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9 - 1 ©2003 Prentice Hall Business Publishing,  Advanced A ccounting  8/e, Beams/Anthony/Clement/Lowensohn Indirect and Mutual Holdings Chapter 9

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7/16/2019 ch09-Advance Accounting-Mutual Holding

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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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9 - 17©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 18©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 20©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 25©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 27©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 30©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 31©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 32©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 36©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 37©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 38©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 39©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 40©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 41©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 42©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 43©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 44©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 45©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

Subsidiary Stock Mutually Held

Poly

Seth

Uno

70% 10%

80%

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9 - 46©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 47©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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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9 - 49©2003 Prentice Hall Business Publishing, Advanced Accounting  8/e, Beams/Anthony/Clement/Lowensohn

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

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End of Chapter 9