A parent-subsidiary relationship exists when one company owns a sufficient number of voting shares of the capital stock of another company to exercise control over it. The number of shares usually required to establish a parent-subsidiary relationship is more than 50 percent. The investing company is known as the parent and the other corporation is called the subsidiary. Both corporations continue as separate legal entities and each prepares its own separate financial statements. However, because of their special relationship, they are viewed for financial measuring and reporting purposes as a single economic entity. Therefore, the parent company (but not the subsidiary) is required to prepare consolidated financial statements.
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