Chap007 - Chapter 7 - Consolidated Financial Statements -...

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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes CHAPTER 7 CONSOLIDATED FINANCIAL STATEMENTS - OWNERSHIP PATTERNS AND INCOME TAXES Chapter Outline I. Indirect subsidiary control A. Control of subsidiary companies within a business combination is often of an indirect nature; one subsidiary possesses the stock of another rather than the parent having direct ownership. 1. These ownership patterns may be developed specifically to enhance control or for organizational purposes. 2. Such ownership patterns may also result from the parent company's acquisition of a company that already possesses subsidiaries. B. One of the most common corporate structures is the father-son-grandson configuration where each subsidiary in turn owns one or more subsidiaries. C. The consolidation process is altered somewhat when indirect control is present. 1. The worksheet entries are effectively doubled by each corporate ownership layer but the concepts underlying the consolidation process are not changed. 2. Calculation of the accrual-based income of a subsidiary recognizing the consolidated relationships is an important step in an indirect ownership structure. a. The determination of accrual-based income figures is needed for equity income accruals as well as for the computation of noncontrolling interest balances. b. Any company within the business combination that is in both a parent and a subsidiary position must recognize the equity income accruing from its subsidiary before computing its own income. II. Indirect subsidiary control-connecting affiliation A. A connecting affiliation exists whenever two or more companies within a business combination hold an equity interest in another member of that organization. B. Despite this variation in the standard ownership pattern, the consolidation process is essentially the same for a connecting affiliation as for a father-son-grandson organization. C. Once again, any company in both a parent and a subsidiary position must recognize an appropriate equity accrual in computing its own income. III. Mutual ownership A. A mutual affiliation exists whenever a subsidiary owns shares of its parent company. B. Parent shares being held by a subsidiary are accounted for by the treasury stock approach. 1. The cost paid to acquire the parent's stock is reclassified within the consolidation process to a treasury stock account and no income is accrued. 7-1 7-1
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Chapter 7 - Consolidated Financial Statements - Ownership Patterns And Income Taxes 2. The treasury stock approach is popular in practice because of its simplicity and is now required by the FASB Codification . IV. Income tax accounting for a business combination—consolidated tax returns A. A consolidated tax return can be prepared for all companies comprising an affiliated group. Any other companies within the business combination file separate tax returns.
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Chap007 - Chapter 7 - Consolidated Financial Statements -...

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