Exam 5: Analyzing Investing Activities: Intercorporate Investments

When the income statement of a foreign subsidiary is translated into the reporting currency from the functional currency, the gross margin will remain the same in the translation process.

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.

When using the current rate method to record foreign subsidiary results, gains and losses arising from the translation process are reported separately as a component of stockholders' equity and excluded from reported net income.

In-process R&D:

Under SFAS 141, accounting for acquisitions can no longer result in an increase in the consolidated entity's stockholders' equity.

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

If the acquisition is completed as of 12/31/06, what will the reported earnings per share be for the year ended 12/31/06 assuming pooling- of-interest accounting is used?

If a company uses the purchase method to account for a merger, which of the following is true? I. Prior year's statements must be restated as if merged companies had always been one company. II. Net income of combined companies will probably be lower than net income of two separate companies added together. III. Goodwill is never recorded. IV. Assets of acquired company will be recorded on acquirer's books at their fair value.

Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows: $\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$ Sales \ 3,000 \ 1,000 Expenses 2,000 800 Net income \ 1,000 \ 200 Assume revenue and earnings remain same for the next year. Company is following SFAS 142. -If accounted for as a pooling-of-interests, 2005 consolidated earnings are reported as:

Both consolidation and equity method accounting assume a dollar earned by a subsidiary is equivalent to a dollar earned for a parent, even if not received in cash. The limitations of this assumption of dollar-for-dollar equivalence include which of the following? I. Dividends restricted by law and loan covenants. II. Risks due to political and economic factors. III. Tax liabilities from remittance of earnings. IV. Minority interests that limit parent's discretion.

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

Purchase accounting will normally result in lower asset turnover than pooling-of-interests.

At the time of acquisition, ABC's stockholders' equity will increase by: Pooling-of-Interest Purchase A) \ 0 \ 0 B) \ 0 \ 4 C) \ 4 \ 10 D) \ 6 \ 6

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

All derivatives are recorded at market value on the balance sheet.

The following information is from L&H's 2004 income statement: 2004 Sales \ 14,000 Investment income 800 \ 14,800 Cost of goods sold \ 7,000 Depreciation expense 2,500 Amortization expense 2,000 Interest expense 700 \ 12,200 Pre-tax income \2 ,600 -Pre-tax earnings growth of 50% for 2005 has just been announced after the close of trading, but further disclosure will not be made until tomorrow. That night, you review 2004 and conclude that, all else being equal, in 2005

The Equity Conformity Rule requires that marketable securities must be marked to market for tax purposes.

Current ratio:

The reclassification of trading securities as available-for-sale would produce the following effect:

a. Gruber PLC operates in England and is a subsidiary of Szudy International. The functional currency of Gruber is the British pound. Gruber reported net income in 2006 of £350M and paid a £75M dividend on July 1, 2006 when the exchange rate was $1.55 per pound. The current rate is $1.65 per pound and the average rate for 2006 was 1.60. Compute the change in retained earnings for the period in US dollars. b. Windsor PLC operates in England and is a subsidiary of Buckingham International. The U.S. dollar is the reporting currency for Buckingham international. The functional currency of Windsor is the British pound, and it prepares financial information in British pounds for internal use. Windsor's 2005 and 2006 net assets were 10,000 and 11,500, respectively. The 12/31/06 exchange rate was 1.56, the 12/31/05 exchange rate was 1.50 and the average rate for the year was 1.53. What was the translation gain or loss for the year for Buckingham when it converted Windsor's financial statements into the reporting currency?