Case 1 - Orange Corporation

Orange Corporations 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

Oranges 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 managements discussion and analysis.