Chapter 7 - Consolidated financial statements – Ownership patterns and income taxes. This chapter concludes coverage of the accounting for business combinations by analyzing two additional aspects of consolidated financial statements. | Chapter Seven Consolidated Financial Statements - Ownership Patterns and Income Taxes Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Consolidated Financial Statements – Ownership Patterns and Income Taxes Indirect Subsidiary Control LO 1 Bottom Company Midway Company Top Company 70% 60% Assume three companies form a business combination: Top Company owns 70% of Midway Company, which owns 60% of Bottom Company. Top controls both subsidiaries, although the parent’s Relationship with Bottom is only of an indirect nature. 7- Assume three companies form a business combination: Top Company owns 70% of Midway Company, which owns 60% of Bottom Company. Top controls both subsidiaries, although the parent’s Relationship with Bottom is only of an indirect nature. Consolidation When Indirect Control is Present When a parent controls a subsidiary which in turn controls other firms, a “pyramid” or “father-son-grandson” relationship exists. To consolidate: start from the bottom of the “pyramid” and work upwards. 1. Recognize realized income of “grandson(s)” 2. Use this to consolidate the “son” and “grandson(s)” financial information (take care to calculate any noncontrolling interest) 3. Finally, consolidate the “son(s)” and parent in the same manner. 7- When a parent controls a subsidiary which in turn controls other firms, a “pyramid” or “father-son-grandson” relationship exists. To consolidate: start from the bottom of the “pyramid” and work upwards. 1. Recognize realized income of “grandson(s)” 2. Use this to consolidate the “son” and “grandson(s)” financial information (take care to calculate any noncontrolling interest) 3. Finally, consolidate the “son(s)” and parent in the same manner. Indirect Subsidiary Control – Connecting Affiliation A connecting affiliation exists when two or more companies within a business combination own an interest in another member of the organization. High Company 70% 30% ownership ownership . | Chapter Seven Consolidated Financial Statements - Ownership Patterns and Income Taxes Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Consolidated Financial Statements – Ownership Patterns and Income Taxes Indirect Subsidiary Control LO 1 Bottom Company Midway Company Top Company 70% 60% Assume three companies form a business combination: Top Company owns 70% of Midway Company, which owns 60% of Bottom Company. Top controls both subsidiaries, although the parent’s Relationship with Bottom is only of an indirect nature. 7- Assume three companies form a business combination: Top Company owns 70% of Midway Company, which owns 60% of Bottom Company. Top controls both subsidiaries, although the parent’s Relationship with Bottom is only of an indirect nature. Consolidation When Indirect Control is Present When a parent controls a subsidiary which in turn controls other firms, a “pyramid” or “father-son-grandson” relationship exists. To .
