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Chapter 03 - The Reporting Entity and Consolidation of Less-Than-Wholly-Owned Subsidiaries with no Differential
CHAPTER 3
Q3-1 The basic idea underlying the preparation of consolidated financial statements is the
company.
Q3-2 Without consolidated statements it is often very difficult for an investor to gain an
understanding of the total resources controlled by a company. A consolidated balance sheet
Q3-3 Parent company shareholders are likely to find consolidated statements more useful.
Noncontrolling shareholders may gain some understanding of the basic strength of the overall
Q3-4 A parent company has the ability to exercise control over one or more other entities.
Under existing standards, a company is considered to be a parent company when it has direct
Q3-5 Creditors of the parent company have primary claim to the assets held directly by the
parent. Short-term creditors of the parent are likely to look only at those assets. Because the
Q3-6 When one company holds a majority of the voting shares of another company, the
investor should have the power to elect a majority of the board of directors of that company and
Q3-7 The primary criterion for consolidation is the ability to directly or indirectly exercise
control. Control normally has been based on ownership of a majority of the voting common
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
Q3-8 Consolidation is not appropriate when control is temporary or when the parent cannot
exercise control. For example, if the parent has agreed to sell a subsidiary or plans to reduce its
Q3-9 Strict adherence to consolidation standards based on majority ownership of voting
common stock has made it possible for companies to use many different forms of control over
Q3-10 Special-purpose entities are corporations, trusts, or partnerships created for a single
specified purpose. They usually have no substantive operations and are used only for financing
Q3-11 Variable interest entities normally are not involved in general business activities such as
producing products and selling them to customers. They often are used to acquire financial
Q3-12 ASC 810-10-20 provides a number of guidelines to be used in determining when a
Q3-13 Indirect control occurs when the parent controls one or more subsidiaries that, in turn,
Q3-14 It is possible for a company to exercise control over another company without holding a
majority of the voting common stock. Contractual agreements, for example, may provide a
control.
Q3-15 Subsidiary shares held by the parent are not owned by an outside party and therefore
cannot be reported as shares outstanding. Those held by the noncontrolling shareholders are
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
Q3-16 While it is not considered appropriate to consolidate if the fiscal periods of the parent
Q3-17 The noncontrolling interest represents the claim on the net assets of the subsidiary
Q3-18 The procedures used in preparing consolidated and combined financial statements may
be virtually identical. In general, consolidated statements are prepared when a parent company
either directly or indirectly controls one or more subsidiaries. Combined financial statements are
.
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C3-1 Computation of Total Asset Values
The relationship observed should always be true. Assets reported by the parent company
C3-2 Accounting Entity [AICPA Adapted]
(2) Product lines or other segments of an enterprise, such as a division, department, profit
(3) Most large corporations issue consolidated financial reports. These statements often
(4) Although the accounting entity often is defined in terms of a business enterprise that is
separate and distinct from other activities of the owner or owners, it also is possible for an
(5) The entire economy of the United States also can be viewed as an accounting entity.
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
E3-1 Multiple-Choice Questions on Consolidation Overview
1. d – Consolidated financial statements are intended to provide a meaningful representation of
the overall position and activities of a single economic entity comprising a number of
separate legal entities (subsidiaries).
2. c – Under certain circumstances, a company can lose the ability to exercise control of a
subsidiary even when a controlling interest is held. For example, if the subsidiary were
under a legal reorganization or bankruptcy. As long as control cannot be exercised,
3. b – The consolidation method is typically used when ownership is greater than 50% of the
common stock of the subsidiary. Penn directly controls Sell and indirectly controls Vane,
thus, Sell and Vane should both be consolidated.
4. b – The companies are each separate legal entities, but in substance they are one economic
entity
.
