CFA L2 Apostila 01 Exame 2018 - COMPLETA IMPRESSÃO

LOS 18.c,d Analyze/Compare/Evaluate/ DetermineSchweser B2 pg 65, CFAI V2 pg 130 Multinational Operations Temporal Method (cont.)4. Produce the income statement. Net income (NI) in the income statement will be different from NI in retained earnings.5. Force the income statement NI to agree to the NI in the retained earnings reconciliation by adding a “gain” or “loss.”© Kaplan, Inc. 112LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Example – Super, Inc. Hoops Ltd. Balance Sheets 20x7 20x8 € € 600Cash 200 600 500Accounts rec. 400 1,300 3,000Inventory 300PP&E 1,500Total Assets 2,400© Kaplan, Inc. 114 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Example – Super, Inc.Super, Inc., a U.S. firm has a European sub, HoopsLtd. The following data relates to Hoops:Exchange RatesOpening rate $1.50 *= applies toClosing rate $1.80 beginning inventory,Average rate $1.65 PP&E, commonHistoric* $1.50 stock, opening R/EDividend declaration $1.75 Ending inventory was purchased at a weighted 113 exchange rate of $1.70.© Kaplan, Inc.LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Example – Super, Inc. Hoops Ltd. Balance Sheets (cont.) Accounts payable 20x7 20x8 Dividends payable € € LTD Common stock 300 200 R/E 0 100 Liab. and equity 1,500 1,400 500© Kaplan, Inc. 500 700 200 3,000 2,400 115ers - Exame CFA 29

LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Example – Super, Inc. Hoops Ltd. Income Statement 20x8 € Sales 3,000 COGS (1,600) Depreciation (200) SG&A (500) Tax provision (100)© Kaplan, Inc. Net income 600 116LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Temporal SolutionConvert liabilities and equity:A/C payable € X∆ Rate $Div. payable 200 $1.80 360LTD 100 $1.80 180Common stock 1,500 $1.80 2,700R/E 500 $1.50 750Liab. & equity 700 β 970 3,000 4,960© Kaplan, Inc. β = plug figure 118 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Temporal SolutionConvert total assets: Cash € X∆ Rate $ A/C rec. 600 $1.80 1,080 Inventory 600 $1.80 1,080 PP&E 500 $1.70 Total assets 1,300 $1.50 850 3,000 1,950 4,960© Kaplan, Inc. 117LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Temporal SolutionDerive net income from reconciliation of retainedearnings: Opening R/E € X∆ $ Net income 200 1.50 300 Dividend 600 845 Closing R/E (100) β (175) 700 1.75 970 β = plug figure© Kaplan, Inc. 119ers - Exame CFA 30

LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Temporal Solution Sales € X∆ Rate $ COGS 3,000 $1.65 4,950 Gross profit (1,600) W1 (2,570) Depreciation 1,400 2,380 SG&A (200) $1.50 (300) Tax (500) $1.65 (825) X∆ gain (loss) (100) $1.65 (165) Net income (245) 600 β© Kaplan, Inc. 845 120LOS 18.c,d Analyze/Compare/Evaluate/DetermineSchweser B2 pg 65, CFAI V2 pg 130 Multinational Operations Current Rate Method Alternative names: Translation Views the overseas operation as an investment All assets and liabilities (i.e., net assets are exposed to exchange rate risk) Exchange rate gains and losses are unrealized and stored in equity until the overseas operation is disposed of CTA realized in income statement on disposal© Kaplan, Inc. 122 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Temporal COGS W1 € Exchange $ Rate Beginning Inv. 300 1.50 450 Purchases β 1,800 1.65 2,970 End Inventory (500) 1.70 (850) COGS 1,600 2,570Ending inventory should be at the historic raterelating to purchases it includes (FIFO, LIFO, and ACVO will impact) 121© Kaplan, Inc.LOS 18.c,d Analyze/Compare/Evaluate/ DetermineSchweser B2 pg 65, CFAI V2 pg 130 Multinational Operations Current Rate Method Balance Sheet Income Statement All Assets & Liabilities Revenues & Expenses Current rate ADviveirdaegnedrsa=te Historical Rate when declared Capital Stock Historical rate Aggregate stockholders’ Retained Earnings Accumulated average rates equity at current rate Cumulative FX Gain/Loss Plug figure 123© Kaplan, Inc.ers - Exame CFA 31

LOS 18.c,d Analyze/Compare/Evaluate/ DetermineSchweser B2 pg 65, CFAI V2 pg 130 Multinational OperationsApplying the Current Rate Method1. Convert the income statement—all revenues and expenses are translated at the average rate2. Derive closing retained earnings Opening retained earnings X NI (from income statement) X Dividends (X) Closing retained earnings X© Kaplan, Inc. 124LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Current Rate Method SolutionProduce income statement:Sales € X∆ Rate $COGS 3,000 $1.65 4,950Gross profit (1,600) $1.65 (2,640)Depreciation 1,400 2,310SG&A (200) $1.65 (330)Tax (500) $1.65 (825)Net income (100) $1.65 (165) 600 990© Kaplan, Inc. 126 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.c,d Analyze/Compare Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Applying the Current Rate Method3. Convert the balance sheet—all assets and liabilities are translated at the current rate4. Balance sheet will not balance. The difference is the translation gain/(loss)5. Force the balance sheet to balance by including the adjustment in shareholders’ equity (Cumulative Translation Adjustment) Note that the exchange rate gain or loss for the period is the change in the CTA.© Kaplan, Inc. 125LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Current Rate Method SolutionReconciliation of retained earnings: Opening R/E € X∆ $ Net income Dividend 200 1.50 300 Closing R/E 600 1.65 990 (100) 1.75 (175) 700 1,115© Kaplan, Inc. 127ers - Exame CFA 32

LOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Current Rate Method SolutionConvert total assets:Cash € X∆ Rate $AR 600 $1.80 1,080Inv. 600 $1.80 1,080PP&E 500 $1.80Total assets 1,300 $1.80 900 3,000 2,340 5,400© Kaplan, Inc. 128LOS 18.d Compare/Evaluate/Determine Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 134Calculating Currency Exposure Exposure:  Temporal method exposure: = (cash + A/R) – (A/P + current debt + LTD)  Current rate method exposure = assets – liabilities = shareholders’ equity Insight: These are the B/S accounts that are affected by the current rate for each method© Kaplan, Inc. 130 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.c,e,f Analyze/Calculate/Evaluate Multinational OperationsSchweser B2 pg 65, CFAI V2 pg 130 Current Rate Method SolutionProduce bottom half of balance sheet:AP € X∆ Rate $Div. payable 200 $1.80 360LTD 100 $1.80 180Common stock 1,500 $1.80 2,700R/E 500 $1.50 750CTA 700 Derive 1,115Liab. & equity β 295 3,000 5,400© Kaplan, Inc. 129LOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153 Calculating Currency Exposure Method Appreciating Depreciating Overseas Overseas currency CurrencyNet monetary Temporal Gain Lossassets Current Gain Loss Loss GainNet assets TemporalNet monetaryliabilities© Kaplan, Inc. 131ers - Exame CFA 33

LOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153 Translated (Current Rate) vs. LC Ratios No change from translation using Current Rate method for pure income statement and balance sheet ratios Mixed ratios are distorted FX rate changes affect consolidated ratios, even when no “real” change occurs© Kaplan, Inc. 132LOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153Compare Temporal to Current RateProcess Step 1: LC appreciating or depreciating? Step 2: Examine numerator  Translated at which rate? (current, avg., etc.)  Will numerator be larger or smaller? Step 3: Examine denominator  Process same as numerator Step 4: Determine impact on ratio© Kaplan, Inc. 134 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153 Compare Temporal to Current Rate Point: Temporal vs. Current Rate more difficult to analyze than LC vs. Current Rate results  Best to analyze ratios individually  Numerator and denominator will likely change by different proportions Your job: Determine whether ratio will be larger or smaller given the choice of accounting methods© Kaplan, Inc. 133LOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153 Compare Temporal to Current RateExample: Effect on Fixed Asset Turnover withappreciating LC LC appreciating: end rate > avg. rate > beg. rate  Numerator (sales): Translated at avg. rate under both methods  Denominator (fixed assets): Temporal = historical rate, current rate method = closing rate Fixed asset turnover is higher under temporal method if the historic rate is lower.© Kaplan, Inc. 135ers - Exame CFA 34

LOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153 Impact on Ratios – Hoops Ltd.Ratio € LC Temporal Current rateGross Margin 46.7% 48.1%Net Margin 20.0% 17.2% 46.7%D/EInventory T/O 1.25 1.42 20.0% 3.20 3.02 1.25 2.93© Kaplan, Inc. 136 Fixed Income Investments Study Session 5 Discussion QuestionsCFA Institute Program curriculum, Level II,Volume 2, page 64 Questions 25–30CFA Institute Program curriculum, Level II,Volume 2, page 108 Questions 1–7 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational OperationsLOS 18.f Analyze Multinational OperationsSchweser B2 pg 79, CFAI V2 pg 153Impact on Ratios – Hoops Ltd. (cont.)Ratio € LC Temporal Current rateAccts Rec. T/O 5.00 4.58 4.58Asset T/O 1.00 1.00ROE 46.3% 44.7% 0.92ROA 20.0% 17.1% 43.3% 18.3%© Kaplan, Inc. 137 Discussion QuestionsThe following information relates to Questions 25–30 Percy Byron, CFA, is an equity analyst with a UK-based investment firm. One firm Byron follows is NinMount PLC, a UK- based company. On 31 December 2008, NinMount paid £320 million to purchase a 50 percent stake in Boswell Company. The excess of the purchase price over the fair value of Boswell’s net assets was attributable to previously unrecorded licenses. These licenses were estimated to have an economic life of six years. The fair value of Boswell’s assets and liabilities other than licenses was equal to their recorded book values. NinMount and Boswell both use the pound sterling as their reporting currency and prepare their financial statements in accordance with IFRS.© Kaplan, Inc. 139ers - Exame CFA 35

Discussion Questions Byron is concerned whether the investment should affect his “buy” rating on NinMount common stock. He knows NinMount could choose one of several accounting methods to report the results of its investment, but NinMount has not announced which method it will use. Byron forecasts that both companies’ 2009 financial results (excluding any merger accounting adjustments) will be identical to those of 2008. NinMount’s and Boswell’s condensed income statements for the year ended 31 December 2008, and condensed balance sheets at 31 December 2008, are presented in Exhibits 1 and 2, respectively© Kaplan, Inc. 140 Discussion QuestionsExhibit 2. NinMount PLC and Boswell Company Balance Sheets at 31December 2008 (£ millions)Cash NinMount Boswell 50 20Receivables—net 70 45Inventory 130 75Total current assets 250 140Property, plant, & equipment—net 1,570 930Investment in Boswell 320 —Total assets 2,140 1,070Current liabilities 110 90Long-term debt 600 400Total liabilities 710 490Common stock 850 535Retained earnings 580 45Total equity 1,430 580Total liabilities and equity 2,140 1,070Note: Balance sheets reflect the purchase price paid by NinMount, but do not yet consider the impact of the©aKccaopluann,tiInngc. method choice. 142 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion QuestionsExhibit 1. NinMount PLC and Boswell Company Income Statementsfor the Year Ended 31 December 2008 (£ millions)Net sales NinMount BoswellCost of goods sold 950 510Selling expensesAdministrative expenses (495) (305) (50) (15)Depreciation & amortization expense (49)Interest expense (136) (92) Income before taxes (102) (32)Income tax expense (42) 125 17 Net income (50) (7) 75 10© Kaplan, Inc. 141 Discussion Questions Question 25NinMount’s current ratio on 31 December 2008 mostlikely will be highest if the results of the acquisitionare reported using:A. the equity method.B. consolidation with full goodwill.C. consolidation with partial goodwill. © Kaplan, Inc. 143ers - Exame CFA 36

Discussion Questions Solution 25Current ratio under equity accounting: current assets = 250 = 2.27 current liabilities 110Current ratio under acquisition accounting: 250 + 140 = 1.95 110 + 90Note that full vs. partial goodwill only effects intangiblelong lived assets and stockholders equity© Kaplan, Inc. 144 Discussion Questions Question 26NinMount’s long-term debt to equity ratio on 31December 2008 most likely will be lowest if theresults of the acquisition are reported using:A. the equity method.B. consolidation with full goodwill.C. consolidation with partial goodwill.© Kaplan, Inc. 146 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 25NinMount’s current ratio on 31 December 2008 mostlikely will be highest if the results of the acquisitionare reported using:A. the equity method.B. consolidation with full goodwill.C. consolidation with partial goodwill.© Kaplan, Inc. 145 Discussion Questions Solution 26Long-term debt to equity ratio under equityaccounting: long-term debt = 600* = 0.42stockholders equity 1,430* Note that any finance raised to purchase Boswellhas been included in NinMount’s accounts © Kaplan, Inc. 147ers - Exame CFA 37



SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 26Group Balance Sheet – acquisition accounting Current liabilities Group £m [110 + 90] Long-term debt 200 [600 + 400] Total liabilities 1,000 1,200© Kaplan, Inc. 149 Discussion Questions Solution 26 Group £m Common Stock 850 NinMount only Retained earnings 580 NinMount only* Minority interest 320 See working Total equity 1,750 Minorities share = 50% * Boswell’s results are pre-acquisitionNon-controlling interest Boswell £m This could Total assets 1,130 have been Total liabilities (490) Net assets Includes FMV computed as of licences 640© Kaplan, Inc. £60m 50% of Boswell’s fair value 151ers - Exame CFA 38

Discussion Questions Solution 26Long-term debt to equity ratio underacquisition accounting: long-term debt 1,000* = 0.57stockholders equity 1,750* Note that any finance raised to purchase Boswellhas been included in NinMount’s accounts© Kaplan, Inc. 152 Discussion Questions Question 27Based on Byron’s forecast, if NinMount deems it hasacquired control over Boswell, NinMount’sconsolidated 2009 depreciation and amortizationexpense (in £ millions) will be closest to:A. 102.B. 148.C. 204.© Kaplan, Inc. 154 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 26NinMount’s long-term debt to equity ratio on 31December 2008 most likely will be lowest if theresults of the acquisition are reported using:A. the equity method.B. consolidation with full goodwill.C. consolidation with partial goodwill.© Kaplan, Inc. 153 Discussion Questions Solution 27 NinMount 2009 £m £60m/6 years Boswell 102 Licences 92 See question 26 Total 10 for the derivation 204 of £60m licences © Kaplan, Inc. 155ers - Exame CFA 39

Discussion Questions Solution 27Based on Byron’s forecast, if NinMount deems it hasacquired control over Boswell, NinMount’sconsolidated 2009 depreciation and amortizationexpense (in £ millions) will be closest to:A. 102.B. 148.C. 204.© Kaplan, Inc. 156 Discussion Questions Solution 28No computations are required. Net Income is the same underall accounting methods. Acquisition methods will combine bothcompany’s sales; however, the equity method only includes theparent’s (NinMount) sales. Equity Both Accounting Consolidation Methods Net Income £m £m 75 75 Sales 950 1,460 Net Margin 7.9% 5.1%© Kaplan, Inc. 158 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Question 28Based on Byron’s forecast, NinMount’s net profitmargin for 2009 most likely will be highest if theresults of the acquisition are reported using:A. the equity method.B. consolidation with full goodwill.C. consolidation with partial goodwill.© Kaplan, Inc. 157 Discussion Questions Solution 28Based on Byron’s forecast, NinMount’s net profitmargin for 2009 most likely will be highest if theresults of the acquisition are reported using:A. the equity method.B. consolidation with full goodwill.C. consolidation with partial goodwill.© Kaplan, Inc. 159ers - Exame CFA 40

Discussion Questions Question 29Based on Byron’s forecast, NinMount’s 2009 returnon beginning equity most likely will be the sameunder:A. either of the consolidation methods, but different under the equity method.B. the equity method, consolidation with full goodwill, and consolidation with partial goodwill.C. none of the equity method, consolidation with fullgoodwill, and consolidation with partial goodwill.© Kaplan, Inc. 160 Discussion Questions Solution 29Based on Byron’s forecast, NinMount’s 2009 returnon beginning equity most likely will be the sameunder:A. either of the consolidation methods, but different under the equity method.B. the equity method, consolidation with full goodwill, and consolidation with partial goodwill.C. none of the equity method, consolidation with fullgoodwill, and consolidation with partial goodwill.© Kaplan, Inc. 162 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 29No computations are required. Net Income is the sameunder all accounting methods. The two acquisition methodswill normally give different stockholders equity figures,however the absence of goodwill in this example meansthat they are identical. NI = 70 + (10/2) – (10/2) = $70© Kaplan, Inc. Net Income Equity Both 161 Opening Equity Accounting Consolidation ROE £m Methods 70 1,430 £m 4.9% 70 1,750 4.0% Discussion Questions Question 30Based on Byron’s forecast, NinMount’s 2009 totalasset turnover ratio on beginning assets under theequity method is most likely:A. lower than if the results are reported using consolidation.B. the same as if the results had been reported under consolidation.C. higher than if the results had been reported under consolidation.© Kaplan, Inc. 163ers - Exame CFA 41

Discussion Questions Solution 30Sales Equity BothOpening Assets Accounting ConsolidationAsset T/O £m Methods 950 2,140 £m 0.444 1,460 2,950 0.495© Kaplan, Inc. 164 Discussion QuestionsThe following information relates to Questions 1–7 Kensington plc, a hypothetical company based in the United Kingdom, offers its employees a defined benefit pension plan. Kensington complies with IFRS. The assumed discount rate that the company used in estimating the present value of its pension obligations was 5.48 percent. Information on Kensington’s retirement plans is presented in Exhibit 1.© Kaplan, Inc. 166 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 30Based on Byron’s forecast, NinMount’s 2009 totalasset turnover ratio on beginning assets under theequity method is most likely:A. lower than if the results are reported using consolidation.B. the same as if the results had been reported under consolidation.C. higher than if the results had been reported under consolidation.© Kaplan, Inc. 165 Discussion QuestionsExhibit 1. Kensington plc Defined Benefit Pension Plan (in millions) 2010 Components of periodic benefit cost Service cost £228 Net interest (income) expense 273 Remeasurements –18 Periodic pension cost £483 Change in benefit obligation £28,416 Benefit obligations at beginning of year 228 Service cost Interest cost 1,557 Benefits paid –1,322 Actuarial gain or loss Benefit obligations at end of year 0 £28,879 Change in plan assets £23,432 Fair value of plan assets at beginning of year Actual return on plan assets 1,302 Employer contributions 693 Benefits paid Fair value of plan assets at end of year –1,322 £24,105© Kaplan, Inc. Funded status at beginning of year –£4,984 167 Funded status at end of year –£4,774ers - Exame CFA 42

