Penn, Inc., a manufacturing company, owns 75% of the common stock of Sell, Inc., an investment company. Sell owns 60% of the common stock of Vane, Inc., an insurance company. In Penn's consolidated financial statements, should consolidation accounting or equity method accounting be used for Sell and Vane?
a. Equity method used for both Sell and Vane.
b. Consolidation used for both Sell and Vane.
c. Equity method used for Sell and consolidation used for Vane.
d. Consolidation used for Sell and equity method used for Vane.
Explanation
Choice "b" is correct, in Penn's consolidated financial statements, consolidation accounting should be used for both Sell and Vane.
Rule: In a vertical chain, where parent co. owns more than 50% of subsidiary co., and subsidiary owns more than 50% of a third company, consolidate:
1. Third co. into subsidiary co.
2. Subsidiary co. (now consolidated with third co.) into parent co.
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