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UNIVERSIDAD DEL PACÍFICO

DEPARTAMENT OF FINANCE
FINANCIAL STATEMENT ANALYSIS
FIRST SEMESTER 2018
TEACHING ASSISTANTS: LUIS SATURNO

DISCUSSION SECTION N° 5

1. Tall Company owns 30% of the common equity of Short Incorporated. Tall has been
unsuccessful in its attempts to obtain representation on Short's board of directors. For financial
reporting purposes, Tall's ownership interest is most likely considered a(n):
A. investment in financial assets.
B. investment in associates.
C. business combination.
2. If a company uses the equity method to account for an investment in another company:
A. income is combined to the extent of ownership.
B. all income of the affiliate is included except intercompany transfers.
C. earnings of the affiliate are included but reduced by any dividends paid to the company.

Use the following information to answer Questions 3 through 7.

Kirk Company acquired shares in the equity of both Company A and Company B. We have the following
information from the public market about Company A and Company B's investment value at the time of
purchase and at two subsequent dates:

3. Kirk Company will report the initial value of its investment in financial assets as:
A. $1,030.
B. $1,200.
c. $1,250.
4. At t = 1, Kirk will:
A. carry the financial assets at cost.
B. write down the financial assets to $1,030 and recognize an unrealized loss of $170.
C. write down the financial assets to $1,030 and recognize a realized loss of $170.

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5. At t = 2, Kirk will report the carrying value of its financial assets as:
A. $1,030.
B. $1,200.
C. $1,250.
6. Based on the information provided, which of the following statements is most accurate?
A. Classifying the shares as trading securities would result in greater reported earnings volatility
for Kirk.
B. Classifying the shares as available-for-sale securities would result in a $220 realized gain for
Kirk between t = 1 and t = 2.
C. It is optimal for Kirk to classify its shares in Company A and Company B as available-for-sale
securities since it results in a net $50 gain recognized on the income statement at t = 2.
7. Assume for this question only that Security A and Security B are both debt securities held-to-
maturity. At t = 2, Kirk will report the carrying value of these securities as:
A. $1,030.
B. $1,200.
c. $1,250.

Use the following information to answer Questions 8 through 10.

Assume Company P acquired 40% of the shares of Company A for $1.5 million on January 1, 2007.
During the year, Company A earned $500,000 and paid dividends of $125,000.

8. At the end of2007, Company P reported investment in Company A as:


A. $1.5 million.
B. $1.65 million.
C. $1.7 million.
9. Company P reported investment income of:
A. $50,000.
B. $150,000.
C. $200,000.
10. Company P received cash flow from the investee of:
A. $50,000.
B. $150,000.
c. $200,000.

Use the following information to answer Questions 11 though 13.


Assume Company P acquires 80% of the common stock of Company S on December 31, 2008, by
paying $120,000 cash to the shareholders of Company S. The two firms' preacquisition balance sheets
as of December 31, 2008, and income statements for the year ending December 31, 2009, follow:

11. Immediately after the acquisition, Company P will report total assets of:
A. $1,080,000.
B. $1,440,000.
C. $1,560,000.
12. For the year ended December 31, 2009, Company P's consolidated net income is:
A. $300,000.
B. $348,000.
C. $360,000.
13. On its December 31, 2009, consolidated balance sheet, Company P should report a minority
ownership interest of:
A. $0.
B. $39,000.
C. $42,000.

Use the following information to answer Questions 14 and 15.


Company M acquired 20% of Company N for $6 million on January 1, 2009. Company N's debt and
equity securities are publicly traded on an organized exchange. Company N reported the following for
the year ended 2009:

14. If Company M can significantly influence Company N, what is the balance sheet carrying value
of Company M's investment at the end of 2009?
A. $5,790,000.
B. $5,970,000.
C. $6,000,000.
15. If Company M can significantly influence Company N, what amount of income should Company
M recognize from its investment for the year ended 2009?
A. ($90,000).
B. ($210,000).
C. $30,000.

Use the following information to answer Questions 16 through 18.

Company C owns a 50% interest in a joint venture, JVC, and accounts for it using the equity method.
They have each reported the following 2009 financial results.
16. Assuming proportionate consolidation, Company C's stockholders' equity at the end of 2009 is
closest to:
A. $5,950.
B. $6,350.
C. $6,750.
17. Assuming proportionate consolidation, Company C's total assets at the end of 2009 is closest
to:
A. $15,250.
B. $15,650.
C. $17,850.
18. According to U.S. GAAP, goodwill is considered impaired if the:
A. implied goodwill at the measurement date exceeds the carrying value of goodwill.
B. carrying value of the reporting unit is greater than fair value of the reporting unit.
C. goodwill can be separated from the business and valued separately.
19. Adam Corporation acquired Hardy Corporation recently using the acquisition method. Adam is
preparing to report its year-end results to include Hardy according to IFRS. Which of the following
statements regarding goodwill is most accurate?
A. Adam would amortize its goodwill over no more than 20 years.
B. Adam would test its goodwill annually to ensure the carrying value is not greater than the fair
value.
C. Adam would test its goodwill annually to ensure the fair value is not greater than the carrying
value.
20. According to U.S. GAAP, which of the following statements about the method used to account
for a joint venture whereby each party owns 50o/o is most accurate?
A. The investor can choose between the proportionate consolidation method and the equity
method.
B. The equity method is required.
C. The consolidation method is required.
21. A company accounts for its investment in a subsidiary using the equity method. The reported net
profit margin is 14%. An analyst adjusts the financials to reflect consolidation and determines
that the adjusted net profit margin is 8%. The net profit margin based on proportionate
consolidation is most likely to be:
A. less than 8%.
B. more than 14%.
C. between 8% and 14%.
22. A company accounts for its investment in a subsidiary using the equity method. The reported
return on equity (ROE) is 21%, and return on assets (ROA) is 14%. An analyst adjusts the
financials to reflect proportionate consolidation. ROE based on proportionate consolidation is
most likely to be:
A. less than 14%.
B. between 14% and 21%.
C. equal to 21%