Ch_05

Chapter 05 - Analyzing Investing Activities: Intercorporate Investments

Chapter 5 Analyzing Analyzing Investing Activities: Intercorporate Investments REVIEW

Inter Intercom compan pany y inve investm stment ents s play play an increa increasin singly gly larger larger role role in busin business ess activ activit it Companies pursue intercompany activities for several reasons incluing iversificatio e"pans e"pansion ion!! an compet competit itive ive opp opport ortuni unitie ties s an return returns. s. #h #his is chapter chapter consi consiers ers analysis analysis an interpret interpretation ation of these intercompany intercompany activities activities as reflecte reflecte in financi financi statements. We consier consier current reporting re$uirements re$uirements from our analysis analysis perspective both bo th for &hat &hat they they o and o not tell us. We escribe ho& current isclosures a relevant for our analysis! an ho& &e might usefully apply analytical a'ustments t these isclosures to improve our analysis. We irect special attention to the unrecore assets an liabilities in intercompany investments.


()#*I+E ,assive investments

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Accounting Accounting for Investment -ecurities isclosure of Investment -ecurities Analyzing Investment -ecurities •

Investments &ith -ignificant Influence E$uity /etho Accounting Analysis Implications of E$uity Investments •

0usiness Combinations Accounting /echanics of 0usiness Combinations Analysis Implications of 0usiness Combinations Comparison of ,ooling versus ,urchase Accounting for 0usiness Combinations erivative -ecurities

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efining a erivative Classification an Accounting for erivatives isclosure of erivatives Analysis of erivatives •

Appeni" 5A: International Activities •

Appeni" 50: Investment Return Analysis


()#*I+E ,assive investments

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Accounting Accounting for Investment -ecurities isclosure of Investment -ecurities Analyzing Investment -ecurities •

Investments &ith -ignificant Influence E$uity /etho Accounting Analysis Implications of E$uity Investments •

0usiness Combinations Accounting /echanics of 0usiness Combinations Analysis Implications of 0usiness Combinations Comparison of ,ooling versus ,urchase Accounting for 0usiness Combinations erivative -ecurities

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efining a erivative Classification an Accounting for erivatives isclosure of erivatives Analysis of erivatives •

Appeni" 5A: International Activities •

Appeni" 50: Investment Return Analysis


A+A*1 A+A*1-I- (02EC#IVE(02EC#IVE•

Analyze Analyze financial reporting for intercorporate investments.

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Interpret consoliate financial statements.

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Analyze Analyze implications of both the purchase an pooling methos of accounting for business combinations.

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Interpret goo&ill arising from business combinations.

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escribe erivative securities an their implications implications for analysis.

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Analyze Analyze foreign currency translation t ranslation isclosures. isclosures.

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Analyze Analyze investment returns.


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4. *ong%term investments are usually investments in assets such as ebt instrument e$uity securities! real estate! mineral eposits! or 'oint ventures ac$uire &ith longe term goals. -uch goals often inclue the ac$uisition of control or affiliation &ith oth companies! investment in suppliers! securing sources of supply! etc. #he valuatio an presentation of noncurrent investments epens on the egree of influence th the investor company has over the investee company. With no influence! investments other than hel%to%maturity bons an e$uity investments are accounte for at maret value. (nce influence is establishe! e$uity investments are accounte for uner the e$uity metho or consoliate &ith the statements of the invest company.

a. In the absence of evience to the contrary! an investment 6irect or inirec 89 or more of the voting stoc of an investee carries the presumption of a ability to e"ercise significant influence over the investee. Conversely! investment of less than 89 in the voting stoc of the investee leas to th presumption of a lac of such influence unless the ability to influence can b emonstrate. Accounting re$uirements are: ;el%to%maturity securities a reporte at amortize cost. +oncurrent available%for%sale securities are reporte fair value. Influential securities are accounte for uner the e$uity metho. b. -tanars inicate that a position of more than 89 of the voting stoc might giv the investor the ability to e"ercise significant influence over the operating an financial policies of the investee. When such an ability to e"ercise influence evient! the investment shoul be accounte for uner the e$uity met 0asically this means at cost! plus the e$uity in the earnings or losses of th investee since ac$uisition 6&ith the aition of certain other a'ustmen Evience of an investor
8. a. #he accounting for investments in common stoc representing over 89 of e$u re$uires the e$uity metho. While use of the e$uity metho is superior reporting cost! one must note that this is not e$uivalent to fair maret value= &hich! epening on the circumstances! can be significantly higher or lo&er tha the carrying amount uner the e$uity metho.

An analyst also must remember that the presumption that an investment holin of 89 or more of the voting securities of an investee results in signifi influence over that investee is arbitrary=an assumption mae in the interest accounting uniformity. If such influence is absent! then there is some $uestio regaring the investor

accounting oes not consier a ecline in maret value to be conclusive evienc of such a loss! the analyst must be alert to situations &here hope rather tha reason supports the carrying amount of an investment. It must be recognize th the e$uity metho reflects only current operating losses rather than the capit losses that occur &hen the earning po&er of an investment eteriorates isappears.

>. -ome &eanesses an inconsistencies pertaining to the accounting for maretab securities carrie as noncurrent assets inclue: #he classification of securities as noncurrent investments is base management intent! a sub'ective notion. Changes in the fair value of noncurrent available%for%sale securities bypass n income. E$uity securities of companies in &hich the enterprise has a 89 percent or large interest! an in some instances an even smaller interest than 89 percent! nee n be a'uste to maret. Instea! it is reporte using the e$uity metho! &hich ma at times yiel values significantly belo& an at other times above! maret. With regar to such relatively substantial blocs of securities! the values at &hic they are carrie on the balance sheet may be substantially ifferent that the realizable values. •

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?. @enerally! investments in maretable securities are one use of e"cess cash availab to managers. (ther uses inclue financing gro&th pro'ects! paying o&n ebt! payin iviens! or buying bac stoc. In certain instances! the purchase of investme securities is vie&e as an amission by the company that they have no positive n present value gro&th pro'ects available to irect its monies.

5. ;eging activities are esigne to protect the company against fluctuations in mar instruments. -peculative activities see to profit on fluctuations in ma instruments.

. A futures contract is an agreement bet&een t&o or more parties to purchase or sell certain commoity or financial asset at a future ate an at a efinite price.

B. A s&ap contract is an arrangement bet&een t&o or more parties to e"change futur cash flo&s. -&aps are typically use to hege riss such as interest rate an for currency riss.

