Question 1

When a subsidiary in a different line of business from that of the parent is consolidated, the separate financial statements of the subsidiary must be presented in the notes to the consolidated statements.

Accepted Answer

Consolidation involves combining the financial statements of the parent and its subsidiaries into one set of financial statements for the entire group, without the requirement to present the separate financial statements of the subsidiary in the notes. The details about the consolidation process, including eliminations and adjustments, are typically disclosed, but separate financial statements of the subsidiaries are not required to be presented in the notes.

Question 2

When a subsidiary's restricted net assets are more than 25% of consolidated net assets, the Securities and Exchange Commission does not allow that subsidiary to be consolidated.

Accepted Answer

The Securities and Exchange Commission (SEC) does not have a specific rule that prohibits the consolidation of a subsidiary when its restricted net assets exceed 25% of the consolidated net assets. Consolidation decisions are generally based on control and ownership criteria, not the proportion of restricted net assets.

Question 3

When a subsidiary of a publicly owned company is restricted from paying dividends to its parent as a result of U.S. regulatory restraints, the Securities and Exchange Commission does not allow that subsidiary to be consolidated.

Accepted Answer

The Securities and Exchange Commission (SEC) allows a subsidiary to be consolidated with its parent company in the financial statements, even if regulatory restraints prevent the subsidiary from paying dividends to its parent. The consolidation is based on control and ownership, not the ability to transfer funds.

Question 4

When a subsidiary's total assets are more than 25% of total consolidated assets, the separate financial statements of the subsidiary must be presented in the notes to the consolidated statements.

Accepted Answer

The requirement to present separate financial statements of a subsidiary in the notes to the consolidated financial statements is not determined by the subsidiary's asset size relative to the total consolidated assets. Disclosure requirements vary by jurisdiction and accounting framework, but typically focus on significant events, transactions, or relationships, rather than mandating separate financial statements based on asset size thresholds.

Question 5

It may be necessary to consolidate a company in which a publicly owned investor company does not own a majority voting interest.

Accepted Answer

Even if a publicly owned investor company does not own a majority voting interest, consolidation may be necessary if the investor has the ability to exert control over the investee, typically through agreements, the ability to influence significant policies, or other mechanisms that provide the investor with control over the investee.

Question 6

The only way to determine whether control exists is by determining whether a majority of the voting common stock is owned.

Accepted Answer

Control can be determined through various means, not just by owning a majority of the voting common stock. It can also be established through agreements, the ability to appoint key management or board members, or through other mechanisms that allow for the exertion of significant influence over the company's financial and operating policies.

Question 7

The consolidation rules of the Securities and Exchange Commission apply to all U.S. corporations.

Accepted Answer

The consolidation rules of the Securities and Exchange Commission (SEC) specifically apply to publicly traded companies and certain other entities that fall under its regulatory purview, not to all U.S. corporations.

Question 8

A subsidiary can be consolidated even if it has a different year-end than its parent company.

Accepted Answer

Consolidation can still occur despite different fiscal year-ends between a parent company and its subsidiary, as adjustments are made to align the reporting periods for consolidation purposes.

Question 9

A subsidiary can be consolidated only if the subsidiary's year-end is within three months of the parent's year-end.

Accepted Answer

A subsidiary can be consolidated regardless of its year-end being within three months of the parent's year-end, as adjustments can be made to align their financial reporting periods for consolidation purposes.

Question 10

Transactions between a parent and its subsidiaries must be eliminated in consolidation exactly as if the transactions had not occurred.

Accepted Answer

In consolidated financial statements, transactions between a parent and its subsidiaries are eliminated to avoid double counting and to present the financial position and results of operations of the group as a single economic entity.

Question 11

When a consolidated subsidiary of a publicly owned company is restricted from transferring funds to its parent as a result of borrowing arrangements or regulatory restraints, the parent must disclose such restrictions in the notes to the consolidated statements only if the subsidiary's total assets exceed 25% of total consolidated assets.

Accepted Answer

The parent must disclose such restrictions regardless of the size of the subsidiary's assets, as these restrictions can significantly impact the parent company's liquidity and financial flexibility, and thus are relevant to the financial statement users.

Question 12

When a subsidiary of a publicly owned company is restricted from transferring funds to its parent as a result of borrowing arrangements or regulatory restraints, the parent must disclose such restrictions in the notes to the consolidated statements only if the subsidiary's restricted net assets exceed 25% of the total consolidated assets.

Accepted Answer

The parent must disclose such restrictions regardless of the percentage of the subsidiary's restricted net assets in relation to total consolidated assets, as it is a material fact that could affect the financial position of the company.

Question 13

_____ A reason for using the subsidiary form of organization when expanding instead of the branch form of organization is
A) It better limits the ability of foreign taxing authorities to examine the books and records of the domestic operation.
B) It better insulates legally the existing operation from the new operation.
C) A foreign unit's earnings are not taxed in the United States until remitted to the domestic unit.
D) All of the above.
E) None of the above.

Accepted Answer

All the choices listed are valid reasons for preferring a subsidiary form of organization over a branch form when expanding. Choice A addresses the limitation on foreign tax authorities' access to domestic records, Choice B highlights the legal insulation between operations, and Choice C explains the tax advantage regarding foreign earnings.

Question 14

_____ The economic resources (normally) that underlie the parent's investment in a subsidiary are the subsidiary's
A) Assets.
B) Assets, net of any liabilities.
C) Fixed assets.
D) Noncurrent assets.
E) Current assets.

