Q$3-1$ What is the basic idea underlying the preparation of consolidated financial statements?

Q$3-4$ What is meant by parent company? When is a company considered to be a parent?

Q$3-7$ What major criteria must be met before a company is consolidated?

E$3-1$ Multiple$-$Choice Questions on Consolidation Overview $[$AICPA Adapted$]$ Select the correct answer for each of the following questions. $1.$ When a parent$$subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of a$.$ Reliability. b$.$ Materiality. c$.$ Legal entity. d$.$ Economic entity. $2.$ Consolidated financial statements are typically prepared when one company has a controlling interest in another unless a$.$ The subsidiary is a finance company. b$.$ The fiscal year$-$ends of the two companies are more than three months apart. c$.$ Circumstances prevent the exercise of control. d$.$ The two companies are in unrelated industries, such as real estate and manufacturing. $3.$ Penn Inc., a manufacturing company, owns $75$ percent of the common stock of Sell Inc., an investment company. Sell owns $60$ percent of the common stock of Vane Inc., an insurance company. In Penn$$s consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments $($assuming there are no side agreements$)?$ a$.$ Consolidation used for Sell and equity method used for Vane. b$.$ Consolidation used for both Sell and Vane. c$.$ Equity method used for Sell and consolidation used for Vane. d$.$ Equity method used for both Sell and Vane. $4.$ Which of the following is the best theoretical justification for consolidated financial statements? a$.$ In form, the companies are one entity; in substance, they are separate. b$.$ In form, the companies are separate; in substance, they are one entity. c$.$ In form and substance, the companies are one entity. d$.$ In form and substance, the companies are separate.

P$3-19$ Multiple$-$Choice Questions on Consolidated and Combined Financial Statements $[$AICPA Adapted$]$ Select the correct answer for each of the following questions. $1.$ What is the theoretically preferred method of presenting a noncontrolling interest in a consoli dated balance sheet? a$.$ As a separate item within the liability section. b$.$ As a deduction from $($contra to$)$ goodwill from consolidation, if any. c$.$ By means of notes or footnotes to the balance sheet. d$.$ As a separate item within the stockholders$$ equity section. $2.$ Mr$.$ Cord owns four corporations. Combined financial statements are being prepared for these corporations, which have intercompany loans of $$200,000$ and intercompany profits of $$500,000.$ What amount of these intercompany loans and profits should be included in the com bined financial statements? Intercompany Loans Profits a$.$ $$200,000$ $ $0$ b$.$ $$200,000$ $$500,000$ c$.$ $ $0$ $ $0$ d$.$ $ $0$ $$500,000$