. An option contract gives a party the right! but not an obligation! to e"ecute transaction. An option to purchase a security at a specifie price at a future ate is a e"ample of an option contract. #his option is liely to be e"ercise if the securi price on that future ate is higher than the contract price an not other&ise.

D. A hege transaction is a transaction e"ecute in an attempt to protect the compan against a specific maret ris. 49. #o $ualify for hege accounting! a erivative instrument must hege either the


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A cash flo& hege is esigne to hege e"posure to volatility in cash fl attributable to a specific ris. An e"ample of a cash flo& hege is a floating%for%fi"e interest rate s&ap. #his s&ap heges the cash flo&s relate to an interest%bearin financial instrument. An e"ample of a fair value hege is a fi"e future commitment sell a fi"e $uantity of a commoity at a specifie price. #his transaction heges th fair value of the commoity against loss before the time that it is sol.

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In fair value accounting! both the heging instrument an the hege asset o liability are recore at fair value in the balance sheet. All realize an unreali gains an losses on both the heging instrument an the hege asset or liability a immeiately recognize in income.

)nrealize gains an losses relating to the effective portion of a cash flo& hege ar immeiately recore as part of other comprehensive income up to the effective a of the transaction. After the effective ate of the transaction! the gains an losses a transferre to income. #he cash flo& heging instrument is recore at fair value o the balance sheet. ;o&ever! there is no offsetting asset or liability as in the case of fair value hege. Instea! the offset in the balance sheet occurs thro accumulate comprehensive income! &hich is part of e$uity.

4>. -peculative erivatives are recore at fair value on the balance sheet an an unrealize or realize gains or losses are immeiately recore in net income.

4?. rom a strict legal vie&point! the statement is basically correct. -till! &e mu remember that consoliate financial statements are not prepare as le ocuments. Consoliate financial statements isregar legal technicalities in favo of economic substance to reflect the economic reality of a business entity une centralize control. rom the analysts< vie&point! consoliate statements are ofte more meaningful than separate financial statements in proviing a fair presentation financial conition an the results of operations.

45. #he consoliate balance sheet obscures rather than clarifies the margin of safe en'oye by specific creitors. #o gain full comprehension of the financial position o each part of the consoliate group! an analyst nees to e"amine the iniviu financial statements of each subsiiary. -pecifically! liabilities sho&n in consoliate financial statements o not operate as a lien upon a common pool o assets. #he creitors! secure an unsecure! have recourse in the event of efau only to assets o&ne by the iniviual corporation that incurre the liability. If! on th other han! a parent company guarantees a specific liability of a subsiiary! then th creitor &oul have the guarantee as aitional security.

4. Consoliate financial statements generally provie the most meanin presentation of the financial conition an the results of operations of the combine entity. -till! they o have certain limitations! incluing: #he financial statements of the iniviual companies in the group may not b prepare on a comparable basis. Accounting principles applie! valuation base an amortization rates use can iffer. #his can impair homogeneity an •


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#he e"tent of intercompany transactions is unno&n unless consoliati financial statements 6&orsheets7 are presente. #he latter reveal the a'ustmen involve in the consoliation process! but are rarely isclose. )nless isclose! it is ifficult to estimate ho& much of consoliate retaine earnings are actually available for payment of iviens. #he composition of the minority interest 6such as bet&een common an preferre stoc7 cannot be etermine because the minority interest is usually sho&n as combine amount in the consoliate balance sheet. Consoliate financial statements o not reveal restrictions on use of cash fo iniviual companies nor the intercompany cash flo&s. Consoliation of nonhomogeneous subsiiaries 6such as finance or insuranc subsiiaries7 can istort ratios an other relations.

4B. a. #his isclosure is necessary=it is a subse$uent event re$uire to be isclose Also! the contingency conitions involving aitional consieration ae$uately isclose. -till! it &oul have been more informative ha the no isclose the maret value of net assets or stocs issue. b. #his must be accounte for by the purchase metho. -ince the more rea eterminable value in this case is the consieration given in the form of the 0es Company stoc! the investment shoul be recore at F4!95B!> 6?!9> share " F88 maret price at ac$uisition7. In the consoliate statements! there may o may not be goo&ill to be recognize=this epens on a comparison of th maret value of its net assets to theF4!95B!> purchase price. c. #he contingency is base on the earnings performance of the ac$u companies over the ne"t five years=but the total amount payable in stoc limite to 454!599 shares! to a ma"imum of F8 million. . uring the course of the ne"t five years! if the ac$uire companies ea cumulatively over F4 million! then the 0est Company &ill recor the aition payment &hen the outcome of the contingency is etermine beyon reasonable oubt. #he payments are consiere aitional consieration in th purchase an &ill either increase the carrying values of tangible assets or th Ge"cess of cost over net tangible assetsG 6goo&ill7 account.

4. a. #he total cost of the assets is the present value of the amounts to be pai in t future. If the liabilities are issue at an interest rate that is substantially above o belo& the current effective rate for similar securities! the appropriate amount o premium or iscount shoul be recore.

b. #he general rule for etermining the total cost of assets ac$uire for stoc is value the assets ac$uire at the fair value of the stoc given 6as trae in th maret7 or fair value of assets receive! &hichever is more clearly evient. If ther is no reay maret for either the stoc or the assets ac$uire! the valuation has be base on the best means of estimation! incluing a etaile revie& of th negotiations leaing up to the purchase an the use of inepenent appraisals.

4D. )sually! the purchase metho of accounting for a business combination is preferab from an analyst

89. a. @oo&ill represents the e"cess of the total cost over the fair value assigne to th ientifiable tangible an intangible assets ac$uire less the liabilities assume.

b. It is possible that the maret values of ientifiable assets ac$uire less liabili assume e"cee the cost 6purchase price7 of the ac$uire company. In this cas the values other&ise assignable to noncurrent assets 6e"cept for mareta securities7 ac$uire shoul be reuce by a proportionate part of the e"ces +egative goo&ill shoul not be recore unless the value assigne to suc long%term assets is first reuce to zero. If negative goo&ill must be recore! is recore as an e"traorinary gain 6net of ta"7 belo& income from continuin operations c. /aretable -ecurities are recore at current net realizable values.

. Receivables are recore at the present value of amounts to be receiv compute at proper current interest rates! less allo&ances for uncollectibility an collection costs. e. inishe @oos are recore at selling prices less cost of isposal reasonable profit allo&ance. f.

Wor%in%,rocess is recore at the estimate selling price of the finishe goo less the sum of the costs to complete! costs of isposal! an a reasonable pro allo&ance.

g. Ra& /aterials are recore at current replacement costs. h. ,lant an E$uipment are recore at current replacement costs unless e"pecte future use of these assets inicates a lo&er value to the ac$uirer. i.

