Indian School of Business

Financial Accounting in Decision Making (FADM)

Digital Headstart Module: 2021-22
Review session for Enderm exam

Use the following information to answer Q1-Q5

P, Inc. purchased 100% of the outstanding common stock of S, Co for $ 4 billion cash. This
takeover transaction occurred on January 1, 2018. Both companies close their books on
December 31. The balance sheets immediately prior to the acquisition are provided below. At
the time of the acquisition, the fair value of each of the assets and liabilities of S, Co equaled
its book value, other than the following three items:

i. S, Co developed significant customer relationships internally and did not recognize

this as an asset in its balance sheet prior to acquisition by P, Inc. On the date of
acquisition, P, Inc. determined the fair value of these customer relationships at $1.5
billion.
ii. Further, P, Inc. estimated that the book value of non-current assets of S company
exceeded their fair value by $100 million on the date of acquisition.
iii. The subsidiary firm, S, Company overlooked recognizing the fair value of its
pension liabilities $300 million in its pre-acquisition balance sheet.

Pre-Acquisition Balance Sheets of P, Inc. and S Co, December 31, 2017

(all amounts in $millions) P, Inc. S Co.

Assets
Cash 4,500 170
Noncurrent Assets 1,500 330
Total assets 6,000 500
Liabilities
Current Liabilities 1,500 50
Noncurrent Liabilities 1,500 150
Shareholders’ Equity
Common Stock (no par) 200 50
Retained Earnings 2,800 250
Total Liabilities and SE 6,000 500

1. Compute the value of goodwill that must be recognized in the consolidated books. All
options below are in $ millions.
A. $2,600 Commented [HM1]: Goodwill = purchase price $4,000 -
(current assets $170 + Non-current assets $230 + Fair value
B. $2,900 of intangibles not recognized in the books of S 1,500 –
C. $3,500 Liabilities $200 – Pension liabilities $300) = $2,600
D. $3,750
E. None of the above
2. Determine the total shareholders’ equity in the consolidated statements of P and S as on
Jan 1, 2018. All options below are in $ millions.
A. $1,700
B. $3,000 Commented [HM2]: SE of S will not be added to the SE of
C. $4,500 P as the net assets of S will be consolidated with P

D. $7,000
E. None of the above

3. Determine the value of total assets in the consolidated statements of P and S as on Jan 1,
2018. All options below are in $ millions.
A. $4,000
B. $4,500
C. $6,500 Commented [HM3]: In the consolidated balance sheet,
D. $10,500 Cash = 4500 – 4000 + 170 = 670
Noncurrent assets = 1500 + 330 – 100 = 1730
E. None of the above Goodwill = 2600
Customer relations = 1500

4. If, rather than 100%, P Inc had purchased only 75% of the outstanding common stock of
the S Co, the total assets in the in the consolidated statements of P and S (in $ millions) will
be
A. $7,500 Commented [HM4]: Cash = 4500 – 75%*4000 + 170 =
B. $6,500 1670
Noncurrent assets = 1500 + 330 – 100 = 1730
C. $8,000 Goodwill = 2600
D. $9,000 Customer relations = 1500

E. None of the above

5. Assuming that P Inc had purchased only 75% of the outstanding common stock of the S
Co, what will be the amount of Non-controlling interest recorded in the consolidated
statements of P and S. All options below are in $ millions.
A. $1,000 Commented [HM5]: NCI = assets and liabilities of S that
B. $1,050 does not belong to P = 25% of 170 (cash) + 25% of 230 (non
current asset) + 25% of 1500 (intangible) + 25% of 2600 (GW)
C. $1,125 – 25% of 50 CL – 25% of 450 NCL
D. $2,000
E. None of the above
Use the following information to answer Q6-7

At the beginning of the year, HM Co invests in SM Tech when the stock price of SM Tech was
$50 / share. At the end of the year SM Tech’s stock price went up to $75 / share. Further
assume that there are 200,000 shares of SM Tech available in the stock market and no new
stock issuances or repurchases happened during the year. During the year SM Tech made a net
income of $100,000 and declared a dividend of $20,000.

