# ch13 - Chapter 13 Solutions Overview Problem Length{S{M{L...

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Chapter 13 Solutions Overview: Problem Length: Problem #s {S} 4, 8, 11, 14 {M} 1, 5, 6, 12, 15 {L} 2, 3, 7, 9, 10, 13, 16 1.{M}a. (i) Dividend income: X: \$10,000 (100,000 x \$.10) Z: 0 Total \$10,000 Dividends are not recorded as income for Y (40% owned), but are included in “equity in income of affiliates” instead.) (ii) Unrealized gains/losses included in stockholders' equity (all before deferred tax): Firm 12/31/2000 2001 Change 12/31/2001 X \$(400,000) \$ 300,000 \$(100,000) Z 300,000 450,000 750,000 Total \$(100,000) \$ 750,000 \$(650,000) Y: market value changes not recognized under equity method. (iii)Equity in income of affiliates: Y: .40 x \$900,000 = \$360,000 b. The investments are accounted for as follows: Y using the equity method, as ownership exceeds 20% X and Z at market value as “available-for-sale” securities under SFAS 115 c. Dividend income \$ 10,000 part a(i) Equity income 360,000 part a(iii) Total income \$370,000 13-1

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d. X: 100,000 x \$49 = \$4,900,000 Z: 150,000 x 30 = 4,500,000 Y: carried at original cost plus equity in undistributed earnings subsequent to acquisition. Carrying amount at 1/1/2001 cannot be determined but would be calculated as: Carrying amount at 1/1/2000: 800,000 x \$35 = \$2,800,000 Plus 2000 undistributed earnings (data not available) Plus 2001 earnings: .40 x \$900,000 = 360,000 Less 2001 dividends: \$.09 x 800,000 = (72,000 ) e. Mark to market returns for 2001: Firm Dividends + MV Change = Total Return X \$ 10,000 \$ 300,000 \$ 310,000 Y 72,000 1,600,000 1,672,000 Z 0 450,000 450,000 Total \$ 82,000 \$2,350,000 \$2,432,000 For firms X and Z, the total return is reported in the financial statements, but the market value change is reported as an adjustment to stockholders' equity. Bart does not report its mark to market return on its investment in Company Y. However, disclosure of the number of shares of Company Y held by Bart and Company Y’s share price allows investors to calculate the return. f. If consolidation were required for 40% ownership, Bart would consolidate firm Y. While consolidation does not change reported income, Bart’s equity in the earnings of firm Y would be replaced by all revenues and expenses of firm Y. Similarly, Bart’s investment in firm Y would be replaced by all of the assets and liabilities of firm Y. The 60% of firm Y equity (and income) not owned by Bart would be shown as minority interest. 13-2
2.{L}a. The held-to-maturity fixed maturities are measured at amortized cost. The available-for-sale fixed maturities and equity securities are measured at market value. b. 2000 Reported ROA by Portfolio Component (\$ millions) Total Fixed Equity Total Maturities Securities Portfolio Opening balance \$14,519 \$ 769 \$15,288 Investment income 903 23 926 Return on assets 6.22% 2.99% 6.06% Note : Opening balances from Exhibit 13-3A (p. 463). Investment income includes realized gains All returns are below the corresponding reported 1999 returns shown in Exhibit 13-3B. c. First, compute the mark-to-market returns, using the analysis on p. 465 as a guide. 2000 Change in MVA (\$ in millions) Fixed Maturity Securities Held-to- Available Equity 2000 Maturity for-Sale Total Securities Market value \$1,565 \$14,068 \$15,633 \$ 830 Cost 1,496 13,720 15,216 840 MVA \$ 69 \$ 348 \$ 417 \$ (10) 1999 Market value \$1,801 \$12,777 \$14,578 \$769 Cost 1,742 12,944 14,686 715 MVA \$ 59 \$ (167) \$ (108) \$ 54 Change in MVA Fixed maturities \$417 - \$(108) = \$ 525 Equity securities \$(10) - \$ 54 = (64 ) Total portfolio \$ 461 Calculation of 2000 Mark-to-Market Return Fixed Equities Total Maturities Dividends and interest \$ 895 \$ 24 \$ 919 Realized gains (losses) 8 (1 ) 7 Reported income \$ 903 \$ 23 \$ 926 13-3

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ch13 - Chapter 13 Solutions Overview Problem Length{S{M{L...

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