Discussion Questions Question 1At year-end 2010, £28,879 million represents:A. the funded status of the plan.B. the defined benefit obligation.C. the fair value of the plan’s assets.© Kaplan, Inc. 168 Discussion Questions Solution 1At year-end 2010, £28,879 million represents:A. the funded status of the plan.B. the defined benefit obligation.C. the fair value of the plan’s assets.© Kaplan, Inc. 170 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 1Funded status = FV plan assets – PVDBOFunded status = £24,105m – £28,879m = – £4,774mDefined benefit obligation = Present value of thedefined benefit obligation (PVDBO)PVDBO = £28,879mNote U.S. GAAP uses the term Projected benefitobligation (PBO) rather than PVDBO Fair value of plan assets = £24,105m 169© Kaplan, Inc. Discussion Questions Question 2For the year 2010, the net interest expense of £273represents the interest cost on the:A. ending benefit obligation.B. beginning benefit obligation.C. beginning net pension obligation. © Kaplan, Inc. 171ers - Exame CFA 43

Discussion Questions Solution 2IFRS reports net interest expense or income. U.S. GAAPpresents interest expense and expected return on plan assetsseparately.Net Interest* = opening funded status × discount rate £273m = $4,984m × 5.48%U.S. GAAP:Gross Interest* = opening PBO × discount rateExpected return = opening plan assets × assumed rate of return* Assuming no remeasurement gains and losses have beenmade to the PVDBO during the year.© Kaplan, Inc. 172 Discussion Questions Question 3For the year 2010, the remeasurement component ofKensington’s periodic pension cost represents:A. the change in the net pension obligation.B. actuarial gains and losses on the pension obligation.C. actual return on plan assets minus the amount of return on plan assets included in the net interest expense.© Kaplan, Inc. 174 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 2For the year 2010, the net interest expense of £273represents the interest cost on the:A. ending benefit obligation.B. beginning benefit obligation.C. beginning net pension obligation.© Kaplan, Inc. 173 Discussion Questions Solution 3IFRS remeasurement gains and losses =• Changes to the PVDBO caused by changes to actuarial assumptions• The difference between actual and expected return on plan assetsChanges to the PVDBO caused by actuarial gains and losseswill appear in the reconciliation of the PVDBO as well asremeasurement gains and losses. The change in benefitobligation (PVDBO) shows no actuarial gain or loss.Conclusion: The remeasurement gains and losses must bedue to the difference in actual and expected rates of return.© Kaplan, Inc. 175ers - Exame CFA 44

Discussion Questions Solution 3For the year 2010, the remeasurement component ofKensington’s periodic pension cost represents:A. the change in the net pension obligation.B. actuarial gains and losses on the pension obligation.C. actual return on plan assets minus the amount of return on plan assets included in the net interest expense.© Kaplan, Inc. 176 Discussion Questions Solution 4 The actual return on plan assets impacts the plan assetsand as a result closing funded status on the balance sheet. The expected return on plan assets is a smoothed itemimpacting the income statement expense. Actual return % = Actual £ return/Opening plan assets = £1,302m/£23,432m = 5.56% The expected rate of return is an actuarial assumption.IFRS requires the expected rate of return and the discountrate used to equal the yield on AA rated corporate debt. The question states the discount rate = 5.48% Under U.S. GAAP the discount rate and rate of expectedreturn may differ© Kaplan, Inc. 178 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Question 4Which of the following is closest to the actual rate of return onbeginning plan assets and the rate of return on beginning planassets that is included in the interest income/expensecalculation? A. The actual rate of return was 5.56%, and the rate included in the interest income/expense was 5.48%. B. The actual rate of return was 1.17%, and the rate included in the interest income/expense was 5.48%. C. Both the actual rate and the rate of rate included in the interest income/expense were 5.48%.© Kaplan, Inc. 177 Discussion Questions Solution 4Which of the following is closest to the actual rate of return onbeginning plan assets and the rate of return on beginning planassets that is included in the interest income/expensecalculation? A. The actual rate of return was 5.56%, and the rate included in the interest income/expense was 5.48%. B. The actual rate of return was 1.17%, and the rate included in the interest income/expense was 5.48%. C. Both the actual rate and the rate of rate included in the interest income/expense were 5.48%.© Kaplan, Inc. 179ers - Exame CFA 45

Discussion Questions Question 5Which component of Kensignton’s periodic pensioncost would be shown in OCI rather than P&L?A. Service costB. Net interest (income) expenseC. Remeasurements© Kaplan, Inc. 180 Discussion Questions Solution 5 Remeasurements: Result from two sources: the changes in actuarial assumptions affecting the PVDBO and the difference between actual and expected return on plan assets. Under both U.S. GAAP and IFRS remeasurements are taken to other comprehensive income (OCI), rather than the income statement. Under U.S. GAAP the opening amounts in OCI are amortized over the remaining service life subject to the 10% corridor. Under IFRS the amounts on OCI are not amortized on the grounds that they should self correct in the long run.© Kaplan, Inc. 182 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 5 Service cost: The increase in the PVDBO due to employees having worked one additional year. Service cost increases the PVDBO and appears in the pension expense in the income statement. Net Interest (income) expense: The netting of interest expense and expected return on plan assets. The interest element results from the increase in the PVDBO due to the passage of time. The expected return on plan assets is a smoothed return based on opening plan assets. The two elements are netted in the income statement under IFRS as the same rate must be used for both. Under U.S. GAAP they are shown separately as different rates may be used.© Kaplan, Inc. 181 Discussion Questions Solution 5Which component of Kensignton’s periodic pensioncost would be shown in OCI rather than P&L?A. service costB. net interest (income) expenseC. remeasurements © Kaplan, Inc. 183ers - Exame CFA 46

