the answer messed up, how did they get debt $496045 buy switch from proportionate consolidation to equity method? Thanks.
i don’t think the answer is messed up, it’s actually correct. so first, you work out the Equity from the ROE and NI that’s given, which is (137,612 / 0.2) = 688,060. then from there, you find the current Debt amount from the D/E ratio given, which is (688,060 * 0.75) = 516,045. now this figure is calculated based on the proportional method, which does include the sub’s assets and liabilities. but remember that equity method does NOT include the sub’s assets or liabilities, it’s recorded just a “1 line” item on the balance sheet. in other words, if we’re switching from proportional to equity, we need to remove that debt amount when we’re calculating the new D/E. since Glade owns 50% of ArdOre, the new Debt amount would simply be (516,045 - (50% * 40,000)) = 496,045. so the new D/E is 496,045 / 688,060, which is 72.1%. i merely just reiterated what the answer key said, so i’m not sure if this is helpful. hope it helped anyway for the guys who didn’t get the sample exam from CFAI.
i thought Glade only owned 20%
in 2009 they own 50%.