Académique Documents
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Chapter 5
Analyzing Investing Activities:
Intercorporate Investments
REVIEW
Intercompany investments play an increasingly larger role in business activities.
Companies pursue intercompany activities for several reasons including diversification,
expansion, and competitive opportunities and returns. This chapter considers our
analysis and interpretation of these intercompany activities as reflected in financial
statements. We consider current reporting requirements from our analysis perspective-both for what they do and do not tell us. We describe how current disclosures are
relevant for our analysis, and how we might usefully apply analytical adjustments to
these disclosures to improve our analysis. We direct special attention to the unrecorded
assets and liabilities in intercompany investments.
5-1
OUTLINE
Passive investments
Accounting for Investment Securities
Disclosure of Investment Securities
Analyzing Investment Securities
Business Combinations
Accounting Mechanics of Business Combinations
Analysis Implications of Business Combinations
Comparison of Pooling versus Purchase Accounting for Business
Combinations
Derivative Securities
Defining a Derivative
Classification and Accounting for Derivatives
Disclosure of Derivatives
Analysis of Derivatives
5-2
ANALYSIS OBJECTIVES
Analyze implications of both the purchase and pooling methods of accounting for
business combinations.
5-3
QUESTIONS
1. Long-term investments are usually investments in assets such as debt instruments,
equity securities, real estate, mineral deposits, or joint ventures acquired with longerterm goals. Such goals often include the acquisition of control or affiliation with other
companies, investment in suppliers, securing sources of supply, etc. The valuation
and presentation of noncurrent investments depends on the degree of influence that
the investor company has over the investee company. With no influence, debt
investments other than held-to-maturity bonds and equity investments are accounted
for at market value. Once influence is established, equity investments are accounted
for under the equity method or consolidated with the statements of the investor
company.
a. In the absence of evidence to the contrary, an investment (direct or indirect) in
20% or more of the voting stock of an investee carries the presumption of an
ability to exercise significant influence over the investee. Conversely, an
investment of less than 20% in the voting stock of the investee leads to the
presumption of a lack of such influence unless the ability to influence can be
demonstrated. Accounting requirements are: Held-to-maturity securities are
reported at amortized cost. Noncurrent available-for-sale securities are reported at
fair value. Influential securities are accounted for under the equity method.
b. Standards indicate that a position of more than 20% of the voting stock might give
the investor the ability to exercise significant influence over the operating and
financial policies of the investee. When such an ability to exercise influence is
evident, the investment should be accounted for under the equity method.
Basically this means at cost, plus the equity in the earnings or losses of the
investee since acquisition (with the addition of certain other adjustments).
Evidence of an investor's ability to exercise significant influence over operating
and financial policies of the investee is reflected in several ways such as
management representation and participation. While eligibility to use the equity
method is based on the percent of voting stock outstanding, that can include, for
example, convertible preferred stock, the percent of earnings that can be picked
up under the equity method depends on ownership of common stock only.
2. a. The accounting for investments in common stock representing over 20% of equity
requires the equity method. While use of the equity method is superior to
reporting cost, one must note that this is not equivalent to fair market value
which, depending on the circumstances, can be significantly higher or lower than
the carrying amount under the equity method.
An analyst also must remember that the presumption that an investment holding
of 20% or more of the voting securities of an investee results in significant
influence over that investee is arbitraryan assumption made in the interest of
accounting uniformity. If such influence is absent, then there is some question
regarding the investor's ability to realize the amount reported.
b. A loss in value of an investment that is other than a temporary decline should be
recognized the same as a loss in value for other long-term assets. This statement
suggests considerable judgment and interpretation and, in the past, has resulted
in companies being very slow to recognize losses in their investments. Since
5-4
5-5
11.
12.
In fair value accounting, both the hedging instrument and the hedged asset or
liability are recorded at fair value in the balance sheet. All realized and unrealized
gains and losses on both the hedging instrument and the hedged asset or liability are
immediately recognized in income.
