This problem demonstrates the dramatic effect that consolidation accounting can have on a company’s ratios. Space Motor Company (Space) owns 100% of Space Motor Credit Corporation (SMCC), its financing subsidiary. Spaces main operations consist of manufacturing automotive products. SMCC mainly helps people finance the purchase of automobiles from Space and its dealers. The two companies’ individual balance sheets are adapted and summarized as follows (amounts in billions):

Assume that SMCCs liabilities include $1.7 billion owed to Space, the parent company.

1. Compute the debt ratio of Space Motor Company considered alone.
2. Determine the consolidated total assets, total liabilities, and stockholders equity of Space Motor Company after consolidating the financial statements of SMCC into the totals of Space, the parent company.
3. Recompute the debt ratio of the consolidated entity. Why do companies prefer not to consolidate their financing subsidiaries into their own financialstatements?

  • CreatedDecember 10, 2012
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