Indirect and Mutual Holdings Answers 1

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall $350,000 9-18 Indirect and Mutual Holdings 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall $320,000.00 Chapter 9 9-19 Solution P9-5 Working paper entries a Income from Sun 27,000 Dividend income 10,000 Dividends Investment in Sun 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. 28,000 9,000 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 Investment in Pin To reclassify investment in Pin to treasury stock. d Noncontrolling Interest Share 3,000 Dividends Noncontrolling Interest To record noncontrolling interest share of subsidiary income and dividends. © 2011 Pearson Education, Inc. publishing as Prentice Hall 80,000 80,000 1,000 2,000 9-20 Indirect and Mutual Holdings 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 Consolidated NI Noncontrolling share Controlling share of NI $ 100,000 a 27,000 10,000 a 10,000 200,000* 50,000* 50,000* 30,000* Consolidated Statements $ 400,000 27,000 $ 500,000 250,000* 80,000* 170,000 d 3,000 $ 177,000 $ 30,000 Retained Earnings Retained earnings — Pin 3,000* $ 167,000 $ 300,000 $ 300,000 $ 200,000 b 200,000 Retained earnings — Sun Net income (Controlling share in Consol. Column) Dividends Adjustments and Eliminations Sun 90% 177,000 30,000 167,000 100,000* 20,000* a 28,000 d 2,000 Retained earnings December 31 Balance Sheet Other assets Investment in Sun 90% $ 377,000 $ 210,000 $ 486,000 414,000 $ 420,000 90,000* $ 377,000 $ 906,000 a 9,000 b 405,000 Investment in Pin 10% Goodwill 80,000 c 80,000 b 50,000 $ 900,000 $ 500,000 Liabilities Capital stock Retained earnings $ 123,000 $ 90,000 400,000 200,000 b 200,000 377,000 210,000 $ 900,000 $ 500,000 Noncontrolling interest January 1 Noncontrolling interest December 31 Treasury stock * 50,000 $ 956,000 $ 213,000 400,000 377,000 b 45,000 d 1,000 c 80,000 Deduct © 2011 Pearson Education, Inc. publishing as Prentice Hall 46,000 80,000* $ 956,000 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. 4,000 2,000 b Dividend income Investment in Sip To eliminate intercompany dividends paid to Sip c Income from Sip 28,000 Dividends Investment in Sip 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. 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 Patent To record current year’s amortization of patent. g Noncontrolling Interest Share Dividends Noncontrolling Interest 100,000 4,000 16,000 12,000 100,000 5,000 5,000 12,000 © 2011 Pearson Education, Inc. publishing as Prentice Hall 8,000 4,000 9-22 Indirect and Mutual Holdings To record the noncontrolling interest share of subsidiary income and dividends. © 2011 Pearson Education, Inc. publishing as Prentice Hall 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 $ 140,000 28,000 Dividend income Gain on sale of land Expenses Consolidated net income Noncontrolling share Controlling share of NI Adjustments and Eliminations Sip 90% $ 100,000 c 28,000 $ 240,000 4,000 b 4,000 3,000 a 2,000 80,000* 60,000* f 5,000 5,000 145,000* 100,000 12,000* g 12,000 $ 88,000 $ 47,000 Consolidated Statements $ 88,000 Retained Earnings $ 405,710 Retained earnings — Par Controlling share of NI Dividends $ 405,710 $ 180,000 e 180,000 Retained earnings — Sip 88,000 88,000 47,000 16,000* 20,000* c 16,000 g 4,000 Retained earnings December 31 Balance Sheet Other assets Investment in Sip $ 477,710 $ 207,000 $ 448,000 $ 157,000 109,710 Investment in Par Patent a 2,000 100,000 $ 557,710 $ 257,000 Capital stock Retained earnings 80,000 $ 477,710 $ 605,000 b 4,000 d 100,000 c 12,000 e 195,710 d 100,000 e 20,000 f 5,000 15,000 $ 620,000 50,000 e 50,000 80,000 477,710 477,710 207,000 $ 557,710 $ 257,000 Noncontrolling interest January 1 Noncontrolling interest