Unrealized gains and losses relating to the effective portion of a cash flow hedge are
immediately recorded as part of other comprehensive income up to the effective date
of the transaction. After the effective date of the transaction, the gains and losses are
transferred to income. The cash flow hedging instrument is recorded at fair value on
the balance sheet. However, there is no offsetting asset or liability as in the case of a
fair value hedge.
Instead, the offset in the balance sheet occurs through
accumulated comprehensive income, which is part of equity.
13. Speculative derivatives are recorded at fair value on the balance sheet and any
unrealized or realized gains or losses are immediately recorded in net income.
14. From a strict legal viewpoint, the statement is basically correct. Still, we must
remember that consolidated financial statements are not prepared as legal
documents. Consolidated financial statements disregard legal technicalities in favor
of economic substance to reflect the economic reality of a business entity under
centralized control. From the analysts' viewpoint, consolidated statements are often
more meaningful than separate financial statements in providing a fair presentation of
financial condition and the results of operations.
15. The consolidated balance sheet obscures rather than clarifies the margin of safety
enjoyed by specific creditors. To gain full comprehension of the financial position of
each part of the consolidated group, an analyst needs to examine the individual
financial statements of each subsidiary. Specifically, liabilities shown in the
consolidated financial statements do not operate as a lien upon a common pool of
assets. The creditors, secured and unsecured, have recourse in the event of default
only to assets owned by the individual corporation that incurred the liability. If, on the
other hand, a parent company guarantees a specific liability of a subsidiary, then the
creditor would have the guarantee as additional security.
16. Consolidated financial statements generally provide the most meaningful
presentation of the financial condition and the results of operations of the combined
entity. Still, they do have certain limitations, including:
The financial statements of the individual companies in the group may not be
prepared on a comparable basis. Accounting principles applied, valuation bases,
and amortization rates used can differ. This can impair homogeneity and the
validity of ratios, trends, and key relations.
Companies in relatively poor financial condition may be combined with sound
companies, obscuring information necessary for effective analysis.
5-6
5-7
20. a. Goodwill represents the excess of the total cost over the fair value assigned to the
identifiable tangible and intangible assets acquired less the liabilities assumed.
b. It is possible that the market values of identifiable assets acquired less liabilities
assumed exceed the cost (purchase price) of the acquired company. In this case,
the values otherwise assignable to noncurrent assets (except for marketable
securities) acquired should be reduced by a proportionate part of the excess.
Negative goodwill should not be recorded unless the value assigned to such
long-term assets is first reduced to zero. If negative goodwill must be recorded, it
is recorded as an extraordinary gain (net of tax) below income from continuing
operations
c. Marketable Securities are recorded at current net realizable values.
d. Receivables are recorded at the present value of amounts to be received,
computed at proper current interest rates, less allowances for uncollectibility and
collection costs.
e. Finished Goods are recorded at selling prices less cost of disposal and
reasonable profit allowance.
f.
j.
k. The goodwill of the acquired company is not carried forward to the acquiring
company's accounting records.
21. A crude way of adjusting for omitted values in a pooling combination is to estimate
the difference between the market value and the recorded book value of the net
assets acquired, and then to amortize this difference on some reasonable basis. The
result would be approximately comparable to the net income reported using purchase
accounting. Admittedly, the information available for making such adjustments is
limited.
22. Analysis should be alert to the appropriateness of the valuation of the net assets
acquired in the combination. In periods of high stock market price levels, purchase
accounting can introduce inflated values when net assets (particularly the
intangibles) of acquired companies are valued on the basis of the high market price
of the stock issued. Such values, while determined on the basis of temporarily
inflated stock prices, remain on a company's balance sheet and may require future
5-8
5-9
23. a. An acquisition program aimed at purchasing companies with lower PE ratios can,
in effect, "buy" earnings for the acquiring company. To illustrate, say that
Company X has earnings of $1 million, or $1 per share on 1 million shares
outstanding, and that its PE is 50. Now, lets assume it purchases Company Y at
10 times it earnings of $5,000,000 ($50 million price) by issuing an additional
1,000,000 shares of X valued at $50 per share. Then:
Earnings of Combined Entity are: X earnings.....$1,000,000
Y earnings..... 5,000,000
$6,000,000
The new number of shares outstanding is 2,000,000, providing an EPS of $3.00
(computed as $6 million divided by 2 million shares). Also, note that earnings per
share increases from $1 to $3 per share for Company X by means of this
acquisition.
