Chapter 8.

Investing in Other Entities

Suggested Solutions to Questions, Exercises, Problems, and Corporate Analyses

Difficulty Rating for Exercises and Problems:

Easy: E8.17
Medium: E8.18; E8.19; E8.20; E8.21; E8.24; E8.25; E8.26
P8.27; P8.28; P8.29; P8.30; P8.31; P8.37; P8.38
Difficult: E8.22; E8.23
P8.32; P8.33; P8.34; P8.35; P8.36

QUESTIONS

Q8.1 Accounting for Marketable Securities. Marketable securities are a current

asset and a component of a companys liquid assets. To insure that a firms
liquidity is correctly reflected on its balance sheet, it is important that
marketable securities be valued at their fair market value to avoid over or
understating the amount of liquid assets. Mark-to-market accounting for
marketable securities, as contrasted with the cost method or lower-of-cost-or-
market, is the only valuation approach that avoids both the overstatement and
understatement of liquidity.
While in theory, mark-to-market accounting could be adopted for use to value
all assets, in reality there are not readily available or reliable market values
available for all assets (e.g., intangible assets). Thus, implementation would be
a serious impediment to adopting this accounting approach for all balance
sheet assets.

Q8.2 Equity Method versus Consolidating Reporting. The major commonality of

the equity method and consolidated reporting is the income statement net
income under the two approaches is always identical. The major differences
are:
Although net income is identical under the two methods, consolidated
reporting discloses the complete income statement (i.e., revenue and
expenses) for a consolidated subsidiary, whereas the equity method
presents the subsidiarys results as a single line item (i.e., Equity in the
earnings of the unconsolidated affiliate).
Although the equity method reports the original investment in the
subsidiary (increased for any reported earnings and decreased for any
dividend payments) on the parents balance sheet, the value is based on
the net assets (i.e., assets minus liabilities) of the subsidiary. As a
consequence, the total assets of the subsidiary are understated, and
there is no disclosure whatsoever of the subsidiarys debt. Under
consolidated reporting, the subsidiarys gross assets are reported, along
with the subsidiarys debt.
Cambridge Business Publishers, 2014
Solutions Manual, Chapter 8 8-1
Q8.3 Noncontrolling Interest. The noncontrolling interest account is technically
neither debt nor equity, although many investment professionals treat the
account as equivalent to debt for purposes of calculating such ratios as the
debt-to-equity ratio. The noncontrolling interest account arises under the full
consolidation approach when a parent lacks 100 percent ownership of a
subsidiary. Under full consolidation, 100 percent of a subsidiarys asset and
liabilities are consolidated even though legal ownership is less than 100
percent. Thus, the noncontrolling interest account represents the portion of the
subsidiarys consolidated net assets not legally owned but nonetheless
consolidated. It is, in effect, a plug figure created to reconcile the difference
between legal ownership and full consolidation. As part of the FASB/IASB
convergence project, noncontrolling interest is now reported as part of
shareholders equity under U.S. GAAP.

Q8.4 Accumulated Other Comprehensive Income. Other Comprehensive Income

(OCI) is a subsection of shareholders equity on the balance sheet representing
various unrealized wealth gains and losses of a business. As these gains and
losses are unrealized, they are not includable in net earnings. The two most
common components of OCI are the unrealized gains (loss) on available-for-
sale securities and the cumulative foreign currency translation adjustment
account. Less frequently seen components include deferred gains/losses on
qualifying derivatives and the minimum pension liability adjustment. The OCI
can have either a positive (credit) or negative (debit) balance.

Q8.5 Cumulative Foreign Currency Translation Adjustment. The cumulative

foreign currency translation adjustment account (CTA) is a summary measure
of the increases and decreases in the consolidated value of foreign net assets
of a business. The CTA measures the wealth changes that occur when the
translated value of foreign net assets increases or decreases due to changes in
currency exchange rates. It measures the unrealized wealth changes that could
be realized upon sale of the foreign assets, followed by repatriation of those
gains or losses back into the currency of the parent company. If the CTA
balance is positive, the unrealized wealth represents a gain due to appreciation
of a foreign currency relative to the parents currency. If the CTA balance is
negative, the unrealized wealth represents a loss due to depreciation of a
foreign currency relative to the currency of the parent.

