Chapter 3 - Copy

Chapter 3 - Copy - CHAPTER 3 Note The letter A or B...

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CHAPTER 3 Note: The letter A or B indicated for a question, exercise, or problem means that the question, exercise, or problem relates to a chapter appendix. ANSWERS TO QUESTIONS 1. (1) Stock acquisition is greatly simplified by avoiding the lengthy negotiations required in an exchange of stock for stock in a complete takeover. (2) Effective control can be accomplished with more than 50% but less than all of the voting stock of a subsidiary; thus the necessary investment is smaller. (3) An individual affiliate’s legal existence provides a measure of protection of the parent’s assets from attachment by creditors of the subsidiary. 2. The purpose of consolidated financial statements is to present, primarily for the benefit of the shareholders and creditors of the parent company, the results of operations and the financial position of a parent company and its subsidiaries essentially as if the group were a single company with one or more branches or divisions. The presumption is that these consolidated statements are more meaningful than separate statements and necessary for fair presentation. Emphasis then is on substance rather than legal form, and the legal aspects of the separate entities are therefore ignored in light of economic aspects. 3. Each legal entity must prepare financial statements for use by those who look to the legal entity for analysis. Creditors of the subsidiary will use the separate statements in assessing the degree of protection related to their claims. Noncontrolling shareholders, too, use these individual statements in determining risk and the amounts available for dividends. Regulatory agencies are concerned with the net resources and results of operations of the individual legal entities. 4. (1) Control should exist in fact, through ownership of more than 50% of the voting stock of the subsidiary. (2) The intent of control should be permanent. If there are current plans to dispose of a subsidiary, then the entity should not be consolidated. (3) Majority owners must have control. Such would not be the case if the subsidiary were in bankruptcy or legal reorganization, or if the subsidiary were in a foreign country where political forces were such that control by majority owners was significantly curtailed. 5. Consolidated workpapers are used as a tool to facilitate the preparation of consolidated financial statements. Adjusting and eliminating entries are entered on the workpaper so that the resulting consolidated data reflect the operations and financial position of two or more companies under common control. 6. Noncontrolling interest represents the equity in a partially owned subsidiary by those shareholders who are not members in the affiliation and should be accounted and presented in equity, separately from the parents’ shareholders equity. Alternative views have included: presenting the noncontrolling interest as a liability from the perspective of the controlling shareholders; presenting the noncontrolling
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This note was uploaded on 07/31/2011 for the course ACCT 401 taught by Professor Bennett during the Spring '08 term at Strayer.

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Chapter 3 - Copy - CHAPTER 3 Note The letter A or B...

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