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Chapter 9
INDIRECT AND MUTUAL HOLDINGS
Answers to Questions
1 Direct holdings is a result of a direct investments in the voting common stock of one or more investee,
while indirect holdings is a result of investments that enable the investor to control or significantly
influence the decisions of an investee NOT directly owned through an investee directly owned. The
accounting method for both types of holdings are the same, equity method is used for 20% or more
holdings directly or indirectly, and consolidation is used for majority holdings directly or indirectly.
2 There are two types of indirect holding structure:

a. Father-Son-Grandson
PARENT
80%
SUBSIDIARY 60%
A75%
SUBSIDIARY
B
In the father-son-grandson structure, the parent owns 80% of subsidiary A and subsidiary A
owns 75% of subsidiary B, so the parent indirectly owns 60% (80%*75%) of subsidiary B.
b. Connecting Affiliates
PARENT
70% 42%
20%
SUBSIDIARY 60% SUBSIDIARY

A
In the connecting affiliates structure, the parent directly owns B70% of subsidiary A and 20% of subsidiary
B. Subsidiary A owns 60% of subsidiary B directly, thus resulting in a 42% (70%*60%) indirect
ownership of subsidiary B by the parent. So, in total, the parent owns 62% (20%+42%) of subsidiary B.
3 An indirect holding involves the ability of one corporation to control another by virtue of its control over
one or more other corporations. A mutual holding affiliation structure is a special type of indirect holding
where affiliates indirectly own themselves.
4 The parent’s direct and indirect ownership of Subsidiary B is 49 percent (70% ´ 70%). However,
consolidation of Subsidiary B is still appropriate because 70 percent of B’s stock is held within the
affiliation structure and only 30 percent is held by the noncontrolling stockholders of B.
5 Approach A
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9-2 Indirect and Mutual Holdings
Pat
Sam
Stan
Combined separate earnings of Pat, Sam, and Stan

($200,000 + $160,000 + $100,000) $460,000
Less: Noncontrolling interest share computed as follows:
Direct noncontrolling interest in Stan’s income
($100,000 ´ 30%) (30,000)
Indirect noncontrolling interest in Stan’s income
($100,000 ´ 70% ´ 20%) (14,000)
Direct noncontrolling interest in Sam’s income
($160,000 ´ 20%) (32,000)
Pat’s net income and controlling share of consolidated net income $384,000
Approach B
Pat Sam Stan
Separate earnings $200,000 $160,000 $100,000
Allocate Stan’s income to Sam
($100,000 ´ 70%) + 70,000 -70,000
Allocate Sam’s income to Pat
($230,000 ´ 80%) +184,000 -184,000 0
Controlling share $384,000
Noncontrolling interest share $ 46,000 $30,000
6 When the schedule approach for allocating income is used, investment income from the lowest subsidiary
must be added to the separate income of the next subsidiary to determine that subsidiary’s net income
before it can be allocated to the next subsidiary, and so on.
7 P S1 80% S2 70%
Deduct: Unrealized profit - 1,000
Separate realized earnings 20,000 9,000 5,000

Allocate S2’s income + 3,500 -3,500
Allocate S1’s income +10,000 -10,000 0
P’s net income $30,000
Noncontrolling int. share $ 2,500 $1,500
S1’s investment in S2 account was not adjusted for the unrealized profits because this would create a
disparity between S1’s investment in S2 account and S1’s share of S2’s equity.
8 A mutual holding situation exists because two affiliates hold ownership interests in each other.
9 Under the treasury stock approach, parent stock held by subsidiary is considered as treasury stock, hence
the investment account is maintained using the cost basis. The conventional approach, however, viewed
the stock as normal stocks, hence the investment account is maintained using the equity basis. This will
result in different amount of accounts, especially for the consolidated retained earnings and the
noncontrolling interest amount.
10 In situations in which a subsidiary holds stock in the parent, both the conventional and treasury stock
approaches are acceptable, but they do not result in equivalent consolidated financial statements. The

