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 revenue is shown. Its profit margin is thus higher than if it consolidated Cambridge’s results, which would impact revenue and income, or if it only reported 19 percent of Cambridge’s dividends (no change in ownership).

5. C is correct. The full and partial goodwill method will have the same amount of debt; however, shareholders’ equity will be higher under full goodwill (and the debt to equity ratio will be lower). Therefore, the debt to equity will be higher under partial goodwill. If control is assumed, Cinnamon cannot use the equity method.

6. A is correct. Cambridge has a lower operating margin (88/1,100 = 8.0%) than Cinnamon (142/1,575 = 9.0%). If Cambridge’s results are consolidated with Cinnamon’s, the consolidated operating margin will reflect that of the combined company, or 230/2,675 = 8.6%.

7. B is correct. Oxbow was classified as a held for trading security. Held for trading securities are reported at fair value, with unrealized gains and losses included in income. The income statement also includes dividends from equity securities that are classified as held for trading. The €3 million decline in the value of Zimt’s stake would reduce income by that amount. Zimt would record its share of the dividends paid (0.1 × €20 million = €2 million). The net effect of Zimt’s stake in Oxbow Limited would be to reduce Zimt’s income before taxes by €1 million for 2009.

8. A is correct. When a company is deemed to have control of another entity, it records all of the other entity’s assets on its own consolidated balance sheet.

9. B is correct. If Zimt is deemed to have significant influence, it would use the equity method to record its ownership. Under the equity method, Zimt’s share of Oxbow’s net income would be recorded as a single line item. Net income of Zimt = 75 + 0.5(68) = 109.

10. B is correct. Under the proportionate consolidation method, Zimt’s balance sheet would show its own total liabilities of €1,421−735 = €686 plus half of Oxbow’s liabilities of €1,283−706 = €577. €686 + (0.5 × 577) = €974.5.

11. C is correct. Under the assumption of control, Zimt would record its own sales plus 100 percent of Oxbow’s. €1,700 + 1,350 = €3,050.

12. C is correct. Net income is not affected by the accounting method used to account for active investments in other companies. “One-line consolidation” and consolidation result in the same impact on net income; it is the disclosure that differs.

13. C is correct. Held for trading and available-for-sale securities are carried at market value, whereas held-to-maturity securities are carried at historical cost. €28,000 + 40,000 + 50,000 = €118,000.

14. C is correct. If Dumas had been classified as a held for trading security, its carrying value would have been the €55,000 fair value rather than the €50,000 historical cost.

15. B is correct. The coupon payment is recorded as interest income whether securities are held-to-maturity or available-for-sale. No adjustment is required for amortization since the bonds were bought at par.

16. B is correct. Unrealized gains and losses are included in income when securities are classified as held for trading securities. During 2009 there was an unrealized loss of €1,000.

17. B is correct. The difference between historical cost and par value must be amortized under the effective interest method. If the par value is less than the initial cost (stated interest rate is greater than the effective rate), the interest income would be lower than the interest received because of amortization of the premium.

18. B is correct. Under IFRS, SPEs must be consolidated if they are conducted for the benefit of the sponsoring entity. Further, under IFRS, SPEs cannot be classified as qualifying. Under U.S. GAAP, qualifying SPEs (a classification that has been eliminated) do not have to be consolidated.

19. B is correct. Statewide Medical was accounted for under the pooling of interest method, which causes all of Statewide’s assets and liabilities to be reported at historical book value. The excess of assets over liabilities generally is lower using the historical book value method than using the fair value method (this latter method must be used under currently required acquisition accounting). It would have no effect on revenue.

20. A is correct. Under the equity method, BetterCare would record its interest in the joint venture’s net profit as a single line item, but would show no line-by-line contribution to revenues or expenses.

21. C is correct. Net income will be the same under the equity method and proportional consolidation. However, sales, cost of sales, and expenses are different because under the equity method the net effect of sales, cost of sales, and expenses is reflected in a single line.

22. B is correct. Under the proportionate consolidation method, Supreme Healthcare’s consolidated financial statements will include its 50 percent share of the joint venture’s total assets.

23. C is correct. The choice of equity method or proportionate consolidation does not affect reported shareholders’ equity.

24. C is correct. Although Supreme Healthcare has no voting interest in the SPE, it is expected to absorb any losses that the SPE incurs. Therefore, Supreme Healthcare “in substance” controls the SPE and would consolidate it. On the consolidated balance sheet, the accounts receivable balance will be the same since the sale to the SPE will be reversed upon consolidation.

25. A is correct. The current ratio using the equity method of accounting is Current assets/Current liabilities = £250/£110 = 2.27. Using consolidation (either full or partial goodwill), the current ratio = £390/£200 = 1.95. Therefore, the current ratio is highest using the equity method.

26. A is correct. Using the equity method, long-term debt to equity = £600/£1,430 = 0.42. Using the consolidation method, long-term debt to equity = long-term debt/equity = £1,000/£1,750 = 0.57. Equity includes the £320 noncontrolling interest under either consolidation. It does not matter if the full or partial goodwill method is used since there is no goodwill.

27. C is correct. The projected depreciation and amortization expense will include NinMount’s reported depreciation and amortization (£102), Boswell’s reported depreciation and amortization (£92), and amortization of Boswell’s licenses (£10 million). The licenses have a fair value of £60 million. £320 purchase price indicates a fair value of £640 for the net assets of Boswell. The net book (fair) value of the recorded assets is £580. The previously unrecorded licenses have a fair value of £60 million. The licenses have a remaining life of six years; the amortization adjustment for 2008 will be £10 million. Therefore, Projected depreciation and amortization = £102 + £92 + £10 = £204 million.

28. A is correct. Net income is the same using any of the methods but under the equity method, net sales are only £950; Boswell’s sales are not included in the net sales figure. Therefore, net profit margin is highest using the equity method.

29. A is correct. Net income is the same using any of the choices. Beginning equity under the equity method is £1,430. Under either of the consolidations, beginning equity is £1,750 since it includes the £320 noncontrolling interest. Return on beginning equity is highest under the equity method.

30. A is correct. Using the equity method, Total asset turnover = Net sales/Beginning total assets = £950/£2,140 = 0.444. Total asset turnover on beginning assets using consolidation = £1,460/£2,950 = 0.495. Under consolidation, Assets = £2,140−320 + 1,070 + 60 = £2,950. Therefore, total asset turnover is lowest using the equity method.