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CHAPTER 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Answers to Questions

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

2 Amounts allocated to identifiable assets and liabilities in excess of recorded amounts on the books of thesubsidiary are not recorded separately by the parent. Instead, the parent records the fair value/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.

3 The 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 total fair value of the subsidiary. 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 still appear in the consolidated balance sheet at $100,000. Under SFAS No. 141R, the noncontrolling interest is alsoreported based on fair values at the acquisition date.

4 Parent company—a corporation that owns a controlling interest in the outstanding voting stock of another corporation (its subsidiary).
Subsidiary company—a corporation that is controlled by a parent company that owns a controlling interest in its outstanding voting stock, either directly or indirectly.
Affiliatedcompanies—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 equityinvestments of 20 percent to 50 percent.

5 A 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 (recorded at fair value) that is not held by the parent company or subsidiaries of the parent company.

6 Under 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.

7 Consolidated financial statements areintended primarily for the stockholders and creditors of the parent company, according to SFAS No. 160 (and ARB No. 51).

8 The 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.

9 Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidationaccounted for as an acquisition. 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.

10 The parentcompany’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...