Question: Exhibit 14.11 presents a spreadsheet that
Exhibit 14.11 presents a spreadsheet that we use to compare the effects of using the equity method with using consolidated financial statements. The Web site for this book contains an Excel spreadsheet that duplicates the one in Exhibit 14.11. Download this spreadsheet in preparing your solution to this exercise. You will change only the cell marked in yellow. a. For this part, assume that Parent owns 80% of Sub. Respond to the following questions:
(1) Why is net income the same independent of whether Parent uses the equity method or prepares consolidated financial statements with Sub?
(2) Why is the ratio of liabilities to assets higher if Parent prepares consolidated financial statements with Sub than when it uses the equity method?
b. For this part, change Parent’s ownership interest in Sub from 80% to 60%. Respond to the following questions:
(1) Why does net income decrease for the change in ownership percentage, independent of whether Parent uses the equity method or prepares consolidated financial statements?
(2) Why do total assets using the equity method decrease but total assets on the consolidated balance sheet remain the same with the decrease in the ownership percentage?
(3) Why do total liabilities using the equity method remain the same with the decrease in the ownership percentage?
(4) Why do total liabilities on the consolidated balance sheet remain the same with the decrease in the ownership percentage?
(5) Why does total shareholders’ equity decrease using the equity method but remain the same on the consolidated balance sheet with the decrease?
(6) Why does the ratio of liabilities to assets on the consolidated balance sheet remain the same with the decrease in the ownership percentage?
Exhibit 14.11:
Transcribed Image Text:
Spreadsheet for Studying the Effects of the Equity Method and Consolidation (Exercise 25) EXHIBIT 14.11 1 [Third column not meaningful unless ownership exceeds 50%] To see how things change, alter this number 80.0% Equity Method Percent Owned Sub Parent Only 4 Income Statement Consolidated Revenues $1,000 $ 400 $ 1,400 Equity in Earnings of Sub 80 Expenses (700) (300) (1,000) 8. Noncontrolling Interest in Net Income of Sub [Note A] (20) Net Income.. $ 380 $ 100 %24 9 380 Note A: Noncontrolling Interest Owns (1 – Parent's Fraction) 10 20.0% 11 Balance Sheet $3,000 $ 5,000 12 Assets, Other Than Investment in Sub.. $2,000 13 Investment in Sub 400 ....... Total Assets... $3,400 $2,000 $ 5,000 14 15 Total Liabilities .. $1,800 $1,500 $ 3,300 16 Noncontrolling Interest in Net Assets of Sub 100 Shareholders' Equity....... 17 1,600 500 1,600 Total Liabilities and Shareholders' Equity. $3,400 $2,000 $ 5,000 18 3. 6. 7,
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