dirk01

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) Acquisition method.

B) Equity method.

C) Investment in Financial Assets method.

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When a company owns an influential but non-controlling interest in another company, commonly 20-50%, it must account for it under the equity method.

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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) Equity method.

B) Acquisition method.

C) Investment in Financial Assets method.

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When a company owns a non-influential and non-controlling interest in another company the investment must be carried at cost. Simpson must carry its BC investment at cost for 1998.

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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) Acquisition method.

B) Equity method.

C) Pooling-of-interests method.

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When a company's interest in another exceeds 50% it is considered to have controlling interest and must consolidate the financial statements.

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Haggs wants to make sure that he assumes the proper accounting method when he does his analysis. The acquisition of BC stock will lead to Simpson's total net cash flow equaling which of the following for the year ending December 31, 1999?

A) $−3,190,000.

B) $−2,830,000.

C) $360,000.

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Simpson paid a total of $−3,190,000 (290,000 shares × $11) however, they also received a dividend from BC of $360,000. For 1999 Bailey Corporation is paying $1.20 in dividends per share (1,200,000 / 1,000,000). As of December 1999, Simpson has purchased 300,000 shares of BC (= 290,000 + 10,000). So dividends received is 300,000 × $1.20 = $360,000. This will make the total cash flow for the year $−2,830,000.

dirk01

Assume that on the balance sheet date shown below TME Corporation acquires 70% of Abcor, Inc. common stock for $25,000 in cash.

Pre-acquisition Balance Sheets December 31, 2001
	TME Corp.	Abcor, Inc.
Current assets	$80,000	$38,000
Other assets	28,000	15,000
Total assets	$108,000	$53,000
Current liabilities	$60,000	$32,000
Common stock	15,000	14,000
Retained earnings	33,000	7,000
Total liabilities and equity	$108,000	$53,000

What will be the post-acquisition current ratio, using both the acquistion method and the equity method, respectively, for TME?
The choices below represent Acquisition and Equity, respectively.

A) 1.01, 0.92.

B) 1.04, 1.11.

C) 1.21, 1.02.

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With the acquisition method: The current assets are ($80,000 + $38,000 - $25,000) = $93,000. The current liabilities are ($60,000 + $32,000) = $92,000. The current ratio is $93,000/$92,000 = 1.01. With the equity method: The current assets are ($80,000 - $25,000) = $55,000. The current liabilities are $60,000. The current ratio is $55,000/$60,000 = 0.92.

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Using the acquistion method to account for the acquisition, what will be the post-acquisition current assets of TME?

A) $93,000.

B) $105,000.

C) $118,000.

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Using the acquisition basis of accounting, the post-acquisition level of the current assets is the amount of the current assets prior to acquisition minus the amount of cash used for the acquisition. ($80,000 + 38,000 – 25,000) = $93,000.

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Using the acquistion method to account for the acquisition, which of the following is closest to the post-acquisition amount that will be recorded as the minority interest under US GAAP?

A) $10,700.

B) $6,300.

C) $21,000.

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Since only 70% of Abcor was purchased by TME there is a minority interest that must be accounted for, equal to the percentage of Abcor not owned by TME times Abcor’s fair value.
Abcor’s fair value = 25,000/0.7 = 35,714.29
Under US GAAP, only full goodwill.
Minority interest = 35,714.29 (0.3) = 10, 714.29

dirk01

The proportionate consolidation method results in:

A) different net income from the equity method.

B) same equity as the cost method.

C) same net income as the equity method.

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The proportionate consolidation results in the SAME net income and equity as the equity method

dirk01

The proportionate consolidation method will least likely achieve the same results as the acquisition method because:

A) of the use of the equity method on the income statement.

B) there are no minority interests.

C) no joint ventures are included.

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Proportionate consolidations and acquisitions are the same except for the exclusion of minority interests in proportionate consolidations.