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International Financial Statement Analysis Workbook, 2nd Edition by Michael A. Broihahn CFA, Anthony T. Cope CFA, Wendy L. Pirie CFA, Elaine Henry CFA, Thomas R. Robinson CFA

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CHAPTER 14

INTERCORPORATE INVESTMENTS

SOLUTIONS

1. A is correct. Dividends from equity securities that are classified as available-for-sale are included in income when earned. Cinnamon would record its 19 percent share of the dividends paid by Cambridge; this is £3.8 million (£20 × 0.19). Though the value of Cinnamon’s stake in Cambridge Processing rose by £2 million during the year, under IFRS any unrealized gains or losses for available-for-sale securities are reported in the equity section of the balance sheet as part of other comprehensive income until the securities are sold.

2. B is correct. If Cinnamon is deemed to have control over Cambridge, it would use the acquisition method to account for Cambridge and prepare consolidated financial statements. Proportionate consolidation is used for joint ventures; the equity method is used for some joint ventures and in situations where there is significant influence but not control.

3. A is correct. If Cinnamon is deemed to have control over Cambridge, consolidated financial statements would be prepared and Cinnamon’s shareholders’ equity would increase and include the amount of the noncontrolling interest. If Cinnamon is deemed to have significant influence, the equity method would be used and there would be no change in the shareholders’ equity of Cinnamon.

4. C is correct. If Cinnamon is deemed to have significant influence, it would report half of Cambridge’s net income as a line item on its income statement, but no additional ...

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