In which of the following cases would consolidation be inappropriate?

 In which of the following cases would consolidation be inappropriate?

Multiple Choice

The subsidiary is in bankruptcy. Correct

Subsidiary's operations are dissimilar from those of the parent.


The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor.


Subsidiary is foreign.

Explanation
The subsidiary is in bankruptcy is correct. Under certain circumstances, a subsidiary’s majority stockholders may not be able to exercise control even though they hold more than 50 percent of its outstanding voting stock. This might occur, for instance, if the subsidiary was in legal reorganization or in bankruptcy; although the parent might hold majority ownership, control would rest with the courts or a court-appointed trustee.

Subsidiary's operations are dissimilar from those of the parent is incorrect. If the subsidiary’s operations are dissimilar from those of the parent, consolidation is still appropriate. Whether to consolidate or not depends on control and does not take into account the type of operations of consolidating companies.

The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor” is incorrect. Consolidation is appropriate in this situation. The parent exercises control over the subsidiary by owning 90% of the subsidiary’s common stock.

Subsidiary is foreign is incorrect. If the subsidiary were located in a foreign country and that country had placed restrictions on the subsidiary that prevented the remittance of profits or assets back to the parent company, consolidation of that subsidiary would not be appropriate because of the parent’s inability to control important aspects of the subsidiary’s operations. However, this question makes no mention of such a situation.