Indirect and Mutual Holdings Chapter 9

Prepare consolidated statements when the parent company Learning Objective 1 Prepare consolidated statements when the parent company controls through indirect holdings.

Affiliation Structures The potential complexity of corporate affiliation structure is limited only by one’s imagination .

Direct Holdings Single subsidiary Parent Subsidiary A 80%

Multiple subsidiaries Direct Holdings Multiple subsidiaries Parent Subsidiary B 70% 80% 90% Subsidiary A Subsidiary C

Indirect Holdings Father-son-grandson Parent Subsidiary A 80% B 70%

Connecting affiliates Indirect Holdings Connecting affiliates Parent 80% 20% Subsidiary A Subsidiary B 40%

Mutual Holdings Parent mutually owned Parent Subsidiary A 80% 10%

Connecting affiliates mutually owned Mutual Holdings Connecting affiliates mutually owned Parent 80% 20% 40% Subsidiary A Subsidiary B 20%

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 Shaw Turk Other assets $400 $195 $190 Investment in Shaw: (80%) 200 – – Investment in Turk: (70%) – 105 – $600 $300 $190 Liabilities $100 $ 50 $ 40 Capital stock 400 200 100 Retained earnings 100 50 50 Separate earnings $100 $ 50 $ 40 Dividends $ 60 $ 30 $ 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 $190,000 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 Shaw’s income ($50,000 × 20%) 10,000 – 27,600 Poe’s net income and consolidated net income $162,400