Exam 5: Analyzing Investing Activities: Intercorporate Investments

Which of the following is an effect of the reclassification of trading securities as available-for-sale?

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition. Parent Company Inc. Child Company Inc. Total assets \ 37,234 \ 5,379 Total liabilities \ 23,467 \ 3,764 Total shareholders' equity \ 13,767 \ 1,615 Total liabilities and shareholders' equity \ 37,234 \ 5,379 Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560. -What would be the net income in the consolidated income statement for year X2 assuming any excess purchase price relates to goodwill, and goodwill was found to be impaired by $830?

Wilde Corporation owns 30% of the outstanding stock of Bernie Inc. Bernie recorded net income of $10 million and paid dividends of $3 million in 2006. For each of the following ratios, state the effect (higher, lower, or no effect) that the use of the equity method would have on Wilde's financial ratios compared to the use of the cost method in 2006. Explain your answers. i. Gross margin ii. Total asset turnover iii. Cash flow from operations to current liabilities iv. Debt-to-equity

Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries into the reporting currency depends upon:

Pauly Co. reports a foreign currency translation gain of $5 million in its statement of shareholders' equity. From this, you can infer that:

A U.S. company has a subsidiary located in Great Britain. If the British pound is the functional currency and is appreciating relative to the dollar, what will happen to the following ratios after translation? Debt-to-equity Net profit margin A) Higher Lower B) Higher Same C) Same Same D) Lower Higher

Compared to the equity method, the cost method of accounting for an investment in a profitable company results in:

When purchase accounting is used for acquisitions, prior year financial statements presented for comparative purposes should be restated as if the companies had always been combined.

If the functional currency of a foreign-based subsidiary of an American company is the local currency, the current rate method of translation should be used for consolidation purposes.

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition. Parent Company Inc. Child Company Inc. Total assets \ 37,234 \ 5,379 Total liabilities \ 23,467 \ 3,764 Total shareholders' equity \ 13,767 \ 1,615 Total liabilities and shareholders' equity \ 37,234 \ 5,379 Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560. -What would be total liabilities in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?

If the temporal method is used for foreign currency translation and the foreign subsidiary has an excess of monetary liabilities over monetary assets, an increase in the strength of the dollar will result in a translation loss.

When using the current rate method to record foreign subsidiary results, all assets and liabilities are translated at a rate, in effect as of the statement date.

Which of the following is incorrect? An analyst should be aware of the following when analyzing a company that has significant investments recorded using the equity method.

Which of the following is allowed to be reported on fair value basis under SFAS 159?

Reported sales in US dollars of revenues from a foreign subsidiary will be the same regardless of the functional currency.

If a company chooses the fair value option for an asset or liability, all changes in the fair value of the asset (or liability), including unrealized gain and losses, will be included in net income.

Translation is the process under which local currency results are translated into the functional currency.

Flowers Inc. an American company has two overseas subsidiaries located in Great Britain (Roses PLC) and in Holland (Tulips Inc.). Flowers prepares consolidated financial statements. The reporting currency is the U.S. dollar. Most of Roses's operations and sales take place in Britain, and the transactions are denominated in the British pound. Additionally, Roses makes its own financing and operating decisions, independently of Flowers Inc. Tulip Inc. is a sales outlet for Roses PLC and operating decisions are made by the British subsidiary, Roses. a. Identify the method(s) Flowers Inc. should use to convert the financial results of Roses PLC into the U.S. dollar for purposes of consolidation. b. Identify the method(s) Flowers Inc. should use to convert the financial results of Tulip Inc. into the U.S. dollar for purposes of consolidation. c. Explain how a decline in the value of the British pound relative to the U.S. dollar will affect Flowers' earnings in the reporting currency.

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006, is as follows: British pound Gross profit margin 40\% Inventory 2,000 Exchange Rate Balance sheet date 1 pound =\ 1.6 Average exchange rate 1 pound =\ 1.5 Historical rate 1 pound =\ 1.4 -After converting to U.S. dollars using the appropriate method, gross profit margin is 40%. What method is being used to record British subsidiaries financial statements?