B. Woods Chapter 9 - Chapter 9 INDIRECT AND MUTUAL HOLDINGS...

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33 Chapter 9 INDIRECT AND MUTUAL HOLDINGS Answers to Questions 1 An indirect holding of the stock of an affiliated company gives the investor an ability to control or significantly influence the decisions of an investee not directly owned through an investee that is directly owned. Two primary types of indirect ownership situations are the father-son-grandson relationship and the connecting affiliates relationship. 2 No. Only 40 percent of T's stock is held within the affiliation structure and P owns indirectly only 24 percent (60% x 40%) of T. T should be included as an equity investment in the consolidated statements of P Company and Subsidiaries. 3a Father-son-grandson b Connecting affiliates Parent Parent Subsidiary Y Subsidiary A Subsidiary B Subsidiary Z Majority stockholders Majority stockholders Direct ownership, 70% interest Direct ownership, 30% interest in B and in Y. Indirect ownership, 42% 70% interest in A. Indirect ownership, interest in Z (70% x 60%). 21% interest in B (70% x 30%). Minority stockholders Minority stockholders Direct ownership, 30% interest Direct ownership, 30% interest in A and in Y and 40% interest in Z. 40% interest in B. Indirect ownership, Indirect ownership, 18% interest 9% interest in B (30% x 30%). in Z (30% x 60%). 4 An indirect holding involves the ability of one corporation to control another corporation 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.
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34 Indirect and Mutual Holdings 5 The parent's direct and indirect ownership of Subsidiary B is 49 percent (70% x 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 minority stockholders of B. 6 Approach A Pat Sam Stan Combined separate earnings of Pat, Sam, and Stan ($100,000 + $80,000 + $50,000) $230,000 Less: Minority interest expense computed as follows: Direct minority interest in Stan's income ($50,000 x 30%) (15,000) Indirect minority interest in Stan's income ($50,000 x 70% x 20%) (7,000) Direct minority interest in Sam's income ($80,000 x 20%) (16,000 ) Pat's net income and consolidated net income $192,000 Approach B Pat Sam Stan Separate earnings $100,000 $80,000 $50,000 Allocate Stan's income to Sam ($50,000 x 70%) +35,000 -35,000 Allocate Sam's income to Pat ($115,000 x 80%) + 92,000 -92,000 Consolidated net income $192,000 Minority interest expense $23,000 $15,000 7 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. 8
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B. Woods Chapter 9 - Chapter 9 INDIRECT AND MUTUAL HOLDINGS...

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