Chapter 9 9-3
consolidated retained earnings and noncontrolling interest amounts will usually be different because of
different amounts of investment income. The treasury stock approach is not applicable when the mutually
held stock involves subsidiaries holding the stock of each other.
11 No. Parent dividends paid to the subsidiary are eliminated.
12 The theory is that parent stock purchased by a subsidiary is, in effect, returned to the parent and
constructively retired. By recording the constructive retirement of the parent stock on parent books, parent
equity will reflect the equity of stockholders outside the consolidated entity. Also, recording the
constructive retirement, by reducing parent stock and retained earnings to reflect amounts applicable to
controlling stockholders outside the consolidated entity, will establish consistency between capital stock
and retained earnings for the parent’s outside stockholders and parent net income, dividends, and earnings
per share which also relate to the outside stockholders of the parent.
13 Controlling Share of Consolidated net income is computed as follows:
P = $100,000 + .8S
S = $40,000 + .1P
P = $100,000 + .8($40,000 + .1P)
P = $143,478
Controlling Share of Consolidated net income = $143,478 ´ 90% = $129,130
14 For eliminating the effect of mutually held parent stock, two generally accepted approaches are used—the
treasury stock approach and the conventional approach. But when the mutually held stock involves
subsidiaries holding stock of each other, the treasury stock approach is not applicable.
15 By adding beginning noncontrolling interest and noncontrolling interest share (determined by multiplying
the company’s net income by the noncontrolling interest percentage) and subtracting the noncontrolling
interest’s percentage of dividends, the noncontrolling interest can be determined without use of
simultaneous equations.
SOLUTIONS TO EXERCISES
Solution E9-1
a. In 2013, Pandu Tbk only have indirect holdings of Dewa Tbk through Sunda Tbk, so the structure is the
father-son-grandson. The percentage of ownership is calculated as follows:
Pandu’s ownership of Sunda ´ Sunda’s ownership of Dewa (90% ´ 60%) = 54%
b. In 2014, Pandu Tbk has both indirect and direct ownership of Dewa Tbk, so the structure is the
connecting affiliates. The percentage of ownership is calculated as follows:
Pandu’sindirect ownership of Dewa (a) + Pandu’s direct ownership of Dewa = 74%
Solution E9-2
Computational approach
Penang's separate earnings $100,000

Add: Penang's share of Minang's separate earnings
(80% x $80,000) $ 64,000
Add: Penang's share of Kelang's separate earnings
(80% x 60% x $50,000) $ 24,000
Controlling share of consolidated net income $188,000

Minang's direct noncontrolling interest share

(20% x $80,000) $ 16,000
Kelang's indirect noncontrolling interest share
(80% x 40% x $50,000) $ 16,000
Kelang's direct noncontrolling interest share
(40% x $50,000) $ 20,000
Noncontrolling interest share $ 52,000
Solution E9-3
a Under treasury stock approach, cost method is used, so:

Penn's separate earnings $ 50,000
Penn's share of Sinn's earnings
(80% x $25,000) $ 20,000
Controlling share of consolidated
net income $ 70,000
b Under conventional approach, equity method is used, so:

Penn’s separate earnings $ 50,000
Penn's share of Sinn's earnings ´
(80% x $41,667.67)-(20% x $83,888.33) $ 16,667
Controlling share of consolidated
net income $ 66,667
*
Determine Penn’s and Sinn's income under consolidation
basis
P = Penn's income + Sinn's mutual income
S = Sinn's income + Penn's mutual income
P = $50,000 + 0.8S
S = $25,000 + 0.2P
P = $50,000 + 0.8($25,000 + 0.2P)

0.84P = $70,000
P = $83,333.33
S = $25,000 + 0.2($83,333.33)
S = $41,667.67

Chapter 9 9-5
Solution E9-4
1 c
Income from Son is equal to:
70% of Son’s $160,000 income $112,000
70% of Son’s 80% interest in Tan’s
$100,000 income 56,000
Income from Son $168,000
2 d
Noncontrolling interest share is equal to:
30% direct noncontrolling interest in Son’s
$160,000 income $ 48,000
20% direct noncontrolling interest in Tan’s
$100,000 income 20,000
30% ´ 80% indirect noncontrolling interest in
Tan’s $100,000 income 24,000
Total noncontrolling interest share $ 92,000
3 d
Consolidated net income is equal to:
Combined separate incomes of $360,000 + $160,000 +
$100,000 $620,000
Less: Noncontrolling interest share 92,000
Controlling interest share of Consolidated net income $528,000
Alternative computation:
Pin’s separate income $360,000
Add: 70% of Son’s $160,000 income 112,000
Add: (70% ´ 80%) of Tan’s $100,000 income 56,000

Solution E9-5
Pal Sal Tea Won Val

Separate earnings $ 50,000 $30,000 $35,000 $(20,000) $40,000
Less: Unrealized profit - 5,000 _________ ________
Separate realized
earnings 50,000 30,000 30,000 (20,000) 40,000
Allocate Val’s income
70% to Tea +28,000 (28,000)
Allocate Won’s income
10% to Tea (2,000) + 2,000
60% to Sal (12,000) + 12,000
Allocate Tea’s income
80% to Pal + 44,800 (44,800)
10% to Sal + 5,600 (5,600)
Allocate Sal’s income
80% to Pal + 18,880 (18,880)
Pal’s net income (or
Controlling share of
consolidated net
income) $113,680 _______ ________ _______
Noncontrolling interest
share $ 4,720 $ 5,600 $ (6,000) $12,000

