Penn Incorporated, a manufacturing company, owns 75 percent of the common stock of Sell Incorporated, an investment company. Sell owns 60 percent of the common stock of Vane Incorporated, an insurance company. In Penn's consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments (assuming there are no side agreements)?

 Penn Incorporated, a manufacturing company, owns 75 percent of the common stock of Sell Incorporated, an investment company. Sell owns 60 percent of the common stock of Vane Incorporated, an insurance company. In Penn's consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments (assuming there are no side agreements)?

Multiple Choice

Consolidation used for Sell and equity method used for Vane.


Consolidation used for both Sell and Vane. Correct

Equity method used for Sell and consolidation used for Vane.


Equity method used for both Sell and Vane.

Explanation
3.

The consolidation method is typically used when ownership is greater than 50% of the common stock of the subsidiary. Penn directly controls Sell and indirectly controls Vane, thus, Sell and Vane should both be consolidated.

(Consolidation used for Sell and equity method used for Vane.) Incorrect. Because Sell owns greater than 50% Vane’s common stock, Vane would be consolidated.
(Equity method used for Sell and consolidation used for Vane.) Incorrect. Because Penn owns greater than 50% Sell’s common stock, Sell would be consolidated.
(Equity method used for both Sell and Vane.) Incorrect. Because Penn owns greater than 50% Sell’s common stock, Sell would be consolidated. Because Sell owns greater than 50% Vane’s common stock, Vane would also be consolidated.