 Hello and welcome to the session in which we will discuss how to consolidate and compute net income when we have indirect control. Now in the prior session we explained what indirect control is but I'm gonna show you what type of indirect control we are looking at here. For the sake of illustration, I'm gonna assume three companies. The parent company is Alphabet, which is the parent company of Google and Google owns YouTube. Now, I'm gonna give you percentages. Those percentages are not real in the real world but I'm gonna give you those percentages for the sake of illustration. So Alphabet is the parent company of Google and owns 70%, therefore it will have to consolidate Google and Google owns 60% of YouTube. So this is the relationship that we have. Now, what would that makes? That will makes YouTube as a subsidiary controlled by Alphabet. In other words, Alphabet controls YouTube indirectly. How? Because they control Google. Well, if they control Google, Google controls YouTube then Alphabet controls YouTube. What do we have to do when we have control? We have to consolidate. So the company could be a parent and a sub at the same time in this type of relationship. What do we mean by this? For example, Google. Google is the parent of YouTube and Google is the sub of Alphabet. So notice the same company could be a parent and could be a sub in this relationship. So the first thing we have to do when we compute the consolidated net income for the parent, first we have to find the equity income accruing from the sub. The sub is, for example, YouTube is the sub of Google. Google is the sub of Alphabet. And what we have to do when we do so, we're gonna adjust the sub earning for any excess fare value amortization and any upstream intra entity transfer. And we're gonna start from the bottom working upward. 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 gonna 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 the figures we are giving for each company separately and we'll try to consolidate. We are giving YouTube, which is, in other words, this relationship is a father, son, grandson, basically. Okay, this is the father, this is the son, and this is the grandson. We start with the grandson. YouTube, we are giving net income for YouTube is 110,000. YouTube will have additional information, amortization, expense from acquisition, date of fair value and access of book value is 20,000 and net deferred intra entity gain which are included in income of 15,000. Google, 330,000, there's a dividend income. We don't worry about this, we're only worrying about the consolidated net income. Then there is amortization, expense from acquisition, date access fair value over book value of 30,000 and intra entity gain with a current net income of 80,000. And for alphabet, we have separate income for the company, 660,000 and net inter entity gain with current net income. No one owns alphabet, no amortization of expense. From acquisition, date access fair value over book value. Now what we're gonna do, we're gonna start to figure out the equity income for each company starting from the bottom. So first we have to find out the YouTube accrual net income. So what is YouTube accrual net income? Well, we are told YouTube has 110,000. Now we're gonna take the 110,000, we're gonna start with that 110,000 and we are going to deduct any access amortization related to the Google acquisition because Google acquired, remember Google controls, Google controls 60%. So when they did this acquisition, there was an access amortization. We have to subtract that. We also have to subtract any inter company gain that's the third, which is the answer is 20 and 15,000. 20 and 15,000. What we're left with is net income accrual for YouTube. Now we can take the ownership percentage. Google owns 60%, 60% of 75,000 is 45. Now Google, their separate income is 330, their separate income is 330. Then we are going to add to it 45,000, their share in the YouTube net income, in the YouTube net income, which is accrual net income. Then Google will have to make its own adjustment, will have to deduct the access amortization from the alphabet acquisition of Google of 30,000, which is giving here, as well as the deferral of Google Entra Entity. So all in all, net accrual for Google is 265,000. But this 265,000 include their share of YouTube, share of YouTube. Now we're going to compute the alphabet, which is the parent company, starting with 660,000, we have no access amortization, then we include 70% of Google income. Google income, Google income that includes YouTube is 265. Therefore we're gonna add to the alphabet 70% of that, which is 185,500, which is 265 multiplied by their ownership of 70. Then we are going to deduct, deferral of intercompany gain, we have an intercompany gain, deferral of 110,000, 110,000. All in all, alphabet company net income, the parent company is 735,500. Now, let's compute now the non-controlling interest. What is the non-controlling interest? Let's scroll down and see the non-controlling interest. YouTube accrual net income is 75,000, then outside ownership is 40. Why? Because YouTube is owned 60% by Google and 40% by others. So the others will have 40%. So 40% of 75 is 30,000. Google the same concept, 70% is owned by alphabet and 30% owned by others. So 265 times 30% will give us 79,500. Together it will be 109,500. Now, if we add up, if we add up the parent plus the non-controlling interest, it will give us 845,000, which is 735,500 plus 109,500. Now let's see if we can do the proof of this. Well, let's add up all of the total income for all three companies, which is 660 plus 330 plus 110. If we add, if we add it up, they'll add it up to, that will add up to 1 million, 1,100,000. Then let's deduct all the access amortization, which is 30 plus 20 equal to 50. And let's also defer all the intercompany gain, remove it, which is in total 205. So if we take 1,100,000 minus the access amortization minus the intercompany gain will give us 845. What's that 845? Well, it's 845 is the income allocated to the parent and the remainder to the NCI non-controlling interest. And notice we showed that, we proved that 845 is the parent, I'm sorry, of 845, 735,500 is the net income for the parent and 109 is the net income for the NCI for the non-controlling interest. I hope this exercise kind of basically illustrated the indirect control consolidation of net income when we have indirect control. Once again, we'll start from the bottom, from the grand son. We could have many, but we start from the bottom and we adjust for any access value amortization, any upstream income. Then we allocate the income from this company, wherever goes to Google after we compute the equity net income, a cruel net income. Same thing we'll do with Google and with allocated to Alphabet. And if there is more, we keep on going. I know this topic is not easy. In a sense, this is part of advanced accounting. Usually this is not covered on the CPA exam. Usually that's the case, but you need to understand how you do this for advanced accounting. What should you do? Go to Farhad Lectures. I have additional MCQs, practice questions that's gonna help you consolidate, no pun intended, consolidate this knowledge. Good luck, study hard, invest in your accounting career and stay safe.