Started reviewing SS5 tonight- wow, I forgot how to do these all! Time to figure it all out again! Sorry if the format isn’t amazing. Company A owns 40% of a joint venture, Jovent, Inc., and each company has reported the following information: Information Statement Information Revenues $8,000 Company A $2,000 Jovent, Inc. Cost of goods sold 2,400 Company A 800 Jovent, Inc. Selling and administration expenses 1,600 Company A 200 Jovent, Inc. Interest expense 1,000 Company A 100 Jovent, Inc. Balance Sheet Information Cash $900 Company A $300 Jovent, Inc. Inventory 700 Company A 200 Jovent, Inc. Accounts receivable 800 Company A 250 Jovent, Inc. Plant and equipment 3,000 Company A 600 Jovent, Inc. Accounts payable 1,300 Company A 200 Jovent, Inc. Additional information: Company A purchases 20% of Jovent’s annual production, Jovent has an account receivable from Company A for $100, and both companies have a 40% tax rate. Using the equity method, what will be the before tax income for Company A, including its equity from Jovent? A) $3,000. B) $3,216. C) $2,650. D) $2,800. -------------------------------------------------------------------------------- Using the proportionate consolidation method, what will be the total assets for Company A? A) $6,750. B) $5,400. C) $6,150. D) $5,900. -------------------------------------------------------------------------------- Which of the following statements about accounting for joint ventures is least accurate? A) When using the equity method to account for a joint venture, it results in less than complete information for analysts about assets, liabilities, revenues, and expenses. B) Many financial ratios will be different when using the proportionate consolidation method than if the equity method is used in accounting for joint ventures. C) The proportionate consolidation method to account for joint ventures provides financial analysts with better financial information. D) With proportionate consolidation, the parent company includes its proportionate share of assets, liabilities, and equity in the joint venture.
1 B 2 D 3C
B D D
B D D
oops… my bad… I meant 3D not only do I make calculation mistakes, I mark the wrong chioce after getting the right one 
B D D
B, D, D 1st one: Jovent income = (2,000-800-200-100)*0.6=540 -> 40% of that is 216 Company A: 8,000-2,400-1,600-1,000+216=3,216 -> B 2nd: adjusting A/R of Jovent 250-100=150 Eq of Jovent: 300+200+150+600=1,250-> 40% of that is 500 Eq of A: 900+700+800+3,000+500=5,400+500 = 5,900 -> D
You guys are ON POINT! I hadn’t looked at this stuff for a while- took me a while to come up with the calcs and clearly i messed up the last one because i’m good like that. A) $3,000. B) $3,216. C) $2,650. D) $2,800. Your answer: B was correct! The net income for Jovent must be calculated first in order to determine the equity in Jovent that will be included on Company A’s income statement. Company A Jovent, Inc. Revenues $8,000 $2,000 Equity in Jovent 216 – Cost of goods sold 2,400 800 Selling and administration expenses 1,600 200 Interest expense 1,000 100 Earnings before tax $3,216 $900 Tax 360 Net income $540 Multiply Jovent’s net income by the equity ownership by Company A to get Company A’s equity in Jovent. (0.40)($540) = $216. -------------------------------------------------------------------------------- Using the proportionate consolidation method, what will be the total assets for Company A? A) $6,750. B) $5,400. C) $6,150. D) $5,900. Your answer: D was correct! Cash $1,020 $900 + 0.40($300) Inventory 780 $700 + 0.40($200) Accounts receivable 860 $800 + 0.40($250 − 100) Plant and equipment $3,240 $3,000 + 0.40($600) -------------------------------------------------------------------------------- Which of the following statements about accounting for joint ventures is least accurate? A) When using the equity method to account for a joint venture, it results in less than complete information for analysts about assets, liabilities, revenues, and expenses. B) Many financial ratios will be different when using the proportionate consolidation method than if the equity method is used in accounting for joint ventures. C) The proportionate consolidation method to account for joint ventures provides financial analysts with better financial information. D) With proportionate consolidation, the parent company includes its proportionate share of assets, liabilities, and equity in the joint venture. Your answer: C was incorrect. The correct answer was D) With proportionate consolidation, the parent company includes its proportionate share of assets, liabilities, and equity in the joint venture. Stockholder’s equity will be unaffected by use of the proportionate consolidation method to account for joint ventures.
can u break down this calc for me and tell me why each thing was done. specifically, what is the 0.6? 1st one: Jovent income = (2,000-800-200-100)*0.6=540 -> 40% of that is 216
That is net income for Jovent. The 0.6=(1-.40).
i thought the question wuz asking for “before tax” net income why are you taxing the JV?
rite, he is asking for before tax income
Because the after tax income of the JV comes in just under the line (operation income) on the IS of the parent (before taxes are calculated for the parent). So it is consistent with the question asked.
so wut ur saying is after tax JV NI is added to the parents pre tax income?
Yeah. You just get your portion of NI (which is of course after-tax).
good point. the double taxation on the income from Jovent is weird though.why would anyone want to be taxed twice for the same thing.
if the parent is reporting it as income…they have to be taxed on it…its irrelevant that the subsidiary has already paid taxes…
I got all right though. Here was my time saver: A) only one choice is higher than 3,000/ B) Only one number is close enough to 5400 (TA for A) plus 40% of 1350 (TA of J) C) Equity is unaffected in Proportionate Consolidation. Does it help? Yes, No, or May be so… Anish
Anish; I like the time savers, and on the real test i would probably have thought in that manner as well. HOWEVER, schweser tends to give a lot of questions where you can use intuition like that, but the real test might not. for example, for the first one, what if the answers were 3000, 3216, 3300, 3352? then u have to do the calc. i think for practice problems its important to due the full calc to make sure u know it cause u cant rely on intuition for the exam. although, great pickup on the shortcuts though!
I agree mike. Thanks for the advice though =) Anish