财务报表分析（英文版·第11版）测试题TestBank Chap005 Analyzing Investing Activities Intercorporate Investments

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Chapter05

AnalyzingInvestingActivities:IntercorporateInvestments

MultipleChoiceQuestions

1.

Tradingmarketablesecurities:

A.

areconsiderednoncurrentassets.

B.

arerecordedatamortizedcost.

C.

aremarkedtothelowerofcostormarketeachaccountingperiod.

D.

aremarkedtomarketeachaccountingperiod.

2.

Theclassificationofmarketableequitysecuritiesastradingoravailable-for-saleisdetermined:

A.

bymanagement'sintentregardingthedispositionofthesecurities.

B.

whenthesecuritiesmature.

C.

whetherthecurrentassetsaregreaterorlessthanthecurrentliabilities.

D.

whethermanagementwantstomarkthemtomarketornot.

3.

Whichofthefollowingisaneffectofthereclassificationoftradingsecuritiesasavailable-for-sale?

A.

Thebalancesheetwouldneedtobeadjustedtoreportthesecuritiesatfairmarketvalueandtherewouldbenoeffectontheincomestatement.

B.

Therewouldbenoeffectoneitherthebalancesheetortheincomestatement.

C.

Thebalancesheetwouldneedtobeadjustedtoreportthesecuritiesatfairmarketvalueandunrealizedgainsorlossesonthedateofthetransferwouldbeincludedinnetincome.

D.

Therewouldbenoeffectonthebalancesheetandunrealizedgainsorlossesonthedateofthetransferwouldbeincludedinnetincome.

4.

Theequitymethodofaccountingforinvestmentsrequires:

A.

investmentshouldbemarkedtomarketeachaccountingperiod.

B.

proportionateshareofinvestee'searningsshouldberecordedasinvestmentincome.

C.

companyshouldnothavesignificantinfluenceoverinvestee.

D.

goodwillrelatedtopurchaseofinvesteestocktoberecordedseparatelyonbalancesheet.

5.

Whichofthefollowingisincorrect?Ananalystshouldbeawareofthefollowingwhenanalyzingacompanythathassignificantinvestmentsrecordedusingtheequitymethod.

A.

Cashflowreceivedfrominvesteemaybesubstantiallydifferentfrominvestmentincomerecorded.

B.

Asinvestee'sliabilitiesarenotrecordedonthecompany'sbalancesheet,theremaybesignificantoff-balance-sheetfinancing.

C.

Theymustmarkinvestmentininvesteetomarketeventhoughtheremaybenoreadymarketinwhichtheycanselltheirinvestment.

D.

Companymustrecordproratashareofinvestee'searnings,whichmaynotbewellcorrelatedwithchangesinmarketvalueofinvestee.

6.

AgwenCorporationowns25%ofthesharesofBronwoCorporation,whichistradedontheNewYorkStockExchange.WhichmethodisAgwenmostlikelytousetoaccountforthisinvestment?

A.

Costmethod

B.

Marketmethod

C.

Equitymethod

D.

Consolidationmethod

7.

Comparedtotheequitymethod,thecostmethodofaccountingforaninvestmentinaprofitablecompanyresultsin:

A.

lowerearningsandlowercashflows.

B.

higherearningsandhighercashflows.

C.

lowerearningsandnoeffectoncashflows.

D.

higherearningsandnoeffectoncashflows.

GuidoInc.buys2,000sharesofWeinerCompanyfor$30pershareonJanuary1,2006.Attheendof2006,Weinersharesaretradingat$33pershare.Weinerhasatotalof200,000sharesoutstandingandreportednetincomeof$3,000,000andpaiddividendsof$1,000,000forfiscal2006.

8.

DeterminetheamountGuidoInc.willrecordasinvestmentincomeinitsincomestatementunderthethreescenarios:Weinerisconsideredtradingmarketableequitysecurity(MES),available-for-sale(AFS)MES,orusingcostmethod.

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

9.

DeterminetheamountGuidoInc.willrecordasaninvestmentonitsbalancesheetunderthethreescenarios:Weinerisconsideredtradingmarketableequitysecurity(MES),availableforsale(AFS)MES,orusingcostmethod.

