The Allocation of Combined Net Income in Reciprocal Affiliations.

Abstract Accounting students often find it difficult to understand the allocation of combined net income of a parent company and its subsidiary to controlling and minority interests when a reciprocal affiliation exists. This difficulty may be attributed, in part at least, to two causes, first, the problem of accurately defining the symbols employed in the conventional algebraic solution, and second, in the selection of a two-step process for computation rather than a single-step process. The problem has been clarified with the help of an example in which company P owns 90% of company S, and company S owns 20% of company P. The net income figures for the current year for Companies P and S are 60, 000 and 20, 000 respectively. The purpose of this paper is to point out the limitations in the conventional algebraic solution to combined net income allocation problems in reciprocal affiliations, and to suggest a method designed to overcome these limitations. Modification of the conventional algebraic solution makes possible the use of a one-step process in which the interests of the controlling and minority stockholder groups in combined net income are directly computed.