*an an /ineral Reserves are recore at appraise maret values.

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,ayables are recore at present values of amounts to be pai! etermine appropriate current interest rates.

. #he goo&ill of the ac$uire company is not carrie for&ar to the ac$uiri company
84. A crue &ay of a'usting for omitte values in a pooling combination is to estim the ifference bet&een the maret value an the recore boo value of the ne assets ac$uire! an then to amortize this ifference on some reasonable basis. #h result &oul be appro"imately comparable to the net income reporte using purchas accounting. Amittely! the information available for maing such a'ustments limite.

88. Analysis shoul be alert to the appropriateness of the valuation of the net asse s of


&rite%o&ns if impaire. #his concern also e"tens to temporarily epresse stoc prices an its relate implications.


8>. a. An ac$uisition program aime at purchasing companies &ith lo&er ,E ratios ca in effect! GbuyG earnings for the ac$uiring company. #o illustrate! say Company H has earnings of F4 million! or F4 per share on 4 million sha outstaning! an that its ,E is 59. +o&! lets assume it purchases Company 1 49 times it earnings of F5!999!999 6F59 million price7 by issuing an aition 4!999!999 shares of H value at F59 per share. #hen: Earnings of Combine Entity are: H earnings.....F4!999!999 1 earnings..... 5!999!999 F!999!999

#he ne& number of shares outstaning is 8!999!999! proviing an E,- of F>.9 6compute as F million ivie by 8 million shares7. Also! note that earnings pe share increases from F4 to F> per share for Company H by means of ac$uisition.

We shoul recognize the Jsynergistic effectK in this case. #hat is! t&o companie combine can sometimes sho& results that are better than the total effect of eac separately. #his can occur through combination of vertical! horizontal! or othe basis of company integration. Consier the follo&ing e"ample: Company -: ,E L 49 E,- L F4.99 Earnings L F4!999!999 +umber of shares L 4!999!999 Company #: ,E L 49 Earnings L F4!999!999 Assume Company - buys Company # at a bargain of 49 times earnings an assumes F4!999!999 after%ta" savings from efficiencies. #hen: Combine entity: - earnings....................................F4!999!999 # earnings.................................... 4!999!999 -avings from merger................... 4!999!999 +e& earnings...............................F>!999!999 +e& number of shares................ 8!999!999 +e& E,-....................................... F4.59

#he E,- of the combine entity increases 59 percent 6relative to Company -7 as result of this merger.

b. or a'ustment purposes! the financial statements shoul be poole as if the t& companies ha been merge prior to the years uner consieration=&ith an intercompany sales eliminate. #his &oul give the best inication of the earning potential. ;o&ever! a'usting bac&ars to reflect merger savings subse$uent realize is a bit tenuous. It is probably better to use the actual combine figure &ith Jmental a'ustmentsK by the analyst. #oo many Ga'uste for mer savingsG statements bear little relation to the historical recor. Also! the analy may &ant to compare the ac$uiring companys actual results &ith the ne& merge


&oul loo goo in comparison &ith poole years 4 an 8. An analysis of th ac$uiring companys results alone versus the combine entity &oul reveal th tric.

8?. #he amount of goo&ill that is carrie on the ac$uirer
85. All factors supporting the estimates of the benefit perios shoul be ree"amine the light of current economic conitions. -ome circumstances that can affect suc estimates are: A ne& invention that reners a patente evice obsolete. -ignificant shifts in customer preferences. Regulatory sanctions against a segment of the business. Reuce maret potential because of an increase number of competitors. • • • •

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#he ma'or provisions of accounting for foreign currency translation 6 SFAS 52 7 ar #he translation process re$uires that the functional currency of the entity ientifie first. (rinarily it &ill be the currency of the country &here the entity locate 6or the ).-. ollar7. All financial statement elements of the foreign entit must then be measure in terms of the functional currency in conformity &i @AA,. )ner the current rate metho 6most commonly use7! translation from functional currency into the reporting currency! if they are ifferent! is to be at current e"change rate! e"cept that revenues an e"penses are to be translate the average e"change rates prevailing uring the perio. #he current metho generally consiers the effect of e"change rate changes to be on the investment in a foreign entity rather than on its iniviual assets an liabilitie 6&hich &as the focus of SFAS 8 7. #ranslation a'ustments are not inclue in net income but are isclose an accumulate as a separate component of stocholers< e$uity 6( Comprehensive Income or *oss7 until such time that the net investment in th foreign entity is sol or li$uiate. #o the e"tent that the sale or li$uia represents realization! the relevant amounts shoul be remove from the separa e$uity component an inclue as a gain or loss in the etermination of the n income of the perio uring &hich the sale or li$uiation occurs.

8B. A #he accounting stanars for foreign currency translation have as its ma' ob'ectives: 647 to provie information that is generally compatible &ith the e"pecte economic effects of a change in e"change rate on an enterprise

8. A ollo&ing are some analysis implications of the accounting for foreign currenc translation: 6a7 #he accounting insulates net income from balance sheet translation gains an losses! but not transaction gains an losses an income statement translatio effects. 6b7 )ner current @AA,! all balance sheet items! e"cept e$uity! are translate at current rateM thus! the translation e"posure is measure by the size of e$uity o the net investment. 6c7 While net income is not affecte by balance sheet translation! the e$uity capital #his affects the ebt%to%e$uity ratio 6the level of &hich may be specifie by certa ebt covenants7 an boo value per share of the translate balance sheet! but no of the foreign currency balance sheet. -ince the entire e$uity capital is th measure of e"posure to balance sheet translation gain or loss! that e"posure ma be even more substantial! particularly &ith regar to a subsiiary finance &i lo& ebt an high e$uity. #he analyst can estimate the translation a'ustmen impact by multiplying year%en e$uity by the estimate change in the perio t perio rate of e"change. 67 )ner current @AA,! translate reporte earnings &ill vary irectly &ith change in e"change rates! an this maes estimation by the analyst of the Ginco statement translation effectG less ifficult. 6e7 In aition to the above! income &ill also inclue the results of complete foreig e"change transactions. Also! any gain or loss on the translation of a cur payable by the subsiiary to parent 6&hich is not of a long %term capital nature7 & pass through consoliate net income.


EHERCI-EE"ercise 5%4 689 minutes7 a.