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

10.

CompanyAacquires40%ofCompanyBinastock-for-stockexchange.Withrespecttopreparingfinancialstatements,whichofthefollowingstatementsiscorrect?

A.

CompanyAwillmostlikelyusepooling-of-interestaccountingforconsolidationpurposes.

B.

CompanyAwillmostlikelyusepurchaseaccounting.

C.

CompanyAwillmostlikelyusethecostmethod.

D.

CompanyAwillmostlikelyusetheequitymethod.

11.

CompanyABCacquirescompanyXYZon12/31/06inashare-for-sharetransactionworth$10million.On12/31/06,XYZfinancialstatementsreportedthefollowing:

Atthetimeofacquisition,thefairvalueofXYZ'sassetsequalsitsbookvalues,exceptforproperty,plantandequipmentwhichhasafairvalue$2millionhigherthanitsbookvalue.Goodwillisexpectedtobeamortizedover10years,andtheaveragelifeofdepreciableassetsis10years.IfABCusespurchaseaccountingtorecordtheacquisition,theamountofgoodwillthatwillappearonitsbalancesheetasof12/31/06withrespecttotheacquisitionofXYZwillbe:

A.

$0.

B.

$2million.

C.

$4million.

D.

$6million.

12.

Ifacompanyusesthepurchasemethodtoaccountforamerger,whichofthefollowingistrue?

I.Prioryear'sstatementsmustberestatedasifmergedcompanieshadalwaysbeenonecompany.

II.Netincomeofcombinedcompanieswillprobablybelowerthannetincomeoftwoseparatecompaniesaddedtogether.

III.Goodwillisneverrecorded.

IV.Assetsofacquiredcompanywillberecordedonacquirer'sbooksattheirfairvalue.

A.

II,III,andIV

B.

I,II,andIII

C.

IIandIV

D.

IandIII

TargetCompanyistradingat$20ashareattheendoftheyear2006andhas1millionsharesoutstanding.AcquirerCorp.istradingat$50ashareandhas2millionsharesoutstanding.AcquireroffersTarget'sshareholdersofoneshareofitsstockforeverytwosharesofTargetCompany.Fortheyearending12/31/06,AcquirerandTargethadearningsof$5millionand$2million,respectively.ThebookvalueofTarget'snetassetsis$12millionandfairvalueis$15millionasof12/31/06.ThebookvalueofAcquirer'snetassetsis$35millionandfairvalueis$48millionasof12/31/06.

13.

HowmanyoutstandingshareswillAcquirerhaveiftheyaresuccessfulinitsacquisition?

A.

2million

B.

2.4million

C.

2.5million

D.

3million

14.

Iftheacquisitioniscompletedasof12/31/06,whatwillthereportedearningspersharebefortheyearended12/31/06assumingpurchaseaccountingisused?

A.

$2.00

B.

$2.33

C.

$2.50

D.

$2.80

15.

Iftheacquisitioniscompletedasof12/31/06,whatwillthemarketvaluepersharebefortheyearended12/31/06assumingpurchaseaccountingisused?

A.

$24.00

B.

$20.00

C.

$18.80

D.

$15.67

16.

SachenCompanyusesthelocalcurrencyforeachcountryinwhichitoperatesasitsfunctionalcurrency.WhentranslatingstatementsintoU.S.dollarstheyshoulduse:

A.

currentratemethod.

B.

temporalmethod.

C.

remeasurementmethod.

D.

exchangeratemethod.

ParentCompanyInc.successfullybidsforChildCompanyInc.inyearX1.ParentCompanyInc.haspurchasedallofChild'ssharesoutstandingfor$8,500.Followingareexcerptsfrombothcompanies'financialstatementsforyearX1,priortotheacquisition.

