Walks, Talks, and Looks Like a Duck; Is It One? Platt Inc. and Dee Ziner, Platt’s head of research and development, formed Secrex Inc., which will perform research and development. Secrex issued 5,000 shares of common stock to Ziner, who is now Secrex’s president. (Ziner is no longer em¬

ployed by Platt.) Platt lent $400,000 to Secrex for initial working capital in return for a note re¬

ceivable that can be converted at will into 95,000 shares of Secrex’s common stock. Platt also granted Secrex a line of credit of $1,000,000.

Required 1 Is consolidation appropriate?
2 What would Platt accomplish with this arrangement?
3 For this question only, assume that consolidating Secrex is not appropriate. What serious re¬
porting issue exists regarding Platt’s separate financial statements?
C 3-5 Trust Your Instincts! On 1/1/06, Phonex, Inc. created a business trust (a trust is not a legal entity).
Also on that date, the trust issued $1,000,000 of Trust Preferred Securities (TPS) in exchange for $1,000,000. The money was immediately lent to Phonex at 10% all in accordance with the terms of the TPS.
Required 1 Is consolidation appropriate?
2 What would Phonex accomplish with this arrangement?
3 How would this arrangement be treated for income tax reporting purposes? (Could Phonex file a consolidated income tax return with the Trust?)