)sual ob'ectives unerlying the holing of both current an noncurre portfolios of securities are: Current=for temporary investments of e"cess cash in highly li$ investments. +oncurrent=for investment income! appreciation value! control purposes o another entity! or to secure sources of supplies or avenues of sales.

b. -ecurities shoul be classifie as follo&s: #raing securities are al&ay classifie as current. ;el%to%maturity securities are classifie as noncurren e"cept for the reporting perio immeiately prior to maturity. Available%for%sal securities are classifie as current or noncurrent base on management intent regaring sale. Influential securities are noncurrent unless their sale i imminent. /aretable securities that are temporary investments of ca specifically esignate for special purposes such as plant e"pansion sining fun re$uirements are classifie as noncurrent.

)nrealize losses on traing securities 6&hich are classifie as curr assets7 are the only unrealize losses to flo& through the income statemen )nrealize losses on noncurrent investments 6an current investments available%for sale securities7 are inclue as a separate component shareholers< e$uity. -ome analysts treat much if not all of these unrealize gains an losses as another component of a'uste net income. E"ercise 5%8 648 minutes7

a. When available%for%sale securities are mare to maret! an asset account i a'uste to maret 6either up&ar or o&n&ar7 an an e$uity account i increase &hen mare up or ecrease &hen mare o&n.

b. If the investments being mare to maret &ere traing securities instea o available%for%sale securities! then an asset account &oul be a'uste maret. In aition! a gain or loss account that flo&s through income &oul also be inclue to reflect the change in maret value 6an e$uity &oul change accoringly &hen income is close to it7.

c. Although uner available%for%sale accounting unrealize gains are recore! realize gains are reflecte in reporte income. /icrosoft! therefore can sell securities &ith unrealize gains an increase its reporte income.


E"ercise 5%> 689 minutes7

a. ,assive interest investments eclare to be available%for%sale or trai securities are reporte at fair maret value on the balance sheet. ,assiv interest investments eclare to be hel%to%maturity are reporte at historica cost. -ignificant influential investments are reporte at historical co increase by a pro rata share of investee net income an ecrease by a pr rata share of iviens eclare by the investee company. Control interests investments are reporte using consoliation proceures.

b. ,assive interest investments eclare to be traing or available%for%s securities are reporte at fair maret value. luctuations in the value o traing securities are reporte in net income in the perio of the fluctuation luctuations in the value of available%for%sale securities are reporte comprehensive income of each perio.

c. ;el%to%maturity securities are reporte at historical cost because perio t perio value fluctuations are arguably less relevant since the comp intens to hol the security to maturity an receive the maturity value of th investment. (n one han! not reporting the volatility in the value of hel%to maturity securities seems appropriate since the company oes not inten t sell the security at its higher or lo&er current value. (n the other ha management intent can change! an such changes in maret value irectl impact the value of the company. E"ercise 5%? 6>9 minutes7 a. )ner purchase accounting! goo&ill is reporte if the purchase pr e"cees fair value of the ac$uire tangible an intangible net assets.

b. All ientifiable tangible an intangible assets ac$uire! either iniviually o by type! an liabilities assume in a business combination! &hether or no sho&n in the financial statements of /oore! shoul be assigne a portion o the cost of /oore! normally e$ual to the fair values at ate of ac$uisition #hen! the e"cess of the cost of /oore over the sum of the amounts assigne to ientifiable tangible an intangible assets ac$uire less the liabiliti assume is recore as goo&ill.

c. Consoliate financial statements shoul be prepare to present finan position an operating results in a manner more meaningful than in separat statements. -uch statements often are more useful for analysis purposes.


. #he first necessary conition for consoliation is control! as typica evience by o&nership of a ma'ority voting interest. As a general ru o&nership by one company! irectly or inirectly! of over fifty percent of th outstaning voting shares of another company is a conition necessary fo consoliation.E"ercise 5%5 6>5 minutes7

a. Each of the four corporations &ill maintain separate accounting reco base on its o&n operations 6for e"ample! C4
b. or -EC filing purposes! consoliate statements &oul be presente for Co H an Co. C4 an Co. C8 as if these three separate legal entities &ere combine entity. C4 or C8 &oul probably not be consoliate if controlle only temporarily. C> &oul be sho&n as a one-line consolidation 6bo balance sheet an income statement7 uner the e$uity metho.

c. #he analyst liely &oul re$uest the follo&ing types of information 6on consoliate statements normally are available7:

647 Consoliate Co. H &ith subsiiaries C4 an C8 6C> &oul be a one%lin consoliation7. 687 Co. H statements only 6all three investee companies! C4! C8! an C> &oul be one%line consoliations7. 6>7 -eparate statements for one or more of the investee companies 6C4! an C>7. 6?7 Consoliating statements 6&hich &oul provie everything in 647%6>7 e"cep separate statements for C>! an &oul also sho& the elimination entries7. 657 -ometimes partial consoliations 6such as Co. H plus C87 or combinin statements 6such as only C4 an C87 also are useful. or e"ample! if C4 is foreign subsiiary! the analyst may as for a partial consoliat e"cluing C4! &ith separate statements for C4. Also! loan covenants 6o loan collateral7 fre$uently cover only selecte companies! an a par consoliation or combine statements are necessary to assess safe margins.

. Co. H &ill sho& an asset Ginvestment in common stoc of subsiiaryG value at either cost or e$uity. 6#he e$uity metho &oul be re$uire only if n consoliate statements &ere presente.7 +ote: Co. H o&ns shares common stoc of Co. C4=that is! Co. H oes not o&n any of C4

e. 499 percent of C8
f. Co. H must purchase enough aitional common stoc from the ot stocholers in C> or purchase enough ne& shares issue by C> to increas its o&nership to more than 59 percent of C>
a. #he choice of the functional currency &oul mae no ifference for reporte sales numbers. #his is because sales are translate at rates on th transaction ate! or average rates! regarless of the choice of the functiona currency.

b. When the ).-. ollar is the functional currency 60ethel Company7! so assets an liabilities 6mainly inventory an fi"e assets7 are translate historic rates. #he monetary assets an liabilities are translate at curren e"change rates. #his means the translation gain or loss is base only o those assets an liabilities that are translate at current rates. When functional currency is the local currency 6;ome 0rite Company7! all assets an liabilities are translate at current e"change rates! an common an preferre stoc are translate at historic rates. #he translation gain or loss is base o the net investment in each local currency.

c. When the ).-. ollar is the functional currency! all translation gains or losse are inclue in reporte net income. When the functional currency is the loca currency! the translation gain or loss appears on the balance sheet as separate component of shareholers< e$uity 6in comprehensive income loss7! thus bypassing the net income statement.

