Accounting Advanced | Course Paper

Advanced Accounting

Thirteenth Edition, Global Edition

Chapter 9

Indirect and Mutual

Holdings

Indirect and Mutual Holdings: Objectives

9.1 Prepare consolidated statements when a parent

company controls a subsidiary company through

indirect holdings.

9.2 Apply consolidation procedures to the special case of

mutual holdings.

9.1: Indirect Holdings

Indirect and Mutual Holdings

Types of Indirect Holdings

Father-son-grandson Connecting Affiliates

Parent

Subsidiary A

Subsidiary B

70%

80%

Parent

Subsidiary A Subsidiary B

20%

80%

40%

Parent owns 80% of A,

and through A,

56% of B (80% x 70%).

Parent owns 80% of A, 20% of B,

and through A an additional

32% of B (80% x 40%).

Parent owns a total of 52% of B.

Equity Method for Father-Son-Grandson

Holdings

●Son applies equity method for Investment in

Grandson.

●Father applies equity method for Investment in

Son.

●Controlling interest share of consolidated net

income includes:

–Share for direct holding of son

–Share for indirect holding of grandson (by father

through son)

Example: Father-Son-Grandson

On 1/1/16 Pop acquires 80% of Son. On 1/1/17 Son

acquires 70% of Toy.

Earnings and dividends for 2017:

Blank

Pop

Son

Toy

Separate earnings

$100

$50

$40

Dividends

60

30

20

Equity Method Entries

Son APPLIES EQUITY METHOD (70%)

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Cash (+A)

14

Investment in Toy (-A)

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14

Investment in Toy (+A)

28

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Income from Toy (R, +SE)

blank

28

for dividends and for income

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Pop APPLIES EQUITY METHOD (80%)

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Cash (+A)

24

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Investment in Son (-A)

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24

Investment in Son (+A)

62.4

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Income from Son (R, +SE)

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62.4

for dividends and for income = 80% x (50+28)

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Allocations to CI and NCI

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Pop Son Toy CI NCI Total

Separate income

100.0

50.0

40.0

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190.0

Allocate

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Toy

➔

70% Son: 30% NCI

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28.0

(40.0)

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12.0

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Son

➔

80% Pop: 20% NCI

62.4

(78.0)

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15.6

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Pop’s

➔

100% CI

(162.4)

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162.4

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Consolidated net

income

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162.4

27.6

190.0

This allocation may look like the “step-down

method” allocation presented in cost accounting

texts. Mathematically it is!

Allocation Results

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Pop Son Toy CI NCI

Total

Separate income

100.0

50.0

40.0

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190.0

Allocate

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Toy

➔

70% Son: 30% NCI

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28.0

(40.0)

blank

12.0

blank

Son

➔

80% Pop: 20% NCI

62.4

(78.0)

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15.6

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Pop’s

➔

100% CI

(162.4)

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162.4

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Consolidated net

income

blank

162.4

27.6

190.0

●On separate income statements:

Pop’s net income = $162.4

Son’s “Income from Toy” = $28.0

Pop’s “Income from Son” = $62.4

●For consolidated statements:

Noncontrolling interest share =

12.0 + 15.6 = $27.6

Indirect Holdings with Connecting

Affiliates

Indirect holdings with connecting affiliates

–Handle similar to Father-son-grandson, but

–Father has direct holdings in both Son and

Grandson

Example: Pet holds 70% of Sal and 60% of Tie. Sal

holds an additional 20% of Tie.

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Pet

Sal

Tie

Separate income

$70

$35

$20

Dividends

40

20

10

Indirect Holdings with Connecting

Affiliates (continued)

Intercompany profit transactions:

–Downstream: Pet sold Sal land with a gain of

$10. This will be fully attributed to Pet.

–Upstream: Sal sold $15 inventory to Pet, and

Pet holds ending inventory with unrealized profit

of $5. This will be allocated between Pet and

NCI.

Calculating Investment Balances

Sal

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Underlying equity

Jan 1

Dec 31

Capital stock

200

Retained earnings

50

69

Goodwill

12

Unrealized profit in

inventory

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(5)

Subtotal (split 70:30)

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276

Tie

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Underlying equity

Jan 1

Dec 31

Capital stock

100

Retained earnings

80

90

Goodwill

12

Total

192

202

Split 60%:20%:20%