This problem demonstrates the dramatic effect that consolidation accounting can have on a company's ratios. ABC Company owns 100% of ABC Credit Corporation, its financing subsidiary. ABC's main operations consist of manufacturing automotive products. ABC Credit Corporation mainly helps people finance the purchase of automobiles from ABC and its dealers. The two companies' individual balance sheets are adapted and summarized as follows (amounts in billions):
_________________________________________ABC (Parent) ________ABC Credit
_____________________________________________________________(Subsidiary)
Total assets...................................................................... $94.8 ................... $179.0
Total liabilities................................................................ $68.4 ................... $164.7
Total shareholders' equity................................................ 26.4 ...................... 14.3
Total liabilities and equity............................................... $94.8 .................. $179.0
Requirements
1. Compute the debt ratio of ABC Company considered alone.
2. Determine the consolidated total assets, total liabilities, and shareholders' equity of ABC Company after consolidating the financial statements of ABC Credit into the totals of ABC, the parent company.
3. Re-compute the debt ratio of the consolidated entity. Why do companies prefer not to consolidate their financing subsidiaries into their own financial statements?