 and welcome to the session in which we will discuss indirect control specifically under connecting affiliation. In the prior session, we looked at indirect control under father-son-grandson relationship and what does that look like? It looks like something like this. For example, a company like Alphabet owns Google, owns 80% of Google or 60% more than 50%, then Google's in turn owns let's assume 60% of YouTube. Now Alphabet notice doesn't own any shares in YouTube. However, Alphabet owns YouTube through Google. So this is a father-son-grandson relationship but that's not the only relationship that you could have where you have controlled. You could have what's called connecting affiliation. What does a connecting affiliation looks like? Well, let's use the same company's Alphabet. Let's assume Alphabet owns 75% of Google. Well Alphabet controls Google and let's assume Google owns 30% of YouTube. Well, what happened here is Alphabet don't control YouTube because Google don't control YouTube. How about if Alphabet bought another 25% of YouTube? Now notice what happens here is Alphabet now controls 30% through Google 25% directly in total more than 50%. More than 50% means what? Means control. Control means what? It will have to be consolidated. So YouTube now consolidated. So when the Alphabet purchased at 25%, that's when the control is established. So the valuation of basis for assets and liabilities occurs when the 25% was purchased because technically it's 55. Now bear in mind, we have three sets of consolidation entries yet. It gets a little bit more work in the real world when you have this type of triangular relationship. This is a triangular relationship. However, the concepts are the same. So the first thing we have to do is to determine the net income for each company. Now to do so we have to work an example. That's the best way to illustrate this concept. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. So let's take a look at this example. We have Alphabet, Google and YouTube and the reason I use those companies, not because this is the true percentage of control. I don't know what the true percentage of control, nor this is their separate income. This is just for illustration. I believe students will be able to follow that Alphabet is the parent company owns Google, Google owns YouTube. So it's easy for students to see this relationship. That's why I use those names. So the separate income for Alphabet is 350 for Google 240 and for YouTube 120. Now there's inter-entity gain in this income of 25,000 for Alphabet, 20,000 for Google and 15% for YouTube. And during the consolidation, we have amortization expense, access fair value, overall value, YouTube 15, Google 10,000. So let's compute a cruel net income. Starting, we always start from the bottom, just like father, son, grandson. We start with YouTube 120 minus 15 minus 15 will give us 90,000. Then what's going to happen of this 90,000? This 90,000 here, Google gets 30%. Google gets 30%. It means the remaining 70% for now is going to end quote, non-affiliates. Okay, there's not an affiliate yet. The others are the majority goes to the other 70% to the other owners. So 30% of the 90,000 is included to Google. Google started with 240, then we deduct the inter-entity gain, we deduct the access amortization, we'll come up with 210. Then with 210, we add the share of YouTube, which is 27,000. Now we come up with Google 237,000. Now of that amount, Alphabet owns 75% of Google. So Alphabet share is 75%. Obviously, the other 25% is the NCI non-controlling interest, but we're not keeping track of that. So 237 times 75%. That's going to be Alphabet share of Google, which include also their share of YouTube. So notice how YouTube income that flow through Google also now through Alphabet. Now let's look at Alphabet separately, 350 minus 25,000. It doesn't have any amortization and access because it controls everyone else. So 325, then we add Alphabet share of Google. Then remember also that Alphabet controls 25% of YouTube. Then we're going to take the 25% of YouTube income, which is 25% of YouTube income is 90,000. 25% goes to Alphabet, which is 22,500. So all in all, Alphabet net income is 177,750 plus 22,50 is 525,250. So notice it's a different, the same concept. We starting from Google and we starting from YouTube at the bottom, and we work backward. Some profit flows through Google, then Google flows through not flows. It's included as part of the consolidation. I hope this session will help you understand this concept. Look, advanced accounting. This topic, I would not say it's on the CPA example. It definitely will be part of your advanced accounting course. Learn it, enjoy it, understand it, invest in yourself, invest in your career. Good luck and stay safe.