Cambridge Business Publishers, 2014

8-2 Financial Accounting for Executives & MBAs, 3 rd Edition
Q8.6 Goodwill. PepsiCos 1989 acquisition of Pizza Hut, Taco Bell, and Kentucky
Friend Chicken was undoubtedly linked to PepsiCos desire to acquire a
monopolistic distribution system for its beverages and snack foods.
Presumably, the $3.0 billion in goodwill represents the present value of the
revenue synergies that PepsiCo expected to realize from control of that
distribution system. Although the goodwill figure is quite large relative to the fair
value of the three food operations as stand-alone businesses, the acquisition
was widely regarded as creating shareholder value.

In the late 1990s PepsiCo spun the three food companies off to its
shareholders to concentrate on its beverage and snack food business. The
three companies exist today as division of Yum! Brands, Inc. (formerly known
as Tricon, Inc.)

Q8.7 Negative Goodwill. Negative goodwill can arise in those market-driven

situations wherein a companys expected future value (as reflected by its share
price) is less than the book value of the business. This situation may arise
where the market perceives little future market potential for a companys
products and where the assets of a business are unlikely to be converted to
alternative uses. In this case, book value may exceed fair market value,
creating the possibility that negative goodwill may arise in an acquisition of the
business.

Q8.8 Accounting for Long-term Investments. CKX, Inc. should consolidate its
investment in G.O.A.T. LLC because the 80 percent shareholding is a
controlling ownership interest. Since the fair market value of G.O.A.T. at the
time of acquisition was $30 million, an 80 percent interest would have a fair
market value of $24 million, indicating that goodwill in the amount of $26 million
(i.e., $50 million less $24 million) was implicit in the transaction.

The Ali Trust, on the other hand, would account for its 20 percent ownership
interest using the equity method.

Cambridge Business Publishers, 2014

Solutions Manual, Chapter 8 8-3
Q8.9 Mergers, Acquisitions and Share Price. In about 80 percent of the
announced mergers and acquisitions, the share price of the acquiror declines
following the announcement, whereas the share price of the acquiree
increases. This result occurs because in the vast majority of acquisition
transactions, the market believes that a transaction will not create value for the
acquirers shareholders. Reasons for this include poor due diligence,
overpayment, poor integration following an acquisition, overestimating revenue
and/or cost synergies, etc. In case of the Danaber-Sybron transaction, the
market apparently perceived that the announced acquisition transaction would
actually create shareholder value (i.e., the Danaber price increased 1.3 percent
following the announcement).

The equity value of Sybron implicit in the transaction was $2.2 billion the $2
billion in cash paid for the shares plus the value of the assumed debt of $200
million.

Q8.10 Acquisition Bidding and the Winners Curse. The 83 percent premium for
Aztars common stock reflected in Columbia Sussexs offer provides strong
evidence of either (a) The Winners Curse or (b) an undervalued (i.e.,
inefficiently priced) Aztar share price. Columbia Sussex may have been willing
to bid so much for Aztar because of anticipated revenue synergies that might
become available from more efficient management of Aztars casino properties
in Las Vegas and Atlantic City. Alternatively, since Aztars casino properties are
well located, Columbia Sussex may intend to redevelop the properties or sell
them off. In any case, the incremental revenue suggested by the Columbia
Sussexs 83 percent premium must be premised on a very favorable outlook for
Las Vegas and Atlantic City.

Q8.11 Goodwill Impairment. Dean Foods will reduce its acquisition goodwill by $1.6
billion and its net income (retained earnings) by an equivalent amount. The
write-down suggests that Dean Foods overpaid for its Fresh Diary Direct
acquisition, or alternatively, that any anticipated revenue and cost synergies
associated with the acquisition failed to materialize.

