Subsidiary’s Purchase of Some of Parent’s Stock to Save U.S. Income Taxes Perlex, which is low on cash, desires to buy back $I million of its own outstanding common stock. Perlex has a very profitable Irish subsidiary (Irelex), however, that has accumulated substantial profits, $1 million of which Perlex would like to have remitted to the United States. If Perlex instructs Irelex to pay div¬

idends, Perlex will incur substantial U.S. income taxes (because Ireland’s corporate income tax rate of 12% is so much lower than the U.S. income tax rate of 35%). Accordingly, Perlex created a Swiss subsidiary (Swerlex), which borrowed the equivalent of $1 million (at 4% interest) from Irelex. Swerlex used the money to acquire $1 million of Perlex’s outstanding common stock (10% of the total shares outstanding). Assume that these transactions occurred on the first day of the year.

Are any consolidation entries needed at year-end as a result of these two transactions? If so, what are they?