Advanced Accounting -Consolidating an Unprofitable Subsidiary

Consolidating an Unprofitable Subsidiary

Amazing Chemical Corporation's president had always wanted his own yacht and crew and concluded that Amazing Chemical should diversity its investments by purchasing an existing boatyard and repair facility on the lake shore near his summer home. He could then purchase a yacht and have a convenient place to store it and have it repaired. 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 money each of the five prior years and had never reported a profit for the original owners.
Not surprisingly, the boatyard continued to lose money after Amazing Chemical purchased it, and the losses grew larger each month. Amazing Chemical, a very profitable chemical company, reported net income of $780,000 on 2002 and $850,000 in 2003 even though the boatyard reported net losses of $160,000 in 2002 and $210,000 in 2003 and was fully consolidated.

Required:

Amazing Chemical's chief accountant has become concerned that numbers 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 authoritative accounting literature 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 boatyard in notes to the financial statements or in management's discussion and analysis.