Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Indirect and Mutual Holdings
Pertemuan 15-16
Affiliation Structures
The potential complexity of corporate
affiliation structure is limited only
by one’s imagination .
Direct Holdings
Parent
80%
Subsidiary
A
Direct Holdings
Parent
80%
Subsidiary
A
70%
Subsidiary
B
90%
Subsidiary
C
Indirect Holdings
Parent
80%
Subsidiary
A
70%
Subsidiary
B
Indirect Holdings
Parent
80%
20%
Subsidiary
A
Subsidiary
B
40%
Mutual Holdings
Parent
80%
10%
Subsidiary
A
Mutual Holdings
Parent
80%
Subsidiary
A
20%
40%
20%
Subsidiary
B
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.
Father-Son-Grandson Structure
(in thousands)
Poe
Other assets
$400
Investment in Shaw: (80%) 200
Investment in Turk: (70%)
–
$600
Liabilities
$100
Capital stock
400
Retained earnings
100
$600
Separate earnings
$100
Dividends
$ 60
Shaw
$195
–
105
$300
$ 50
200
50
$300
$ 50
$ 30
Turk
$190
–
–
$190
$ 40
100
50
$190
$ 40
$ 20
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
Computational Approaches for
Consolidated Net Income
Combined separate earnings:
Poe
$100,000
Shaw
50,000
Turk
40,000
Less: Minority interest expenses:
Direct minority interest in
Turk’s income ($40,000 × 30%)
$ 12,000
Indirect minority interest in
Turk’s income ($40,000 × 70%)
5,600
Direct minority interest in
Shaw’s income ($50,000 × 20%) 10,000
– 27,600
Poe’s net income and consolidated net income
$162,400
$190,000
Computational Approaches for
Consolidated Net Income
(in thousands)
Separate earnings
Allocate Turk’s income to Shaw
($40,000 × 70%)
Allocate Shaw’s income to Poe
($78,000 × 80%)
Consolidated net income
Minority interest expense
Poe
$100.0
Shaw
$ 50.0
Turk
$ 40.0
–
+ 28.0
– 28.0
– 62.4
–
$ 15.6
$ 12.0
+ 62.4
$162.4
Indirect Holdings –
Connecting Affiliates Structure
Pet
70%
Sal
60%
20%
Ty
Accounting for Connecting Affiliates
(in thousands)
Pet 70% Pet 60% Sal 20%
in Sal
in Ty
in Ty
Cost
Less: Book value
Goodwill
Investment Balance 12/31/09
Cost
Add: Share of investees’ pre-2008
income less dividends
Balance 12/31/07
$178
–168
$ 10
$100
– 90
$ 10
$20
–20
–
$178
$100
$20
7
$185
18
$118
16
$36
Accounting for Connecting Affiliates
Pet
Sal
Ty
Earnings (2008)
$70,000
$35,000
$20,000
Dividends
$40,000
$20,000
$10,000
Pet’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.
Accounting for Connecting Affiliates
(in thousands)
Separate earnings
Deduct unrealized profit
Separate realized earnings
Allocate Ty’s income:
20% to Sal
60% to Pet
Allocate Sal’s income:
70% to Pet
Consolidated net income
Minority interest expense
Pet
Sal
Ty
$70.0
–10.0
$60.0
$35.0
– 5.0
$30.0
$20.0
–
$20.0
–
+12.0
+ 4.0
–
– 4.0
–12.0
+23.8
$95.8
–23.8
–
$10.2
$ 4.0
Accounting for Connecting Affiliates
Cash
6,000
Investment 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
Accounting for Connecting Affiliates
Reported income ($39,000 × 70%)
Less: 70% of Sal’s unrealized
profit of $5,000
Less: 100% of unrealized gain on land
Total
$27,300
– 3,500
–10,000
$13,800
Accounting for Connecting Affiliates
Cash
14,000
Investment 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
Accounting for Connecting Affiliates
Pet’s investment
accounts at 12/31/08
Balance 12/31/2007
Add: Investment income
Deduct: Dividends
Balance 12/31/2008
Investment
Investment
in Sal (70%) in Ty (60%)
$185,000
13,800
– 14,000
$183,800
$118,000
12,000
– 6,000
$124,000
Learning Objective 2
Apply consolidated procedures of
indirect holdings to the special
case of mutual holdings.
Mutual Holding – Parent Stock
Held by Subsidiary
Pace
90%
10%
Salt
The 10% interest held by Salt, and the 90%
interest held by Pace, are not outstanding
for consolidation purposes.
Mutual Holding – Parent Stock
Held by Subsidiary
Treasury Stock Approach
Conventional Approach
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.