Dean Foods share price actually rose slightly on the day of the announcement,
suggesting that some of the anticipated share price response to the goodwill
write-off probably was already impounded in the firms share price and the
impairment was not as great as had been anticipated.

Cambridge Business Publishers, 2014

8-4 Financial Accounting for Executives & MBAs, 3 rd Edition
Q8.12 Divesting Long-term Investments. Prior to 2001, Airbus would have been
accounted for using the equity method, which is appropriate for joint ventures
and consortiums. In 2001, given a 20 percent shareholding, BAE Systems
would have accounted for its investment in Airbus using the equity method,
while EADS, with an 80 percent shareholding, would have used consolidated
accounting. BAEs expected divestiture is likely to bring a gain of $3.5 billion.

Q8.13 De-Merger and Share Prices. There are two possible explanations why
Cendants share price was undervalued relative to its earnings. First, the
conglomerates equity value may reflect the phenomenon of a conglomerate
discount wherein a company composed of many different types of businesses
may be undervalued relative to its breakup value because the market has
difficulty valuing complex entities. Second, since share prices reflect future, not
past earnings, the lower share price may reflect the markets lower future
earnings expectation for Cendant.

If the undervaluation of Cendants share price in 2004 was due to a

conglomerate discount, the de-merger should allow that discount to be
recaptured by shareholders following the de-merger. However, if the
undervaluation reflects the markets reduced expectations for Cendants family
of businesses, there should be little or no price adjustment (improvement)
following the de-merger.

Q8.14 Poison-Pill Defense. Under Nippons poison-pill defense, shareholders may

double the quantity of their shares owned for a small investment if and when an
outside interest acquires a 15 percent ownership interest in Nippon. The
presumption of this plan is that the new share purchases by existing Nippon
shareholders would substantially dilute the hostile investors ownership stake,
conceivably reducing it as much as 50 percent, thereby making it much harder
and more expensive to gain control of Nippon Steel.

Since the plan reduced the likelihood of any Nippon share price appreciation
due to outsider-buying, existing shareholders are actually disadvantaged by this
action. As evidence of the negative effect that a poison-pill defense can have
on shareholder value, Nippons share price fell 1.1 percent following the
announcement.

It is commonly thought that poison-pill defenses destroy shareholder value and

are designed to protect an incumbent management team.

Cambridge Business Publishers, 2014

Solutions Manual, Chapter 8 8-5
Q8.15 Goodwill Impairment and Debt Covenants. The circumstances appear to
suggest that Expedia should take a write-down of its acquisition goodwill. The
companys market capitalization of $5.2 billion is significantly below its current
book value of just $5.8 billion. Assuming that a write-down of just $500 million is
taken, Expedias book value will fall below the required covenant level of $5.4
billion, triggering a covenant violation. Assuming that Expedias lenders are
willing to revise its borrowing arrangement rather than call the outstanding debt,
the covenant violation waiver is likely to cost Expedia money in the form of a
higher borrowing rate and fees to renegotiate the contract.

Q8.16. (Ethics Perspective) Whistle-Blowing. The issue of being a whistle-blower in

many ways comes down to personal integrity. In making the decision whether
or not to report a questionable activity, a potential whistle-blower must realize
both the short and long-term effects of their actions. In the short-term he/she
will likely suffer some pains from being insulted, potentially leaving or losing
his/her job, and dealing with the myriad of public consequences. The long-term
effects may be even tougher to deal with, being more psychic in nature. While
the whistle-blower may feel pride in knowing that corrupt activity has been
exposed and guilty people will be punished, it is also likely that many innocent
people may lose their jobs as well. This was certainly the case with Enron.

