#33, #35, #36 … This question really confused me. Cause it says in the vignette, the balance sheet was prepared immediately FOLLOWING the acquisition. Doesn’t that mean the $500 cash investment has already been deducted off of Merick’s B/S and gone to Lisam’s shareholders (and thus accounted for) ??? I lost 3 marks cause I thought the $500 was accounted for! The Merick cash balance in the B/S is $400, so I automatically thought it doesn’t make sense to deduct it cause that would yield a negative cash balance (otherwise they said they would have financed the transaction with debt or equity?). It also mentions that ‘for ratio computation purposes, the analyst uses beginning-of-year balance sheet values rather than average balance sheet values’ - but I assumed that applied to ratio analysis, not the actual B/S data. Any thoughts? I’m probably missing something…
yeah 33 you just have to realize that you deduct that $500 investment when getting to total assets because WE ARE CONSOLIDATING NOW. So you add all the assets of the subsidiary, but if you left the $500 investment in there you would be double counting. #35, you just gotta know the ratio, realize interest expense is in the denominator, say oh which method gives highest interest expense…probably consolidation or prop consol, test both out and see which is higher. Under consolidation you are recognizing 100% of the sub’s EBIT and 100% of their int expense. #36, total equity under consolidation is just the parent’s/Merick’s plus noncontrolling interest (what the other little guys actually own, which is 50%). Sometimes there could be a write up here if they had to issue equity or something but here there is none of that. Let me know if that helps.
Sorry, the main issue is whenever they deduct $500…I got the other q’s wrong primarily cause I didn’t deduct $500 for the entire set. I think I get it now. Cause on Merick’s B/S, they have a line item called “Long-term investment” which equals $500 - I am assuming that is referring to the investment in Lisam… Thanks