized
profit of $5,000 – 3,500
Less: 100% of unrealized gain on land – 10,000
Total $13,800
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9 - 21©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accounting for Connecting Affiliates
Cash 14,000Investment 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
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9 - 22©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accounting for Connecting Affiliates
Pet’s investment Investment Investmentaccounts at 12/31/08 in Sal (70%) in Ty (60%)
Balance 12/31/2007 $185,000 $118,000
Add: Investment income 13,800 12,000
Deduct: Dividends – 14,000 – 6,000
Balance 12/31/2008 $183,800 $124,000
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9 - 23©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 2
Apply consolidated procedures of
indirect holdings to the special
case of mutual holdings.
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9 - 24©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Mutual Holding – Parent Stock
Held by Subsidiary
Pace
Salt
90% 10%
The 10% interest held by Salt, and the 90%
interest held by Pace, are not outstanding
for consolidation purposes.
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Mutual Holding – Parent Stock
Held by Subsidiary
Treasury Stock Approach
Conventional Approach
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9 - 26©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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.
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Mutual Holding – Parent Stock
Held by Subsidiary
Trail balances 12/31/2005 Pace Salt
Debits Other assets $480,000 $260,000
Investment in Salt (90%) 270,000 – Investment in Pace (10%) – 70,000Expenses 70,000 50,000
$820,000 $380,000Credits Capital stock, $10 par $500,000 $200,000Retained earnings 200,000 100,000Sales 120,000 80,000
$820,000 $380,000
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9 - 28©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Treasury Approach:
Working Papers December 31, 2005Adjustments/ Consol-
Pace Salt Eliminations idated
Sales
Investment income
ExpensesMinority interest expense
Net income
Retained earnings – Pace
Retained earnings – Salt
Add: Net income
Retained earnings
December 31, 2005
$120
27
(70)
$ 77
$200
77
$277
$ 80
(50)
$ 30
$100
30
$130
a 27
d 3
b 100
$200
(120)(3)
$ 77
$200
77
$277
Income Statement
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9 - 29©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Treasury Approach:
Working Papers December 31, 2005
Other assetsInvestment in Salt (90%)
Investment in Pace (10%)
Capital stock – PaceCapital stock – SaltRetained earnings
Treasury stock Minority interest
$480297
$777$500
277
$777
$260
70$330
$200130
$330
a 27b 270
c 70
b 200
c 70b 30d 3
$740
$740$500
277
(70)
33$740
Balance SheetAdjustments/ Consol-
Pace Salt Eliminations idated
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Treasury Approach:
Working Papers December 31, 2006Adjustments/ Consol-
Pace Salt Eliminations idatedSalesIncome from SaltDividend income
ExpensesMinority interest expenseNet incomeRetained earnings – PaceRetained earnings – Salt
Dividends
Add: Net incomeRetained earningsDecember 31, 2006
$14035.7
(80)
$ 95.7$277
(27)
95.7
$345.7
$100
3
(60)
$ 43
$130
(20)
43
$153
a 35.7a 3
d 4.3
b 130
a 18d 2
$240
(140)(4.3)
$ 95.7$277
(27)95.7
$345.7
Income Statement
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Treasury Approach:
Working Papers December 31, 2006
Other assetsInvestment in Salt (90%)
Investment in Pace (10%)
Capital stock – PaceCapital stock – SaltRetained earnings
Treasury stock Minority interest
$528317.7
$845.7$500
345.7
$845.7
$283
70$353
$200153
$353
a 20.7b 297
c 70
b 200
c 70b 33d 2.3
$811
$811$500
345.7
(70)
35.3$811
Balance SheetAdjustments/ Consol-
Pace Salt Eliminations idated
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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.