However, just as American citizens are responsible for reporting suspicious

behavior that resembles potential terrorist activities, so too are employees
responsible for reporting questionable activities that resemble corporate fraud.
Whistle-blowers should, to the best of their abilities make a concerted effort to
research fraudulent events to make sure they are legitimate instances of
wrongdoing, prior to reporting them. This does not mean that they should only
report something they fully understand, however, since it is unlikely they will be
able to obtain all the necessary information. What is important is that the
employee has reasonable belief that a questionable activity is occurring. The
Sarbanes-Oxley Act of 2002 went so far as to specify that an employee is not
required to prove the underlying violation. The employee only needs to believe
on a reasonable basis that a violation may have occurred.

Section 301 of the Sarbanes-Oxley Act requires all publicly traded companies
to establish procedures for employees to file internal whistle-blower complaints
and procedures that will protect the confidentiality of employees who file
allegations. Section 806 of the Act provides protection against retaliation
against employees who act as whistle-blowers.

(Note: This answer was based on the writings of Michelle Stewart and Leah
Emkin.)

Cambridge Business Publishers, 2014

8-6 Financial Accounting for Executives & MBAs, 3 rd Edition
 EXERCISES

E8.17 Accounting for Short-term Investments.

a. All securities are classified as trading securities:
Cost Market Gains
Company Basis Value (Loss)

BMS $75,000 $82,000 $7,000

JNJ 55,000 53,000 (2,000)
PFE 110,000 100,000 (10,000)
Total $(5,000)

Income statement effect:

Unrealized loss on trading securities: $(5,000)

b. All securities are classified as available-for-sale securities:

There is no income statement effect because the unrealized loss would

appear on the balance sheet as a component of Other Comprehensive
Income.

c. BMS and JNJ are classified as trading securities:

Income statement effect:
Unrealized gain on trading securities: $5,000

The specific classification of a security as either trading or available-for-sale will

definitely impact an investors reported earnings. Changes in the market value
of trading securities flow through to the investors income statement whereas
market value changes in available-for-sale securities do not. Since these value
changes are unrealized, they should have no immediate impact on the
investors share price, assuming an efficient market. Likewise, since the IRS
does not allow unrealized losses to be deducted for income tax purposes, nor
tax unrealized gains until they are realized, there should be no impact on an
investors income tax bill.

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Solutions Manual, Chapter 8 8-7
E8.18 Accumulated Other Comprehensive Income.
a. Comprehensive income is the periodic net wealth change of a
business to include both realized (i.e., net income) and unrealized (i.e.,
Other Comprehensive Income) wealth effects. Comprehensive income is a
broader measure of business income than net income because it includes
unrealized gains/losses in addition to the realized gains/losses.

b. The Carlton Companys portfolio of available-for-sale securities

declined in value in Year 1 and appreciated in value in both Years 2 and 3.

c. The functional currency of The Carlton Company depreciated in value

in Year 1 relative to the functional foreign currencies of its consolidated
subsidiaries but appreciated in value relative to those same currencies in
Years 2 and 3.

The Carlton Company is required under U.S. IRC regulations to pay income
taxes only on its realized earnings, to include its net income but not its
unrealized comprehensive income.

E8.19 Available-for-Sale Securities.

Marketable securities (Yr 1) $3,794
Less: Sales of securities (1,043)
Net value 2,751
Marketable securities (Yr 2) (2,749)
Decline in fair market value $(2)

BMSs portfolio of available-for-sale securities declined in value by $2.0 million.

The unrealized loss would appear as a component of Other Comprehensive
Income within the Shareholders Equity section of the balance sheet. Since the
loss is unrealized, it is not subject to income taxation.

E8.20 Available-for-Sale Securities.

Marketable securities (Yr 1) $18,085
Purchases of securities 1,261
Total 19,346
Marketable securities (Yr 2) (19,979)
Gain in fair market value $633

Pfizers portfolio of available-for-sale securities appreciated by $633 million.

This unrealized gain would appear as a component of Other Comprehensive
Income within the Shareholders Equity section of the balance sheet. The gain
of $633 is unrealized and thus not subject to taxation.

