Help -- Reading 21 Example 6 (Page # 23 ) FSA

Hello Everyone, I would really appericiate if anyone can explain me the answer for Example 6 (Page# 23, Volume 2), how did they got \$16,000 number in their profit for Solution to 1 (Unreliazed profit) and also in solution to 2 (Realized profit) -Regards,

Jones Company sold \$96K of inventory to Jason Company for \$160K. Ordinarily, this would bring Jones Company \$64K in profit. However, since Jones Company owns 25% of Jason Company, any unearned profits have to be eliminated to the extent of Jones Company’s interest in Jason Company. Jason Company only sold \$120K of the \$160K it bought in 2009, so the last 25% of that 160K needs to be eliminated. For Jones a quarter of that original profit was 64K * 0.25 = 16K. But since we only need to eliminate to the *extent* that Jones owns Jason, we eliminate 25% of the 16K = 4K when arriving at the Equity Income for 2009.

Thanks tmeynink

One more question relating to this example. In the 2nd part of it where you have to calculate the figures for 2010, why is it that an addition for the realised profit is added? I mean, the profit from the sale of the remaining \$40k worth of inventory would have been included in the \$820k, no? Is this a case of double counting? CFA20089, did you manage to figure that out too? I realised that only the first part of your question was answered…

^ bump. Does anyone have any idea?

i think it’s because it’s jones selling to jason- so jones is going to make 64k by selling it’s inventory to jason (which it owns 25% of). so jones stands to make 64k on this deal, but jason in '09 only sells off 75% of the inventory. so in '09, since jones does have that 25% stake, it reports the 25% of jason’s income (which would include the inventory that did get sold), takes out the amortization charge, but then accounts for the fact that 25% of the inventory it sold to jason isn’t sold yet by taking that 64k x .25 = 16k x .25 (their ownership stake) = 4k of unrealized profits. tmeynink says it well up there. In 2010, you are correct that jason does sell off that other 25% of the inventory and that is going to show up in jason’s income of which jones gets 25%. however, jones realizes the profit of selling jason that inventory when jason sells it as the 16k x .25%. jason might’ve sold off the inventory at a gain, loss, whatever and those sale proceeds are reported in the income # in 2010- jason selling the inventory to the street. the “realized profit” of 4k is jones making the \$\$ off of the sale of the inventory to jason. so it’s not double counting. it’s more you backed out that 4k in '09 so it didn’t look like you made a profit from selling the part of inventory that was more or less to yourself and sitting on it. but when that inventory is sold, you get to say yes, i did make that money. ok, i’m going to start FSA today. In schweser though. let the games begin.

I think I managed to figure that out with your explanation bannisja. Thanks a lot!

no prob. i’m actually now reading schweser and pg 122-123 there describes the whole upstream/downstream thing pretty well in SS5. if you don’t have schweser but want a little practice: so company A owns 30% of company B. during the year, co A sold 40k of goods to co B for 50k. co B during the year sells 45k of the goods. how much does company A need to reduce it’s equity income by in that year due to this transaction? the followup q is your followup- when can co A recognize this \$\$? schweser also does an example of an upstream (investee selling to investor)- worth a look if you have both texts. pretty concise i think. glad i just looked at your example 1st though- helps it hit home nicely! ok back to the schwess… looking to finish SS5 this weekend in reading.

Heh. I think you are using the 2009 version? I have only the 2008 version and I could not find it for some reason. Perhaps I didnt search hard enough so thanks a million for typing it out!

bannisja Wrote: ------------------------------------------------------- > no prob. i’m actually now reading schweser and pg > 122-123 there describes the whole > upstream/downstream thing pretty well in SS5. if > you don’t have schweser but want a little > practice: > > so company A owns 30% of company B. during the > year, co A sold 40k of goods to co B for 50k. co > B during the year sells 45k of the goods. how > much does company A need to reduce it’s equity > income by in that year due to this transaction? > the followup q is your followup- when can co A > recognize this \$\$? > > schweser also does an example of an upstream > (investee selling to investor)- worth a look if > you have both texts. pretty concise i think. > glad i just looked at your example 1st though- > helps it hit home nicely! ok back to the > schwess… looking to finish SS5 this weekend in > reading. Anyway, the answer I got is that A has to take out the unrealised profit of \$300. Inventory left behind in B = 5K (10% of the total inventory bought from A) Less: Cost to A = 10%*40k = 4k Unrealised profit in B = 0.3 * 1k = 0.3k A can recognize this \$300 when B sells the remainder of the inventory.

the answer you get is right but they come at it as A from the whole thing would profit 10k (50k sold to B - 40k px of inventory). B sell’s 90% of the inventory, 45k/50k. So A can’t recognize 10% of it yet. (10k profit x 10% “unconfirmed” is what they call it (the unsold stuff)) x 30% which is their ownership percentage = \$300. and you are correct that they recognize it, or add it into the equity income as in the CFAI’s example calculations for the next year, when it gets sold. i did just buy the 2009 version schweser. it seems shorter than last year’s so far (one FSA session), but this could be due to the fact that i did quant/econ in the big daddy books. glad that it has updated for small stuff like this upstream/downstream little thing. for both of our sakes, i hope this is a q on the FSA section. we’ll nail it.