In this workout, we're told that A incorporated by 30% of the equity of B from the shareholders of B for 15 in an all cash deal.

And we're asked to rework the balance sheet of A.

Let's look at the answer.

Well, what's happened? First of all, my current assets have gone down by 15.

Cash has gone out. It's gone out to some other shareholders it's left the business, but we've also gained another asset.

I've got a brand new asset here, equity method investments of 15, which wasn't being shown before.

So my total assets are actually the same as they were before.

And my current liabilities, long-term liabilities and shareholder equity are unchanged.

In the next workout, we're told in the first year post deal B incorporated generated net income of 12 and it paid dividends of 6.

Show how this will impact the balance sheet reported by A assumed nothing else happened for simplicity.

So we start with the balance sheet that we had at the end of the previous question.

Current assets went down by 15.

Equity method investments went up by 15.

We now need to incorporate the two changes.

The first one was the net income. Net income of 12 was made and remember, A owns 30% of B. So 30% of 12 gives you an increase in your equity method investment of 3.6.

Remember the investment company, it's got more cash it's done really well. Fantastic we need to represent that increase in its value in our balance sheet.

Also, that's going to have appeared in the income statement. 3.6 goes in the income statement and eventually flows down to my retained earnings.

So that's the net income.

Next up, we were told that there was a dividend of 6, and remember 30% of that comes to company A.

So cash goes up by 1.8, 30% times the 6.

But what else has happened here? Our equity method investment has to go down.

This is because the value of the investment has dropped slightly.

They've paid out a load of cash.

In this case, they paid out cash of 6.

They're not worth quite so much.

We need to represent that on our balance sheet as well.

In workout C, we've got A incorporated having the following income statement for year one before dealing with the equity affiliate B.

We need to use the information from the previous question to rework the income statement.

We need to rework the income statement here, and in the previous question we reworked the balance sheet.

So we now need to decide how those figures are going to appear.

The first way we can present it is by putting equity income in above tax, and we can see the equity income's gone up by 3.6 and that was 30% times by the 12 of net income that A incorporated had.

Now important to notice that your tax expense does not change.

Why is this? Because that equity income has already been taxed in the investments.

Now there's also a second way that this can be presented.

Instead, we can show equity income appearing below the tax line.

This means that my profit before tax doesn't change at all, and of course my tax expense we already said doesn't change.

This will mean that your effective tax rate will look different between presentation one and two.

Your effective tax rate is tax expense divided by the profit before tax.

So do beware of that difference.