Alsoassumethefollowinginformation:theacquisitionwasaccountedforusingthepurchasemethod.$1,500oftheexcesspricerelatestodepreciableassets,andthoseassetshaveanadditionalusefullifeof10yearsatthetimeoftheacquisition.ParentCompanyInc.usesthestraightlinedepreciationmethodandhasa34%taxrate.ThecombinednetincomeforbothcompaniesforyearX2(excludinganyexpensesthatneedtoberecordedasaresultofthepurchasemethodaccountingforthemerger)was$1,560.

17.

Whatwouldbetotalliabilitiesintheconsolidatedfinancialstatementsforthedateonwhichthemergerbecameeffective?

A.

$28,221

B.

$27,231

C.

$27,741

D.

$25,462

18.

Whatwouldbetotalassetsintheconsolidatedfinancialstatementsforthedateonwhichthemergerbecameeffective?

A.

$50,008

B.

$49,498

C.

$41,508

D.

$44,113

19.

Whatwouldbetotalliabilitiesintheconsolidatedfinancialstatementsforthedateonwhichthemergerbecameeffective,assuminganyexcesspurchasepricerelatestogoodwill?

A.

$28,221

B.

$27,231

C.

$27,741

D.

$25,462

20.

Whatwouldbetotalassetsintheconsolidatedfinancialstatementsforthedateonwhichthemergerbecameeffective,assuminganyexcesspurchasepricerelatestogoodwill?

A.

$50,008

B.

$49,498

C.

$41,508

D.

$44,113

21.

WhatwouldbethenetincomeintheconsolidatedincomestatementforyearX2?

A.

$1,461

B.

$1,560

C.

$1,450

D.

$1,611

22.

WhatwouldbethenetincomeintheconsolidatedincomestatementforyearX2assuminganyexcesspurchasepricerelatestogoodwill,andgoodwillwasfoundtobeimpairedby$830?

A.

$1,461

B.

$1,560

C.

$1,012.2

D.

$730

23.

UndieInc.hasmanyforeignoperationsandusestheU.S.dollarasitsfunctionalcurrencyworldwide.Whichofthefollowingstatementsistruewithrespecttoforeignoperations?

A.

Allassetsandliabilitiesaretranslatedatcurrentexchangerates.

B.

Monetaryassetsandliabilitiesaretranslatedatcurrentexchangerates.

C.

Translationgainsandlossesarereportedinequitysectionofbalancesheet.

D.

Non-monetaryassetsandliabilitiesaretranslatedataverageexchangeratesfortheyear.

24.

PaulyCo.reportsaforeigncurrencytranslationgainof$5millioninitsstatementofshareholders'equity.Fromthis,youcaninferthat:

A.

theyhaveforeignoperationswheretheU.S.dollaristhefunctionalcurrency.

B.

theyhaveforeignoperationswherelocalcurrencyisthefunctionalcurrency.

C.

theyenteredintoaforeigncurrencytransactionthatyear.

D.

Noneoftheabove

25.

Whichexchangeratesareusedforforeignsubsidiarieswithdifferentfunctionalcurrencies?Usingthefollowingabbreviationsidentifywhichofthebelowarecorrectmethodsforconvertingaccountsreceivable.

Year-endrates:YE

Averagerates:AR

Historicalrates:HR

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

AU.S.companyhasasubsidiarylocatedinGreatBritain.InformationforthesubsidiaryfortheyearendedDecember31,2006,isasfollows:

26.

AfterconvertingtoU.S.dollarsusingtheappropriatemethod,grossprofitmarginis40%.WhatmethodisbeingusedtorecordBritishsubsidiariesfinancialstatements?

A.

Thecurrentratemethod

B.

Thetemporalmethod

C.

Theconversionmethod

D.

Notdeterminablefrominformationgiven

27.

Ifsaleswere3,000inBritishpoundsforthefiscalyearandthetemporalmethodwasused,whatwouldthisbeinU.S.dollars?

A.

$4,800

B.

$4,500

C.

$4,200

D.

$4,000

28.

IftheBritishpoundwasdeterminedtobethefunctionalcurrency,whatwouldinventorybeinUSdollars?

A.

$3,500

B.

$3,200

C.

$3,000

D.

$2,800

29.

Depreciationexpensewouldbe:

A.

lowerusingconversionmethodthantemporalmethod.

