Caterpillar Inc., consists of two business units: the manufacturing company (parent corporation) and a wholly owned finance subsidiary. These two units are consolidated in Caterpillar's 2018 10-K report. Following is a supplemental disclosure that Caterpillar includes in its 10-K report that shows the separate balance sheets of the parent and its subsidiary, as well as consolidating adjustments and the consolidated balance sheet presented to shareholders. This supplemental disclosure is not mandated under GAAP, but is voluntarily reported by Caterpillar as useful information for investors and creditors.

REQUIRED:

a. Does each individual company (unit) maintain its own financial statements? Explain. Why does GAAP require consolidation instead of providing the financial statements of individual companies (units)?

b. What is the balance of Investments in Financial Products Subsidiaries as of December 31, 2018, on the parent's balance sheet (Machinery, Energy & Transportation)? What is the equity balance of the financial products subsidiary to which this relates as of December 31, 2018? Do you see a relation? Will this relation always exist?

c. Refer to your answer for a. How does the equity method of accounting for the investment in the subsidiary company obscure the actual financial condition of the parent company that is revealed in the consolidated financial statements?

d. Refer to the Consolidating Adjustments column reported-it is used to prepare the consolidated balance sheet. Generally, what do these adjustments accomplish?

e. Compare the consolidated balance of stockholders' equity with the stockholders' equity of the parent company (Machinery, Energy & Transportation). Will the relation that is evident always hold? Explain.

f. Recall that the parent company uses the equity method of accounting for its investment in the subsidiary, and that this account is eliminated in the consolidation process. What is the relation between consolidated net income and the net income of the parent company? Explain. 

g. What do you believe is the implication for the consolidated balance sheet if the fair value of the Financial Products subsidiary is greater than the book value of its stockholders' equity?

Transcribed Image Text:

Supplemental Consolidating Data Machinery, Energy & Consolidated Transportation Products Adjustments Financial Consolidating Assets Current assets $ 6,968 4,677 $ 889 Cash and short-tem investments.. $ 7,857 Receivables-trade and other. 8,802 401 3,724 Receivables-finance... 13,989 (5,339) (45) 8,650 - Prepaid expenses and other current assets Inventories 1,765 1,227 11,529 583 11,529 Total current assets 38,603 24,401 15,862 (1,660) Property, plant and equipment-net. 13,574 9,085 4,489 Long-term receivables-trade and other Long-term receivables-finance..... 1,161 302 204 655 13,286 13,951 (665) (3,672) Investments in Financial Products subsidiaries 3,672 | Noncurrent deferred and refundable income taxes 1,439 2,015 116 (692) Intangible assets... 1,897 1,897 Goodwill .. 6,217 6.217 Other assets. 2,332 886 1,446 Total assets. S78,509 $48,475 $36,068 $(6,034) Liabilities Current liabilities Short-term borrowings ... Short-term borrowings with consolidated companies Accounts payable. Accrued expenses $ 5,723 $ 5,723 (1,500) (115) 1,500 7,051 3,573 6,972 3,212 194 361 2,384 1,243 Accrued wages, salaries, and employee benefits. Customer advances. Dividends payable. Other current liabilities 2,350 1,243 34 495 495 1,919 5,830 1,532 433 (46) Long-tem debt due within one year 10 5,820 Total current liabilities. 14,065 28,218 25,000 7,455 3,756 15,814 ৪,015 7,455 3,111 (1,661) (10) Long-term debt due after one year. Liability for postemployment benefits. Other liabilities . 16,995 1,336 (691) Total liabilities. . Stockholders' equity 64,429 34,395 32,396 (2,362) %24