Aceco has significant investments in three separate entities. These investments are:
1. 40% ownership of the voting stock of Kapco.
2. 60% ownership of the voting stock of Placo.
3. 100% ownership of the voting stock of Simco
Which of Aceco's investments would be consolidated with Aceco in its consolidated financial statements?
A. Simco only.
B. Placo and Simco.
C. Kapco, Placo, and Simco.
D. Kapco only.
The correct answer is B. Placo and Simco.
In order for an investment to be consolidated with the parent company in its consolidated financial statements, the parent company must have control over the investee. Control is typically determined by ownership of over 50% of the voting stock.
In this scenario, Aceco has 60% ownership of the voting stock of Placo and 100% ownership of the voting stock of Simco, making them both eligible for consolidation. However, Aceco only has 40% ownership of the voting stock of Kapco, so it does not have control over Kapco and therefore would not consolidate its financial statements.
To determine which investments would be consolidated with Aceco in its consolidated financial statements, we need to consider the concept of control. Generally, control exists when one entity has the power to govern the financial and operating policies of another entity to obtain benefits from its activities.
Based on the information provided, Aceco has the following ownership percentages:
1. 40% ownership of the voting stock of Kapco: Aceco does not have a controlling interest in Kapco, as it owns only 40% of the voting stock. Therefore, Kapco would not be consolidated.
2. 60% ownership of the voting stock of Placo: Aceco has a controlling interest in Placo, as it owns 60% of the voting stock. Therefore, Placo would be consolidated.
3. 100% ownership of the voting stock of Simco: Aceco has a controlling interest in Simco, as it owns 100% of the voting stock. Therefore, Simco would also be consolidated.
Based on the above analysis, the investments that would be consolidated with Aceco in its consolidated financial statements are:
B. Placo and Simco.