Discussion Questions Question 6The relationship between the periodic pension cost and theplan’s funded status is best expressed in which of thefollowing?A. Periodic pension cost of –£483 = Ending funded status of –£4,774 – Employer contributions of £693 – BeginningB. funded status of – £4,984C. Periodic pension cost of £1,322 = Benefits paid of £1,322 Periodic pension cost of £210 = Ending funded status of – £4,774 – Beginning funded status of –£4,984© Kaplan, Inc. 184 Discussion Questions Solution 6The relationship between the periodic pension cost and theplan’s funded status is best expressed in which of thefollowing?A. Periodic pension cost of –£483 = Ending funded status of –£4,774 – Employer contributions of £693 – Beginning funded status of – £4,984B. Periodic pension cost of £1,322 = Benefits paid of £1,322C. Periodic pension cost of £210 = Ending funded status of – £4,774 – Beginning funded status of –£4,984© Kaplan, Inc. 186 ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 6 The total periodic pension cost is the total accounting cost of operating the pension scheme during the year regardless of whether the cost has been taken to the income statement or directly to OCI. TPPC = income statement expense + change in OCI items TPPC = employers contributions – change in funded statusPeriodic pension cost = £693m – (–£4,774 – –£4,984 )Periodic pension cost = £693m – £210m = £483m Note: Total periodic pension cost is the same under IFRS and U.S. GAAP© Kaplan, Inc. 185 Discussion Questions Question 7An adjustment to Kensington’s statement of cashflows to reclassify the company’s excess contributionfor 2010 would most likely entail reclassifying £210m(excluding income tax effects) as an outflow relatedto:A. investing activities rather than operating activities.B. financing activities rather than operating activities.C. operating activities rather than financing activities.© Kaplan, Inc. 187ers - Exame CFA 47

Discussion QuestionsSolution 7 Typically the impact on the cash flow of defined benefits plans is the employers contribution net of tax. This is treated as an operating cash flow. An employer contribution greater than the period pension cost will cause the funded status to improve. A contribution less than periodic cost will cause funded status to worsen. An improvement to funded status can be viewed as paying off a long-term, interest bearing liability. Principal payments of debt flow through financing activities Excess contribution = Employer contribution – TPPC 188 £210m = £693m – £483m £210m (1 – T): increase CFO decrease CFF© Kaplan, Inc. ©2018 FK Partne

SS 05 - Intercorporate Investments, Post-Employment Compensation, and Multinational Operations Discussion Questions Solution 7An adjustment to Kensington’s statement of cashflows to reclassify the company’s excess contributionfor 2010 would most likely entail reclassifying £210m(excluding income tax effects) as an outflow relatedto:A. investing activities rather than operating activities.B. financing activities rather than operating activities.C. operating activities rather than financing activities.© Kaplan, Inc. 189ers - Exame CFA 48

Questions – SS 5 - Financial Reporting and Analysis Intercorporate Investments, Post Employment and Share Based Compensation, and Multinational OperationsQuestion 1 - 6On December 15, 2009, the Zeisler Company faces a financial crisis. Zeisler's industry has goneinto recession and net income has declined to nearly zero. Jeremiah Welch, the company's CFO, isextremely concerned that, when the final figures for 2009 come in, the poor operating results willthrow the firm into violation of its debt covenants, which specify that it must meet a certain returnon assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant wouldtrigger a provision in the lending agreement allowing lenders to put Zeisler's debt back to the firmand likely force Zeisler into bankruptcy.With only two weeks before the close of the firm's fiscal year on December 31, there is no way toavoid bankruptcy through improved operations. Welch calls an emergency meeting with OliviaDupree, the firm's controller, to come up with a plan of action to keep Zeisler out of bankruptcy. Heexplains to Dupree that they need to increase Zeigler's reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2009.Dupree suggests that Zeisler's equity investments might be useful in staving off bankruptcy. Zeisleracquired 100,000 shares of the Market Square Corporation on January 1, 2009, at $25 per share.Market Square paid dividends during 2009 of $1.50 per share and was expected to have earningsfor 2009 of $2.50 per share. Zeisler also holds 250,000 shares of General Nuclear, purchased for$72 per share. General Nuclear has no dividends and is expected to report a loss for 2009. Bothsecurities are classified on the financial statements as available-for-sale.Dupree added that Zeisler also holds several million dollars of Market Square's debt securities,classified as a held - to-maturity investment. The holding in Market Square represents a smallfraction of Zeisler's total fixed-income investments, all of which are also classified as held-to-maturity. The investment in Market Square's debt differs significantly from Zeisler's otherinvestments in fixed-income securities in that Market Square's debt is trading slightly above Zeisler'scost while Zeisler's other fixed-income investments are all trading significantly below Zeisler's costbecause of a general increase in market interest rates. Welch points out, however, that even if thefirm were to sell all its marketable securities, the proceeds would not be sufficient to pay off the debtand avert bankruptcy.Dupree left the meeting with Welch for a moment to check the stock market. She found that MarketSquare was trading at $35 per share and General Nuclear was at $43. This new information gaveDupree an idea.Dupree suggested to Welch, \"We could reclassify our equity investment in Market Square as tradingbefore year - end. That will help raise our ROA for this year.\" Welch pointed out that a reclassificationof the e quity investment from available-for-sale to trading would reduce Zeisler's reported netincome because the firm would be required to stop including the dividends it receives from MarketSquare in net income. Welch suggested that, instead of reclassifying Market Square's equity, theysell Market Square's debt. That would reduce Zeisler's debt-to-assets ratio because the unrealizedgain in the market value of the Market Square debt would be realized when the security was sold.Dupree added that the firm could also liquidate the Gen eral Nuclear investment to raise cashwithout affecting the firm's reported ROA for 2009. Welch and Dupree decided to liquidate the twoassets to help improve the firm's financial position.Question 1What is the investment income that Zeisler Company will report for the year 2009 on its investmentin Market Square Corporation shares if it continues to account for the shares as an available -for-sale investment? A) $250,000. B) $200,000. C) $150,000.Question 2If Zeisler were to account for the Market Square Corporation shares as trading securities, assumingthat the securities do not change in value between the December 15th meeting and the end of theyear, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheet would be: ______________________ 1 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

