Agee Company purchased 70% of the outstanding common stock of Himes Corporations.
Instructions
- Explain the relationship between Agee Company and Himes Corporation.
- How should Agee account for its investment in Himes?
- Why is the accounting treatment described in (b) useful?
Solution
Given:
Agee Company purchased 70% of the outstanding common stock of Himes Corporation.
(a) Relationship between Agee Company and Himes Corporation
Because Agee Company owns 70% of Himes Corporation's outstanding common stock, Agee has a controlling interest in Himes.
- Agee Company = Parent company
- Himes Corporation = Subsidiary company
- 30% = Noncontrolling interest (NCI)
(b) How should Agee account for its investment in Himes?
Agee should account for Himes as a subsidiary and prepare consolidated financial statements.
The consolidated financial statements combine the financial statements of Agee and Himes as though they were one economic entity.
Himes's assets, liabilities, revenues, and expenses are included in the consolidated financial statements. The 30% noncontrolling interest is reported separately.
(c) Why is this accounting treatment useful?
Consolidated financial statements are useful because they provide financial information about Agee and Himes as a single economic entity.
- Total assets and liabilities controlled by Agee are presented.
- Combined revenues and expenses are reported.
- The financial position of the entire group is shown.
- The portion of Himes owned by outside shareholders is identified.
Final Answer
| Question | Answer |
|---|---|
| (a) | Agee is the parent, and Himes is its subsidiary because Agee owns 70%. |
| (b) | Agee should consolidate Himes in its consolidated financial statements and recognize the 30% noncontrolling interest. |
| (c) | Consolidation presents Agee and Himes as one economic entity, providing more complete financial information to users. |
