Question

Which of the following constitutes a change in reporting entity?

a) Hunt Corporation launches a new product line
b) Hunt Corporation reports a net loss after reporting net income for five consecutive years
c) Hunt Corporation converts from a simple capital structure to a complex capital structure
d) Hunt Corporation acquires ownership of Outdoors Unlimited

Answer 1

A change in reporting entity occurs when Hunt Corporation acquires ownership of Outdoors Unlimited, as this results in consolidated financial reporting of both companies as if they are a single economic entity.

Step-by-step explanation:

Among the options listed, d) Hunt Corporation acquires ownership of Outdoors Unlimited constitutes a change in reporting entity. A change in reporting entity can occur when there is a change in the composition of the companies that make up a consolidated group for financial reporting purposes, such as acquiring or disposing of subsidiaries.

When Hunt Corporation acquires another company like Outdoors Unlimited, it may then consolidate the financial statements, which means the financial results of both companies are presented as if they are a single economic entity. This changes the 'reporting entity' as prior period financial statements will need to be restated to include the subsidiary's financials, as if the acquisition had occurred at the beginning of the earliest comparative period presented.