We should recognize the synergistic effect in this case. That is, two companies
combined can sometimes show results that are better than the total effect of each
separately. This can occur through combination of vertical, horizontal, or other
basis of company integration. Consider the following example:
Company S:
PE = 10
EPS = $1.00
Earnings = $1,000,000
Number of shares = 1,000,000
Company T:
PE = 10
Earnings = $1,000,000
Assume Company S buys Company T at a bargain of 10 times earnings and it
assumes $1,000,000 after-tax savings from efficiencies. Then:
Combined entity:
S earnings....................................$1,000,000
T earnings.................................... 1,000,000
Savings from merger................... 1,000,000
New earnings...............................$3,000,000
New number of shares................ 2,000,000
New EPS.......................................
$1.50
The EPS of the combined entity increases 50 percent (relative to Company S) as a
result of this merger.
b. For adjustment purposes, the financial statements should be pooled as if the two
companies had been merged prior to the years under considerationwith any
intercompany sales eliminated. This would give the best indication of the earnings
potential. However, adjusting backwards to reflect merger savings subsequently
realized is a bit tenuous. It is probably better to use the actual combined figures,
with mental adjustments by the analyst. Too many "adjusted for merger
savings" statements bear little relation to the historical record. Also, the analyst
may want to compare the acquiring companys actual results with the new merged
company's record to get an idea of the success of the acquisition program. One
trick in the acquisition game is to look for companies with satisfactory
performance in two prior years (say, Year 1 and Year 2) and a good subsequent
year (Year 3). Such companies are prime acquisition candidates since the Year 3
pooled statements
5-10
would look good in comparison with pooled years 1 and 2. An analysis of the
acquiring companys results alone versus the combined entity would reveal this
trick.
24. The amount of goodwill that is carried on the acquirer's statement too often bears
little relation to its real value based on the demonstrated superior earning power of
the acquired company. Should the goodwill become impaired, the resulting writedown could significantly impact earnings and the market value of the company.
25. All factors supporting the estimates of the benefit periods should be reexamined in
the light of current economic conditions. Some circumstances that can affect such
estimates are:
A new invention that renders a patented device obsolete.
Significant shifts in customer preferences.
Regulatory sanctions against a segment of the business.
Reduced market potential because of an increased number of competitors.
26.A
The major provisions of accounting for foreign currency translation (SFAS 52) are:
The translation process requires that the functional currency of the entity be
identified first. Ordinarily it will be the currency of the country where the entity is
located (or the U.S. dollar). All financial statement elements of the foreign entity
must then be measured in terms of the functional currency in conformity with
GAAP.
Under the current rate method (most commonly used), translation from the
functional currency into the reporting currency, if they are different, is to be at the
current exchange rate, except that revenues and expenses are to be translated at
the average exchange rates prevailing during the period. The current method
generally considers the effect of exchange rate changes to be on the net
investment in a foreign entity rather than on its individual assets and liabilities
(which was the focus of SFAS 8).
Translation adjustments are not included in net income but are disclosed and
accumulated as a separate component of stockholders' equity (Other
Comprehensive Income or Loss) until such time that the net investment in the
foreign entity is sold or liquidated. To the extent that the sale or liquidation
represents realization, the relevant amounts should be removed from the separate
equity component and included as a gain or loss in the determination of the net
income of the period during which the sale or liquidation occurs.
