Consolidation of Balance Sheets
Selected items from the unconsolidated financial statements of Tipton Financial Services, Inc., and its wholly owned subsidiary are provided below. Tipton accounts for its investment in Smartcom, Inc., using the equity method. Its investment cost is equal to Smartcom’s net asset book value (shareholders’ equity).
|
Tipton |
Smartcom |
|
|
(Dollars in thousands) |
||
|
Total assets (including the investment) |
$ 420,000 |
$210,000 |
|
Total liabilities |
230,000 |
190,000 |
|
Total shareholders’ equity |
190,000 |
20,000 |
|
Sales |
1,200,000 |
575,000 |
|
Interest expense |
40,000 |
30,000 |
|
Net income |
24,000 |
100 |
Required
a. Combine the two unconsolidated companies’ financial statements and show the consolidated financial statements of Tipton, similar to Exhibit 13-2. Remember to eliminate Tipton’s investment against Smartcom’s shareholders’ equity.
b. Calculate the following ratios for Tipton before and after consolidation:
- Debt-to-total assets ratio
- Return on shareholders’ equity ratio (use ending shareholders’ equity to approximate the average)
c. Comment on any differences in these ratios before and after consolidation.