In general, consolidated financial statements should be prepared: O whenever the market value of the stock investment is significantly lower than its cost Owhen a corporation owns more than 50% of the common stock of another company when a corporation owns more than 20% of the common stock of another company Oonly when a corporation owns 100% of the common stock of another company
In general, consolidated financial statements should be prepared: O whenever the market value of the stock investment is significantly lower than its cost Owhen a corporation owns more than 50% of the common stock of another company when a corporation owns more than 20% of the common stock of another company Oonly when a corporation owns 100% of the common stock of another company
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter8: Investing Activities
Section: Chapter Questions
Problem 12QE
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Question
![**When Should Consolidated Financial Statements be Prepared?**
Consolidated financial statements are crucial for presenting the overall financial status of a parent company and its subsidiaries as a single entity. Here are situations when these statements should generally be prepared:
1. **Option 1: If the market value of the stock investment is significantly lower than its cost.**
- This option is not generally a trigger for preparing consolidated financial statements. Typically, changes in market value are managed through impairments rather than consolidation.
2. **Option 2: When a corporation owns more than 50% of the common stock of another company.**
- This scenario typically necessitates the preparation of consolidated financial statements. By owning more than 50% of the common stock, the corporation has a controlling interest in the subsidiary, thus requiring consolidation.
3. **Option 3: When a corporation owns more than 20% of the common stock of another company.**
- While significant influence can be exerted with ownership of 20% or more, this usually leads to the equity method of accounting for investments rather than full consolidation unless other control factors are present.
4. **Option 4: Only when a corporation owns 100% of the common stock of another company.**
- Ownership of 100% does lead to consolidation, but it's not the only case. Control—and thus the need for consolidation—can be established with ownership of more than 50%.
In conclusion, consolidated financial statements are generally prepared when a corporation owns more than 50% of the common stock of another company, indicating control over the subsidiary.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F94589190-d7d8-41be-9c6e-d2d51b756765%2F500678f8-dee1-41b5-a165-629601b57fcf%2Fgy8yw4s_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**When Should Consolidated Financial Statements be Prepared?**
Consolidated financial statements are crucial for presenting the overall financial status of a parent company and its subsidiaries as a single entity. Here are situations when these statements should generally be prepared:
1. **Option 1: If the market value of the stock investment is significantly lower than its cost.**
- This option is not generally a trigger for preparing consolidated financial statements. Typically, changes in market value are managed through impairments rather than consolidation.
2. **Option 2: When a corporation owns more than 50% of the common stock of another company.**
- This scenario typically necessitates the preparation of consolidated financial statements. By owning more than 50% of the common stock, the corporation has a controlling interest in the subsidiary, thus requiring consolidation.
3. **Option 3: When a corporation owns more than 20% of the common stock of another company.**
- While significant influence can be exerted with ownership of 20% or more, this usually leads to the equity method of accounting for investments rather than full consolidation unless other control factors are present.
4. **Option 4: Only when a corporation owns 100% of the common stock of another company.**
- Ownership of 100% does lead to consolidation, but it's not the only case. Control—and thus the need for consolidation—can be established with ownership of more than 50%.
In conclusion, consolidated financial statements are generally prepared when a corporation owns more than 50% of the common stock of another company, indicating control over the subsidiary.
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