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

Assume that SMCC’s liabilities include $1.9 billion owed to Spindler, the parent company.

1. Compute the debt ratio of Spindler Motor Company considered alone.
2. Determine the consolidated total assets, total liabilities, and stockholders’ equity of Spindler Motor Company after consolidating the financial statements of SMCC into the totals of Spindler, 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?

  • CreatedApril 22, 2013
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