Mutual Holding – Parent Stock
Held by Subsidiary
Trail balances 12/31/2005
Debits
Other assets
Investment in Salt (90%)
Investment in Pace (10%)
Expenses
Credits
Capital stock, $10 par
Retained earnings
Sales
Pace
Salt
$480,000
270,000
–
70,000
$820,000
$260,000
–
70,000
50,000
$380,000
$500,000
200,000
120,000
$820,000
$200,000
100,000
80,000
$380,000
Treasury Approach:
Working Papers December 31, 2005
Income Statement
Sales
Investment income
Expenses
Minority interest expense
Net income
Retained earnings – Pace
Retained earnings – Salt
Add: Net income
Retained earnings
December 31, 2005
Adjustments/ ConsolPace Salt Eliminations idated
$120 $ 80
$200
27
a 27
(70) (50)
(120)
d 3
(3)
$ 77 $ 30
$ 77
$200
$200
$100 b 100
77
30
77
$277
$130
$277
Treasury Approach:
Working Papers December 31, 2005
Balance Sheet
Other assets
Investment in Salt (90%)
Pace
$480
297
Investment in Pace (10%)
Capital stock – Pace
Capital stock – Salt
Retained earnings
Treasury stock
Minority interest
$777
$500
277
$777
Salt
$260
Adjustments/
Eliminations
70
$330
Consolidated
$740
a 27
b 270
c 70
$740
$500
$200 b 200
130
$330
c 70
277
(70)
b 30
d 3
33
$740
Treasury Approach:
Working Papers December 31, 2006
Income Statement
Sales
Income from Salt
Dividend income
Expenses
Minority interest expense
Net income
Retained earnings – Pace
Retained earnings – Salt
Dividends
Add: Net income
Retained earnings
December 31, 2006
Pace
$140
35.7
(80)
$ 95.7
$277
(27)
95.7
Adjustments/ ConsolSalt Eliminations idated
$100
$240
a 35.7
3 a 3
(60)
(140)
d 4.3
(4.3)
$ 43
$ 95.7
$277
$130 b 130
(20)
a 18
d 2
(27)
43
95.7
$345.7 $153
$345.7
Treasury Approach:
Working Papers December
31, 2006
Adjustments/
Balance Sheet
Pace Salt
Other assets
$528
$283
Investment in Salt (90%) 317.7
Investment in Pace (10%)
Capital stock – Pace
Capital stock – Salt
Retained earnings
Treasury stock
Minority interest
Eliminations
70
$845.7 $353
$500
$200 b 200
345.7 153
$845.7 $353
c 70
Consolidated
$811
a 20.7
b 297
c 70
$811
$500
345.7
(70)
b 33
d 2.3
35.3
$811
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.
Conventional Approach
January 1, 2005
Capital stock
Retained earnings
Stockholders’ equity
Pace
Consolidated
$500,000
200,000
$700,000
$450,000
180,000
$630,000
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
20,000
Investment in Salt
70,000
To record the constructive retirement of 10% of Pace’s
outstanding 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
Allocation of Mutual Income
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
Allocation of Mutual Income
P
Before allocation: $50,000
After allocation: $84,615
S
$30,000
$38,462
Total
$ 80,000
$123,077
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
Accounting for Mutual Income
($38,462 × 90%) – ($84,615 × 10%) = $26,154
How does Pace record its investment income?
Investment in Salt
Income from Salt
To record income from Salt
26,154
26,154
Conventional Approach:
Working Papers December
31, 2005
Adjustments/ ConsolIncome Statement
Sales
Investment income
Expenses
Minority interest
expense
Net income
Retained earnings – P
Retained earnings – S
Add: Net income
Retained earnings
December 31, 2005
Pace
Salt
Eliminations idated
$120,000 $ 80,000
$200,000
26,154
b 26,154
(70,000) (50,000)
(120,000)
(3,846)
d 3,846
$ 76,154 $ 30,000
$ 76,154
$180,000
$180,000
$100,000 c 100,000
76,154
30,000
76,154
$256,154
$130,000
$256,154
Conventional Approach:
Working Papers December 31, 2005
Adjustments/
Eliminations
Consolidated
$740,000
Pace
Salt
$480,000 $260,000
226,154
a 70,000 b 26,154
c 270,000
Investment in P
70,000
a 70,000
$756,154 $330,000
$740,000
Capital stock – P $450,000
$450,000
Capital stock – S
$200,000 c 200,000
Retained earnings 256,154 130,000
256,154
Balance Sheet
Other assets
Investment in S
$706,154 $330,000
Minority interest
b 30,000
d 3,846
33,846
$740,000
Conversion to Equity Method on
Separate Company Book
Separate earnings 2005
Separate earnings 2006
Less dividends declared
Add dividends received
Increase in net assets
P
S
$ 50,000
+ 60,000
– 30,000
+ 18,000
$ 98,000
$ 30,000
+ 40,000
– 20,000
+ 3,000
$ 53,000
Total
$ 80,000
+ 100,000
– 50,000
+ 21,000
$ 151,000
Conversion to Equity Method on
Separate Company Book
P = $98,000 + 0.9S
S = $53,000 + 0.1P
P = $98,000 + 0.9($53,000 + 0.1P) = $160,110
S = $53,000 + (0.1 × $160,110) = $69,011
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
Subsidiary Stock Mutually Held
The mutually held stock involves subsidiaries
holding the stock of each other, and the
treasury stock approach is not applicable.
Subsidiary Stock Mutually Held
Poly
80%
Seth
70%
10%
Uno
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 on
January 3, 2006, for $115,000 ($10,000 goodwill).
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.
Subsidiary Stock Mutually Held
(in thousands 12/31/2006)
Cash
Other current assets
Plant and equipment – net
Investment in Seth (80%)
Investment in Uno (70%)
Investment in Seth (10%)
Total
Liabilities
Capital stock
Retained earnings
Total
Poly
$ 64
200
500
336
–
–
$1,100
$ 200
500
400
$1,100
Seth
$ 40
85
240
–
135
–
$500
$100
200
200
$500
Uno
$ 20
80
110
–
–
40
$250
$ 70
100
80
$250
Subsidiary Stock Mutually Held
Cost
Add: Income less
dividends (2005)
Add: Income less
dividends (2006)
Balance 12/31/2006
Poly 80%
in Seth
$260,000
Seth 70% Uno 10%
in Uno
in Seth
$115,000 $40,000
32,000
–
–
48,000
$340,000
21,000
$136,000
–
$40,000