Question #50
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 22
Status: Correct
Correct Answer: A
Part of Context Group: Q49-50
Shared Context
Question
If Anderson Company accounts for the Birschbach Company shares using the equity method, the change in carrying value from 2012 to 2013 is closest to:
Answer Choices:
A. +$2,650,000
B. +$50,000
C. +$225,000. Prior to 2007, Company X (reporting under U.S. GAAP) had never made any acquisitions of other companies. However, on January 2, 2007, it went on a buying spree, purchasing 10% of Company A for $10,000; 30% of Company B for $20,000; 40% of Company C for $80,000; and 70% of Company D for $168,000. Below are the balance sheets for the five companies (in thousands) just prior to the purchase. Company X A B C D Cash 400 10 20 30 40 Other assets 1,600 90 180 270 360 Total assets 2,000 100 200 300 400 Liabilities 300 40 80 120 160 Equity 1,700 60 120 180 240 Total 2,000 100 200 300 400 During 2007, the companies generated the following sales, income, and dividends:
Explanation
For the equity method, the ending carrying value on the balance sheet is the beginning
carrying value plus a proportion of earnings minus a proportion of dividends. For the
Anderson Company, the change in the carrying value is the difference between the
earnings per share and the dividends per share. Dividends per share in 2013 were $1.75
per share and the earnings per share were $2.25 per share. 100,000 shares × ($2.25 –
$1.75) = +$50,000. The actual carrying value on the balance sheet is $2,600,00 + $225,000 -
$175,000 = $2,650,000.
(Module 8.3, LOS 8.a)
Prior to 2007, Company X (reporting under U.S. GAAP) had never made any acquisitions of
other companies. However, on January 2, 2007, it went on a buying spree, purchasing 10% of
Company A for $10,000; 30% of Company B for $20,000; 40% of Company C for $80,000; and
70% of Company D for $168,000.
Below are the balance sheets for the five companies (in thousands) just prior to the
purchase.
Company
X
A
B
C
D
Cash
400
10
20
30
40
Other assets
1,600
90
180
270
360
Total assets
2,000
100
200
300
400
Liabilities
300
40
80
120
160
Equity
1,700
60
120
180
240
Total
2,000
100
200
300
400
During 2007, the companies generated the following sales, income, and dividends:
Company
X
A
B
C
D
Revenue
2,000
100
200
300
400
Net income
200
10
20
30
40
Dividends
4
8
12
16
The company accounts for the acquisitions based on typical ownership proportion
guidelines. Investment in financial assets are classified as FVOCI.