A subsidiary is an entity that:

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Question restated: A subsidiary is an entity that:

Option 1: has significant influence over a parent entity. This describes a scenario where one entity can influence another, but not necessarily control; significant influence over a parent does not align with the typical definition of a subsidiary, which involves the subsidiary being governed by the parent rather than influencing the parent.

Option 2: exercises control over a parent entity. If a subsidiary could control its parent, that would imply the subsidiary dominates the parent, which contradicts the usual corporate relationship where the parent controls the subsidiary. This describes the reverse of the typical relationship.

Option 3: has the power to control a parent entity. Similar to Option 2, this phrasing suggests potential ability rather than actual control, and it reverses the conventional hierarchy in which the parent exerts control over the subsidiary rather than the other way around.

Option 4: is controlled by another entity. This option aligns with the standard understanding of a subsidiary: an entity that is under the control of a parent or another controlling entity, forming a parent–subsidiary relationship where the subsidiary is governed by the controlling entity.

Further clarifications:
- The core idea of a subsidiary is ownership or control by another entity, typically a parent company, which consolidates its financial statements and exercises governance over the subsidiary.
- The other options mix up directions of influence and control, which are central to distinguishing a subsidiary from other relationships like joint ventures, associates, or mere influence without control.

In summary, the statement that best fits the conventional definition of a subsidiary is that it is controlled by another entity, which is why Option 4 is the correct characterization.

22754 Corporate Accounting - Autumn 2025 Online Self-study Quiz (Module 2A)

A subsidiary is an entity that:

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22754 Corporate Accounting - Autumn 2025 Online Self-study Quiz (Module 2A)

A subsidiary is an entity that:

View Explanation

Log in for full answers

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(3 marks, difficulty level: Very Easy) Organizing a firm as a corporation has certain disadvantages over a proprietorship or partnership, such as "___," but also conveys some advantages, such as "."