6CA Aapte


,R(0*E/,roblem 5%4 689 minutes7 a. Investments Reporte on the 0alance -heet: Able Corp. bons ............................ F >>9 0ryan Co. bons ........................................................85 Caltran! Inc. bons ....................................................545 Available%for%sale e$uity securities ......................4!99 #raing e$uity securities ..................................... D59 #otal........................................................................F?!889

b. Reporting of )nrealize Value luctuations: )nrealize price fluctuations on available%for%sale securities are reporte i comprehensive income 60ryan Co. bons an available%for%sale e$u securities7. )nrealize price fluctuations on traing securities are reporte in income 6Caltran bons an traing e$uity securities7. •

•

,roblem 5%8 6>9 minutes7

4. -ince the aggregate maret value of the portfolio e"cees cost! there is n &rite o&n of the iniviual security &hose maret value ecline to less tha one%half of its cost. -tocholers< e$uity &ill be increase 6ecrease7 to th e"tent that the e"cess of maret over cost has increase 6ecrease7 over th perio. #here is no effect on the income statement.

8. #his situation is similar to 4 above. #he only ifference is that the firm $uestion oes not use the classifie balance sheet format. In this case! th analyst must be sure to revie& note isclosures regaring the classification o investments 6if not provie on the face of the balance sheet7.

>. #his is not a reclassification bet&een categories as the securities remain i the available%for%sale category. ;o&ever! the analyst shoul note management is contemplating a sale in the near future.

?. #he increase in fair value of the security shoul be creite to shareholer e$uity. 6-ince the security is classifie as noncurrent! it cannot be a train security7.


,roblem 5%> 6?5 minutes7

a. Effects of Investments on -impson Corp.: 899? 6air Value /etho Applies7: -ales: Investment has no effect on -impsons sales. +et income: -impsons net income increases by the 899? ivien incom from 0ailey Company 60C7 of F49!999 6compute NF4!999!999 ivien O4!999!999 shares L F4.99 shareP " 49!999 shares L F49!9997 Cash flo&s: iviens receive 64 of F4!999!9997 F 49!999 Cost of shares 649!999 shares " F497 6499!9997 +et cash flo& F6D9!999

8995 6E$uity /etho Applies7 -ales: Investment has no effect on -impsons sales. +et income: -impsons net income increases by >9 share earni of 0ailey Company 60C7 6compute as: N>99!999 shares 4!999!999 shares L >9P " F8!899!999 income F9!9997 Cash flo&s: iviens receive 6>9 of F4!899!9997 F >9!9 Cost of shares 68D9!999 shares " F447 6>!4D9!9 +et cash flo& F68!>9!9

b. Carrying 60oo7 Value of Investment in 0ailey Company: 899? 6air Value /etho Applies7 At ecember >4! 899?! -impsons carrying value of the investment in 0C i the historical cost of F499!999 649!999 shares Q F49 per share7.

8995 6E$uity /etho Applies7=#&o -teps (i) Equity method is applied retroactively to prior years of onersh (2!!")# (riginal cost 6F49 " 49!999 shares7 F499!999 A: ,ercentage share of 899? earnings 64 " F8!999!9997 89!999 *ess: iviens receive in 899? 649!99 +et carrying value at 2anuary 4! 899? 6F44 per share7 F449!999 (ii) Equity method is carried through year-end 2!!5# +et carrying value at 2anuary 4! 899? A: (riginal cost of aitional shares 6F44 " 8D9!9997 A: ,ercentage share of 8995 earnings 6>9 " F8!899!9997 *ess: iviens receive in 8995 +et carrying value at ecember >4! 8995 6F48 per share7

F 449!99 >!4D9!99 9!999 6>9!99 F>!99!999

c" Accounting method for 2!!$ . or 899! &ith o&nership in e"cess of 59


,roblem 5%? 6?9 minutes7 a.

Computation of 0urrys Investment in 0o&man Co. (% thousands) Cost of Ac$uisition.................................

Investment F?9!999

+et income for 1ear .............................

4!99 N4P

iviens for 1ear  ..............................

6997 N8P

+et loss for 1ear B...................................

6?97 N>P

iviens for 1ear B...............................

6?97 N?P

Investment at ec. >4! 1ear B.................

F>D!9

&otes (%!!!s)# N4P 9 of F8!999 net income N8P 9 of F4!999 iviens N>P 9 of F6997 net loss N?P 9 of F99 iviens

b. #he strengths associate &ith use of the e$uity metho in this case inclue: It reuces the balance in the investment account in 1ear B ue to the ne loss. +ote: 2ust recoring ivien income &oul obscure the loss. It recognizes goo&ill on the balance sheet 6via inclusion in the investmen balance7 an! therefore! it reflects the full cost of the investment 0o&man Co. •

•

#he possible &eanesses &ith use of the e$uity metho in this case inclue: *ac of etaile information 6one%line consoliation7. ollar earne by 0o&man may not be e$uivalent to ollar earne by 0urry. • •


,roblem 5%5 6?9 minutes7 a. or 1ear : +o effect on sales. +et income effect e$uals the ivien income of F49 64 of F4!999! or F4 p share7 since the investment is accounte for uner the maret metho. Als assuming the shares are classifie as available%for%sale 6a reason assumption given subse$uent purchases7! the price appreciation of F4 share &ill bypass the income statement. Cash flo& effect e$uals the ivien income of F49. If the outflo& ue to th stoc purchase is inclue: +et cash flo& L ivien income less purchas price L F49 % F499 L F6D97. • •

•

or 1ear B 6the e$uity metho applies7: +o effect on sales. +et income effect e$uals the percentage share of rancisco earnings for 1ear or >9 of F8!899 L F9. Cash flo& effect e$uals the ivien income of F>9 6compute as >9 F4!8997. If the outflo& ue to the stoc purchase is inclue: +et cash flo& ivien income less purchase price L F>9 % F>!4D9 L F68!>97. • •

