Indirect and Mutual Holdings Pertemuan 15-16 Mata kuliah: F0074 - Akuntansi Keuangan Lanjutan II Tahun: 2010

Indirect and Mutual Holdings Pertemuan 15-16

Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan IITahun : 2010

Affiliation Structures

The potential complexity of corporateaffiliation structure is limited only

by one’s imagination .

Direct Holdings

Parent

SubsidiaryA

80%

Direct Holdings

Parent

SubsidiaryB

70%

SubsidiaryA

80%

SubsidiaryC

90%

Indirect Holdings

Parent

SubsidiaryA

80%

SubsidiaryB

70%

Indirect Holdings

Parent

SubsidiaryA

SubsidiaryB

80% 20%

40%

Mutual Holdings

Parent

SubsidiaryA

80% 10%

Mutual Holdings

Parent

SubsidiaryA

SubsidiaryB

80% 20%

40%

20%

Father-Son-Grandson Structure

Poe Corporation acquires 80% of the stockof Shaw Corporation on January 1, 2003.

Shaw acquires 70% of the stock of TurkCorporation on January 1, 2004.

Both investments are made at book value.

Father-Son-Grandson Structure

Other assets $400 $195 $190Investment in Shaw: (80%) 200 – –Investment in Turk: (70%) – 105 –

$600 $300 $190Liabilities $100 $ 50 $ 40Capital stock 400 200 100Retained earnings 100 50 50

$600 $300 $190

(in thousands) Poe Shaw Turk

Separate earnings $100 $ 50 $ 40Dividends $ 60 $ 30 $ 20

Computational Approaches forConsolidated Net Income

Poe’s separate earnings $100,000Add: Poe’s share of Shaw’s separate earnings

($50,000 × 80%) 40,000Add: Poe’s share of Turk’s separate earnings

($40,000 × 80% × 70%) 22,400Poe’s net income and consolidated net income $162,400


Combined separate earnings:Poe $100,000Shaw 50,000Turk 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


(in thousands) Poe Shaw Turk

Separate earnings $100.0 $ 50.0 $ 40.0Allocate Turk’s income to Shaw

($40,000 × 70%) – + 28.0 – 28.0Allocate Shaw’s income to Poe

($78,000 × 80%) + 62.4 – 62.4 –Consolidated net income $162.4Minority interest expense $ 15.6 $ 12.0

Indirect Holdings –Connecting Affiliates Structure

Pet

20%Sal

70%

Ty

60%

Accounting for Connecting Affiliates

Pet 70% Pet 60% Sal 20%(in thousands) in Sal in Ty in Ty

Cost $178 $100 $20Less: Book value –168 – 90 –20Goodwill $ 10 $ 10 –Investment Balance 12/31/09Cost $178 $100 $20Add: Share of investees’ pre-2008

income less dividends 7 18 16Balance 12/31/07 $185 $118 $36


Pet Sal TyEarnings (2008) $70,000 $35,000 $20,000Dividends $40,000 $20,000 $10,000

Pet’s separate earnings of $70,000 included an unrealizedgain of $10,000 from the sale of land to Sal during 2008.

Sal’s separate earnings of $35,000 included unrealizedprofit of $5,000 on inventory items sold to Pet for $15,000during 2008, and remaining in Pet’s 12/31/2008 inventory.


(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


Cash 6,000Investment in Ty 6,000

To record dividends received from Ty

Investment in Ty 12,000Income from Ty 12,000

To record income from Ty


Reported income ($39,000 × 70%) $27,300Less: 70% of Sal’s unrealized

profit of $5,000 – 3,500Less: 100% of unrealized gain on land –10,000Total $13,800


Cash 14,000Investment in Sal 14,000

To record dividends received from Sal

Investment in Sal 13,800Income from Sal 13,800

To record income from Sal


Pet’s investment Investment Investmentaccounts at 12/31/08 in Sal (70%) in Ty (60%)

Balance 12/31/2007 $185,000 $118,000Add: Investment income 13,800 12,000Deduct: Dividends – 14,000 – 6,000Balance 12/31/2008 $183,800 $124,000

Learning Objective 2

Apply consolidated procedures of

indirect holdings to the special

case of mutual holdings.

Mutual Holding – Parent StockHeld 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.


Treasury Stock Approach

Conventional Approach

Treasury Stock Approach

It considers parent company stock heldby a subsidiary to be treasury stock

of the consolidated entity.

The investment account on the books of thesubsidiary are maintained on a cost basis

and is deducted at cost from stockholders’equity in the consolidated balance sheet.


