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

Assume that FMCCs liabilities include $1.2 billion owed to Fixed, the parent company.

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

FMCC (Subsidiary) $170.7 S156.6 14.1 Fixed (Parent) Total liabilitis Total stockholders' equity24.6 Total liabilities and equiy $89.7 S65.1 170.7