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9 - 33©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Conventional Approach
Capital stock $500,000 $450,000
Retained earnings 200,000 180,000
Stockholders’ equity $700,000 $630,000
January 1, 2005 Pace Consolidated
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9 - 34©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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 20,000Investment in Salt 70,000
To record the constructive retirement of 10% of Pace’s
outstanding stock
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9 - 35©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
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
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Allocation of Mutual Income
P = $50,000 + 0.9($30,000 + 0.1 P )
P = $50,000 + $27,000 + 0.09 P 0.91 P = $77,000 P = $84,615
S = $30,000 + 0.1($84,615)
S = $30,000 + $8,462 = $38,462
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Allocation of Mutual Income
P S Total
Before allocation: $50,000 $30,000 $ 80,000
After allocation: $84,615 $38,462 $123,077
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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
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Accounting for Mutual Income
($38,462 × 90%) – ($84,615 × 10%) = $26,154
How does Pace record its investment income?Investment in Salt 26,154
Income from Salt 26,154
To record income from Salt
C ti l A h
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Conventional Approach:
Working Papers December 31, 2005Adjustments/ Consol-
Pace Salt Eliminations idated
Sales
Investment income
ExpensesMinority interest
expense
Net income
Retained earnings – P
Retained earnings – S
Add: Net income
Retained earnings
December 31, 2005
$120,000
26,154
(70,000)
$ 76,154
$180,000
76,154
$256,154
$ 80,000
(50,000)
$ 30,000
$100,000
30,000
$130,000
b 26,154
d 3,846
c 100,000
$200,000
(120,000)(3,846)
$ 76,154
$180,000
76,154
$256,154
Income Statement
C ti l A h
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Conventional Approach:
Working Papers December 31, 2005
Other assetsInvestment in S
Investment in P
Capital stock – PCapital stock – SRetained earnings
Minority interest
$480,000226,154
$756,154$450,000
256,154
$706,154
$260,000
70,000$330,000
$200,000130,000
$330,000
a 70,000 b 26,154c 270,000
a 70,000
c 200,000
b 30,000d 3,846
$740,000
$740,000$450,000
256,154
33,846$740,000
Balance SheetAdjustments/ Consol-
Pace Salt Eliminations idated
C i t E it M th d
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Conversion to Equity Method on
Separate Company Book
P S TotalSeparate earnings 2005 $ 50,000 $ 30,000 $ 80,000
Separate earnings 2006 + 60,000 + 40,000 + 100,000
Less dividends declared – 30,000 – 20,000 – 50,000
Add dividends received + 18,000 + 3,000 + 21,000Increase in net assets $ 98,000 $ 53,000 $ 151,000
C i t E it M th d
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Conversion to Equity Method on
Separate Company Book
P = $98,000 + 0.9S S = $53,000 + 0.1 P
P = $98,000 + 0.9($53,000 + 0.1 P ) = $160,110
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
S = $53,000 + (0.1 × $160,110) = $69,011
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Subsidiary Stock Mutually Held
The mutually held stock involves subsidiaries
holding the stock of each other, and the
treasury stock approach is not applicable.
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Subsidiary Stock Mutually Held
Poly
Seth
Uno
70% 10%
80%
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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 onJanuary 3, 2006, for $115,000 ($10,000 goodwill).
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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.
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Subsidiary Stock Mutually Held
Cash $ 64 $ 40 $ 20Other current assets 200 85 80Plant and equipment – net 500 240 110Investment in Seth (80%) 336 – – Investment in Uno (70%) – 135 – Investment in Seth (10%) – – 40
Total $1,100 $500 $250Liabilities $ 200 $100 $ 70Capital stock 500 200 100Retained earnings 400 200 80
Total $1,100 $500 $250
(in thousands 12/31/2006) Poly Seth Uno
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Subsidiary Stock Mutually Held
Poly 80% Seth 70% Uno 10%in Seth in Uno in Seth
Cost $260,000 $115,000 $40,000
Add: Income less
dividends (2005) 32,000 – –
Add: Income less
dividends (2006) 48,000 21,000 – Balance 12/31/2006 $340,000 $136,000 $40,000