27. A The accounting standards for foreign currency translation have as its major
objectives: (1) to provide information that is generally compatible with the expected
economic effects of a change in exchange rate on an enterprise's cash flows and
equity, and (2) to reflect in consolidated statements the financial results and relations
as measured in the primary currency of the economic environment in which the entity
operates, which is referred to as its functional currency. Moreover, in adopting the
functional currency approach, the FASB had the following goals of foreign currency
translation in mind: (1) to present the consolidated financial statements of an
enterprise in conformity with U.S. GAAP, and (2) to reflect in consolidated financial
statements the financial results and relations of the individual consolidated entities as
measured in their functional currencies. The Board's approach is to report the
adjustment resulting from translation of foreign financial statements not as a gain or
loss in the net income of the period but as a separate accumulation as part of equity
(in comprehensive income).
5-11
28. A Following are some analysis implications of the accounting for foreign currency
translation:
(a) The accounting insulates net income from balance sheet translation gains and
losses, but not transaction gains and losses and income statement translation
effects.
(b) Under current GAAP, all balance sheet items, except equity, are translated at the
current rate; thus, the translation exposure is measured by the size of equity or
the net investment.
(c) While net income is not affected by balance sheet translation, the equity capital is.
This affects the debt-to-equity ratio (the level of which may be specified by certain
debt covenants) and book value per share of the translated balance sheet, but not
of the foreign currency balance sheet. Since the entire equity capital is the
measure of exposure to balance sheet translation gain or loss, that exposure may
be even more substantial, particularly with regard to a subsidiary financed with
low debt and high equity. The analyst can estimate the translation adjustment
impact by multiplying year-end equity by the estimated change in the period to
period rate of exchange.
(d) Under current GAAP, translated reported earnings will vary directly with changes
in exchange rates, and this makes estimation by the analyst of the "income
statement translation effect" less difficult.
(e) In addition to the above, income will also include the results of completed foreign
exchange transactions. Also, any gain or loss on the translation of a current
payable by the subsidiary to parent (which is not of a long-term capital nature) will
pass through consolidated net income.
5-12
EXERCISES
Exercise 5-1 (20 minutes)
a.
5-13
5-14
5-15
e. 100 percent of C2's assets and liabilities are included in the consolidated
balance sheet. However, the stockholders' equity of C2 is split into two parts:
80 percent is added to the stockholders' equity of Co. X and 20 percent is
shown on a separate line (above Co. X's stockholders' equity) as "minority
ownership of C2" (frequently just simply called "minority interest"). The
portion of the 80 percent representing the past purchase by Co. X would be
eliminated (in consolidation) against the "investment in subsidiary."
Exercise 5-5concluded
f. Co. X must purchase enough additional common stock from the other
stockholders in C3 or purchase enough new shares issued by C3 to increase
its ownership to more than 50 percent of C3's common stock. (Alternatively,
C1 or C2 could purchase the additional shares.)
g. There would be no intercompany investment or intercompany dividends. But
any other intercompany transactions must be eliminated (such as
intercompany sales and intercompany receivables and payables).
Exercise 5-6A (20 minutes)
a. The choice of the functional currency would make no difference for the
reported sales numbers. This is because sales are translated at rates on the
transaction date, or average rates, regardless of the choice of the functional
currency.
b. When the U.S. dollar is the functional currency (Bethel Company), some
assets and liabilities (mainly inventory and fixed assets) are translated at
historic rates. The monetary assets and liabilities are translated at current
exchange rates. This means the translation gain or loss is based only on
those assets and liabilities that are translated at current rates. When the
functional currency is the local currency (Home Brite Company), all assets and
liabilities are translated at current exchange rates, and common and preferred
stock are translated at historic rates. The translation gain or loss is based on
the net investment in each local currency.
c. When the U.S. dollar is the functional currency, all translation gains or losses
are included in reported net income. When the functional currency is the local
currency, the translation gain or loss appears on the balance sheet as a
separate component of shareholders' equity (in comprehensive income or
loss), thus bypassing the net income statement.
(CFA Adapted)
5-16
PROBLEMS
Problem 5-1 (20 minutes)
a. Investments Reported on the Balance Sheet:
Able Corp. bonds ............................