•

b. As of ecember >4! 1ear : At ecember >4! 1ear ! the carrying value of the investment in rancisco is F4 6compute as 49 shares " F44 per share7. #he F44 per share figure is the fair valu at 2an. 4! 1ear B. As of ecember >4! 1ear B 6the e$uity metho applies7: Step one=the e$uity metho is applie retroactively to the prior years o&nership 6that is! 1ear 7. (riginal cost 649 shares " F497........................................................... F 499 A: ,ercentage share of 1ear  earnings 64 " F8!9997................ 89 *ess: iviens receive in 1ear ..................................................... 6497 +et carrying value at 2an. 4! 1ear B..................................................... F 449 Step to=the e$uity metho is applie throughout 1ear B. +et carrying value! 2an. 4! 1ear B........................................................ F 449 A: (riginal cost of aitional shares 68D9 shares " F447 ............ >!4D9 A: ,ercentage share of 1ear B earnings 6>9 " F8!8997 ............. 9 *ess: iviens receive in 1ear B..................................................... 6>9 +et carrying value at ec. >4! 1ear B.................................................. F>!99

c. or 1ear ! &ith o&nership in e"cess of 59 6inee! 4997! ranciscos financ statements &oul be consoliate &ith those of ,otter. #he purchase metho the only available choice uner current @AA,. )ner this metho! all assets an liabilities for rancisco are restate to fair maret value. #o o this! one mu no& fair maret values. Also! information about off%balance sheet items 6such ientifiable intangibles7 that may nee to be recognize must be obtaine. ue these implications to asset an liability valu in applyin purch


,roblem 5% 6>5 minutes7 a. ,ierson! Inc.! ,ro orma Combine 0alance -heet A--E#Current assets................................................................................ F4>5 *an................................................................................................. B9 0uilings! net................................................................................. 4>9 E$uipment! net............................................................................... 4>9 @oo&ill.......................................................................................... >5 Q #otal assets.................................................................................... F599 *IA0I*I#IE- A+ E3)I#1 Current liabilities.................................................................... *ong%term liabilities............................................................... -hareholers< e$uity.............................................................. #otal liabilities an e$uity.....................................................

F4?9 49 49 F599

Q@oo&ill computation: Cash payment.......................................................................................................................... F49 air value of net assets ac$uire 6F45 % F897...................................................................... 4?5 F >5

b. #he basic ifference bet&een pooling an purchase accounting for busines combinations is that in the pooling case there is a high lielihoo of no recoring all assets ac$uire an pai for by the ac$uiring company. #hi results in an unerstatement of assets an! conse$uently! an overstatement o current an future net income. #his is because pooling accounting is limite to recoring only boo values of the ac$uire companys net assets! &hich  not necessarily reflect current fair values of net assets. @iven the inflationar tenencies of most economies! pooling tens to unerstate asset values. #h unerstatement of assets uner pooling leas to an unerstatement e"penses 6from lac of cost allocations7 an to an overstatement of gain realize on the isposition of these assets.


,roblem 5%B 6>5 minutes7 a. #hey are reporte in Gother assetsG N4P at an amount of F455. million un investments in affiliates! &hich also inclues F8.> million as goo&ill. b. +o! isclosure is limite to this note.

c. #hese ac$uisitions inicate that of the F49.4 million pai! F4>8.> million is fo intangibles! principally goo&ill N49BP. #his implies that most of the purchas price &as in effect for some form of superior earning po&er 6resiual income assume to be en'oye by the ac$uire companies. . Analytical entry to reflect the 1ear 44 ac$uisitions: Woring capital items...................................... 5.4 i"e assets net............................................... ?.B Intangibles! principally goo&ill..................... 4>8.> (ther assets...................................................... 4.5 /inority interest................................................ >.5 Cash 6or other consieration7...................

49.4

e. 647 #he change in the cumulative translation a'ustment accounts N494P fo Europe is most liely ue to significant translation losses in 1ear 44.

687 In the case of Australia! the ecrease in the creit balance of the accoun may be ue to sales of businesses by Arnotts *t. N4DAP! &hich may hav involve the removal of a proportionate part of the account as &ell a gains or losses on translation in 1ear 44. #his is corroborate by item ND> that sho&s a reuction in the cumulative translation account ue to sale of foreign operations.


CA-ECase 5%4 6?5 minutes7 a. 647 'ooling Accounting# Investment in Wheal ........................................... Capital -toc=A"el ......................................

449!999 449!999

687 'urchase Accounting# Investment in Wheal............................................ Capital -toc=A"el ...................................... (ther Contribute Capital=A"el ................ b. 647 'ooling orsheet Entries# Capital -toc=Wheal ........................................ (ther Contribute Capital=Wheal ................... Investment in Wheal...................................... 687 'urchase orsheet Entries# Inventory ............................................................. ,roperty! ,lant! an E$uipment......................... -ecret ormula 6,atent7...................................... @oo&ill............................................................... *ong%#erm ebt................................................... Accounts Receivable..................................... Accrue Employee ,ensions....................... Investment in Wheal...................................... Capital -toc=Wheal ........................................ (ther Contribute Capital=Wheal ................... Retaine Earnings=Wheal ............................... Investment in Wheal......................................

>59!999 449!999 8?9!999 499!999 49!999 449!999 85!999 499!999 >9!999 ?9!999 8!999 5!999 8!999 4D9!999 499!999 85!999 >5!999 49!999

c. Consoliate Retaine Earnings at ec. >4! 1ear ? 'ooling 'urchase Retaine Earnings! A"el.............................................. Retaine Earnings! Wheal........................................... Consoliate Retaine Earnings................................

F459!999 >5!999 F45!999

F459!999 = F459!999


Case 5%8 659 minutes7

a. When mergers occur! the resulting company is ifferent than either of the t& former! separate companies. Conse$uently! it is often ifficult to assess th performance of the combine entity relative to that of the t&o form companies. While this problem e"tens to both purchase an pool methos! it is especially apparent &hen the pooling metho is use. )ne pooling accounting! the boo values of the t&o companies are combine. *os is the fair value of the consieration e"change an the fair value of th ac$uire assets an liabilities. As a result! the assets of the combi company are usually unerstate. -ince the assets are unerstate combine e$uity is unerstate an e"penses also are unerstate. #h means that return on assets an return on e$uity ratios are overstate.

b. #ycos high price%to%earnings ratio &as primarily riven by its relatively hig stoc price. Its high stoc price meant that poolings coul be complete &it relatively fe&er of its shares being given in consieration. Accoringly! a hig price is crucial to #ycos ability to e"ecute! an continue to e"ec ac$uisitions at a favorable price.

c. When large charges are recore in con'unction &ith ac$uisitio subse$uent perios are relieve of these charges. #his means that future ne income is increase because the items currently &ritten off &ill not have to b &ritten off in future perios. As a result! the reporte net income in futur perios may be misleaingly high. It is important that analysts assess th nature an amount of &rite%offs relate to ac$uisitions to see if such charge are actually relate to pastOcurrent events or more appropriately shoul b carrie to future perios. If such misstatements are ientifie! net income i the perio of the ac$uisition shoul be a'uste up&ar to compensate fo the over%charge! an the reporte net income of future perios shoul b commensurately reuce.

