Question

Case 1 - Orange Corporation

Orange Corporation’s president had always wanted to acquire an ice-cream company and concluded that Orange should diversify its investments by purchasing an existing ice-cream company in the same city. Although the board of directors was never formally asked to approve this new venture, the president moved forward with optimism and a rather substantial amount of corporate money to purchase full ownership of the ice-cream company, which had lost rather significant amounts of money each of the five prior years and had never reported a profit for the original owners.

The ice-cream company continued to lose money after Orange purchased it, and the losses grew larger each month. Orange, a very profitable company, reported net income of $780,000 in 20X2 and $850,000 in 20X3 even though the ice-cream company reported net losses of $160,000 in 20X2 and $210,000 in 20X3 and was fully consolidated.

Required

Orange’s chief accountant has become concerned that members of the board of directors or company shareholders will accuse him of improperly preparing the consolidated statements. The president does not plan to tell anyone about the losses, which do not show up in the consolidated income statement that the chief accountant prepared.

You have been asked to prepare a memo to the chief accountant indicating the way to include subsidiaries in the consolidated income statement and to provide citations to or quotations from the Accounting Standards Codification that would assist the chief accountant in dealing with this matter. You have also been asked to search the accounting literature to see whether any reporting requirements require disclosure of the ice-cream company in notes to the financial statements or in management’s discussion and analysis.

Answer 1

Consolidating an Unprofitable Subsidiary:

MEMO:

TO: Chief Accountant

Orange Corporation

From: BBB, Accounting Staff

RE: Consolidation of the Ice-cream company which is unprofitable

The Orange Corporation owns 100% of the Ice-cream company and thus should completely consolidate the accounts of the Ice-cream company in its financial statements. The consolidated are prepared when the organisation has directly or indirectly the controlling interest in one or more organisations.

The Orange Corporation follows GAAP principles while preparing the consolidated financial statements including the Ice-cream company's accounts.the business operations of the Ice-cream company are different from operations of Orange Corporation and thus the losses represent sufficient enough to set up a segment which is reportable segment of the Ice-cream company if the previous year financial statements does not include.

The breach of ethics is seen as the President of Orange Corporation is not able to receive the permission of buying Ice-cream Company and the actions regarding the operations of the company are unethical, which should be brought to the notice of board of directors.