The effect on the financial reporting of the company is that the liabilities on the balance sheet would be understated. This is because at the end of the year, a possible event was calculated. The management felt from the calculation of that event that it is possible that the event could become an actual liability and that the amount could be estimated explainably. So it would become understated if these calculations of probable events cannot be written down in the balance sheet or in the notes of the final statements. It is like a forecasting of possible events that may happen in the future to prevent losses in the company.
Answer:
a. $51,840
b. $15,440
Explanation;
a. First find the excess fair-value allocation;
= Fair value of Nephew - Book Value
Fair Value = Uncle ownership + Non-controlling interest
= 672,000 + 168,000
= $840,000
Excess fair value = 840,000 - 806,000
= $34,000
Any excess fair-value allocations are amortized over a 10-year period;
= 34,000/10
= $3,400
The Income to be recognized will be reduced by this yearly amotization so the 2014 income recognized by Uncle would be;
= (Nephew income - Amortization) * Uncle ownership stake
= ( 68,200 - 3,400) * 0.8
= $51,840
b. Nephew Company also owns 30% of Uncle which means that they will receive 30% of Uncle dividends.
= 0.3 * 30,000
= $9,000
Added to their own income;
= 9,000 + 68,200
= $77,200
The Non-controlling interest owns 20% so the income they will recognise is;
= 0.2 * 132,100
= $15,440
Answer:
Project's WACC = 12.95%
Explanation:
The WACC or weighted average cost of capital is the cost of a firm's capital structure. The capital structure of a firm may contain one or all of the following components - debt, preferred stock, common stock. For a firm with two components in capital structure in form of debt and equity, the WACC is calculated as follows,
WACC = wD * rD * (1+tax rate) + wE* rE
Where,
- wD and wE are the weights of debt and equity in the total capital structure
- rD and rE are the cost of each component
- We multiply the cost of debt by 1 - tax rate to calculate the after tax cost of debt
We must first determine the weight of debt and equity in total capital structure.
A debt to equity ratio of 0.64 means 0.64 debt for every 1 dollar of equity. The total assets are made up of debt + equity. So, total assets are 0.64 + 1 = 1.64
Weight of debt = 0.64 / 1.64 = 16/41
Weight of equity = 1 / 1.64 = 25/41
WACC = 16/41 * 0.053 + 25/41 * 0.149
WACC = 0.1115 or 11.15%
The projects cost of capital is 1.8% more than the company's WACC.
So, the project's cost of capital is,
Project's WACC = 11.15% + 1.8%
Project's WACC = 12.95%
