Question

9. Cellphone Inc. acquires 50% of Battery AG in 2014 and needs to record investmenton its balance sheet. Under which accounting method profit margin of Cellphone will be the highest, the lowest? If this investment would be classified as joint venture (proportionate consolidation), what liabilities would be reported on the balance sheet of Cellphone? Year ending 2014 Revenue EBIT Net Income Cellphone Inc Battery AG 1700 153 75 1350 135 68 Total Assets 1421 735 1283 706 Shareholders' equity

Answer 1

The Profit Margin of Cellphone Inc is 4.41% (75/1700) and the profit margin of Battery AG is 4.69% (143/3050). The profit margin of Battery AG is more than profit margin of Cellphone Inc. So, under Equity Method the net profit margin of Cellphone Inc will be more because when we merge the total figures of Battery AG, my profit margin ratio will increase due to high profit margin ratio of Battery AG on the total figures of Battery AG.

Under proportion consolidation method, only the share of Cellphone AG will be added in the consolidated balance sheet of Cellphone Inc. So the liabilities in the consolidated balance sheet will be 974.50 (1,421-73+ (1,283-706)*0.50).