Chapter 9 9-7
Solution E9-6
Pet Man Nun Oak

Separate earnings $130,000 $36,000 $56,000 $18,000
Unrealized profit - 8,000 + 4,000 -8,000
Separate realized earnings 130,000 28,000 60,000 10,000
Allocate Oak’s income
20% to Nun + 2,000 (2,000)
70% to Man + 7,000 (7,000)
Allocate Nun’s income
70% to Pet + 43,400 (43,400)
10% to Man + 6,200 (6,200)
Allocate Man’s income
90% to Pet + 37,080 (37,080)
Pet’s net income (or
Controlling share of NI) $210,480 _______ ______
Noncontrolling interest share $ 4,120 $12,400 $1,000
Alternative solution
Noncontrolling
Reported + Adjusted Consolidated Interest
Income - Adjustments = Income - Net Income = Share
Pet $130,000 $130,000 $130,000 0
Man 36,000 - $8,000 28,000a 25,200 $ 2,800
Nun 56,000 + 4,000 60,000b 47,400 12,600
Oak 18,000 - 8,000 10,000c 7,880 2,120
$228,000 $210,480 $17,520
a $28,000 divided 90% to consolidated net income (CNI)

10% to noncontrolling interest share (NIS)
b $60,000 divided 70% + (90% ´ 10%) to CNI and 20% + (10% ´ 10%) to NIS
c $10,000 divided (90% ´ 70%) + (70% ´ 20%) + (90% ´ 10% ´ 20%) to CNI [78.8%]
and 10% + (10% ´ 10% ´ 20%) + (20% ´ 20%) + (10% ´ 70%) to NIS [21.2%]

Solution E9-7
1 a
Separate income of Tar $400,000
Direct noncontrolling interest X 30%
$120,000
2 a
Separate income = net income of Van $240,000
Noncontrolling interest (direct) X 20%
$ 48,000
3 c
Total separate incomes $2,130,000
Less: Controlling Share of Consolidated net
income
Pan $1,240,000 ´ 100% $1,240,000
Sin $350,000 ´ 90% 315,000
Tar $400,000 ´ 90% ´ 70% 252,000
Win $(100,000) ´ 90% ´ 60% (54,000)
Van $240,000 ´ 90% ´ 80% 172,800
(1,925,800)
Sin $350,000 ´ 10% $ 35,000
Tar $400,000 ´ 37% 148,000
Won $(100,000) ´ 46% (46,000)
Van $240,000 ´ 28% 67,200
4 a
[See computations for question 3]
5 d
Net income of Sin
Separate income $ 350,000
Add: 70% of Tar’s $400,000 280,000
Deduct: 60% of Won’s $(100,000) (60,000)
Add: 80% of Van’s $240,000 192,000
Net income of Sin $ 762,000
Pan’s interest 90%
Investment increase 685,800
Less: Dividends received from Sin ($200,000 ´ 90%) (180,000)
Net increase $ 505,800

Chapter 9 9-9
Solution E9-8
1 b
Separate income of Sam (net income) $ 80,000
Separate income of Ten $40,000 - ($80,000 ´ 10%) 32,000
Separate income of Pat
$240,000 - ($40,000 ´ 70%) - ($80,000 ´ 80%) 148,000
Total separate income $260,000
2 d
Pat Sam Ten
Separate income $148,000 $80,000 $32,000
Unrealized profit on inventory (10,000)
Unrealized profit on land _________ ________ (15,000)
Separate realized income $148,000 $70,000 $17,000
3 a
Pat’s separate income $148,000
Add: Investment income from Sam ($70,000 ´ 80%) 56,000
Add: Investment income from Ten
[$17,000 + ($70,000 ´ 10%)] ´ 70% 16,800
Pat’s income (controlling share of consolidated net income) $220,800
4 d
Total separate realized income $235,000
Less: Controlling share of consolidated net income 220,800
Direct noncontrolling interest in Sam ($70,000 ´ .1) $ 7,000
Indirect noncontrolling interest in Sam
($70,000 ´ .3 ´ .1) 2,100
Direct noncontrolling interest in Ten ($17,000 ´ .3) 5,100

Solution E9-9
Controlling Share of Consolidated net income

P = Income of Pan on a consolidated basis (including mutual income)
S = Income of Sol on a consolidated basis (including mutual income)
P = Separate income of $6,000,000 + 80% of S
S = Separate income of $3,000,000 + 30% of P
P = $6,000,000 + .8($3,000,000 + .3P) = $6,000,000 + $2,400,000 + .24P
.76P = $8,400,000
P = $11,052,632
Controlling Share of Consolidated net income = $11,052,632 ´ 70% =
$7,736,842

Chapter 9 9-11
Solution E9-10
P = Pad’s income on a consolidated basis

S = Sad’s income on a consolidated basis
T = Two’s income on a consolidated basis
P = $400,000 + .7S
S = $240,000 + .8T
T = $160,000 + .1S
Solve for S
S = $240,000 + .8($160,000 + .1S)
S = $368,000 + .08S
S = $400,000
Compute P and T
P = $400,000 + .7($400,000)
P = $680,000
T = $160,000 + .1($400,000)
T = $200,000
Income Allocation
Controlling Share of Consolidated net income (equal to P) $680,000
Noncontrolling interest share in Sad ($400,000 ´ 20%) 80,000
Noncontrolling interest share in Two ($200,000 ´ 20%) 40,000
Total consolidated income $800,000

