Effects of Consolidation on Selected Accounts and Ratios
Selected items from the unconsolidated financial statements of Mammoth Motors Company and its wholly owned subsidiary, Chattel Credit Corp., are provided below. Mammoth uses the equity method to account for its investment in Chattel, and the investment cost is equal to Chattel’s book value of shareholders’ equity.
| Mammoth | Chattel | |
| Motors Co. | Credit Corp. | |
| (Dollars in millions) | ||
| Total assets (including investments) | $29,000 | $18,500 |
| Total liabilities | 15,500 | 17,700 |
| Total shareholders’ equity | 13,500 | 800 |
| Sales | 54,000 | 10,200 |
| Interest expense | 4,000 | — |
| Net income | 3,000 | 1,100 |
Required
a. Determine how the following items would be valued in Mammoth Motors’ consolidated financial statements:
b. Contrast the following financial ratios of Mammoth Motors before and after consolidation with Chattel Credit:
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