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hoyle_sg07 - Updated Sixth Edition Chapter 7 Ownership...

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Updated Sixth Edition Chapter 7 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. The calculation of the realized income of a subsidiary company is an important step in an indirect ownership structure. a. The determination of realized income figures is needed for equity income accruals as well as for the calculation 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 calculating its own realized 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 as a prerequisite for computing its own realized income. 94 Advanced Accounting – Updated 6/e
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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 can be accounted for by the treasury stock approach. 1. The cost paid to acquire the parent’s stock is reclassified during the consolidation process to a treasury stock account and no income is accrued. 2. The treasury stock approach is popular in practice because of its simplicity. C. Parent shares being held by a subsidiary can also he accounted for by the conventional approach. 1. The subsidiary’s ownership is reported in a manner that parallels the parent’s accounting for investments in the members of a business combination. 2. The subsidiary must record any income accruing from its ownership of the parent based upon use of the equity method.
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