Solution E9-11 [AICPA adapted]
1 b
2 b
3 d
4 c
Supporting computations
A = Pin’s income on a consolidated basis

B = Son’s income on a consolidated basis
C = Tin’s income on a consolidated basis
A = $190,000 + .8B + .7C

B = $170,000 + .15C
C = $230,000 + .25A
Solve for A
A = $190,000 + .8[$170,000 + .15($230,000 + .25A)] + .7($230,000 + .25A)
A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175A
A = $514,600 + .205A
.795A = $514,600
A = $647,295.59
Determine C
C = $230,000 + .25($647,295.59)
C = $391,823.90
Determine B
B = $170,000 + .15($391,823.90)
B = $228,773.58
Allocate income to controlling share of consolidated net income and

noncontrolling interest
Controlling Share of Consolidated net income ($647,295.59 ´ 75%) $485,471.69

Noncontrolling interest — Son ($228,773.58 ´ 20%) 45,754.72
Noncontrolling interest — Tin ($391,823.90 ´ 15%) 58,773.59
Total consolidated income $590,000.00

Chapter 9 9-13
Solution E9-12
1 d
Combined separate income $160,000
Less: Noncontrolling interest share 6,750
Controlling Share of Consolidated net income $153,250
Alternatively:
Pet’s separate income $100,000
Add: Sod’s net income of $67,500 ´ 90% 60,750
Less: Dividends received from Pet ($50,000 ´ 15%) (7,500)
2 b
P = $100,000 + .9($60,000 + .15P)
.865P = $154,000
P = $178,035
S = $60,000 + $26,705 = $86,705
Controlling Share of Consolidated net income = $178,035 ´ . $151,330

85 =
Noncontrolling interest share = $86,705 ´ .10 = 8,670
Total consolidated income $160,000

Solution E9-13
1 Treasury stock approach

Investment in Sat balance December 31, 2011
Investment balance December 31, 2010 $245,700
Add: Income from Sat 26,900
Less: Dividends received from Sat(70% x $30,000) (21,000)
Add: Dividends paid to Sat 6,000
Investment in Sat December 31, 2011 $257,600
Supporting computations
Computation of income from Sat:
Sat’s separate income $ 50,000
Add: Sat’s dividend income from Pug 6,000
Sat’s net income 56,000
Pug’s ownership interest 70%
Pug’s equity in Sat’s income 39,200
Less: Dividends paid to Sat ($60,000 ´ 10%) (6,000)
Less: Excess amortization ($9,000 x 70%) (6,300)
Income from Sat $ 26,900
2 Conventional approach
Pug’s net income and consolidated net income
P = ($120,000 + .7S) - $6,300

S = $50,000 + .1P
P = $120,000 + .7($50,000 + .1P) - $6,300

P = $120,000 + $35,000 + .07P - $6,300
.93P = $148,700
P = $159,892
S = $50,000 + .1($159,892)
S = $65,989
Pug’s net income and controlling share

($159,892 ´ 90%) $143,903
Noncontrolling interest share ($65,989 ´ 30%) 19,797
Total income $163,700
Income from Sat

Controlling Share of Consolidated net income $143,903
Less: Pug’s separate income 120,000
Income from Sat $ 23,903
Or alternatively,
($65,989 ´ 70%) - ($159,892 ´ 10%) - $6,300 excess $ 23,903
Investment in Sat December 31, 2011

Add: Income from Sat 23,903
Less: Dividends from Sat (21,000)

Chapter 9 9-15
SOLUTIONS TO PROBLEMS
Solution P9-1
Polly and Subsidiaries

Income Allocation Schedule
For the year 2014
Polly Sally Jolly Wally

Separate earnings $450,000 $ 250,000 $100,000 $50,000
Add: Realized profit from sale $ 10,000 $ 5,000
of land
Less: Unrealized profit from $ (15,000) _$(10,000)
sale of land
Separate realized earnings $450,000 $ 235,000 $100,000 $ 45,000

Alllocate Wally's income
50% to Jolly $ 22,500 $(22,500)
10% to Sally $ 4,500 $( 4,500)
30% to Polly $ 13,500 $(13,500)
Allocate Jolly’s income
70% to Sally $122,500
$ 85,750 $(85,750)
Allocate Sal’s income $ 325,250
80% to Polly $260,200 $(260,200)
Patent (40,000)
Controlling share of net income $723,700
Noncontrolling interest share $ 65,050 $ 36,750 $ 4,500
Solution P9-2
1 Sea’s books
Investment in Toy (70%) 588,000

Cash 588,000
To record purchase of a 70% interest in Toy Corporation.
Cash 28,000
To record dividends received from Toy ($40,000 ´ 70%).

Income from Toy 70,000
To record investment income computed as follows:
Share of Toy’s net income ($120,000 ´ 70%) $ 84,000
Less: Unrealized profit from upstream sale of
inventory items ($20,000 ´ 70%) (14,000)

$ 70,000
Pot’s books
Cash 96,000
Investment in Sea (80%) 96,000
To record dividends received from Sea ($120,000 ´ 80%).

