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

Assume that RMCC’s liabilities include $1.5 billion owed to Roto, the parent company.

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