A) $3.50 million.B) $2.75 million.C) $2.50 million.Question 3If Zeisler reclassified the common stock of General Nuclear as a trading security, what effect wouldit have on Zeisler's 2009 income statement?A) Net income would decline.B) Net income would increase.C) Reclassifying the security would have no effect on the income statement because gains and losses would be recognized in equity.Question 4Regarding the statements made by Dupree and Welch about reclassifying Zeisler's equityinvestment in Market Square to trading:A) Welch's statement is correct; Dupree's statement is incorrect.B) Welch's statement is incorrect; Dupree's statement is correct.C) Welch's statement is incorrect; Dupree's statement is incorrect.Question 5If Zeisler were to account for the Market Square Corporation shares using the equity method,assuming that the securities do not change in value between the December 15th meeting and theend of the year, the carrying amount of these shares on Zeisler's December 31, 2009 balance sheetwould be:A) $2.60 million.B) $2.75 million.C) $3.50 million.Question 6Regarding the statements made by Welch about reclassifying Zeisler's debt investment in MarketSquare to trading, and Dupree's statement on General Nuclear:A) Welch's statement is incorrect; Dupree's statement is incorrect.B) Welch's statement is correct; Dupree's statement is incorrect.C) Welch's statement is correct; Dupree's statement is correct.Question 7 - 12Jon Horton, CFA, is the Chief Financial Officer (CFO) for Springtown Corporation, a manufacturer ofwindows for residential and commercial applications. As part of an ongoing diversification strategy,Springtown Corp. has recently entered into a preliminary agreement to purchase all of the assets ofPrime Doors, a manufacturer and distributor of doors to the same residential and commercial marketin which Springtown sells its windows. Horton is head of the due diligence team that will fullyevaluate Prime Doors' financial statements prior to the proposed acquisition.Prime Doors has been in operation for thirty years, and currently has approximately 800 employeesat two operating facilities. Horton observes in the notes to the financial statements that Prime Doorshas a defined benefit pension plan, for which all employees are eligible. Employees are vested atthe rate of 20% per year of employment, and are fully vested upon completion of five years ofemployment. Springtown does not offer a pension plan to its employees, but encourages employeesto contribute to Individual Retirement Accounts (IRAs) and offers a 401(k) program.Horton wants to fully evaluate the financial implications of Spri ngtown's assumption of Prime Doors'pension assets and the associated future liabilities and expenses. Like most companies, the pensionplan for Prime Doors' employees is not fully funded, but Horton wants to review all assumptionsused by Prime Doors' acc ountants in the valuation of the plan's current liabilities. The most currentinformation regarding the pension plans is as follows:Select Pension Plan Information for Prime Doors (as of 12/31/05) 2 ______________________ ©2018 FK Partners Todos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

Project benefit obligation (PBO) $15,500,000Accumulated benefit obligation (ABO) $13,750,000Market value of plan assets $11,875,000Horton notices a paragraph in the pension plan footnotes that the original pension plan wasamended last year, effectively increasing the level of benefits to be paid to employees with morethan ten years of service. However, he is not able to detect what effect, if any, this change inprojected benefits has had on Prime Doors' financial statements or is expected to have in the future.Horton is aware that a commonly used method can be used to adjust the income statement andprovide a better measure of Prime Doors' economic pension cost than reported pension expense.He is not quite sure which components of the financial statements are utilized to derive an ad justedpension expense, but intends to investigate what analysis he can perform to gain more insight intothe company's position with regards to its pension plan.Question 7When accounting for pension liabilities in the U.S., a company must make fundamental assumptionsto estimate the future liability and expense for each employee. How are the following assumptionsrequired to be treated in the pension footnotes? Required disclosure Not required to be disclosedA) Discount rate Rate of compensation growthB) Rate of compensation growth Expected length of employmentC) Discount rate Expected return on plan assetsQuestion 8What effect will an increased discount rate and increased expected rate of return have on acompany's projected benefit obligation (PBO) and accumulated benefit obligation (ABO) as reflectedin the financial statements?A) Both will increase.B) Only one will increase.C) Both will decrease.Question 9According to U.S. GAAP, companies must account for pension assets and the associated pensionobligation in their financial statements. These could be reported in two ways. Method 1 is to reportthe values of the pension fund assets and liability separately on the balance sheet. Method 2 is toreport a net amount for the difference between the value of the fund assets and the fund liabilities.Which of the following statements most accurately describes the requirements of U.S. GAAP?A) Companies are required to use Method 1.B) Companies are required to use Method 2.C) Companies may choose to use either method.Question 10Prime Doors has recorded a net pension liability of $1.5 million on its balance sheet. According tocurrent U.S. accounting standards, Prime Doors is required to:A) Record $2,125,000 as additional pension liability on its balance sheet.B) Record $375,000 as additional pension expense on its balance sheet.C) Immediately recognize $2,125,000 as additional pension expense in its income statement.Question 11Which of the following statements regarding the treatment of pension plan amendments under U.S.GAAP standards is most accurate? A plan amendment results in:A) An unrecognized prior service cost that is amortized over the expected remaining service life of the affected employees.B) An immediate increase in pension expense equal to the amount of the amendment. ______________________ 3 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

C) The disclosure in the pension plan footnotes of the nature of the amendment and the projected future financial impact.Question 12Pension expense as reported by a firm is routinely adjusted by analysts to derive a more accuratemeasure of a firm's true economic pension cost. Economic pension expense is calculated as: A) Contribution - ( Ending funded status - beginning funded status) B) Reported pension cost - actual return on plan assets. C) Reported pension expense - service cost + interest cost.Question 13 - 19Della Air Lines has recently acquired Australian Puddle Jumpers, Inc. (APJ), a small airlin e locatedin Sydney. The Australian dollar has been chosen by Della as the functional currency for APJ. Thebalance sheet of APJ is given below as of Dec. 31, 2011 in U.S. dollars.APJ's income statement for the year ending Dec. 31, 2012 is expressed in Australian dollars as:The Australian dollar has steadily depreciated against the U.S. dollar. At Dec. 31, 2011, theexchange rate was 2.5 Australian dollars = $1 but at Dec. 31, 2012, the exchange rate haddeteriorated to 3 Australian dollars = $1.The Dec. 31, 2012 Balance Sheet for APJ is given in Australian dollars as follows:Question 13On APJ's 2012 income statement, the level of sales in U.S. dollars would be closest to:A) $1,985.B) $1,377.C) $1,272.Question 14On APJ's 2012 income statement, the level of net income in U.S. dollars would be closest to:A) $229.B) $217.C) $242.Question 15On APJ's 2012 balance sheet, the level of accounts receivable is U.S. dollars would be closest to: ______________________ 4 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