Income from Sea 176,000
To record investment income computed as follows:
Share of Toy’s net income

($200,000 + $70,000) ´ 80% $216,000
Less: Unrealized gain on land sold to Toy (40,000)
$176,000

Chapter 9 9-17
Solution P9-2 (Continued)
2 Schedule of income allocation

Pot Sea Toy
Less: Unrealized profits (40,000) (20,000)
Separate realized earnings 560,000 200,000 100,000

Allocate Toy’s realized earnings
to Sea ($100,000 ´ 70%) 70,000 (70,000)
Sea’s net income 270,000

Allocate Sea’s net income to
Pot ($270,000 ´ 80%) 216,000 (216,000)
Pot’s net income and

Controlling share of net income $776,000 _________
Noncontrolling interest share $ 54,000 $ 30,000
Check: Realized earnings ($560,000 + $200,000 + $100,000) $860,000

Less: Noncontrolling interest share (54,000+30,000) (84,000)
Controlling share of net income $776,000
3 Schedule of assets and equities at December 31, 2012
Pot Sea Toy
Assets $ 3,696,000 $ 920,000 $1,080,000

Investment in Toy (70%) ___________ 630,000 __________
Total assets $ 4,576,000 $1,550,000 $1,080,000
Liabilities $ 600,000 $ 400,000 $ 200,000

Capital stock 2,400,000 800,000 600,000
Retained earnings 1,576,000 350,000 280,000
Total liabilities and equity $ 4,576,000 $1,550,000 $1,080,000
Note: Pot’s assets other than investments consist of $3,200,000 assets

at the beginning of the year, plus separate earnings of $600,000 and
dividend income of $96,000, less dividends paid of $200,000.
Sea’s assets other than investments consist of $1,400,000 assets
at the beginning of the period, plus separate earnings of $200,000 and
dividend income of $28,000, less investment cost of $588,000 and
dividends paid of $120,000.

Solution P9-3
Preliminary computations
Check on consolidated net income

Pen Sir Tip Total
Net income as stated $184,500 $90,000 $25,000 $299,500
Less: Investment income (84,500) (10,000) (94,500)
Separate income 100,000 80,000 25,000 205,000
Add: Unrealized profit in
beginning inventory 8,000 8,000
Less: Unrealized profit in
ending inventory _________ ________ (20,000) (20,000)
Separate realized incomes 108,000 80,000 5,000 193,000
Allocate Tip’s income
50% to Pen 2,500 (2,500)
40% to Sir 2,000 (2,000)
Sir’s net income 82,000
Allocate Sir’s income
80% to Pen 65,600 (65,600)
Less: Depreciation on excess
allocated to plant and
Equipment (5,000) ( 1,250) (6,250)
Total income of consolidated
Entity _________ $186,750
Controlling share of NI $171,100 _________ ________ 171,100
Noncontrolling int. share $ 15,150 $ 500 15,650
$186,750
Investment in Sir (80%) $ 420,000
Implied total fair value of Sir ($420,000 / 80%) $ 525,000

Book value of Sir (500,000)
Excess of fair value over book value $ 25,000
Excess allocated to equipment with a four year lfe

Amortization ($25,000 / 4 yrs) $ 6,250
Investment in Tip (50%) $ 75,000
Implied total fair value of Tip ($75,000 / 50%) $ 150,000

Book value of Sir (120,000)
Excess of fair value over book value – Goodwill $ 30,000

Chapter 9 9-19
Solution P9-3 (continued)

Pen Corporation and Subsidiaries
Consolidation Working Papers
for the year ended December 31, 2011
Adjustments and Consolidated

Pen Sir Tip Eliminations Statements
Income Statement
Sales $500,000 $300,000 $100,000 h 50,000 $ 850,000
Income from Sir 72,000 d 72,000
Income from Tip 12,500 10,000 a 22,500
Cost of sales 240,000* 150,000* 60,000* i 20,000 g 8,000
h 50,000 412,000*
Other expenses 160,000* 70,000* 15,000* f 6,250 251,250*
Noncont.int.share — Sir c 15,150 15,150*
Noncont.int.share — Tip c 500 500*
Cont. share of net inc. $184,500 $ 90,000 $ 25,000 $ 171,100
Retained Earnings
Retained earnings — Pen $115,500 f 12,500
g 8,000 $ 95,000
Retained earnings — Sir 160,000 e 160,000
Retained earnings — Tip 45,000 b 45,000