6. Assuming that HM Co bought 10% shares of SM tech and classifies them as non-trading
(FVTOCI) shares at the beginning of the year, how much total investment income will HM
Co record in its income statement at the end of the year.
A. $2,000 Commented [HM6]: 10% of 20,000 = 2000 of dividend
B. $12,000
C. $500,000
D. $502,000
E. None of the above

7. Assuming that HM Co bought 10% shares of SM tech and classifies them as trading
(FVTPL) shares at the beginning of the year, how much total investment income will HM
Co record in its income statement at the end of the year.
A. $2,000
B. $12,000
C. $500,000
D. $502,000 Commented [HM7]: 10% of 20,000 = 2000 of dividend +
F. None of the above 10% of (75-50)*200,000 =

8. Assuming that HM Co bought 25% shares of SM tech at the beginning of the year, how
much will be the value of investment that HM Co will record in its balance sheet at the end
of the year.
A. $2,500,000
B. $2,520,000 Commented [HM8]: Investment will be valued using
C. $2,225,000 equity method as 25%* (200,000*50 + 100000 – 20000)

D. $3,750,000
E. None of the above
Use the following information to answer Q9-Q11

PM Co issued a 4-year, $150,000, 7% debenture on January 1, 20X6 dated as of that date.

The bond will every December 31, with the principal to be paid on December 31, 20X9. The
effective interest rate on the bond is 5%, and the company uses effective-interest
amortization. Given this information and using the present value tables

9. What were the net proceeds from the bond issue?

A. $150,000
B. $150,562
C. $160,637 Commented [HM9]: PV = 150,000*.8227 +
D. $171,000 150,000*7%*3.5459

E. None of the above

10. What is the total interest expense for the first year of the bond – i.e. year ended Dec 31st
20X6?
A. 7,500
B. 10,500
C. 8,032 Commented [HM10]: = 160,637*5%
D. 21,000
E. None of the above

11. How much of the bond premium will be amortized in the first year of the bond – i.e. year
ended Dec 31st 20X6?

A. $0
B. $10,500
C. $632
D. $2,468 Commented [HM11]: = 10500 - 8032
E. None of the above
Use Asian Paints financial statements to answer Question 12-20.

12. What proportion of Asian Paints’ assets were funded by non-owners as of March 31,
2017?
A. 34.6%
B. 35.8% Commented [HM12]: =(557.14+3884.87)/ 12419.76
C. 43.1%
D. 100%
E. None of the above

13. What is the ROE for the year ended March 31st, 2017?
A. 11.2%
B. 16.2%
C. 27.1% Commented [HM13]: 2016.24 / ((7977.75 + 5893.45)/2)
D. 45.4%
E. None of the above

14. ROE declined between 2016 and 2017. What is the most plausible reason for this?
A. Decline in profit margin
B. Decline in operational efficiency Commented [HM14]: Sales / Total assets decline from
C. Increase in leverage 1.61 to 1.51
D. All of the above
E. None of the above

15. D/E ratio for the year 2017 is

A. 0.05 : 1
B. 0.07 : 1 Commented [HM15]: = (504.43 + 41.07)/ 7977.75
C. 0.36 : 1
D. 0.56 : 1
E. None of the above

16. Interest coverage ratio for the year 2017 suggests that-
A. The company generates large enough profit from its operations to cover its interest
expense Commented [HM16]: ICR = =(2016.24 +
B. The company does not generate large enough profit from its operations to cover 30.58+947.98)/30.58 = 98

its interest expense

C. The company will have to borrow new loans to make its interest payments
D. The company will have to sell it non-core assets to make its interest payments
E. None of the above

17. The term loan taken by the company is secured against

A. Guarantee of the promoters
B. Building plant and equipment of a subsidiary company Commented [HM17]: Refer note 15 Borrowings. The first
C. Building plant and equipment of the parent company sentence of the detailed notes mentions about security

D. No security is provided
E. None of the above
18. What is the largest type of borrowing for this company
A. Unsecured loan repayable on demand from banks or financial institution Commented [HM18]: Refer note 15 Borrowings.
B. State tax deferment scheme
C. Bank term loan
D. Overdraft
E. None of the above

19. The number of shares sold to public during the year 2017 are?
A. 0 Commented [HM19]: Refer to note 13. The issued shares
B. 50,000 have remained unchanged
C. 95,91,97,790
D. 99,50,00,000
E. None of the above

20. The par value of Rs 1 / share is used for

A. Determining dividends to be paid to shareholders
B. Identifying influential shareholders of the company
C. Determining liquidation value of the company
D. There is no use for this number
E. None of the above