Q48. Joseph Haggs, CFA, is an analyst working for Garvess Jones, a large publicly traded investment-baking firm. Haggs covers the Internet sector. Recently, one of the more successful companies Haggs covers, Simpson Corporation, made an aggressive move to acquire another Internet company, Bailey Corporation (BC). BC is a company specializing in graphics and animation on the World Wide Web and has 1,000,000 shares outstanding. Simpson also holds minimal investments in other technology companies both public and private. In 1999 Simpson saw an opportunity to substantially increase its share in BC. Simpson feels that their sophisticated animation can greatly improve Simpson's market share and sees an acquisition as an opportunity to expand their business. The relevant financial data are in the following tables. Bailey Corporation | Selected Financial Data, Years Ended December 31 | (in Thousands) | < >> | Item | 1998 | 1999 | 2000 | Sales | $50,000 | $60,000 | $70,000 | Less: cost of goods sold (COGS) | 37,000 | 43,700 | 47,250 | Earnings before interest & taxes (EBIT) | 13,000 | 16,300 | 22,750 | Less: Interest | 10,000 | 13,000 | 19,000 | EBT | 3,000 | 3,300 | 3,750 | Less: Taxes | 1,000 | 1,100 | 1,250 | Net Income | $2,000 | $2,200 | $2,500 | Dividends Paid | $1,000 | $1,200 | $1,500 | Total Shares Outstanding | 1,000,000 |
Simpson’s Purchase Transactions in BC’s Stock | Date | January 1, 1998 | January 1, 1999 | January 1, 2000 | Number of Shares | 10,000 | 290,000 | 700,000 | Price per Share | 10 | 11 | 15 |
Because this is the largest acquisition in Simpson's history, Mr. Haggs' supervisor has asked him to prepare a report for Garvess Jones' clients detailing the affects of the acquisition on Simpson's financial statements. Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1999. Which is the correct method?
A) Equity method. B) Consolidation method. C) Cost method.
Q49. Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 1998. Which is the correct method?
A) Cost method. B) Equity method. C) Consolidation method.
Q50. Haggs wonders which accounting method Simpson uses to calculate the book value of the BC investment for the year ending December 31, 2000. Which is the correct method?
A) Equity method. B) Consolidated method. C) Pooling-of-interests method.
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