$ 330
Bryan Co. bonds ........................................................825
Caltran, Inc. bonds ....................................................515
Available-for-sale equity securities ......................1,600
Trading equity securities ..................................... 950
Total........................................................................$4,220
b. Reporting of Unrealized Value Fluctuations:
Unrealized price fluctuations on available-for-sale securities are reported in
comprehensive income (Bryan Co. bonds and available-for-sale equity
securities).
Unrealized price fluctuations on trading securities are reported in net
income (Caltran bonds and trading equity securities).
Problem 5-2 (30 minutes)
1. Since the aggregate market value of the portfolio exceeds cost, there is no
write down of the individual security whose market value declined to less than
one-half of its cost. Stockholders' equity will be increased (decreased) to the
extent that the excess of market over cost has increased (decreased) over the
period. There is no effect on the income statement.
2. This situation is similar to 1 above. The only difference is that the firm in
question does not use the classified balance sheet format. In this case, the
analyst must be sure to review note disclosures regarding the classification of
investments (if not provided on the face of the balance sheet).
3. This is not a reclassification between categories as the securities remain in
the available-for-sale category. However, the analyst should note that
management is contemplating a sale in the near future.
4. The increase in fair value of the security should be credited to shareholders'
equity. (Since the security is classified as noncurrent, it cannot be a trading
security).
5-17
$ 110,000
3,190,000
660,000
(360,000)
$3,600,000
c. Accounting method for 2006. For 2006, with ownership in excess of 50% (in
this case, 100%) and Simpson in control of BC, the consolidation method is
used to combine BCs financial statements with those of Simpson. In a
consolidation, only the purchase method is available to account for the
investmentpooling of interest is not allowed.
5-18
Investment
$40,000
1,600 [1]
(800) [2]
(480) [3]
(640) [4]
$39,680
Notes ($000s):
[1] 80% of $2,000 net income
[2] 80% of $1,000 dividends
[3] 80% of $(600) net loss
[4] 80% of $800 dividends
b. The strengths associated with use of the equity method in this case include:
It reduces the balance in the investment account in Year 7 due to the net
loss. Note: Just recording dividend income would obscure the loss.
It recognizes goodwill on the balance sheet (via inclusion in the investment
balance) and, therefore, it reflects the full cost of the investment in
Bowman Co.
The possible weaknesses with use of the equity method in this case include:
Lack of detailed information (one-line consolidation).
Dollar earned by Bowman may not be equivalent to dollar earned by Burry.
5-19
5-20
$140
180
180
$500
*Goodwill computation:
Cash payment..........................................................................................................................
$180
Fair value of net assets acquired ($165 - $20)......................................................................
145
$ 35
b. The basic difference between pooling and purchase accounting for business
combinations is that in the pooling case there is a high likelihood of not
recording all assets acquired and paid for by the acquiring company. This
results in an understatement of assets and, consequently, an overstatement of
current and future net income. This is because pooling accounting is limited
to recording only book values of the acquired companys net assets, which do
not necessarily reflect current fair values of net assets. Given the inflationary
tendencies of most economies, pooling tends to understate asset values. The
understatement of assets under pooling leads to an understatement of
expenses (from lack of cost allocations) and to an overstatement of gains
realized on the disposition of these assets.
5-21
180.1
e. (1) The change in the cumulative translation adjustment accounts [101] for
Europe is most likely due to significant translation losses in Year 11.
(2) In the case of Australia, the decrease in the credit balance of the account
may be due to sales of businesses by Arnotts Ltd. [169A], which may have
involved the removal of a proportionate part of the account as well as
gains or losses on translation in Year 11. This is corroborated by item [93]
that shows a reduction in the cumulative translation account due to sales
of foreign operations.
5-22
CASES
Case 5-1 (45 minutes)
a. (1) Pooling Accounting:
Investment in Wheal ...........................................
Capital StockAxel ......................................
