E3-1 Multiple-Choice Questions on Consolidation Overview [AICPA Adapted] Select the correct answer for each of the following questions. 1. When a parentsubsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of a. Reliability. b. Materiality. c. Legalentity. 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 Penns consolidated statements, should consolidation accounting or equity- method accounting be used for Sell and Vane? 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. Shep Company has a receivable from its parent, Pep Company. Should this receivable be sepa- rately reported on Sheps balance sheet and in Peps consolidated balance sheet? Sheps Balance Sheet Peps Consolidated Balance Sheet a. Yes b. Yes c. No No d. No Yes 5. 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