Chapter 6 Breakeven Analysis

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CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions

1A corporation becomes a subsidiary when another corporation either directly or indirectly acquires a majority (over 50 percent) of its outstanding voting stock.

2Amounts allocated to identifiable assets and liabilities in excess of their recorded amounts on the books of the subsidiary are not recorded separately by the parent. Instead, the parent company records the purchase price of the interest acquired in an investment account. The allocation to identifiable asset and liability accounts is made through working paper entries when the parent and subsidiary financial statements are consolidated.

3The land would be shown in the consolidated balance sheet at $100,000, its fair value, assuming that the purchase price is equal to or greater than the fair value of the interest acquired. If the parent had acquired an 80 percent interest and the purchase price was equal to or greater than the fair value of the interest acquired, the land would appear in the consolidated balance sheet at $98,000. This amount consists of the $90,000 book value plus 80 percent of the $10,000 excess of fair value over book value of the land.

4Parent company—a corporation that owns a majority of the outstanding voting stock of another corporation (its subsidiary). Subsidiary company—a corporation that is controlled by a parent company that owns a majority of its outstanding voting stock, either directly or indirectly. Affiliated companies—companies that are controlled by a single management team through parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent company is included in the total affiliation structure.) Associated companies—companies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent.

5A noncontrolling interest is the equity interest in a subsidiary company that is owned by stockholders outside of the affiliation structure. In other words, it is the equity interest in a subsidiary that is not held by the parent company or subsidiaries of the parent company.

6Under the provisions of FASB Statement No. 94, “Consolidation of All Majority-owned Subsidiaries,” a subsidiary will not be consolidated if control is temporary or if control does not rest with the majority owner, such as in the case of a subsidiary in reorganization or bankruptcy, or when the subsidiary operates under severe foreign exchange restrictions or other governmentally imposed restrictions.

7Consolidated financial statements are intended primarily for the stockholders and creditors of the parent company, according to ARB No. 51.

8The amount of capital stock that appears in a consolidated balance sheet is the total par or stated value of the outstanding capital stock of the parent company.

9Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as a purchase. But goodwill from consolidation would not appear in the general ledger of a parent company or its subsidiary. Goodwill is entered in consolidation working papers when the reciprocal investment and equity amounts are eliminated. Working paper entries affect consolidated financial statements, but they are not entered in any general ledger.

10The parent company’s investment in subsidiary does not appear in a consolidated balance sheet if the subsidiary is consolidated. It would appear in the parent company’s separate balance sheet under the heading “investments” or “other assets.” Investments in unconsolidated subsidiaries are shown in consolidated balance sheets as investments or other assets. They are accounted for under the equity method if the parent can exercise significant influence over the subsidiary; otherwise, they are accounted...
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