. Cost%cutting can be valuable &hen the costs that are cut relate to reunan processes or other non%value ae processes. ;o&ever! cost%cutting have averse conse$uences for the future of the company if the costs that ar cut relate to activities that bring future value=such potential costs inclu research an evelopment or management training.

e. When the maret perceives a company to have lo& $uality financial reportin the stoc price of the company can fall precipitously for at least t&o importan reasons. irst! the maret &ill assign a higher iscount rate to the company t price protect itself against accounting ris or the ris of misleaing financia information. -econ! the integrity of management is calle into $uestion. As result! the maret &ill not be &illing to pay as much for the stoc of th


Case 5%8=continue f.

ocusing on earnings before special items can be a useful tool &h attempting to measure earnings that is more reflective of the permane earnings stream an! conse$uently! more reflective of future earnin ;o&ever! several companies recor repeate special item charges. #hes companies are essentially overstating earnings for several perios 6n incluing those &ith special charges7 an then catching up by recoring th huge charge. Analysts must be careful to ientify such companies so that the are not relying on overstate earnings of the company in preicting futur performance. or such companies! it is pruent to assign a portion of th charges to several perios to evelop an appro"imation of the ongo earnings of the company.


Case 5%> 6489 minutes7 a. -ee table belo&. b. -ee table belo&. +e&monts -trategy

Accounting #reatment by +e&mont 6pre%-A- 4>>7

or&ar -ales of 485!999 ounces

#o loc%in the price of future gol sales.

+o unrealize gain or loss recore in the

Classification: Cash lo& ;ege. #he fair value of the for&ar sale 6future7 recore as as

from Inonesian mine S F?5? per

;ege.

boos. Realize gains an losses recore

liability 6as the case may be7 in the balance sheet until th of actual sale. #he compensating effect goes to accumu

&hen sol.

comprehensive income. Any change in fair value of for& 6future7 is recognize in other comprehensive income. A time of sale! accumulate comprehensive income is a'u

#ransaction

ounce

Accounting #reatment uner -A- 4

&ith net income so that the amount recognize as reven F?5?Oounce. ,urchase calls

#o provie an

+o unrealize gain or

Classification: air%Value ;ege of above fi"e commitm

on 59!999 ounces &ith strie price

upsie potential for ?9 of the for&ar

loss recore in the boos. Realize gains

for&ar sale commitment S F?5?Oounce is the hege it this instrument. #he call is recore at fair value. #he n

F?5? line to the for&ar sale.

sales in case of brea out of gol

an losses recore &hen sol.

income effect is the ifference bet&een the value of the the value of the e$uivalent $uantity 659!999 ounces7 of fo

price above F?5?.

sales. #he effect of 59!999 ounces of the above for&ar remove from accumulate comprehensive income an comprehensive income 6because it is no& recore in n

income7. #he purchase cost of the call is amortize ove holing perio. ,repai -ale in

#o raise immeiate

+o unrealize gains

Classification: Cash lo& ;ege.

2uly 4DDD: ?>!>>> ounces at various

cash to service ebt. -econary

an losses are recognize. Realize

+ote the fair value of the instrument is non%zero only &h gol price is above F>9 or belo& F>99. air value is rec

prices &ith a floor of F>99 an ceiling

ob'ective! to hege o&nsie ris

price recore on ate of sale.

the balance sheet an offset by accumulate comprehe income. Any change in fair value is recognize in other

of F>9.

belo& F>99 per ounce! but provie upsie potential up

,repai amount compute S F>99 per ounce an treate as

comprehensive income. At time of s ale! accumulate comprehensive income is a'uste &ith net income so th realize amount 6variable bet&een F>99 an F>9 per ou

to F>9. A hege &ith some limite

eferre revenue that is a'uste &hen

recore as revenue. #he eferre revenue accounting unchange.

upsie potential &ithin a range.

actual sales occur to reflect the actual sales procees.


Case 5%>=continue 6parts a T b7

#ransaction

+e&monts -trategy

Accounting #reatment by +e&mont 6pre%-A- 4>>7

,repai -ales in 2uly 4DDD: >5!D99 per annum at

#o raise immeiate cash to service ebt. 1et! first

+o unrealize gains an losses recognize on either

some fi"e price 6no information

instrument locs%in sales price! the

security. Realize 6fi"e7 price on

given about fi"e price7.

secon instrument reverses it. -o the

for&ar sale a'uste by the value of

ob'ective is clearly not heging relate.

for&ar purchase recore &hen sol! &hereby the revenue

Accounting #reatment uner -A- 4

Classification: Cash lo& ;ege. Accounting effects sim the first instrument in this table 6for&ar sale on Inone mine7.

recore is ientical to actual realization.

Classification: air Value ;ege of the for&ar sale 6&hi

in 2uly 4DDD of ientical

#reate as eferre

fi"e commitment7. Recore at fair value an any unrea gains an losses on both the for&ar sa le an purchase

$uantities at prices ranging from F8> to F>5?.

revenue that is a'uste &hen actual sales occur.

recore in net income. #ogether both the sale an pur have no effect on income or balance sheet.

or&ar purchase

,urchase ,ut (ption in August 4DDD for 8.5

#o provie o&nsie ris protection for 8.5

+o unrealize gains an losses recognize. Cost of

Classification: ifficult to say. ,robably fair%va lue hege because it is not line to forecast sale of gol. air valu puts an e$uivalent $uantity of gol reporte at fair valu

million ounces.

million ounces but allo& for upsie

put options amortize over term.

balance sheet. )nrealize gains an losses on puts an e$uivalent $uantity of gol charge to net income.

All unrealize gains an losses recore

Classification: -peculative transaction. air value on ba sheet an all unrealize gains an losses c harge to net

potential. Written Call (ptions in August 4DDD for 8.>5 million ounces.

#o finance the put purchase.

in net income.


Case 5%>=continue

c. Forard sales: Economically! this agreement locs in the cash flo& associate &ith sales. #here is no potential for gain or loss on this sale price. As a result! ris is remove. #he accounting treatment oes reflect th economics of this transaction as there is no impact until the ate of sale.

'urchased calls: Economically this agreement maes the loc in of F?5? o ?9 of the for&ar sales a floor sales price! &ith no economic impact until th ate of sale. Earlier metho oes reflect the economics. -A- 4>> treatmen recognizes the change in value over time even though no cash &ill chang hans until the ate of sale.

