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Orange Corporation's president had always wanted to acquire an ice-cream company andconcludedthat Orange should diversify its investments by purchasing an existing ice-cream company in the
Orange Corporation's president had always wanted to acquire an ice-cream company andconcludedthat Orange should diversify its investments by purchasing an existing ice-cream company in the same city. Although the board of directors was neverformally asked to approve this new venture, the president moved forward with optimism and arather substantial amount of corporate money to purchase full ownership of the ice-cream company, whichhad lost rather significant amounts of money each of the five prior years and had never reported aprofit for the original owners. The ice-cream company continued to lose money after Orange purchasedit, 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 thoughthe ice-cream company reported net losses of $160,000 in 20X2 and $210,000 in 20X3 and was fullyconsolidated. Required Orange's chief accountant has become concemed that members of the board ofdirectors or company shareholders will accuse him of improperly preparing the consolidatedstatements. The president does not plan to tell anyone about the losses, which do not show up inthe consolidated income statement that the chief accountant prepared. You have been asked toprepare a memo to the chief accountant indicating the way to include subsidiaries in the consolidatedincome statement and to provide citations to or quotations from the Accounting StandardsCodification that would assist the chief accountant in dealing with this matter. You have alsobeen asked to search the accounting literature to see whether any reporting requirements requiredisclosure of the ice-cream company in notes to the financial statements or inmanagement's discussion andanalysis
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