978-0078025877 Chapter 3 Solution Manual Part 1

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

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

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

.

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.

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

.