Dr. M. D. Chase Long Beach State University Advanced -315-25B Investment Analysis and Distributions of Net Income Page 1

I. DISTRIBUTIONS OF CONSOLIDATED NET INCOME A. Basic Concept 1. Consolidated net income consists of: --combined of the parent and consolidated less --combined of the parent and consolidated subsidiaries adjusted by --all nominal adjusting/elimination entries

2. Consolidated net income is then distributed to the and the controlling interest;

Note: The sum of minority interest income and controlling interest income must equal consolidated net income.

3.Minority Interest Income: That portion of the consolidated net income allocable to the minority interest shareholders. Minority interest income may be computed as follows:

Computation of Minority Interest income

Minority Interest Income: MI% (SIGNI + Upstream Nominal Credit Adjustment - Upstream Nominal Debit Adjustments)

Where: MI%: Minority Interest percentage of ownership of company

SIGNI: Subsidiary Internally Generated Net Income (The income as computed by subsidiary; this computation is not affected by any intercompany considerations)

Upstream Nominal Credit Adjustments: Adjustments crediting nominal ( accounts) as a result of upstream (from subsidiary to parent) transactions

Upstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of upstream (from subsidiary to parent) transactions

Note: Only upstream adjustments to nominal accounts cause any affect on these computations

4. Controlling Interest Net Income: That portion of the consolidated net income allocable to the controlling interest (Parent's) shareholders. Controlling interest income may be computed as follows:

Computation of Controlling Interest income

Controlling Interest Income: PIGNI + P%("S" Adjusted net income) + Downstream Nominal Credit Adjustment - Downstream Nominal Debit Adjustments

Where: PIGNI: Parents Internally Generated Net Income (The income as computed by parent; this computation is not affected by any intercompany considerations)

P%: Parent percentage of ownership of subsidiary company

"S" Adjusted Net Income: (SIGNI + Upstream Nominal Credit Adjustment - Upstream Nominal Debit Adjustments) Note: This is the same computation made in MI income computation above

Downstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of

Dr. M. D. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 2

downstream (from parent to subsidiary) transactions Downstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of downstream (from subsidiary to parent) transactions Note 1:All elimination entries resulting from the analysis of the investment that affect nominal accounts are included, these would typically include all elimination in the "C" and "D" entries discussed in 11B and 12B; 2:Only downstream adjustments to nominal accounts cause any affect on these computations (the upstream adjustments affect the MI NI only); 3:Adjustments to nominal accounts are outside the parenthesis in Controlling Interest computations; the entire effect of the adjustment affects the income distribution (in the MI distribution, the nominal accounts are inside the parenthesis);

Illustrative Example: --Analyzing the investment --Distribution of net income "P" Company purchased an 80% interest in "S" Company on July 1, 19X1, for $260,000. On July 1, 19X1, "S" Company had the following information available: Common stock outstanding ($10 par) ...... $ 100,000 Retained earnings, January 1, 19X1 ...... 120,000 Net income, January 1-June 30, 19X1 ...... 10,000 Dividends paid, June 30, 19X1 ...... 2,000 --Equipment is undervalued by $30,000 and has a 6-year remaining life. Any remaining excess is attributable to with a 20-year life. (a) Analyze the Investment (assuming the subsidiary books were not closed at the purchase date). (b) Complete the following partial worksheet for the year ended December 31, 19X1. Subsidiary books were not closed on the purchase date. Provide keyed explanations for all worksheet entries and key each amortization of excess separately. Include income distribution computations.

P and Subsidiary “S” Partial Worksheet for Consolidated Financial Statements For Year Ended 12/31/x1 Partial Eliminations and Consolidated Minority Consolidated P S Adjustments Income Interest BS Dr. Cr. Statement Investment in “S” 266,000

PP&E Net 80,000 50,000 Goodwill “S” C/S (100,000) “S” RE (120,000) Dividends 4,000

Sales (600,000) (200,000) Cost of Sales 400,000 150,000 Other Expenses 100,000 30,000

Subsidiary NI (8,000)

ConsNI MINI CINI

Dr. M. D. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 3

Requirement a: Analyze the Investment Note: Income less dividends times percentage of ownership equals net change to retained earnings, Price paid ...... $ 260,000 therefore the percentage must taken against Less interest acquired: dividends even though "P" will not receive any of the Common stock (.8)(100,000)...... $ 80,000 distribution Retained earnings (1/1/x1) (.8)(120,000)...... 96,000 Add: Purchased Net income (.8)(10,000)...... 8,000 Less: Dividends (2,000)(.8)...... (1,600)* Note: Because the investment account Interest acquired...... 182,400 is being carried at cost plus the Excess cost over book value ...... $ 77,600 purchased net income, the purchased Add back pre-existing goodwill...... -0- net income must be eliminated Adjusted Excess to account for: $ 77,600 Accounted for as follows: To Fair Market Value Accounts: Inventory...... -0- Liabilities...... -0- Marketable securities...... -0- Total...... -0- Excess Available to non-current accounts...... $ 77,600 To equipment: ($30,000 x .8) [6 yr life].. 24,000 Balance to GW 53,600 Total accounted for...... $ 77,600

Requirement (b):Complete the following partial worksheet for the year ended December 31, 19X1. Subsidiary books were not closed on the purchase date. Provide keyed explanations for all worksheet entries and key each amortization of excess separately. Include income distribution computations.

