Advanced Accounting Review Exam 1
ACCT 4022 – Advanced Accounting Notes
Chapter 1: Intercorporate Acquisitions and Investments in Other Entities
The Development of Complex Business Structures
By expanding into new markets or acquiring other companies already in those markets, companies can develop new earnings potential and those in cyclical industries can add greater stability to earnings through diversification.
A subsidiary is a corporation that is controlled by another corporation, referred to as a parent company.
Control is usually through majority ownership of its common stock.
Because a subsidiary is a separate legal entity, the parent’s risk associated with the subsidiary’s activities is limited.
Reasons for creating subsidiary:
May transfer receivables to subsidiary. Other companies can hold interest in entity. Transferring company therefore able to share risk of receivables.
Tax benefits
Companies have used subsidiaries to borrow large amounts of money without reporting debt on balance sheets.
A special purpose entity is a financing vehicle that is not a substantive operating entity, usually created for one specific purpose.
May be in the form of a corporation, a trust, or a partnership.
Can be done through contracts
Other manipulations include pooling of interests and assigning portions of purchase prices to in-process R&D so that the cost was expensed.
Business Expansion and Forms of Organizational Structure
Recently companies have been expanding by means of acquiring other companies rather than product development or expanding existing product lines into new markets.
Internal Expansion
Conduct expanded operations through subsidiaries or partnerships, joint ventures, or special entities.
Transfer assets to new entity and receive equity ownership in exchange
May establish subs for tax incentives, less regulation, spreading of risk.
May establish subs for disposition purposes, like shedding nonaligned operations, unprofitable operations, or to gain shareholder
Chapter 1: Intercorporate Acquisitions and Investments in Other Entities
The Development of Complex Business Structures
By expanding into new markets or acquiring other companies already in those markets, companies can develop new earnings potential and those in cyclical industries can add greater stability to earnings through diversification.
A subsidiary is a corporation that is controlled by another corporation, referred to as a parent company.
Control is usually through majority ownership of its common stock.
Because a subsidiary is a separate legal entity, the parent’s risk associated with the subsidiary’s activities is limited.
Reasons for creating subsidiary:
May transfer receivables to subsidiary. Other companies can hold interest in entity. Transferring company therefore able to share risk of receivables.
Tax benefits
Companies have used subsidiaries to borrow large amounts of money without reporting debt on balance sheets.
A special purpose entity is a financing vehicle that is not a substantive operating entity, usually created for one specific purpose.
May be in the form of a corporation, a trust, or a partnership.
Can be done through contracts
Other manipulations include pooling of interests and assigning portions of purchase prices to in-process R&D so that the cost was expensed.
Business Expansion and Forms of Organizational Structure
Recently companies have been expanding by means of acquiring other companies rather than product development or expanding existing product lines into new markets.
Internal Expansion
Conduct expanded operations through subsidiaries or partnerships, joint ventures, or special entities.
Transfer assets to new entity and receive equity ownership in exchange
May establish subs for tax incentives, less regulation, spreading of risk.
May establish subs for disposition purposes, like shedding nonaligned operations, unprofitable operations, or to gain shareholder