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Exam 5: Analyzing Investing Activities: Intercorporate Investments

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Question 31

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The following information is from L&H's 2004 income statement: $\begin{array}{|l|r|r|}\hline&&2004\\\hline \text { Sales } & \$ 14,000 \\\hline \text { Investment income } & 800 \\\hline && \$ 14,800 \\\hline \text { Cost of goods sold } & \$ 7,000 \\\hline \text { Depreciation expense } & 2,500 \\\hline \text { Amortization expense } & 2,000 \\\hline \text { Interest expense } & 700 \\\hline && \$ 12,200 \\\hline \text {Pre-tax income}&&\$2,600\\\hline\end{array}$ -Based upon your analysis, you reflect that L&H management

A) is more than holding its own in a tough economic environment.
B) needs to strengthen its marketing.
C) is achieving growth in its new product line.
D) has adroitly managed its asset portfolio.

E) None of the above
F) B) and C)

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Question 32

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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:

A) Cash flow received from investee may be substantially different from investment income recorded.
B) As investee's liabilities are not recorded on the company's balance sheet, there may be significant off-balance-sheet financing.
C) They must mark investment in investee to market even though there may be no ready market in which they can sell their investment.
D) Company must record pro rata share of investee's earnings, which may not be well correlated with changes in market value of investee.

E) A) and B)
F) A) and C)

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Question 33

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Determine the amount Guido Inc. will record as an investment on its balance sheet under the three scenarios: Weiner is considered trading marketable equity security (MES) , available for sale (AFS) MES or using cost method. $\begin{array} { | l | c | c | c | } \hline & \text { Trading MES } & \text { AFS MES } & \underline { \text { Cost } } \\\hline \text { A) } & \$ 60,000 & \$ 60,000 & \$ 60,000 \\\hline \text { B) } & \$ 66,000 & \$ 60,000 & \$ 60,000 \\\hline \text { C) } & \$ 60,000 & \$ 66,000 & \$ 60,000 \\\hline \text { D) } & \$ 66,000 & \$ 66,000 & \$ 60,000 \\\hline\end{array}$

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

The classification of marketable equity securities as trading or available-for-sale is determined by:

If a company uses pooling-of-interests to account for a merger, which of the following are 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. No goodwill will be recorded. IV. Assets of acquired company will be recorded on acquirer's books at their fair value.

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.

A U.S. company has a subsidiary located in Great Britain. If the U.S. dollar is the functional currency and the British pound is appreciating relative to the dollar, what will happen to the following ratios after remeasurement? $\begin{array} { | l | c | c | } \hline & \text { Inventory Turnover } & \text { Net Profit Margin } \\\hline \text { A) } & \text { Higher } & \text { Lower } \\\hline \text { B) } & \text { Lower } & \text { Lower } \\\hline \text { C) } & \text { Higher } & \text { Higher } \\\hline \text { D) } & \text { Lower } & \text { Higher } \\\hline\end{array}$

The equity method of accounting for investments requires:

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. $\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$ 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?

SFAS 159 allows companies to selectively report held-to-maturity and available-for-sale securities at fair value.

When a company acquires another company and purchase accounting is used, net income is usually lower than that in case of pooling-of-interests, because the cost of goods may be higher as inventory is recorded at market value (besides other reasons).

Corporation A acquires Corporation T for $90M, using 25% debt and 75% equity, in 2006. The fair value and book value of net assets acquired are $60M. Which of the following statements are true? I. If pooling-of-interests accounting is used, no goodwill will be recorded. II. If purchase accounting is used, goodwill of $30M will be recorded. III. If purchase accounting is used, Corporation A's stockholders' equity will increase by $90M on date of acquisition. IV. If purchase accounting is used, net income in future years will be lower than if pooling-of-interests was used.

Sachen Company uses the local currency for each country in which it operates as its functional currency. When translating statements into U.S. dollars they should use:

Xena Corporation has a foreign subsidiary, Zete Corporation, located in Japan. At the end of fiscal 2006, Zete has: $\begin{array} { | l | l | } \hline \text { Non-monetary assets } & \text { 55M Yen } \\\hline \text { Monetary assets } & \text { 20M Yen } \\\hline \text { Non-monetary liabilities } & \text { 30M Yen } \\\hline \text { Monetary liabilities } & \text { 25M Yen } \\\hline\end{array}$ -Assume Xena uses the temporal method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?

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

When an acquisition is made and accounted for using the purchase method, the post-acquisition retained earnings account:

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

If the acquisition is completed as of 12/31/06, what will the book value per share be for the year ended 12/31/06 assuming purchase accounting is used?

Old Co. was acquired by Raptor for cash, at a significant premium to book value, on January 1, 2004. Since that time, the now wholly owned subsidiary has had modest growth and all of its earnings have been distributed to its parent. Some of Old's bonds remain publicly traded. Which of the following is most likely?