December 31 16,000* e 54,290 g 8,000 62,290 $ 620,000 * Deduct © 2011 Pearson Education, Inc. publishing as Prentice Hall 9-24 Indirect and Mutual Holdings Solution P9-7 Preliminary Computations Pan’s investment cost Implied total fair value of Set ($340,000 / 80%) Book value of Set Excess of fair value over book value - Goodwill 1 $340,000 $425,000 (400,000) $ 25,000 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) $258,261 21,739 Noncontrolling interest share ($108,696 20%) Total (separate incomes) 2 $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 To record constructive retirement of 10% of Pan’s stock. Investment in Set (80%) 58,261 Income from Set 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 10,000 © 2011 Pearson Education, Inc. publishing as Prentice Hall 160,000 58,261 32,000 10,000 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. © 2011 Pearson Education, Inc. publishing as Prentice Hall 9-26 Indirect and Mutual Holdings Solution P9-7 (continued) 3 Journal entries on Set’s books Investment in Pan (10%) 160,000 Assets To record acquisition of a 10% interest in Pan at book value. 160,000 Investment in Pan 28,696 Income from Pan To record 10% of Pan’s $286,957 income on a consolidated basis. Cash Investment in Pan (10%) To record receipt of dividends from Pan ($100,000 28,696 10,000 10,000 10%). 4 Net income for 2013 Separate incomes Investment income Net income Pan Set $200,000 $ 80,000 58,261 28,696 $258,261 $ 108,696 5 Investment balance December 31, 2013 Pan Set Investments beginning of 2013 $416,000 $ 160,000 Less: Constructive retirement of Pan’s stock (160,000) Add: Investment income 58,261 28,696 Add: Dividends paid to Set 10,000 Less: Dividends received (32,000) (10,000) Investment balances December 31, 2013 $292,261 $ 178,696 6 Stockholders’ equity December 31, 2013 Stockholders’ equity January 1, 2013 Add: Net income Less: Dividends Stockholders’ equity December 31, 2013 7 Noncontrolling interest at December 31, 2013 Set’s equity on a consolidated basis Noncontrolling interest percentage Noncontrolling interest at December 31, 2013 Pan Set $1,440,000 $500,000 258,261 108,696 (90,000) (40,000) $1,608,261 $568,696 Alternative solution Noncontrolling interest January 1, 2013 ($500,000 20%) Noncontrolling interest share ($108,696 20%) Noncontrolling interest dividends Noncontrolling interest at December 31, 2013 $568,696 20% $ 113,739 $ 100,000 21,739 (8,000) $ 113,739 © 2011 Pearson Education, Inc. publishing as Prentice Hall Chapter 9 9-27 Solution P9-7 (continued) 8 Adjustment and elimination entries a Income from Pan 28,696 Dividends 10,000 Investment in Pan 18,696 To eliminate investment income and dividends from Pan and return the investment account to its beginning-of-the-period balance. b Investment in Set 160,000 Investment in Pan To eliminate investment in Pan balance and increase the investment in Set for the constructive retirement of Pan’s stock that was charged to the investment in Set account. c Dividends Investment in Set To eliminate dividends. d Income from Set 58,261 Dividends 32,000 Investment in Set 26,261 To eliminate income and dividends from Set and return the investment in Set to its beginning-of-the-period balance. e 300,000 Capital stock — Set 200,000 Retained earnings — Set Goodwill 25,000 Investment in Set 416,000 Noncontrolling interest 109,000 To eliminate Set’s equity account balances and the investment in Set, enter beginning-of-the-period goodwill and noncontrolling interest. f Noncontrolling interest share 21,739 Dividends 8,000 Noncontrolling Interest 13,739 To record the noncontrolling interest share of subsidiary income and dividends. © 2011 Pearson Education, Inc. publishing as Prentice Hall 10,000 160,000 10,000