B.

lowerusingtemporalmethodthancurrentratemethod.

C.

lowerusingcurrentratemethodthanconversionmethod.

D.

lowerusingall-currentratemethodthantemporalmethod.

30.

Currentratio:

A.

wouldbeunchangedafterapplyingthecurrentratemethod.

B.

wouldbeunchangedafterapplyingthetemporalmethod.

C.

wouldbeunchangedafterapplyingtheconversionmethod.

D.

wouldbehigherafterapplyingthetemporalmethod.

31.

Whichexchangeratesareusedforforeignsubsidiarieswithdifferentfunctionalcurrencies?Usingthefollowingabbreviations,identifywhichofthebelowarecorrectmethodsforconvertinginventory.

Year-endrates:YE

Averagerates:AR

Historicalrates:HR

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

32.

Whenanacquisitionismadeandaccountedforusingthepurchasemethod,thepost-acquisitioncommonstockaccount:

A.

isthesumofthepre-acquisitioncommonstockaccountsofthetwocombiningcompanies.

B.

isthepre-acquisitioncommonstockaccountoftheacquiredcompanyonly.

C.

isthepre-acquisitioncommonstockaccountoftheacquiringcompanyplustheparvalueofnewstockissuedtoaffecttheacquisition.

D.

isthepre-acquisitioncommonstockaccountoftheacquiringcompanyplusthefairvalueofnewstockissuedtoaffecttheacquisition.

33.

Whenanacquisitionismadeandaccountedforusingthepurchasemethod,thepost-acquisitionretainedearningsaccount:

A.

isthesumofthepre-acquisitionretainedearningsaccountsofthetwocombiningcompanies.

B.

isthepre-acquisitionretainedearningsaccountoftheacquiringcompanyonly.

C.

isthepre-acquisitionretainedearningsaccountsoftheacquiringcompanyplusnetincomeofacquiredcompanyinyearofacquisition.

D.

isthepre-acquisitionretainedearningsaccountsoftheacquiringcompanylesstreasurystockoftheacquiredcompany.

34.

In-processR&D:

A.

iswritten-offimmediatelytoretainedearnings.

B.

isonlyanissuewhenpurchaseaccountingisused.

C.

iscapitalizedonthebalancesheetandneveramortized.

D.

isexpensedimmediatelyunderpoolingofinterests.

XenaCorporationhasaforeignsubsidiary,ZetaCorporation,locatedinJapan.Attheendoffiscal2006,Zetahas:

35.

AssumeXenausesthecurrentratemethodfortranslatingZeta'sfinancialstatementsfromtheyenintoU.S.dollars.Iftheyenappreciatesrelativetothedollar,whichofthefollowingistrue?

A.

Xenawillrecordaforeigncurrencytranslationgainontheincomestatement.

B.

Xenawillrecordaforeigncurrencytranslationlossontheincomestatement.

C.

Xenawillrecordaforeigncurrencytranslationgainintheequitysectionofthebalancesheet.

D.

Xenawillrecordaforeigncurrencytranslationlossintheequitysectionofthebalancesheet.

36.

AssumeXenausesthetemporalmethodfortranslatingZeta'sfinancialstatementsfromtheyenintoU.S.dollars.Iftheyenappreciatesrelativetothedollar,whichofthefollowingistrue?

A.

Xenawillrecordaforeigncurrencytranslationgainontheincomestatement.

B.

Xenawillrecordaforeigncurrencytranslationlossontheincomestatement.

C.

Xenawillrecordaforeigncurrencytranslationgainintheequitysectionofthebalancesheet.

D.

Xenawillrecordaforeigncurrencytranslationlossintheequitysectionofthebalancesheet.

37.

AU.S.companyhasasubsidiarylocatedinGreatBritain.IftheBritishpoundisthefunctionalcurrencyandisappreciatingrelativetothedollar,whatwillhappentothefollowingratiosaftertranslation?

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

38.