'repaid sale: Economically! this agreement locs the cash flo&s associate &ith the sales into a specifie range. #he eferre revenue treatmen consistent &ith the economics. ;ege accounting treatment! both befo -A- 4>> an uner -A- 4>>! is consistent &ith the economics as there is n income statement impact until the ate of sale. 'repaid sale (*5+,!! ounces) and forard purchase (*5+,!! ounc Consiere simultaneously! the economic impact of these transactions is &ash an the accounting treatment reflects this offsetting effect.

'urchased put option : Economically! this option sets a floor on the sales pric of 8.5 million ounces of prouct. #he accounting treatment! both before -A 4>> an uner -A- 4>> shoul be a goo reflection of the economic reality.

ritten call option : Economically! this option e"poses the company to lo&e sales prices in the future. #he value of this option &ill change over time. #hus the accounting treatment is an ae$uate reflection of the economics.

. #he 'ustification for not allo&ing the heging treatment comes from the fac that the &ritten calls are not heging a specific transaction or event. -A- 4> re$uires that the erivative be tie to a specific transaction! not 'ust an overa business ris.

e. +e&monts criticism is vali if heging is efine in terms of firm%&ie ris rather than in terms of transaction ris. rom the firm%&ie perspectiv +e&mont is correct in escribing the economic impact as only being opportunity cost of selling at a higher price in the future.

f. #he economic reality is that +e&mont &as unable to benefit fully from suen increase in gol prices because of its various heging arrangements #he financial statements e"aggerate the opportunity costs of the hegin program! primarily because the loss recognize on the &ritten options is no offset by an increase in the value of the gol reserves.


Case 5%? A 65 minutes7 a. #rial 0alance in ).-. ollars: -WI--C( #rial 0alance ecember >4! 1ear  rial E.change ria /alance 0ate /alan (in 1) ode %31 (in Cash........................................................ 59!999 C .> 4D!9 Accounts Receivable............................ 499!999 C .> >!9 ,roperty! ,lant! an E$uipment! net.... 99!999 C .> >9?!9 epreciation E"pense........................... 499!999 A .>B >B!9 (ther E"penses 6incluing ta"es7....... 899!999 A .>B B?!9 Inventory 4O4O1ear ............................... 459!999 A N4P 5!B ,urchases............................................... 4!999!999A .>B >B9!999 #otal ebits............................................. 8!?99!999 D!B -ales....................................................... Allo&ance for oubtful Accounts........ Accounts ,ayable.................................. +ote ,ayable.......................................... Capital -toc.......................................... Retaine Earnings 4O4O1ear ............... #ranslation A'ustment......................... #otal creits...........................................

8!999!999A 49!999 9!999 89!999 499!999 4D9!999 UUUUUUUU 8!?99!999

.>B C C. C ; N>P

B?9!99 .> >! .> >9!? .> B! .>9 >9!9 N8P 4!9 85!D99 D!B

&otes: C L Current rateM A L Average rateM ; L ;istorical rate N4P ollar amount neee to state cost of goos sol at average rate: Rate F 1 Inventory! 4O4O1ear  459!999 5!B99 #o 0alan ,urchases 4!999!999 A .>B >B9!999 @oos available for sale 4!459!999 ?8!B99 Inventory! 48O>4O1ear  489!999 C .> ?5!99 Cost of goos sol 4!9>9!999 A .>B >4!499 N8P ollar balance at ec. >4! 1ear B N>P Amount to balance.


Case 5%? A=continue b. -WI--C( Income -tatement 6In ollars7 or the 1ear Ene ec. >4! 1ear  -ales.................................................................. 0eginning inventory......................................... F 5!B99 N4P ,urchases.......................................................... >B9!999 @oos available................................................ ?8!B99 Ening inventory 6 1 489!999 " F9.>7............. 6?5!997 N4P Cost of goos sol........................................... @ross profit....................................................... epreciation e"pense...................................... >B!999 (ther e"penses 6incluing ta"es7.................. B?!999 +et income........................................................

FB?9!999

>4!499 >5!D99 444!999 F8?B!D99

N4P -ee +ote 4 to translate trial balance.

-WI--C( 0alance -heet 6In ollars7 At ecember >4! 1ear  ASSES Cash.......................................................................... Accounts receivable............................................... *ess: Allo&ances for oubtful accounts.............. Inventory................................................................... ,roperty! plant! an e$uipment! net...................... #otal assets.............................................................. 4A/4ES A&6 E 79 Accounts payable.................................................... +ote payable............................................................ #otal liabilities......................................................... Capital stoc............................................................ Retaine earnings: 4O4O1ear ................................ A: Income for 1ear ........................................... E$uity A'ustment from translation of foreign currency statements................................. -tocholers< e$uity............................................... #otal liabilities an e$uity......................................

F 4D!999 F>!999 >!99

>?!899 ?5!99 N >9?!999 F?98!99 F>9!?99 B!99 >!999 >9!999

4!999 8?B!D99

>9!D99 85!D99 N >?!99 F?98!99


+otes: NAP Ening Inventory 1 489!999 " 9.> N0P irst time this account appears in the financial statements.

c. )nisco Corp. Entry to Recor its -hare in -&issCo 1ear  Earnings: Investment in -&issCo Corporation........................... E$uity in -ubsiiary
45!D85 45!D85

o record :5; equity in Sisso
+ote: While not specifically re$uire by the problem! the parent &oul als pic up the translation a'ustment as follo&s: Investment in -&issCo Corporation........................... E$uity a'ustment from translation of foreign currency statements 6B5 " F85!D997....

4D!?85 4D!?85


Case 5%5 A 69 minutes7 a. With the ollar as the functional currency! I originally translate its statements using the Gtemporal metho.G +o& that the pont is the functional currency! I must use the Gcurrent methoG as follo&s: )+I! I+C. 0alance -heet ecember >4! 1ear D 'onts (millions)

A--E#Cash ................................................................... Accounts receivable ................................................................... Inventory ................................................................... i"e assets 6net7 ................................................................... #otal assets ................................................................... *IA0I*I#IE- A+ E3)I#1 Accounts payable ................................................................... Capital stoc ................................................................... Retaine earnings ................................................................... #ranslation a'ustment ................................................................... #otal liabilities an e$uity

E.change 0ate 'onts3%

6ollars (millions)

8

?.9

89

B99

?.9

4B5

?55

?.9

44>

>9

?.9

D9

4!5DB

>DD

5>8

?.9

4>>

99

>.9

899

?5

4>8

6.4

4!5DB

>DD.

Q#ranslation a'ustment L 99 64O>.9 % 4O?.97L 99 64O487 L 659.997 ?5 64O>.5 %4O?.97 L ?5 64O87 L 64.47 6.47

Ch_05

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