Cambridge Business Publishers, 2014

8-8 Financial Accounting for Executives & MBAs, 3 rd Edition
E8.21 Long-term Equity Investments.
Cash dividends paid:
Yr 1 Yr 2 Yr 3
Equity in net income of affiliates $151 $273 $334
Less: Undistributed income of affiliates (66) (7) (50)
Cash dividends paid by affiliates $85 $266 $284

The balance sheet value of the Investment in Equity Affiliates increased

(net) by $66, $7, and $50, in Yr 1 Yr 3, respectively.

E8.22 Long-term Equity Investments.

Cash dividends paid:
Yr 2 Yr 3
Increase in investment in unconsolidated affiliates $215 $235
Less: Equity in earnings of unconsolidated
affiliates 415 520
Dividends paid $200 $285

Undistributed earnings of unconsolidated affiliates $215 $235

E8.23 Equity Method.

Book Value of common shares (Dec. 31, 2012) $350,000
Income effect:
2009 $(30,000)
2010 120,000
2011 150,000
2012 200,000
$440,000 x 25% = (110,000)

Dividends paid
2009 $-0-
2010 50,000
2011 60,000
2012 80,000
$190,000 x 25% = 47,500

Book value of common shares (Jan. 2009) $287,500

The Miller Corporation paid $287,500 for a 25 percent ownership interest in The
Mann Corporation in January, 2009.

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Solutions Manual, Chapter 8 8-9
E8.24 Equity Method.
Purchase price of shares (Jan. 1, 2011) $5,700,000
Add: Income effect (2011)
$2,250,000 x 25% = 562,500
Less: Dividends paid (2011)
$0.15 x 300,000 shares = (45,000)
Book value (Dec. 31, 2011) $6,217,500
Add: Income effect (2012)
$(180,000) x 25% = (45,000)
Less: Dividends paid (2012)
$0.15 x 300,000 shares (45,000)
Book value (Dec. 31, 2012) $6,127,500

E8.25 Equity Method.

Purchase price of shares (Jan. 2, 2011) $32,000,000
Add: Income effect (2011)
1,000,000 share x $1.05 1,050,000
Less: Dividends paid (2011)
1,000,000 x $0.35 (350,000)
Book value (Dec. 31, 2011) $32,700,000
Add: Income effect (2012)
1,000,000 x $1.50 1,500,000
Less: Dividends paid
1,000,000 x $0.40 (400,000)
Book value (Dec. 31, 2012) $33,800,000

E8.26 Accounting for Joint Ventures.

Change in value of joint venture:
($90 - $70): $20.0 million

Total joint venture earnings (2012)

$22 x 2 $44.0 million

Total joint venture dividends (2012)

$2 x 2 $ 4.0 million

Cambridge Business Publishers, 2014

8-10 Financial Accounting for Executives & MBAs, 3 rd Edition
 PROBLEMS

P8.27 Accounting for Marketable Equity Securities.

1. Balance sheet value of the portfolio of securities at year-end: $243,000.

2. Income statement effect of the portfolio of securities at year-end:

Unrealized gain: $20,000

3. Income statement effect of the portfolio of securities at year-end assuming

all securities are classified as available-for-sale: There is no income
statement effect if all of the securities are classified as available-for-sale; the
unrealized gain of $18,000 is reported as a component of shareholders
equity on the balance sheet as part of Other Comprehensive Income.

4. Thunderbirds reported earnings are definitely impacted by the particular

investment classification adopted by the CFO, since the market value
changes of trading securities flow through to the companys income
statement. However, in an efficient market, these market value charges
should have no impact on firm share price as long as the value changes
remain unrealized. Similarly, since unrealized, they art not subject to income
taxation.

P8.28 Accounting for Marketable Equity Securities

1. Portfolio value
a. Cost method: $150,000
b. Lower-of-cost-or-market value:
1. Individual-security basis: $142,000
2. Portfolio basis: $150,000
c. Market value basis: $177,000

2. If the portfolio is classified as trading, the appreciation of $27,000

($177,000 - $150,000) will be treated as an unrealized gain on the
companys income statement. If the portfolio is classified as available- for-
sale, the unrealized gain will be treated as a component of Other
Comprehensive Income in the shareholders equity section of the balance
sheet.