AU.S.companyhasasubsidiarylocatedinGreatBritain.IftheU.S.dollaristhefunctionalcurrencyandtheBritishpoundisappreciatingrelativetothedollar,whatwillhappentothefollowingratiosafterremeasurement?

A.

OptionA

B.

OptionB

C.

OptionC

D.

OptionD

39.

UnderU.S.GAAP,themethodusedtoconvertfinancialstatementsofforeignsubsidiariesintothereportingcurrencydependsupon:

A.

thesizeofthesubsidiary.

B.

thefunctionalcurrencyofthesubsidiary.

C.

thetemporallocationofthesubsidiary.

D.

thecurrentmethodusedbythesubsidiary.

40.

UnderU.S.GAAP,themethodusedtoconvertfinancialstatementsofforeignsubsidiariesincountriesexperiencinghyperinflationis:

A.

thecurrentratemethod.

B.

theinflationmethod.

C.

thetemporalmethod.

D.

thetransitionmethod.

41.

Whenaccountingforaninvestmentundertheequitymethod,whatsituationsmayreducethecarryingvalueoftheinvestment?

I.Investeeexperiencessignificantlosses.

II.Investeedistributesdividendsinexcessofearnings.

III.Investeesellsadditionalsharesforlessthanbookvalue.

IV.Investeeengagesinastocksplit.

A.

IandII

B.

IIandIV

C.

I,II,andIII

D.

I,III,andIV

42.

Bothconsolidationandequitymethodaccountingassumeadollarearnedbyasubsidiaryisequivalenttoadollarearnedforaparent,evenifnotreceivedincash.Thelimitationsofthisassumptionofdollar-for-dollarequivalenceincludewhichofthefollowing?

I.Dividendsrestrictedbylawandloancovenants

II.Risksduetopoliticalandeconomicfactors

III.Taxliabilitiesfromremittanceofearnings

IV.Minorityintereststhatlimitparent'sdiscretion

A.

IIandIII

B.

II

C.

IandIII

D.

I,II,III,andIV

43.

OldCo.wasacquiredbyRaptorforcash,atasignificantpremiumtobookvalue,onJanuary1,2004.Sincethattime,thenowwhollyownedsubsidiaryhashadmodestgrowthandallofitsearningshavebeendistributedtoitsparent.SomeofOld'sbondsremainpubliclytraded.Whichofthefollowingismostlikelybetrueconsideringtheabovescenario?

A.

AnincreaseinOld'stotalassetsfrom2003to2005

B.

AnincreaseinOld'spretaxincomefrom2003to2005

C.

AnincreaseinOld'sstockholders'equityfrom2003to2005

D.

ARaptorguaranteeofthebonds

44.

WhichofthefollowingisallowedtobereportedonfairvaluebasisunderSFAS159?

A.

Investmentinsubsidiariesthatneedtobeconsolidated

B.

Leaseassetsandobligations

C.

Derivatives

D.

Postretirementbenefitassetsandobligations

True/FalseQuestions

45.

Held-to-maturitysecuritiesareequitysecuritiesthatmanagementintendsandhastheabilitytoholdtomaturity.

True

False

46.

Held-to-maturitysecuritiesarealwaysclassifiedasnoncurrentassets.

True

False

47.

Investmentsecuritiesshouldalwaysbereportedatlowerofcostormarket.

True

False

48.

Whenasecurityisreclassifiedfromavailable-for-saletotrading,itistransferredatfairmarketvalue,andanyunrealizedgainsorlossesmustberecognizedintheincomestatement.

True

False

49.

Theequityconformityrulerequiresthatmarketablesecuritiesmustbemarkedtomarketfortaxpurposes.

True

False

50.

Theequitymethodofaccountingforinvestmentsshouldbeusedwhenacompanyhasacontrollinginterestintheinvestee.

True

False

51.

Allderivativesarerecordedatmarketvalueonthebalancesheet.

True

False

52.

Whenpurchaseaccountingisusedforacquisitions,prioryearfinancialstatementspresentedforcomparativepurposesshouldberestatedasifthecompanieshadalwaysbeencombined.

True

False

53.

Goodwillrecordedastheresultofanacquisitionisdefinedasthepurchasepricelessthebookvalueofnetassets.