Requirement (c): Present income distribution schedules for minority interest income and controlling interest income. P and Subsidiary “S” Partial Worksheet for Consolidated Financial Statements For Year Ended 12/31/x1 Partial Trial Balance Eliminations and Consolidated Minority Interest Consolidated P S Adjustments I/S BS Dr. Cr. Investment in “S” 266,400 (a) 6,400 -0- (b) 182,400 (c) 77,600

PP&E Net 80,000 50,000 (c) 24,000 (d) 2,000 152,000 Goodwill (c) 53,600 53,600 “S” C/S (100,000) (b) 80,000 20,000 “S” RE (120,000) (b) 96,000 24,000 Dividends 4,000 (a) 1,600 2,400 (b)1,600 Sales (600,000) (200,000) (800,000) Cost of Sales 400,000 150,000 550,000 Other Expenses 100,000 30,000 (d)2,000 132,000

Subsidiary NI (8,000) (a) 8,000 Purchased NI (b) 8,000 8,000 271,600 276,600 ConsNI 110,000 MINI (.2)(20,000)+0-0 (4,000) (4,000) CINI 100,000+(.8)(20,000)+0-2,000 114,000 (114,000)

Dr. M. D. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 4

Dr. M. D. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 5

Journal entries: (a) Eliminate current year net income effects: Subsidiary Net Income (10,000))(.8) (income for last 1/2 year)...... 8,000 Dividends declared (2,000)(.8) [last 1/2 year only]...... 1,600 Investment in "S"...... 6,400

(b) Eliminate pro-rata share of the investment account per the analysis: "S" Common Stock (100,000)(.8)...... 80,000 "S" Retained Earnings (120,000)(.8)...... 96,000 Purchased net income...(10,000)(.8)...... 8,000 Dividends declared (2,000)(.8) [first 1/2 year only]...... 1,600 Investment in "S"...... 182,400

(c) Eliminate the excess of cost over book value per the analysis: Accumulated -Equipment...... 24,000 Goodwill...... 53,600 Investment in "S"...... 77,600

(d) Amortize the excess of cost over bookvalue per the analysis: Depreciation -Equipment (24,000/6)(.5 yr)...... 2,000 Accumulated depreciation-PP&E...... 2,000

Requirement (c): Present income distribution schedules for minority interest income and controlling interest income.

Computation of Minority Interest income

Minority Interest Income: MI% (SIGNI + Upstream Nominal Credit Adjustment - Upstream Nominal Debit Adjustments)

Where: MI%: 20%

SIGNI: 200,000 - (150,000 + 30,000) = 20,000

Upstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of upstream (from subsidiary to parent) transactions None exist in this problem

Upstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of upstream (from subsidiary to parent) transactions None exist in this problem

Note: Only upstream adjustments to nominal accounts cause any affect on these computations

4. Controlling Interest Net Income: That portion of the consolidated net income allocable to the controlling interest (Parent's) shareholders. Controlling interest income may be computed as follows:

Computation of Controlling Interest income

Controlling Interest Income: PIGNI + P%("S" Adjusted net income) + Downstream Nominal Credit Adjustment - Downstream Nominal Debit Adjustments

Where:

Dr. M. D. Chase Long Beach State University Advanced Accounting-315-25B Investment Analysis and Distributions of Net Income Page 6

PIGNI: 600,000 - (400,000 + 100,000) = 100,000

P%: 80%

"S" Adjusted Net Income: (SIGNI + Upstream Nominal Credit Adjustment - Upstream Nominal Debit Adjustments) Note: This is the same computation made in MI income computation above [20,000 + 0 - 0] = 20,000

Downstream Nominal Credit Adjustments: Adjustments crediting nominal (income statement accounts) as a result of downstream (from parent to subsidiary) transactions

None in this example

Downstream Nominal Debit Adjustments: Adjustments debiting nominal (income statement accounts) as a result of downstream (from subsidiary to parent) transactions

Note 1:All elimination entries resulting from the analysis of the investment that affect nominal accounts are included, these would typically include all elimination in the "C" and "D" entries

2:Only downstream adjustments to nominal accounts cause any affect on these computations (the upstream adjustments affect the MI NI only);

3:Adjustments to nominal accounts are outside the parenthesis in Controlling Interest computations; the entire effect of the adjustment affects the income distribution (in the MI distribution, the nominal accounts are inside the parenthesis); Purchased net income...... 6,400 Depreciation expense-PP&E...... 2,000