(Learning Objective 3: Analyzing consolidated fi nancial statements) 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 fi nancing subsidiary. Space’s main operations consist of manufacturing automotive products. SMCC mainly helps people fi nance 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 SMCC’s liabilities include €1.7 billion owed to Space, the parent company.

❙ Requirements 1. Compute the debt ratio of Space Motor Company considered alone.
2. Determine the consolidated total assets, total liabilities, and shareholders’ equity of Space Motor Company after consolidating the fi nancial 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 fi nancing subsidiaries into their own fi nancial statements?