In this workout we're told that A Inc buys 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? Well first of all my current assets has 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 investment 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 shareholders' equity are unchanged In the next workout we're told in the first year post deal B Inc generated net income of 12 and it paid dividends of 6 Show how this will impact the balance sheet reported by A, assume nothing has 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, it's got more cash, its done really well Fantastic! We need to represent that increase in it's value in our balance sheet Also that's going to have appeared in the income statement 3.6 goes into 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've 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 Inc having the following income statement for year 1 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 was we can present it, is by putting equity income in above tax And we can see the equity income has gone up by 3.6 And that was 30% times by the 12 of net income that A Inc have And importance to notice that your tax expense does not change Why is this? Because that equity income has already been taxed in the investment 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 1 and 2 Your effective tax is profit before tax divided by the tax expense So do be aware of that difference