Cont. share of net inc. 184,500ü 90,000ü 25,000ü 171,100
Dividends 80,000* 40,000* 10,000* a 9,000
c 9,000
d 32,000 80,000*
Retained earnings
December 31 $220,000 $210,000 $ 60,000 $ 186,100
Balance Sheet
Cash $ 67,000 $ 36,000 $ 10,000 $ 113,000
Accounts receivable 70,000 50,000 20,000 j 10,000 130,000
Inventories 110,000 75,000 35,000 i 20,000 200,000
Plant and
equipment — net 140,000 425,000 115,000 e 25,000 f 18,750 686,250
Investment in d 40,000
Sir 80% 508,000 e 468,000
Investment in 95,000 a 7,500
Tip 50% b 87,500
Investment in 74,000 a 6,000
Tip 40% b 68,000
Goodwill ________ ________ ________ b 30,000 30,000
$990,000 $660,000 $180,000 $1,159,250
Accounts payable $ 70,000 $ 40,000 $ 15,000 j 10,000 $ 115,000

Other liabilities 100,000 10,000 5,000 115,000
Capital stock 600,000 400,000 100,000 b 100,000
e 400,000 600,000
Retained earnings 220,000ü 210,000ü 60,000ü 186,100
$990,000 $660,000 $180,000
Noncontrolling interest — Sir (beginning) e 117,000
Noncontrolling interest — Tip (beginning) b 19,500
Noncontrolling interest December 31 _________ c 6,650 143,150
976,900 976,900 $1,159,250
* Deduct

Solution P9-4
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 = $400,000 + .8S + .5T
S = $200,000 + .2T
T = $100,000 + .1S
Solve for S
S = $200,000 + .2($100,000 + .1S)
S = $220,000 + .02S
.98S = $220,000
S = $224,489.80 or $224,490
Compute T
T = $100,000 + .1($224,489.80)
T = $100,000 + $22,448.98
T = $122,448.98 or $122,449
Compute P
P = $400,000 + .8($224,489.80) + .5($122,448.98)
P = $640,816.33
or $640,816
Income allocation
Controlling share of consolidated net income = P = $640,816
Noncontrolling interest share in Sit ($224,490 ´ .1) 22,449
Noncontrolling interest share in Tot ($122,449 ´ .3) 36,735
$700,000

Chapter 9 9-21
3 P, S, and T are as defined in part 2.
Equation
P = ($400,000 - $40,000) + .8S + .5T
S = $200,000 + .2T
T = ($100,000 - $20,000) + .1S
Solve for S
S = $200,000 + .2($80,000 + .1S)
S = $216,000 + .02S
S = $220,408.16
Compute T
T = $80,000 + .1($220,408.16)
T = $102,040.82
Compute P
P = $360,000 + .8($220,408.16) + .5($102,040.82)
P = $587,346.94
Income allocation
Controlling share of consolidated net income = P = $587,346.94
Noncontrolling interest share in Sit ($220,408.16 ´ 10%) 22,040.82
Noncontrolling interest share in Tot ($102,040.82 ´ 30%) 30,612.24
$640,000.00

Solution P9-5
Preliminary computations
Shin's separate income (Sales - Expenses) $ 40,000

Shin's dividend income $ 4,000
Shin's income $ 44,000
Pamela's share of income (90%) $ 39,600
Intercompany dividend adjustment $ (4,000)
Income from Shin $ 35,600 1
Pamela's dividend -
beginning $ 40,000
Intercompany dividend adjustment $ (4,000)
Pamela's dividend - ending $ 36,000 2
Investment in Shin - beginning $ 315,000

Add: Pamela's share of Shin's
income $ 39,600
Less: Dividend from Shin (90%) $ 27,000
Investment in Shin - ending $ 327,600 3
Implied fair value (100%) $ 350,000

Book value of equity $ 340,000
Goodwill $ 10,000
Consolidation workpaper entries

Income from
a Shin $ 35,600
Dividend income $ 4,000
Dividends $ 27,000
Investment in Shin $ 12,600
To eliminate income from Shin
b Noncontrolling interest share $ 4,400
Dividends $ 3,000
Noncontrolling
interest $ 1,400
c Common stock - Shin $ 200,000
Retained earnings - Shin $ 140,000
Goodwill $ 10,000
Investment in Shin $315,000

Chapter 9 9-23
Noncontrolling
interest $ 35,000
To eliminate equity accounts and
recognize goodwill
d Treasury stock $ 80,000

Investment in Pamela $ 80,000
To recognize treasury stock under
treasury stock approach
Pamela Incorporated and Subsidiary

Consolidated Workpaper
For year ended December 31, 2014
Consolidate
Pamela Shin Adjustments d
and eliminations Statements
Debits Credits
Income
Statement
$ $ $
Sales 220,000 110,000 330,000
Income from $ $ $
Shin 35,600 a 35,600 -
Dividend $ $ $
income 4,000 a 4,000 -
Expenses $ $ $
including COGS (100,000) (70,000) (170,000)
Noncontrolling $ $
interest share b 4,400 (4,400)
Controlling
share of net $ $ $
income 155,600 44,000 155,600
Retained
Earnings
Statement
Retained
earnings - $ $
Pamela 308,000 308,000
Retained
earnings - $ $
Shin 140,000 c 140,000
$ $ $ $
Dividends (36,000) (30,000) a 27,000 (36,000)
$
b 3,000
Controlling
share of net $ $ $
income 155,600 44,000 155,600

