Chapter 9, Problem 9.5C

To determine

Introduction: A reciprocal relationship is a situation where two affiliated companies have intercompany stock holdings. Under reciprocal relationships, the stock acquired by parents is treated the same way as, repurchase of own stock by the parent and held in the treasury. This investment by a subsidiary in parent stock is recognized using the cost method because the size of the investment is usually very small and not capable of influencing parental ownership significantly. Income assigned to the non-controlling interest includes the subsidiary’s separate income excluding the dividend income from investment in the parent.

The action that will be best for the consolidated entity, and the factors that it must consider in making decision that can maximize consolidated net income.