Cambridge Business Publishers, 2014

Solutions Manual, Chapter 8 8-11
P8.29 Equity Method.
1. Income effect:
Equity in loss of Keystone Consolidated $(700,000)
(35% x $2 million)

2. Balance sheet value: $38.6 million

Investment in Keystone

Beg. bal. - $40 million

$0.7 million loss
$0.35 million 3rd qtr. dividend
$0.35 million 4th qtr. dividend

End bal. - $38.6 million

P8.30 Consolidation Accounting.

a. Unconsolidated Balance Sheet
ABC Inc.
(in millions)
Investment in Equity Affiliate $100
Other assets 50
Total $150
Liabilities $30
Shareholders equity 120
Total $150

b. Consolidated Balance Sheet

Consolidated
ABC Inc. XYZ, Inc. Consolidating ABC Inc.
(in millions) (in millions) Adjustments (in millions)
Investment in equity affiliates $100 $0 -$100 $0
Other assets 50 100 150
Goodwill 0 0 $20 20
Total $150 $100 -$80 $170
Liabilities $30 $20 $50
Shareholders equity 120 80 -$80 120
Total $150 $100 -$80 $170

Cambridge Business Publishers, 2014

8-12 Financial Accounting for Executives & MBAs, 3 rd Edition
P8.31 Consolidation Accounting
1.
MTF, Inc.
Unconsolidated Balance Sheet

Assets $70 million

Investment in KMF 50 million
Total $120 million

Liabilities $20 million

Shareholders equity 100 million (50 + 50)
Total $120 million

2.
MTF-KMF, Inc.
Consolidated Balance Sheet

Assets (from MTF) $70 million

Assets (from KMF) 50 million
Goodwill 10 million
Total $130 million

Liabilities (from MTF) $20 million

Liabilities (from KMF) 10 million
Shareholders equity 100 million
Total $130 million

Cambridge Business Publishers, 2014

Solutions Manual, Chapter 8 8-13
P8.32 Consolidation Accounting.
Consolidation under purchase accounting.

Initial investment by Graham Inc. in Mahoney, Inc. (in thousands):

Increase:
Investment in Equity Affiliate (Mahoney, Inc.) 400
Common stock (no par) 400

Pre-Consolidation
(in thousands) Graham Mahoney Adjustments Consolidated

Cash $60 $10 $70

Accounts receivable (net) 140 80 220
Inventory (FIFO) 220 120 340
Property & equipment 800 540 1,340
Other assets 40 20 60
Investment in Mahoney Inc. 400 -- (400) --
Goodwill(1) -- -- 20 20
Total $1,660 $770 $2,050

Accounts payable $100 $25 $125

Other current liabilities 100 15 115
Bonds payable 240 350 590
Common stock (no par value) 900 250 (250) 900
Retained earnings 320 90 (90) 320
Revaluation reserve -- 40 (40) --
Total $1,660 $770 $2,050
(1)
($770 $390 = $380 FMV; goodwill is $400 $380 = $20).

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8-14 Financial Accounting for Executives & MBAs, 3 rd Edition
P8.33 Consolidation Accounting.
Initial investment by Global Enterprises (in millions):

Increase:
Investment in Equity Affiliate (The Carlton Corp.) 294
Common stock ($10 par value) 1) 120
Capital in excess of par value 174
1)
($294 million/$24.50 = 12 million shares)

Pre-Consolidation
The Carlton
Global Corp.
(in millions) Enterprises (at FMV) Adjustments Consolidated

Cash $80 $25 $105

Short-term investments 50 45 95
Accounts receivable (net) 75 35 110
Inventories (LIFO) 190 130 320
Property & equipment 380 280 660
Other assets 45 -- 45
Investment in Carlton. 294 -- (294) --
Goodwill2) -- -- 9 9
Total $1,114 $515 $1,344

Accounts payable $95 $75 $170

Other current liabilities 40 30 70
Bond payable 110 -- 110
Other long-term debt 75 125 200
Common stock ($10 par) 240 -- 240
Common stock ($5 par) -- 60 (60) --
Capital in excess of par 244 20 (20) 244
Retained earnings 310 140 (140) 310
Revaluation reserve -- 65 (65) --
Total $1,114 $515 $1,344
2)
($515 - $230 = $285 FMV; goodwill is $294 - $285 = $9).