Trail balances 12/31/2005 Pace SaltDebitsOther assets $480,000 $260,000Investment in Salt (90%) 270,000 –Investment in Pace (10%) – 70,000Expenses 70,000 50,000

$820,000 $380,000CreditsCapital stock, $10 par $500,000 $200,000Retained earnings 200,000 100,000Sales 120,000 80,000

$820,000 $380,000

DebitsOther assets $480,000 $260,000Investment in Salt (90%) 270,000 –Investment in Pace (10%) – 70,000Expenses 70,000 50,000

$820,000 $380,000CreditsCapital stock, $10 par $500,000 $200,000Retained earnings 200,000 100,000Sales 120,000 80,000

$820,000 $380,000

Treasury Approach:Working Papers December 31, 2005

Adjustments/ Consol- Pace Salt Eliminations idated

SalesInvestment incomeExpensesMinority interest expenseNet incomeRetained earnings – PaceRetained earnings – Salt Add: Net incomeRetained earningsDecember 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


Other assetsInvestment in Salt (90%)

Investment in Pace (10%)

Capital stock – PaceCapital stock – SaltRetained earnings

Treasury stockMinority interest

$480 297

$777 $500

277 $777

$260

70 $330

$200 130 $330

a 27b 270c 70

b 200

c 70b 30d 3

$740

$740 $500

277

(70)

33 $740

Balance Sheet Adjustments/ Consol-

Pace Salt Eliminations idated


Adjustments/ Consol- Pace Salt Eliminations idated

SalesIncome from SaltDividend incomeExpensesMinority interest expenseNet incomeRetained earnings – PaceRetained earnings – SaltDividends

Add: Net incomeRetained earningsDecember 31, 2006

$140 35.7

(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 18 d 2

$240

(140) (4.3) $ 95.7 $277

(27) 95.7 $345.7

Income Statement


Other assetsInvestment in Salt (90%)

Investment in Pace (10%)

Capital stock – PaceCapital stock – SaltRetained earnings

Treasury stockMinority interest

$528 317.7

$845.7 $500

345.7 $845.7

$283

70 $353

$200 153 $353

a 20.7b 297c 70

b 200

c 70b 33d 2.3

$811

$811$500

345.7

(70)

35.3$811




It accounts for the subsidiary investment inparent company stock on an equity basis.

Parent company stock held by a subsidiaryis constructively retired.

Capital stock and retained earnings applicable tothe interest held by the subsidiary do not appear

in the consolidated financial statements.


Capital stock $500,000 $450,000Retained earnings 200,000 180,000Stockholders’ equity $700,000 $630,000

January 1, 2005 Pace Consolidated


January 1, 2005Investment in Salt 270,000

Cash 270,000To record acquisition of a 90% interest in Salt at book value

January 5, 2005Capital Stock, $10 par 50,000Retained Earnings 20,000

Investment in Salt 70,000To record the constructive retirement of 10% of Pace’soutstanding stock

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


P = $50,000 + 0.9($30,000 + 0.1P)

P = $50,000 + $27,000 + 0.09P

0.91P = $77,000 P = $84,615

S = $30,000 + 0.1($84,615)

S = $30,000 + $8,462 = $38,462


P S TotalBefore allocation: $50,000 $30,000 $ 80,000After allocation: $84,615 $38,462 $123,077


Determine Pace’s net income on anequity basis and minority interest.

P = 84,615 × 90% = $76,154

MI = 38,462 × 10% = $3,846

$76,154 + $3,846 = $80,000

Accounting for Mutual Income

($38,462 × 90%) – ($84,615 × 10%) = $26,154

How does Pace record its investment income?

Investment in Salt 26,154Income from Salt 26,154

To record income from Salt

Conventional Approach:Working Papers December 31, 2005 Adjustments/ Consol-

Pace Salt Eliminations idatedSalesInvestment incomeExpensesMinority interest expenseNet incomeRetained earnings – PRetained earnings – SAdd: Net incomeRetained earningsDecember 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

Conventional Approach:Working Papers December 31, 2005

Other assetsInvestment in S

Investment in P

Capital stock – PCapital stock – SRetained earnings

Minority interest

$480,000 226,154

$756,154$450,000

256,154

$706,154

$260,000

70,000$330,000

$200,000 130,000

$330,000

a 70,000 b 26,154 c 270,000 a 70,000

c 200,000

b 30,000 d 3,846

$740,000

$740,000$450,000

256,154

33,846$740,000



Conversion to Equity Method onSeparate Company Book

P S TotalSeparate earnings 2005 $ 50,000 $ 30,000 $ 80,000Separate earnings 2006 + 60,000 + 40,000 + 100,000Less dividends declared – 30,000 – 20,000 – 50,000Add dividends received + 18,000 + 3,000 + 21,000Increase in net assets $ 98,000 $ 53,000 $ 151,000

Conversion to Equity Method onSeparate Company Book

P = $98,000 + 0.9S S = $53,000 + 0.1P

P = $98,000 + 0.9($53,000 + 0.1P) = $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

Subsidiary Stock Mutually Held

The mutually held stock involves subsidiariesholding the stock of each other, and the

treasury stock approach is not applicable.


Poly

Seth

Uno

70% 10%

80%


Poly acquired 80% interest in Seth onJanuary 2, 2005, for $260,000 ($20,000 goodwill).

Seth’s stockholders’ equity consisted of $200,000capital stock and $100,000 retained earnings.

Seth acquired 70% interest in Uno onJanuary 3, 2006, for $115,000 ($10,000 goodwill).


Uno’s stockholders’ equity consisted of $100,000capital stock and $50,000 retained earnings.

Uno acquired 10% interest in Seth onDecember 31, 2006, for $40,000.

Seth’s stockholders’ equity consisted of $200,000capital stock and $200,000 retained earnings.


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


Poly 80% Seth 70% Uno 10% in Seth in Uno in Seth

Cost $260,000 $115,000 $40,000Add: 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

Documents

Indirect and Mutual Holdings Pertemuan 15-16 Mata kuliah: F0074 - Akuntansi Keuangan Lanjutan II Tahun: 2010