Retained
earnings - $ $ $
December 31 427,600 154,000 427,600
Balance Sheet
Other assets $ $ $
600,000 274,000 874,000
Investment in $ a $ $
Shin - 90% 327,600 12,600 -
c $
315,000
Investment in $ d $ $
Pamela - 10% 80,000 80,000 -
Goodwill c $ $
10,000 10,000
$ $ $
927,600 354,000 884,000
Common stock - $ $
Pamela 500,000 500,000
Common stock - $ c $
Shin 200,000 200,000
Retained $ $ $
earnings 427,600 154,000 427,600
$ $
927,600 354,000
Treasury stock d $ $
80,000 (80,000)
Noncontrolling b $ $
interest 1,400 36,400
c $
35,000
$
884,000

Chapter 9 9-25
Solution P9-6
Calculations
Income from Sip
Par separate income (140,000 - 80,000) $ 60,000
Sip separate income (100,000 + 3,000 - 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 2,000
To recognize previously deferred gain on sale of land.
b Dividend income 4,000
Investment in Sip 4,000
To eliminate intercompany dividends paid to Sip
c Income from Sip 28,000
Dividends 16,000
To eliminate income from Sip and 80% of Sip’s dividends, and
return the investment in Sip account to the beginning-of-the-
period balance under the equity method.
d Investment in Sip 100,000
Investment in Par 100,000
To eliminate reciprocal investments.
e Capital stock — Sip 50,000
Retained earnings — Sip 180,000
Patent 20,000
Noncontrolling interest — beginning 54,290
To eliminate reciprocal investment and equity accounts, and enter
beginning-of-the-period patent and noncontrolling interest.
f Expenses 5,000
Patent 5,000
To record current year’s amortization of patent.
g Noncontrolling Interest Share 12,000
Dividends 4,000
Noncontrolling Interest 8,000
To record the noncontrolling interest share of subsidiary income
and dividends.

Chapter 9 9-27
Par Company and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2010
Adjustments and Consolidated

Par Sip 90% Eliminations Statements
Income Statement
Sales $ 140,000 $ 100,000 $ 240,000
Income from Sip 28,000 c 28,000
Dividend income 4,000 b 4,000

Gain on sale of land 3,000 a 2,000 5,000
Expenses 80,000 * 60,000 * f 5,000 145,000 *
Consolidated net income 100,000
Noncontrolling share g 12,000 12,000 *
Controlling share of NI $ 88,000 $ 47,000 $ 88,000
Retained Earnings
Retained earnings — Par $ 405,710 $ 405,710
Retained earnings — Sip $ 180,000 e 180,000
Controlling share of NI 88,000ü 47,000ü 88,000
Dividends 16,000 * 20,000 * c 16,000
g 4,000 16,000 *
Retained earnings
December 31 $ 477,710 $ 207,000 $ 477,710
Balance Sheet
Other assets $ 448,000 $ 157,000 $ 605,000
Investment in Sip 109,710 a 2,000 b 4,000
d 100,000 c 12,000
e 195,710
Investment in Par 100,000 d 100,000
Patent __________ __________ e 20,000 f 5,000 15,000
$ 557,710 $ 257,000 $ 620,000
Capital stock 80,000 50,000 e 50,000 80,000

Retained earnings 477,710ü 207,000ü 477,710
$ 557,710 $ 257,000
Noncontrolling interest January 1 e 54,290

Noncontrolling interest December 31 _________ g 8,000 62,290
401,000 401,000 $ 620,000
* Deduct

Solution P9-7
Preliminary Computations
Pan’s investment cost $170,000
Implied total fair value of Set ($170,000 / 80%) $212,500

Book value of Set (200,000)
Excess of fair value over book value - Goodwill $ 12,500
1 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 = $100,000 separate earnings + .8S

S = $40,000 separate earnings + .1P
Solve for P
P = $100,000 + .8($40,000 + .1P)
P = $100,000 + $32,000 + .08P
P = $143,478
Compute S
S = $40,000 + .1($143,478)
S = $54,348
Income allocation
Controlling Share of Consolidated net income ($143,478 ´ 90% $129,130
outside ownership)
Total (separate incomes) $140,000

Chapter 9 9-29
2 Entries to account for investments on an equity basis

Pan’s books
Capital stock 60,000

Retained earnings 20,000
Investment in Set 80,000
To record constructive retirement of 10% of Pan’s stock.
Investment in Set (80%) 29,130

Income from Set 29,130
To record income from Set computed as follows: 80%($54,348) - 10%
($143,478) = $29,130. Alternatively $129,130 - $100,000 separate
income = $29,130.
Cash 16,000
To record receipt of 80% of Set’s dividends.
Investment in Set (80%) 5,000

Dividends 5,000
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.