A) $330.B) $110.C) $132.Question 16For APJ, the conversion to US$ is most likely to result in:A) Remeasurement gain.B) Cumulative translation adjustment gain.C) Cumulative translation adjustment lossQuestion 17If the functional currency is the reporting currency, the exposure and the foreign currencymovements are most likely to result in a:A) Cumulative translation adjustment loss.B) Remeasurement gain.C) Remeasurement loss.Question 18The cumulative translation adjustment (CTA) is closest to:A) A loss of US$65.B) A loss of US$137.C) A gain of US$440Question 19 - 24Paul Roberts, CPA, is a partner in Roberts & Smith, an accounting firm that is located in Chicago.The firm has recently been retained by Midwest Manufacturing, a major producer of heavymachinery and tractor parts in the U.S. Midwest has been in operation since 1965, and currentlyhas approximately 700 full-time employees. The company had its initial public offering in 1986. Thecompany has hired Roberts's firm to ensure that the accounting for Midwest's employee pensionplan is fully in compliance U.S. GAAP standards.Selected year-end pension plan information for Midwest Manufacturing 2006 2007PBO $21 million $23 millionDiscount Rate 6.0% 7.5%Rate of Compensation Increase 4.0% 4.0%Benefits paid $0.8m $1mInterest cost $1.6mService cost $3mRoberts will educate Midwest's accounting department on pension plan accounting that would berelevant to their situation.Question 19In accordance with U.S. GAAP, distinguish which of the following events are classified as \"actual\"events and which ones are \"smoothed\" events. Actual SmoothedA) service cost interest costB) interest cost total periodic pension costC) service cost expected return on plan assetsQuestion 20 5 ______________________ ©2018 FK Partners Todos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

Based on the information provided, the impact of change in discount rate in 2007 (as compared to2006) is closest to: A) A decrease in PBO of $1.6 million. B) A decrease in PBO of $2 million. C) A decrease in PBO of $2.6 million.Question 21As of January 1st, 2007, the fair value of plan assets was $19 million. Which three components arenecessary to calculate the fair value of the plan assets at the end of the year? A) Expected return on plan assets, employer and participant contributions, and benefits paid. B) Service cost, interest cost, and benefits paid. C) Actual return on assets, employer contributions, and benefits paid.Question 22Current U.S. GAAP pension accounting standards require public companies to report which of thefollowing in the balance sheet? A) The pension liability adjusted for unrecognized items. B) The expected return on plan assets. C) The funded status of the plan.Question 23As of December 31st, 2007, the fair value of plan assets was $21 million. For this question only,assume that the sum of the unrecognized prior service cost and the unrecognized actuarial lossesequals $1.5 million. Calculate the amount attributable to Midwest's pension plan as of December31st, 2007 that must be reported on the balance sheet under U.S. GAAP. A) $2.0 million. B) −$500,000. C) −$2.0 million.Question 24Which of the following statements regarding the U.S. GAAP pension accounting standards is mostaccurate? A) For most companies, the pension liability will increase while financial leverage may increase or decrease as a result of applying the standard. B) The changes in GAAP now cause U.S. standards to be consistent with the International Financial Reporting Standards (IFRS) for pension plans. C) The balance sheet will now reflect the true economic position of the pension plan, but the income statement will not necessarily reflect a true measure of economic pension expense.Question 25 - 30Birch Corporation is a large conglomerate based in the U.S. that has grown primarily throughacquisition. On the first day of this reporting year, January 1, 2012, Birch acquired 1,500,000 sharesof the common stock of TRQ Inc. TRQ Inc. produces high quality fabrics for use in the fashionindustry. Exhibit 1 shows key numbers from TRQ Inc.'s accounts.Exhibit 1 – TRQ Financial Statement ExtractsTRQ IncIncome - year ending 31 Dec 12 $700,000Dividend paid $210,000Number of common shares in issue 6,000,000Number preferred shares in issue 3,000,000Total number of shares in issue 9,000,000Both Birch and TRQ prepare their accounts using US GAAP. ______________________ ©2018 FK Partners Todos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio. 6

Dan Fitzroy is the CFO of Birch, and is currently preparing with a meeting with the auditors todiscuss the correct treatment of the TRQ investment in Birch's group accounts. Fitzroy is of theopinion that the equity method of accounting should be used for the following reasons: 1. The proportion of TRQ's common shares owned by Birch suggests that Birch has significant influence over TRQ's operations 2. The lack of ownership of preferred shares suggests that Birch has no significant influence over TRQ's operations 3. The proportion of TRQ's total shares owned by Birch suggests that Birch has significant influence over TRQ's operationsFitzroy has to present to the board on the implications of the decision once he has spoken to theauditors. He intends to discuss the following impacts on the financial statements:Impact OneIf the auditors rule that the TRQ investment should be accounted for as a subsidiary rather than anassociate, the group's liquidity ratios will be unaffectedImpact TwoIf the auditors rule that the TRQ investment should be accounted for as a subsidiary rather than anassociate, th e group's net profit margin will be lowerFitzroy also intends to ask the auditors about another potential acquisition that Birch may potentiallymake this year. Thecompany under consideration is Tyrobin Inc., a small U.S. based company in the pharmaceuticalindustry.Fitzroy has observed the note shown in exhibit two in the company's footnotes for last year. He isunsure how it would be accounted for in the event of a 100% acquisition of Tyrobin's share capitalby Birch.Exhibit Two - Tyrobin FootnoteNote 45 Contingent LiabilitiesTyrobin is involved in various legal proceedings considered typical to its business, including actualor threatened litigatio n and/or actual or potential government investigations relating to productliability, infringement of IP rights, the validity of certain patents and competition laws. All of theclaims involve highly complex issues.Often these issues are subject to substantial uncertainties and, therefore, the probability of a loss,if any, being sustained and an estimate of the amount of any loss is difficult to ascertain.Consequently, for a majority of these claims, it is not possible to make a reasonable estimate of theexpected financial effect, if any, that will result from ultimate resolution of the proceedings.Question 25Assuming the equity method of accounting is used, what will be the reported investment income forBirch?A) $60,000.B) $115,000.C) $175,000.Question 26Assuming the equity method of accounting is used, what will be the cash flow received by Birch,due to their investment in TRQ?A) $65,400.B) $52,500.C) $227,500.Question 27If the consolidation method is used, how much of TRQ's net income will Birch recognize in the groupincome statement? ______________________ 7 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

A) $122,500 B) $700,000 C) $175,000Question 28Which of Fitzroy's reasons would most likely support the equity accounting method beingappropriate for TRQ? A) Reason 2 B) Reason 3 C) Reason 1Question 29Which of the impacts Fitzroy intends to present to the board is most likely correct? A) Neither impact is correct B) Impact one only C) Impact two onlyQuestion 30If Birch were to acquire 100% of the share capital of Tyrobin, how would the issues detailed inexhibit 2 be treated when accounting for the business acquisition? A) The contingent liabilities would be measured at their fair value and shown as a liability in the group accounts B) The contingent liabilities would be charged immediately as an expense to the group income statement C) The contingent liabilities would not be recognized in the balance sheet or income statement on acquisition ______________________ 8 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio.

