CFAI EOC question 6 reading 24

CFA Level II FRA
#1

Given:

While examining the balance sheet for Colorful Concepts, Leenid also discovers that the company has a 204 ending asset balance (188 beginning) for investments in associates, primarily due to its 20 percent interest in the equity of Exotic Imports. Exotic Imports is a specialty retail chain and in the most recent year reported 1,230 in sales, 105 in net income, and had average total assets of 620.

Question 6 asks us to exclude investment in associate and calculate net profit margine for colorful

The answer is

The investment in Exotic Imports is accounted for using the equity method and 20 percent of Exotic Import’s net income is included in the net income of Colorful Concepts. The net profit margin excluding the investment in Exotic Imports is (528 – 21)/7,049 = 7.2 percent. (If the investment in Exotic Imports is included, net profit margin is 7.5 percent.)

My question is, the share of investee’s net income included below the line or above the line?

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91330669

According to this thread, I thought it would be below the line so net profit margin wouldn’t be affected.

Can someone elaborate?

Thanks,

#2

Below the line, as in, they won’t pay additional tax on their pro-rata share of the associate’s net income since that net income has already been taxed. By excluding the net income associated with their investment ( 20% x 105 = 21), they have $21 less in total net income. Of course it’s going to affect profit margin.

#3

isn’t below the line = below net income?

anything thats above net income gets taxed right?

I’ve never seen an item after tax but before net income…

Am I misunderstanding a concept?

Thanks in advance.

#4

When you add a company’s pro-rata share of the associate’s net income to its income statement, do you take additional tax out of it?

#5

I do not… i agree with you… what you say makes sense… I am just confused about “the line” now…

can you confirm if its possible for something to appear between tax and net income?

if so, It will do for now…

Thanks,

#6

if my prior phrase of “below the line” is what’s confusing you, let me rephrase it to say “below the line of taxable income.” Will that work?

#7

absolutely! thank you… smiley