# Two Qs

Is Debt to Equity higher under temporal? Are dividends recognized in income under the prop consolidation and consolidation methods?

You have to know the direction of currency to answer the first question. And your second one I don’t know for sure, but I think you do not recognize in the income statement but rather reduce the balance sheet by the amount of the dividend??? Any guidance on this one guys?

say appreciating for one two - you’re talking about the equity method; what’s the treatment for prop consol and consol?

jpm- debt- all monetary assets and liabities (ST and LT debt included) are translated at the current rate both in AC and temporal. so the numerator is same both methods. equity- in temporal method you use a mix of things, but some of the equity (inventory, fixed assets) are taken at historical rate. in AC method, it’s a more current rate than temporal on the equity side. lets say you have 1 LC/ beginning 1.5 LC/ ave 2 LC/\$ end rate so here local currency is depreciating over the year. you tell me- which one gets you a bigger D/E ratio if you’re comparing ratio in \$USD? one that uses closer to the end rate or closer to the beginning?

I agree with lancetx, for second one,no dividends will be recognized in incom statement.

JPM I didn’t understand your question to mean is D/E higher using temporal rather than AC. Although, i though that Banni’s post was great. So Banni, how would you do this? Under the temporal method, will D/E be higher or lower if the LC is depreciating? I couldn’t figure this one out

so since debt is the same and equity is lower, D/E is higher for temporal in an appreciating currency scenario; but since the lc is depreciating, it should be the opposite and D/E is lower in temp. right?

In this example, correct.

who knows- let’s finish it up. lets say you have 1 LC/ beginning 1.5 LC/ ave 2 LC/\$ end rate what if we had in LC D = 100 E = 100 temporal: 100 LC x they say “mixed” rate in notes b/c the monetary stuff is at current, the non-monetary stuff is at historical… i dunno let’s use average here just for illustration- so 100 LC x oh wait, we need to use reciprocal to get \$\$ so x 1/1.5 = 66.67 AC- 100LC x we’ll use current here so 1/2 = \$50 debt in both translated at current rate so 100LC x 1/2 = \$50 so AC i get D/E = 1 temporal i get D/E = less than 1 i’m agreeing with you then- yes, D/E looks lower to me in temporal here. it probably won’t save me any time on exam day, but that’s how i do ratios normally- i just play them out. i could memorize how they move, but i don’t like memorizing.

bann is the wo–man

bann is the wo–man - how about the second question? What happens to dividends in prop consolidation and consolidation?

LOL i’m a wo-man! in equity method it’s like lance said, you take the divs and drop your “investment” on the balance sheet. i’m tired and lazy and wish someone would just tell me here… my gut wants to say put them in the income statement? where else would you put them? don’t make me look this up! someone smart come and tell how it is! maritikus, i’m looking in your direction…

Div’s not recognized on I/S under both methods, only for marketable securities like cost, HTM, AFS or trading. They do appear on cash flow statement though, CFO I believe. NI does not change whether you use EQ, Prop. Cons. or Cons. method. Including Div’s on I/S would change NI.

jpm351 Wrote: ------------------------------------------------------- > bann is the man Except…wait for it, wait for it…SHE’S NOT!

there was a practice question like this, where they gave you three types of equity securities classified different ways and asked what happened on the income statement. I think the div income is included.

No, I don’t think dividends are included in any IS, unless like someone said its dividend income from a marketable security or AFS, etc. If you consolidate you statements, neither firm has it on their IS, why put it there after consolidation.

I’m totally thinking MS - don’t mind me…

hk- good point. NI same, Equity same, ROE same same SAME under all methods. 3-letters- add that to the gimmie list of no brainer easy points. i just went -1 for not thinking.

hk Wrote: ------------------------------------------------------- > Div’s not recognized on I/S under both methods, > only for marketable securities like cost, HTM, AFS > or trading. They do appear on cash flow statement > though, CFO I believe. NI does not change whether > you use EQ, Prop. Cons. or Cons. method. Including > Div’s on I/S would change NI. I think it appears under CFI, these are not part of your daily activities but rather investments.