1. When does a corporation become a subsidiary of another corporation?
A corporation becomes a subsidiary when another corporation acquires a controlling financial interest (generally over 50 percent) of its outstanding voting stock.
2. In allocating the excess of investment fair value over book value of a subsidiary, are the amounts allocated to identifiable assets and liabilities (land and notes payable, for example) recorded separately in the accounts of the parent? Explain.
Amounts assigned to identifiable assets and liabilities in excess of recorded amounts on the books of the subsidiary are not recorded separately by the parent. The parent records the fair value/purchase price of the interest acquired in an investment account.
3. Define or explain the terms parent company, subsidiary company, affiliates, and associates. 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 that owns a controlling interest in its outstanding voting stock, either directly or indirectly. Affiliates—companies that are controlled by a single management team through parent-subsidiary relationships. (Although the term affiliate is a synonym for subsidiary, the parent is included in the total affiliation structure.) In many annual reports, the term includes all investments accounted for by the equity method. Associates—companies that are controlled through parent-subsidiary relationships or whose operations can be significantly influenced through equity investments of 20 percent to 50 percent.
5. What is a non-controlling interest? A noncontrolling interest is the equity interest in a subsidiary that is owned by stockholders outside of the affiliation structure.
6. Describe the circumstances under which the accounts of a subsidiary would not be included in the consolidated financial statements. Under GAAP, a subsidiary will not be consolidated if control does not rest with the majority owner.
7. Who are the primary users for which consolidated financial statements are intended?
Consolidated financial statements are intended primarily for the stockholders and creditors of the parent, according to GAAP.
8. What amount of capital stock is reported in a consolidated balance sheet? The amount of capital stock that appears in a consolidated balance sheet is the total par
9. In what general ledger would you expect to find the account “goodwill from consolidation”?
Goodwill from consolidation may appear in the general ledger of the surviving entity in a merger or consolidation accounted for as an acquisition.
10. Name some reciprocal accounts that might be found in the separate records of a parent and its subsidiaries.
Investment in subsidiary
Advance to subsidiary
Reciprocal accounts on subsidiary’s books:
Capital stock and retained earnings
Advance from parent
1. A 75 percent-owned subsidiary should not be consolidated when:
a. Its operations are dissimilar from those of the parent company
b. Control of the subsidiary does not lie with the parent company
c. There is a dominant non-controlling interest in the subsidiary
d. Management feels that consolidation would not provide the most meaningful financial statements
2. An 80 percent owned subsidiary that cannot be consolidated must be accounted for:
a. Under the equity method
b. Under the cost method
c. Under the equity method if the parent exercises significant influence over the subsidiary
d. At market value if the subsidiary is in bankruptcy
3. Consolidated statements for Por Corporation and its 60 percent-owned investee, Spy Company, will not be prepared under current GAAP if:
a. The fiscal periods of Por and Spy are more than