110,000
110,000
350,000
110,000
240,000
100,000
10,000
110,000
25,000
100,000
30,000
40,000
2,000
5,000
2,000
190,000
100,000
25,000
35,000
160,000
5-23
$150,000
35,000
$185,000
$150,000
$150,000
5-24
Case 5-2continued
f.
5-25
Transaction
Forward Sales of
125,000 ounces
from Indonesian
mine @ $454 per
ounce
Newmonts
Strategy
To lock-in the price
of future gold sales.
Hedge.
Accounting
Treatment by
Newmont
(pre-SFAS 133)
No unrealized gain or
loss recorded in the
books. Realized gains
and losses recorded
when sold.
Purchased calls
on 50,000 ounces
with strike price
$454 linked to the
forward sale.
To provide an
upside potential for
40% of the forward
sales in case of
break out of gold
price above $454.
No unrealized gain or
loss recorded in the
books. Realized gains
and losses recorded
when sold.
Prepaid Sale in
July 1999: 483,333
ounces at various
prices with a floor
of $300 and ceiling
of $380.
To raise immediate
cash to service
debt. Secondary
objective, to hedge
downside risk
below $300 per
ounce, but provide
upside potential up
to $380. A hedge
with some limited
upside potential
within a range.
No unrealized gains
and losses are
recognized. Realized
price recorded on
date of sale.
Prepaid amount
computed @ $300 per
ounce and treated as
deferred revenue that
is adjusted when
actual sales occur to
reflect the actual
sales proceeds.
5-26
Transaction
Prepaid Sales in
July 1999: 35,900
per annum at
some fixed price
(no information
given about fixed
price).
Newmonts
Strategy
To raise immediate
cash to service
debt. Yet, first
instrument locks-in
sales price, the
second instrument
reverses it. So the
objective is clearly
not hedging
related.
Forward purchase
in July 1999 of
identical
quantities at
prices ranging
from $263 to $354.
Accounting
Treatment by
Newmont
(pre-SFAS 133)
No unrealized gains
and losses
recognized on either
security. Realized
(fixed) price on
forward sale adjusted
by the value of
forward purchase
recorded when sold,
whereby the revenue
recorded is identical
to actual realization.
Treated as deferred
revenue that is
adjusted when actual
sales occur.
Purchased Put
Option in August
1999 for 2.85
million ounces.
To provide
downside risk
protection for 2.85
million ounces but
allow for upside
potential.
No unrealized gains
and losses
recognized. Cost of
put options amortized
over term.
Written Call
Options in August
1999 for 2.35
million ounces.
5-27
Case 5-3continued
c. Forward sales: Economically, this agreement locks in the cash flows
associated with sales. There is no potential for gain or loss on this sales
price. As a result, risk is removed. The accounting treatment does reflect the
economics of this transaction as there is no impact until the date of sale.
Purchased calls: Economically this agreement makes the lock in of $454 on
40% of the forward sales a floor sales price, with no economic impact until the
date of sale. Earlier method does reflect the economics. SFAS 133 treatment
recognizes the change in value over time even though no cash will change
hands until the date of sale.
Prepaid sale: Economically, this agreement locks the cash flows associated
with the sales into a specified range. The deferred revenue treatment is
consistent with the economics. Hedge accounting treatment, both before
SFAS 133 and under SFAS 133, is consistent with the economics as there is no
income statement impact until the date of sale.
Prepaid sale (35,900 ounces) and forward purchase (35,900 ounces):
Considered simultaneously, the economic impact of these transactions is a
wash and the accounting treatment reflects this offsetting effect.
Purchased put option: Economically, this option sets a floor on the sales price
of 2.85 million ounces of product. The accounting treatment, both before SFAS
133 and under SFAS 133 should be a good reflection of the economic reality.