True

False

54.

Thecurrentratemethodshouldbeusedtotranslateforeigncurrencyintotheparentcurrencywhenthefunctionalcurrencyisdeemedtobetheparentcurrency.

True

False

55.

Whenusingthecurrentratemethodtorecordforeignsubsidiaryresults,allassetsandliabilitiesaretranslatedatarate,ineffectasofthestatementdate.

True

False

56.

Oneoftheproblemswithpurchaseaccountingisthatthereisoftenverylittlebasisforcomparabilityoffinancialstatementsbeforeacquisitionandafteracquisition.

True

False

57.

Oneoftheproblemswithconsolidatedfinancialstatementsisthatallintercompanytransactionsarenotreported.

True

False

58.

Translationistheprocessunderwhichlocalcurrencyresultsaretranslatedintothefunctionalcurrency.

True

False

59.

Whenusingthecurrentratemethodtorecordforeignsubsidiaryresults,gainsandlossesarisingfromthetranslationprocessarereportedseparatelyasacomponentofstockholders'equityandexcludedfromreportednetincome.

True

False

60.

Ifthefunctionalcurrencyofaforeign-basedsubsidiaryofanAmericancompanyisthelocalcurrency,thecurrentratemethodoftranslationshouldbeusedforconsolidationpurposes.

True

False

61.

ReportedsalesinUSdollarsofrevenuesfromaforeignsubsidiarywillbethesameregardlessofthefunctionalcurrency.

True

False

62.

Ifacompanyhasawhollyownedforeignsubsidiarylocatedataplacewherethefunctionalcurrencyishighlyinflationary,theyshouldusethetemporalmethod.

True

False

63.

Whentheincomestatementofaforeignsubsidiaryistranslatedintothereportingcurrencyfromthefunctionalcurrency,thegrossmarginwillremainthesameinthetranslationprocess.

True

False

64.

Ifthetemporalmethodisusedforforeigncurrencytranslationandtheforeignsubsidiaryhasanexcessofmonetaryliabilitiesovermonetaryassets,anincreaseinthestrengthofthedollarwillresultinatranslationloss.

True

False

65.

Ifthetemporalmethodisusedforforeigncurrencytranslationandtheforeignsubsidiaryhasanexcessofmonetaryassetsovermonetaryliabilities,anincreaseinthestrengthofthedollarwillresultinatranslationloss.

True

False

66.

UnderSFAS141,accountingforacquisitionscannolongerresultinanincreaseintheconsolidatedentity'sstockholders'equity.

True

False

67.

Ifacompanychoosesthefairvalueoptionforanassetorliability,allchangesinthefairvalueoftheasset(orliability),includingunrealizedgainandlosses,willbeincludedinnetincome.

True

False

EssayQuestions

68.

Equitymethodversuscostmethod

WildeCorporationowns30%oftheoutstandingstockofBernieInc.Bernierecordednetincomeof$10millionandpaiddividendsof$3millionin2006.Foreachofthefollowingratios,statetheeffect(higher,lower,ornoeffect)thattheuseoftheequitymethodwouldhaveonWilde'sfinancialratioscomparedtotheuseofthecostmethodin2006.Explainyouranswers.

i.Grossmargin

ii.Totalassetturnover

iii.Cashflowfromoperationstocurrentliabilities

iv.Debt-to-equity

69.

ClassificationofDerivativesforAccounting

I.Speculative

II.Fairvaluehedge

III.Cashflowhedge

IV.Foreigncurrencyfairvaluehedge

V.Foreigncurrencycashflowhedge

VI.Foreigncurrencyhedgeofnetinvestmentinforeignoperation

VII.Notaderivative

70.

ForeignCurrencyTranslation

CompanyABC,anAmericancompany,hasa100%ownedforeignsubsidiary.Theforeignsubsidiary'slocalcurrency,functionalcurrencyandreportingcurrencyarealldifferent.Thesubsidiaryaccountsforinventoriesusingthefirst-in,first-out(FIFO)method.

