Chapter 16 - Solution Manual

B it is probable that through the rate making process

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b. It is probable that, through the rate-making process, future revenue approximately equal to the sales price will result from the regulated affiliate's use of the products. 45-2 The sales price usually shall be considered reasonable if the price is accepted or not challenged by the regulator that governs the regulated affiliate. Otherwise, reasonableness shall be considered in light of the circumstances. For example, reasonableness might be judged by the return on investment
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356 earned by the manufacturing or construction operations or by a comparison of the transfer prices with prices available from other sources. Room for Debate Debate 16-1 Team 1 Argue in favor of presenting the noncontrolling interest as an element of stockholders’ equity The reporting of noncontrolling interest as an element of stockholders’ equity is consistent with the entity theory. According to entity theory, the consolidated group (parent company and subsidiaries) is an entity, separate from its owners. Thus, the emphasis is on control of the group of legal entities operating as a single unit. Consolidated net assets and the change in them (income) belongs to and is controlled by the consolidated entity. Consolidated assets belong to the consolidated entity, consolidated liabilities are obligations of the consolidated entity, and the income generated by investing in the consolidated assets is income to the consolidated entity rather than to the parent company stockholders. Consequently, the purpose of consolidated financial statements is to provide information to all shareholders - parent company stockholders and outside noncontrolling stockholders of the subsidiary companies. Entity theory implies that all stockholders are stockholders in the consolidated group - i.e., that noncontrolling interest is an equity interest. The consolidated entity is considered as one economic unit, and noncontrolling stockholders contribute resources to the unit in the same manner as parent company stockholders. Noncontrolling stockholders have the same characteristics as parent company stockholders. Their interest is enhanced or burdened by changes in net assets from nonowner sources - a prerequisite for equities as defined and described in SFAC No. 6. For noncontrolling interest which owns common stock, they have the four basic rights of common stock inherent in the common stock of the parent company. They have the right to vote, to share in profits, to share in liquidation, and the preemptive right. The FASB defined minority interest (here termed noncontrolling interest) as meeting the definition of equity. Recently the FASB issued an exposure draft in which they reiterated this position. Noncontrolling interest does not meet the definition of a liability. It embodies no obligation for the future transfer of assets unless a dividend is declared (no different from parent company shares). If noncontrolling interest does not meet the definition of a liability and it is not an asset, under the present accounting model, it must be equity.
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