Reference no: EM131797467

Assignment

Analyzing and Interpreting Disclosures on Consolidations (L03)

Snap-on Incorporated consists of two business units: the manufacturing company (parent corporation) and a wholly-owned finance subsidiary. These two units are consolidated in Snap-on's 10-K report. Following is a supplemental disclosure that Snap-on includes in its 10-K report that shows the separate balance sheets of the parent and the subsidiary. This supplemental disclosure is not mandated under GAAP, but is voluntarily reported by Snap-on as useful information for investors and creditors. Using this disclosure, answer the following requirements:

Required

a. Do the parent and subsidiary companies each maintain their own financial statements? Explain. Why does GAAP require consolidation instead of separate financial statements of individual companies?

b. What is the balance of Investments in Financial Services as of December 31, 2012, on the parent's balance sheet? What is the equity balance of the financial services subsidiary to which this relates as of December 31, 2012? Do you see a relation? Will this relation always exist?

c. Refer to your answer for part a. How does the equity method of accounting for the investment in the subsidiary obscure the actual financial condition of the parent company as compared to the consolidated financial statements?

d. Recall that the parent company uses the equity method of accounting for its investment in the subsidiary, and that this account is eliminated in the consolidation proress. What is the relation between consolidated net income and the net income of the parent company? Explain.

e. What is the implication for the consolidated balance sheet if the fair value of the Financial Services subsidiary (subsequent to acquisition) is greater than the book value of its stockholders' equity?

	Operations*		Financial Services
(Amounts in millions)	2012	2011	2012	2011
ASSETS
Current assets
Cash and cash equivalents	$ 211.2	$ 181.1	$ 3.3	$ 4.5
Intersegment receivables	14.1	10.8	-	-
Trade and other accounts receivable-net	497.5	463.3	0.4	0.2
Finance receivables-net	-	-	323.1	277.2
Contract receivables-net	7.4	6.5	55.3	43.2
Inventories-net	404.2	386.4	-	-
Deferred income tax assets	68.8	90.0	13.0	2.6
Prepaid expenses and other assets	88.3	78.1	1.0	0.9
Total current assets	1,291.5	1,216.2	396.1	328.6
Property and equipment-net	373.2	351.9	2.0	1.0
Investment in Financial Services	165.3	142.0	-	-
Deferred income tax assets	110.2	119.8	0.2	5.4
Long-term finance receivables-net	-	-	494.6	431.8
Long-term contract receivables-net	12.1	9.1	182.3	156.0
Goodwill	807.4	795.8	-	-
Other intangibles-net	187.2	188.3	-	-
Other assets	65.3	83.7	1.1	1.0
Total assets	$3,012.2	$2,906.8	$1,076.3	$ 923.8
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable	5.2	$ 16.2	$ -	$ -
Accounts payable	142.1	124.0	0.4	0.6
Intersegment payables	-	-	14.1	10.8
Accrued benefits	50.6	48.8	-	-
Accrued compensation	84.9	87.1	3.4	3.9
Franchisee deposits	54.7	47.3	-	-
Other accrued liabilities	207.8	229.7	46.9	31.1
Total current liabilities	545.3	553 1	64.8	46.4
Long-term debt and intersegment long-term debt	143.2	257.6	827.2	710.3
Deferred income tax liabilities	125.7	108.0	1.4	0.1
Retiree health care benefits	48.4	52.8	-	-
Pension liabilities	260.7	317.7	-	-
Other long-term liabilities	69.9	70.3	17.6	25.0
Total liabilities	1,193.2	1,359.5	911.0	781.8
Total shareholders' equity attributable to Snap-on Inc	1,802.1	1,530.9	165.3	142.0
Noncontrolling interests	16.9	16.4
Total shareholders' equity	1,819.0	1,547.3	165.3	142.0
Total liabilities and shareholders' equity	$3,012.2	$2,906.8	$1,076.3	$ 923.8

*Snap-on Incorporated with Financial Services on the equity method.