Answers – SS05 - Financial Reporting and Analysis Intercorporate Investments, Post Employment and Share Based Compensation, and Multinational OperationsQuestions 1 -6Questions 1The correct answer was C) $150,000.The investment income for available-for-sale securities includes dividends, interest, and realizedgains. In this case, the investment income from Market Square Corporation would be the dividendsit paid to the number of shares Zeisler owns:100,000 shares × $1.50 per share = $150,000.Question 2The correct answer was A) $3.50 million.Trading securities are carried at fair market value: 100,000 shares × $35 per share = $3,500,000.Question 3The correct answer was A) Net income would decline.Reclassifying a security from available-for-sale to trading requires unrealized gains and losses to berecognized in income. Since Zeisler's investment in General Nuclear has an unrealized loss, netincome would be reduced.Question 4The correct answer was B) Welch's statement is incorrect; Dupree's statement is correct.Welch's statement is incorrect because dividends and interest are recognized as income both whenthe securities are classified as trading and when they are classified as available-for-sale.Dupree's statement is correct. Reclassifying the securities from available -for-sale to trading willsignificantly raise Zeisler's near-zero net income by allowing Zeisler to recognize the unrealized gainin income w hen the security is reclassified. It will have no material effect on asset value becausethe shares will be carried at fair market value as trading securities and were already carried at fairmarket value (with the net unrealized gain in equity) as availab le- for-sale securities. Even thoughit may appear that equity would decline by the amount of the unrealized gain if the securities werereclassified, the unrealized gain will flow through income in 2009 and thus return to equity.Consequently, reclassifying the equity securities of Market Square would help increase Zeisler's ROAby raising net income and having little effect on assets.Question 5The correct answer was A) $2.60 million.Under the equity method the market value of the stock is ignored but the proportionate share ofthe earnings are added to the original investment and the proportionate share of the dividends aresubtracted from the earnings. Hence, we have the original investment + (earnings − dividends) =total value of the investment.[(100,000 shares)($25)] + [(100,000 shares)($2.50 earnings − 1.50 dividend)] = $2,600,000.Question 6The correct answer was A) Welch's statement is incorrect; Dupree's statement is incorrect.Welch's statement is incorrect because accounting standards require a firm that sells a held -to-maturity security before maturity to carry its remaining held-to-maturity securities at market valueinstead of cost. Since the MarketSquare debt is the only fixed-income investment trading above Zeisler's cost, and it represents onlya small part of Zeisler's total fixed-income portfolio, the net effect of selling the Market Square debtwould be to reduce assets (not raise them) because it would require Zeisler to mark down all itsother fixed-income investments. A decline in assets would effectively increase the debt to assetsratio.Dupree's statement is also incorrect. The investment in General Nuclear would be carried on thebooks at fair market value, with the unrealized loss in equity. Selling the asset and converting it tocash would not materially affect total assets. However, selling the General Nuclear shares wouldreduce net income because the realized loss would have to be recognized in income. Thus, the salewould reduce reported ROA. _________________________ 1 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio

Questions 7 - 12Question 7The correct answer was B) Rate of compensation growthExpected length of employmentA company must disclose the discount rate, the expected return on plan assets, and the rate ofcompensation growth. The expected length of employment is not a required disclosure.Question 8The correct answer was C) Both will decrease.The use of a higher discount rate will decrease a company's PBO and ABO because it will result in alower present value of future pension liability. The expected rate of return has no impact on pensionobligations.Question 9The correct answer was B) Companies are required to use Method 2.GAAP requires that companies use the \"net\" method, which decreases a firm's total assets and totalliability. Netting also affects certain financial ratios, such as return on assets and leverage ratios.Question 10The correct answer was A) record $2,125,000 as additional pension liability on its balance sheet.According to current U.S. accounting standards, the funded status must be reported on the balancesheet. The plan is underfunded by $3,625,000 ($11,875,000 Plan assets − $15,500,000 PBO). SincePrime Doors is reporting a liability of $1,500,000, an additional liability of $2,125,000 ($3,625,000required liability − $1,500,000 reported liability) must be reported.Question 11The correct answer was According to current U.S. accounting standards, the funded status must bereported on the balance sheet. The plan is underfunded by $3,625,000 ($11,875,000 Plan assets −$15,500,000 PBO). Since Prime Doors is reporting a liability of $1,500,000, an additional liability of$2,125,000 ($3,625,000 required liability − $1,500,000 reported liability) must be reported.The amendment affects the funded status on the balance sheet immediately. In the incomestatement, the amendment is amortized as a component of pension expense over the remainingservice life of the affected employees.Question 12The correct answer was A) Contribution - ( Ending funded status - beginning funded status)Economic pension expense is calculated without reflecting the amortized items normally included inpension expense and using \"actual\" instead of \"expected\" return on assets. It can be also computedas Change in funded status excluding contributions.Question 13 - 18The correct answer was C) $1,272.The basis for using the current rate method is when Functional Currency is NOT the same asParent's Presentation (reporting) Currency. The basis for using the temporal method is whenFunctional Currency = Parent's Presentation Currency.Since the Australian dollar is the functional currency, use the current rate method. The items inthe income statement are translated at the average exchange rate. The average rate is (2.5 + 3)/ 2 = 2.75 Australian dollars per = US$.Income Statement (in $)Sales (3,500 / 2.75) $1,272Costs (2,900 / 2.75) $1,055Net Income $217Question 14The correct answer was B) $217. _________________________ 2 ©2018 FK PartnersTodos os direitos reservados – É proibida a reprodução total ou parcial, de qualquer forma ou por qualquer meio