Accepted Answer

The economic resources that underlie the parent's investment in a subsidiary are the subsidiary's assets, net of any liabilities. This reflects the net assets approach, where the value of the investment is considered in terms of the subsidiary's total assets minus its liabilities, providing a more accurate representation of the investment's underlying value.

Question 15

_____ In an aggregated consolidated balance sheet, the subsidiary's individual assets are
A) Shown separately.
B) Not included.
C) Summed with the parent's individual assets.
D) Netted against its liabilities and shown as a net amount.
E) None of the above.

Accepted Answer

In an aggregated consolidated balance sheet, the subsidiary's individual assets are summed with the parent's individual assets to present the financial position of the entire group as if it were a single entity.

Question 16

_____ In a disaggregated consolidated balance sheet, the subsidiary's individual assets are
A) Shown separately.
B) Not included.
C) Summed with the parent's individual assets.
D) Netted against its liabilities and shown as a net amount.
E) None of the above.

Accepted Answer

In a disaggregated consolidated balance sheet, the subsidiary's individual assets are shown separately to provide a detailed view of the financial position, distinguishing between the assets of the parent company and those of the subsidiary.

Question 17

_____ The disaggregated reporting format of presenting a subsidiary's financial statement amounts in the consolidated statements would not serve any useful purpose when the subsidiary is
A) In a different line of business from the parent.
B) In a different line of business from the parent and losing money.
C) Restricted from paying dividends to the parent by regulatory authorities.
D) Located in a foreign country.
E) None of the above.

Accepted Answer

The disaggregated reporting format can be useful in all the scenarios listed (A through D) as it provides detailed information that can help in understanding the financial health and operations of the subsidiary in relation to the parent company, regardless of the subsidiary's business line, profitability, dividend restrictions, or location.

Question 18

_____ A parent generally will not consolidate a subsidiary that
A) Is in an unrelated line of business.
B) Is located in a foreign country.
C) Has a different year-end.
D) Is in bankruptcy proceedings.
E) None of the above.

Accepted Answer

A parent generally will not consolidate a subsidiary that is in bankruptcy proceedings because the control over the subsidiary's operations and financial policies might be significantly limited or transferred to a bankruptcy court, making consolidation inappropriate or impractical.

Question 19

_____ A parent need not consolidate a subsidiary if
A) The subsidiary is economically independent of the parent.
B) More than 50% of the subsidiary's sales are to the parent.
C) The subsidiary's total assets are less than 10% of total consolidated assets.
D) The parent allows the subsidiary to operate freely and independently (a decentralized management philosophy).
E) None of the above.

Accepted Answer

A parent must consolidate a subsidiary unless it does not have control, regardless of economic independence, sales, asset size, or management philosophy.

Question 20

_____ A parent generally will not consolidate a subsidiary that
A) Is unable to distribute dividends because of a cash shortage that is expected to be temporary.
B) Has completely emerged from bankruptcy reorganization proceedings.
C) Has an entirely different board of directors than the parent.
D) Has total assets and earnings that are less than 10% of the parent's total assets and earnings, respectively.
E) None of the above.

Accepted Answer

A parent is expected to consolidate a subsidiary unless specific criteria are met, such as lack of control. The situations described in options A, B, C, and D do not typically exempt a parent from consolidating a subsidiary. Temporary cash shortages, differences in board composition, emergence from bankruptcy, or relative size of assets and earnings do not inherently preclude consolidation.

Quiz 1: Wholly Owned Subsidiaries: at Date of Creation

When a subsidiary in a different line of business from that of the parent is consolidated, the separate financial statements of the subsidiary must be presented in the notes to the consolidated statements.

When a subsidiary's restricted net assets are more than 25% of consolidated net assets, the Securities and Exchange Commission does not allow that subsidiary to be consolidated.

When a subsidiary of a publicly owned company is restricted from paying dividends to its parent as a result of U.S. regulatory restraints, the Securities and Exchange Commission does not allow that subsidiary to be consolidated.

When a subsidiary's total assets are more than 25% of total consolidated assets, the separate financial statements of the subsidiary must be presented in the notes to the consolidated statements.

It may be necessary to consolidate a company in which a publicly owned investor company does not own a majority voting interest.

The only way to determine whether control exists is by determining whether a majority of the voting common stock is owned.

The consolidation rules of the Securities and Exchange Commission apply to all U.S. corporations.

A subsidiary can be consolidated even if it has a different year-end than its parent company.

A subsidiary can be consolidated only if the subsidiary's year-end is within three months of the parent's year-end.

Transactions between a parent and its subsidiaries must be eliminated in consolidation exactly as if the transactions had not occurred.

_____ A reason for using the subsidiary form of organization when expanding instead of the branch form of organization is

_____ The economic resources (normally) that underlie the parent's investment in a subsidiary are the subsidiary's

_____ In an aggregated consolidated balance sheet, the subsidiary's individual assets are

_____ In a disaggregated consolidated balance sheet, the subsidiary's individual assets are

_____ The disaggregated reporting format of presenting a subsidiary's financial statement amounts in the consolidated statements would not serve any useful purpose when the subsidiary is

_____ A parent generally will not consolidate a subsidiary that

_____ A parent need not consolidate a subsidiary if

_____ A parent generally will not consolidate a subsidiary that