Written call option: Economically, this option exposes the company to lower
sales prices in the future. The value of this option will change over time. Thus,
the accounting treatment is an adequate reflection of the economics.
d. The justification for not allowing the hedging treatment comes from the fact
that the written calls are not hedging a specific transaction or event. SFAS 133
requires that the derivative be tied to a specific transaction, not just an overall
business risk.
e. Newmonts criticism is valid if hedging is defined in terms of firm-wide risk,
rather than in terms of transaction risk. From the firm-wide perspective,
Newmont is correct in describing the economic impact as only being the
opportunity cost of selling at a higher price in the future.
f. The economic reality is that Newmont was unable to benefit fully from the
sudden increase in gold prices because of its various hedging arrangements.
The financial statements exaggerate the opportunity costs of the hedging
program, primarily because the loss recognized on the written options is not
offset by an increase in the value of the gold reserves.
5-28
2,000,000A
10,000
80,000
20,000
100,000
190,000
________
2,400,000
.37
C
C.
C
H
[3]
740,000
.38
3,800
.38
30,400
.38
7,600
.30
30,000
[2]
61,000
25,900
898,700
Rate
$
Inventory, 1/1/Year 8
150,000
56,700 To Balance
Purchases
1,000,000
A
.37
370,000
Goods available for sale
1,150,000
426,700
Inventory, 12/31/Year 8
120,000
C
.38
45,600
Cost of goods sold
1,030,000
A
.37
381,100
[2] Dollar balance at Dec. 31, Year 7
[3] Amount to balance.
5-29
Case 5-4Acontinued
b.
SWISSCO
Income Statement (In Dollars)
For the Year Ended Dec. 31, Year 8
Sales..................................................................
Beginning inventory......................................... $ 56,700 [1]
Purchases..........................................................
370,000
Goods available................................................
426,700
Ending inventory ( 120,000 x $0.38).............
(45,600) [1]
Cost of goods sold...........................................
Gross profit.......................................................
Depreciation expense......................................
37,000
Other expenses (including taxes)..................
74,000
Net income........................................................
$740,000
381,100
358,900
111,000
$247,900
SWISSCO
Balance Sheet (In Dollars)
At December 31, Year 8
ASSETS
Cash..........................................................................
Accounts receivable...............................................
Less: Allowances for doubtful accounts..............
Inventory...................................................................
Property, plant, and equipment, net......................
Total assets..............................................................
LIABILITIES AND EQUITY
Accounts payable....................................................
Note payable............................................................
Total liabilities.........................................................
Capital stock............................................................
Retained earnings: 1/1/Year 8................................
Add: Income for Year 8...........................................
Equity Adjustment from translation of
foreign currency statements.................................
Stockholders' equity...............................................
Total liabilities and equity......................................
5-30
$ 19,000
$38,000
3,800
34,200
45,600 [A]
304,000
$402,800
$30,400
7,600
38,000
30,000
61,000
247,900
308,900
25,900 [B]
364,800
$402,800
185,925
185,925
Note: While not specifically required by the problem, the parent would also
pick up the translation adjustment as follows:
Investment in SwissCo Corporation...........................
Equity adjustment from translation of
foreign currency statements (75% x $25,900)....
5-31
19,425
19,425
ASSETS
Cash
...................................................................
Accounts receivable
...................................................................
Inventory
...................................................................
Fixed assets (net)
...................................................................
Total assets
...................................................................
Exchange Rate
Ponts/$
82
4.0
20.50
700
4.0
175.00
455
4.0
113.75
360
4.0
90.00
1,597
Dollars
(millions)
399.25
532
4.0
133.00
600
3.0
200.00
465
132.86
(66.61)*
1,597
5-32
399.25
Case 5-5continued
FUNI, INC.
Income Statement
For Year Ended Dec. 31, Year 9
Ponts
(millions)
Sales
...................................................................
Cost of sales
...................................................................
Depreciation expense
...................................................................
Selling expense
...................................................................
Net income
b. (1) Dollar:
Pont:
(2) Dollar:
Pont:
(3) Dollar:
Pont:
Exchange Rate
Ponts/$
Dollars
(millions)
3,500
3.5
1,000.00
(2,345)
3.5
(60)
3.5
(670.00
)
(17.14)
(630)
3.5
(180.00)
465
132.86
5-33