A.Assumethefunctionalcurrencyisappreciatingrelativetothereportingcurrency.Compareeachofthefollowingratiosfortheforeignsubsidiaryinthereportingcurrencyaftertranslationtothesameratiosinthefunctionalcurrencybeforetranslation.Explainwhytheratiosdoordonotdiffer.

i.Grossprofitmarginpercentage

ii.Currentratio

B.Assumethelocalcurrencyisappreciatingrelativetothefunctionalcurrency.Compareeachofthefollowingratiosfortheforeignsubsidiaryinthefunctionalcurrencyafterremeasurementtothesameratiosinthelocalcurrencybeforeremeasurement.Explainwhytheratiosdoordonotdiffer.

i.Grossprofitmarginpercentage

ii.Operatingprofitmargin

iii.Netprofitmargin

71.

Acquisitions

GrowthCorporationistradingat$102pershareon11/1/06whenitmakesabidof0.667sharesofGrowthCorp.foreachoutstandingshareofTargetCorp.Targethas40millionsharesoutstanding,andGrowthCorp.hasapproximately30millionsharesoutstanding.Targetclosedat$50pershareon10/31/06.

On11/19/06,BidderCorp.makesabidof2.5sharesofBidder'sstockforeachshareofTarget.Bidderistradingat$29on11/19/06with90millionsharesoutstanding.

ThefairmarketvalueofTarget'snetidentifiableassetsis$1,020millionatthetimeoftheoffers.Target'sexpectedearningsfor2006are$250million.

GrowthCorporation'searningsfor2006areexpectedtobe$125million.BidderCorporation'searningsfor2006areexpectedtobe$330million.

a.HowmuchofapercentagepremiumoverthemarketpricewasGrowthCorporationpreparedtopayforTarget?

b.Assumingthestockmarketisefficient,whywouldonecompanybepreparedtopayapremiumovercurrentmarketvaluetoacquireanothercompany?

72.

AcquisitionsandComparability

YouareanalyzingthefinancialstatementsofFloydCorp.Floydhasmadeseveralacquisitionsinthepastfewyearsusingnewlyissuedstock.Theseacquisitionshaveallbeenaccountedforusingpurchaseaccounting.Ineachcase,thepurchasepriceexceededthebookvalueandfairvalueofthenetassetsoftheacquiredcompany.Thebookvalueandfairvalueofdebtofacquiredcompanieswerethesame.FloydusesFIFOforinventoryvaluationpurposes.

ExplainwhyFloyd'sacquisitionhistorymakesitdifficulttoanalyzethetrendofitsfinancialresults.

73.

ForeignCurrencyTranslation

FlowersInc.anAmericancompanyhastwooverseassubsidiarieslocatedinGreatBritain(RosesPLC)andinHolland(TulipsInc.).Flowerspreparesconsolidatedfinancialstatements.ThereportingcurrencyistheU.S.dollar.

MostofRosesoperationsandsalestakeplaceinBritain,andthetransactionsaredenominatedintheBritishpound.Additionally,Rosesmakesitsownfinancingandoperatingdecisions,independentlyofFlowersInc.

TulipInc.isasalesoutletforRosesPLCandoperatingdecisionsaremadebytheBritishsubsidiary,Roses.

a.Identifythemethod(s)FlowersInc.shouldusetoconvertthefinancialresultsofRosesPLCintotheU.S.dollarforpurposesofconsolidation.

b.Identifythemethod(s)FlowersInc.shouldusetoconvertthefinancialresultsofTulipInc.intotheU.S.dollarforpurposesofconsolidation.

c.ExplainhowadeclineinthevalueoftheBritishpoundrelativetotheU.S.dollarwillaffectFlowers'earningsinthereportingcurrency.

74.

ForeignCurrencyTranslation

a.GruberPLCoperatesinEnglandandisasubsidiaryofSzudyInternational.ThefunctionalcurrencyofGruberistheBritishpound.Gruberreportednetincomein2006of£350millionandpaida£75milliondividendonJuly1,2006whentheexchangeratewas$1.55perpound.Thecurrentrateis$1.65perpoundandt