Question

In the following independent situations, discuss and determine whether a parent–subsidiary relationship exists, and which entity, if any, is a parent. You must fully explain and support your answer. This includes identifying and discussing each of the important facts or considerations in each case.

1. Sawyer Ltd is a major financing company whose interest in investing is return on the investment. Sawyer Ltd does not get involved in the management of its investments. If an investee is not managed properly, Sawyer Ltd sells its shares in that investee and selects a more profitable investee to invest in. It previously held a 35% interest in Anderson Ltd as well as providing substantial convertible debt finance to that entity. Recently, Anderson Ltd was having cash flow difficulties and persuaded Sawyer Ltd to convert some of the convertible debt into equity so as to ease the effects of interest payments on cash flow. As a result, Sawyer Ltd’s equity interest in Anderson Ltd increased to 52%. Sawyer Ltd still wanted to remain as a passive investor, with no changes in the directors on the board of Anderson Ltd. These directors were appointed by the holders of the 48% of shares not held by Sawyer Ltd.                                                                

Answer space for question 3 part 1 – expand the space as necessary for your answer

2.    Beauty Ltd has recently acquired a 35% interest in Beast Ltd, a company that has discovered large deposits of iron ore. Beauty Ltd has extensive experience in the mining industry and, as a result, has been able to have four of its directors elected to the board of Beast Ltd, which has six directors in total.                 

Answer space for question 3 part 2 – expand the space as necessary for your answer

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Answer 1

Situations	Facts of the Case	Solution	Explanation and Conclusion
Situation ( Sawyer Ltd.	Sawyer Ltd. Model is earnng interest over its investment made in various industires / companies. Not Management controller. As per the situation currenly hold 35% in Anderson lTd and in addition convertible debt holding also. With this the appointment of director is made by the investor having 48% shares in Anderson.	No Parent Subsidiary, ie. Non Controller Interest Holder.	Simple Rule of Control is followed , " Having Power to direct the activity to affect the return". Here, Sawyer is not controlling the business, it is the 48% percentage holdership making judgements about busienss practices, appointing Board, which impact the business i.e 100% operation of buisness even though holding 48% share in the Anderson. Thus Anderson is not the Parent PArty of the Company, but it can be Non controller party in Anderson Balancesheet.
Sitaution ( Beauty Ltd)	In this scenario, holding 35% in Beast Ltd. Mining Experience, Appointed 4 directors on Board of Beast Ltd. Where the composition of BOD is of 6 Members.	Yes, Parent Subsidiary i.e Beauty Ltd. Is Parent and Beast is Subsidiary.	Following Above rule, Beauty having knowledge of Mining Business, thus controlling the activity of generation of income which may ultimately impact the profits of the company. Hence Beauty Ltd is Parent company of Beast Ltd.