Total assets reported by the parent generally will be less than total assets reported on the consolidated balance sheet.

 2. Which of the following is correct?

Multiple Choice

The noncontrolling shareholders’ claim on the subsidiary’s net assets is based on the book value of the subsidiary’s net assets.


Only the parent’s portion of the difference between book value and fair value of the subsidiary’s assets is assigned to those assets.


Goodwill represents the difference between the book value of the subsidiary’s net assets and the amount paid by the parent to buy ownership.


Total assets reported by the parent generally will be less than total assets reported on the consolidated balance sheet.

Correct Answer

Total assets reported by the parent generally will be less than total assets reported on the consolidated balance sheet.

Explanation


Because the consolidated balance sheet contains the assets of the parent company as well as the assets of the subsidiary, total assets of the parent company will always be less than total assets reported on the consolidated balance sheet.

(The noncontrolling shareholders’ claim on the subsidiary’s net assets is based on the book value of the subsidiary’s net assets.) Incorrect. The noncontrolling shareholders’ claim on the subsidiary’s net assets is based on the fair value of the net assets, not the book value.
(Only the parent’s portion of the difference between book value and fair value of the subsidiary’s assets is assigned to those assets.) Incorrect. The entire differential is assigned and proportionately allocated to both the parent and the noncontrolling interest’s respective share.
(Goodwill represents the difference between the book value of the subsidiary’s net assets and the amount paid by the parent to buy ownership.) Incorrect. Goodwill represents the difference between the fair value of the subsidiary’s net assets and the amount paid by the parent to buy ownership.

 

3. Which of the following statements is correct?

Multiple Choice

Foreign subsidiaries do not need to be consolidated if they are reported as a separate operating group under segment reporting.


Consolidated retained earnings do not include the noncontrolling interest’s claim on the subsidiary’s retained earnings.

Correct

The noncontrolling shareholders’ claim should be adjusted for changes in the fair value of the subsidiary assets but should not include goodwill.


Consolidation is expected any time the investor holds significant influence over the investee.

Answer

Consolidated retained earnings do not include the noncontrolling interest’s claim on the subsidiary’s retained earnings.

Explanation

The only amount included in the consolidated retained earnings balance is the retained earnings balance from the parent’s books.

(Foreign subsidiaries do not need to be consolidated if they are reported as a separate operating group under segment reporting.) Incorrect. Foreign subsidiaries are still required to be consolidated even if they are reported as a separate operating segment. However, if laws of the foreign country prevented the parent from exercising control, the foreign subsidiary would not be consolidated.
(The noncontrolling shareholders’ claim should be adjusted for changes in the fair value of the subsidiary assets but should not include goodwill.) Incorrect. The noncontrolling shareholders’ claim on the net assets does include their proportionate share of goodwill that results in the acquisition.
(Consolidation is expected any time the investor holds significant influence over the investee.) Incorrect. Consolidation is only required when control is held over the subsidiary, not just significant influence.