P8.34 Equity Investments: International.

1. Investment in unconsolidated subsidiary: $10 million

2. Investment in unconsolidated subsidiary: $12 million

[$10 million + (25% x $12 million NI) (25% x $4 million dividend)]

3. Total assets: $3 million (RMB 24 million RMB 8)

4. Cumulative foreign translation adjustment: -$1 million

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Solutions Manual, Chapter 8 8-15
P8.35 Equity Investments: International.
1. Total assets: $6 million (48 million P P8)

2. Cumulative foreign currency translation adjustment: $2 million

[48 million P x (1/6 1/8)]

3. Depreciated

P8.36 Consolidated versus Unconsolidated Reporting.

1. The investments in Scrub-All and GEAC are consolidated with those of GE.

2. Spotless Appliance is accounted for using the equity method.

3. The long-term investment must be considered an available-for-sale

security.

4. Goodwill is the excess paid for an investment over the investments fair
market value of identifiable assets. The goodwill relates to the 80 percent
shareholding in Scrub-All, assuming no other acquisitions.

5. The minority interest account reflects the 20 percent of the Scrub-All

company net worth not owned (but still consolidated) by GE. Technically, the
minority interest account is neither debt nor shareholders equity, although
many credit analysts consider it to be debt.

6. Current ratio = $37.5 $31.5 = 1.19

Total debt-to-equity = 2.01(assuming minority interest is treated neither debt

nor equity); 2.12 (assuming minority interest is treated as debt); and 1.81
(assuming minority interest is treated as equity).

Total debt-to-assets = 0.64 (assuming minority interest is treated as either

equity or as neither debt nor equity); 0.68 (assuming minority interest is
treated as debt).

The ratios ignore the unconsolidated debt of Spotless Appliance that is

guaranteed by GE, and thus, it could be argued that the ratios understate
GEs true debt position.

Cambridge Business Publishers, 2014

8-16 Financial Accounting for Executives & MBAs, 3 rd Edition
 CORPORATE ANALYSIS

CA8.37 The Procter and Gamble Company.

Goodwill:
2012 2011
As a percentage of total assets 40.7% 41.6%

P&G does not amortize its goodwill; however, the company does annually (or
more often if indicators of a potential impairment are present) evaluate the
goodwill for any impairment in value. P & G did not recognize an impairment in
its goodwill in 2011, but in 2012, P & G recognized $1.330 billion of impairment.

CA8.38 General Electric Company

a. You would notice two significant differences between the unconsolidated
financial statements presented in the question, and the final consolidated
statements for GE. First, the Investment in GECC account would not exist,
as the investment value of GECC would be reflected in each individual line
item of GECC is consolidated with the parent. Second, many of the
accounts will not be simple additions of the two balances. This is because
many intercompany transactions between the GE parent and GECC would
be eliminated during consolidation.

b. Please see the companys annual report at www.ge.com.

CA8.39 Internet-based Analysis. No solution is provided as any solution would be

unique to the company selected.

CA8.40 IFRS Financial Statements. LVMH Moet Hennessey-Louis Vuitton S.A.

LVMHs consolidation policy follows IFRS but is inconsistent with U.S. GAAP.
Subsidiaries in which the company has de facto control are not consolidated
under U.S. GAAP. Only subsidiaries in which a parent company has a majority
shareholding (ie. de jure control) are consolidated under U.S. GAAP. LVMHs
policy of accounting for subsidiaries in which the company has a significant
influence but no controlling interest using the equity method is fully consistent
with U.S. GAAP.

Cambridge Business Publishers, 2014

Solutions Manual, Chapter 8 8-17