3 Journal entries on Set’s books
Investment in Pan (10%) 80,000

Assets 80,000
To record acquisition of a 10% interest in Pan at book value.
Investment in Pan 14,348

Income from Pan 14,348
To record 10% of Pan’s $143,478 income on a consolidated basis.
Cash 5,000
Investment in Pan (10%) 5,000
To record receipt of dividends from Pan ($50,000 ´ 10%).
4 Net income for 2013 Pan Set

Separate incomes $100,000 $ 40,000
Investment income 29,130 14,348
Net income $129,130 $ 54,348
5 Investment balance December 31, 2013 Pan Set

Investments beginning of 2013 $208,000 $ 80,000
Less: Constructive retirement of Pan’s stock (80,000)
Add: Investment income 29,130 14,348
Add: Dividends paid to Set 5,000
Less: Dividends received (16,000) (5,000)
Investment balances December 31, 2013 $146,130 $ 89,348
6 Stockholders’ equity December 31, 2013 Pan Set

Stockholders’ equity January 1, 2013 $720,000 $250,000
Add: Net income 129,130 54,348
Less: Dividends (45,000) (20,000)
Stockholders’ equity December 31, 2013 $804,130 $284,348
7 Noncontrolling interest at December 31, 2013

Set’s equity on a consolidated basis $284,348
Noncontrolling interest percentage 20%
Noncontrolling interest at December 31, 2013 $ 56,870
Noncontrolling interest January 1, 2013 ($250,000 ´ 20%) $ 50,000
Noncontrolling interest dividends (4,000)
Noncontrolling interest at December 31, 2013 $ 56,870

Chapter 9 9-31
8 Adjustment and elimination entries
a Income from Pan 14,348

Dividends 5,000
To eliminate investment income and dividends from Pan and
return the investment account to its beginning-of-the-period
balance.
b Investment in Set 80,000

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 5,000
To eliminate dividends.
d Income from Set 29,130

Dividends 16,000
To eliminate income and dividends from Set and return the
investment in Set to its beginning-of-the-period balance.
e Capital stock — Set 150,000

Retained earnings — Set 100,000
Goodwill 12,500
Noncontrolling interest 54,500
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 10,870

Dividends 4,000
Noncontrolling Interest 6,870
To record the noncontrolling interest share of subsidiary
income and dividends.

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Chapter 9

INDIRECT AND MUTUAL HOLDINGS

2 There are two types of indirect holding structure:

SUBSIDIARY 60% SUBSIDIARY

Copyright © 2015 Pearson Education Limited

Combined separate earnings of Pat, Sam, and Stan

Separate realized earnings 20,000 9,000 5,000

Copyright © 2015 Pearson Education Limited

11 No. Parent dividends paid to the subsidiary are eliminated.

13 Controlling Share of Consolidated net income is computed as follows:

Penang's separate earnings $100,000

Copyright © 2015 Pearson Education Limited

Minang's direct noncontrolling interest share

a Under treasury stock approach, cost method is used, so:

b Under conventional approach, equity method is used, so:

P = $50,000 + 0.8($25,000 + 0.2P)

Copyright © 2015 Pearson Education Limited

Copyright © 2015 Pearson Education Limited

Pal Sal Tea Won Val

Copyright © 2015 Pearson Education Limited

Pet Man Nun Oak

Man 36,000 - $8,000 28,000a 25,200 $ 2,800

Nun 56,000 + 4,000 60,000b 47,400 12,600

Oak 18,000 - 8,000 10,000c 7,880 2,120

$228,000 $210,480 $17,520

a $28,000 divided 90% to consolidated net income (CNI)

Copyright © 2015 Pearson Education Limited

Copyright © 2015 Pearson Education Limited

Copyright © 2015 Pearson Education Limited

Controlling Share of Consolidated net income

Copyright © 2015 Pearson Education Limited

P = Pad’s income on a consolidated basis

Copyright © 2015 Pearson Education Limited

Solution E9-11 [AICPA adapted]

A = Pin’s income on a consolidated basis

A = $190,000 + .8B + .7C

Allocate income to controlling share of consolidated net income and

Controlling Share of Consolidated net income ($647,295.59 ´ 75%) $485,471.69

Copyright © 2015 Pearson Education Limited

Controlling Share of Consolidated net income = $178,035 ´ . $151,330

Copyright © 2015 Pearson Education Limited

1 Treasury stock approach

P = ($120,000 + .7S) - $6,300

P = $120,000 + .7($50,000 + .1P) - $6,300

Pug’s net income and controlling share

Income from Sat

Investment in Sat December 31, 2011

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Polly and Subsidiaries

Polly Sally Jolly Wally

Separate realized earnings $450,000 $ 235,000 $100,000 $ 45,000

Controlling share of net income $723,700

Noncontrolling interest share $ 65,050 $ 36,750 $ 4,500

Investment in Toy (70%) 588,000

Investment in Toy (70%) 70,000

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Investment in Sea (80%) 176,000

Share of Toy’s net income

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Solution P9-2 (Continued)

2 Schedule of income allocation

Separate realized earnings 560,000 200,000 100,000

Sea’s net income 270,000