The following information relates to Questions 1-6 Cinnamon, Inc. is a diversified manufacturing company headquartered in the United King- dom. It complies with IFRS. In 2009, Cinnamon held a 19 percent passive equity ownership interest in Cambridge Processing that was classified as available-for-sale. During the year, the value of this investment rose by £2 million. In December 2009, Cinnamon announced that it would be increasing its ownership interest to 50 percent effective 1 January 2010 through a cash purchase. Cinnamon and Cambridge have no intercompany transactions. Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the increased stake will affect Cinnamon's consolidated financial statements. He asks Cinnamon's CFO how the company will account for the investment, and is told that the decision has not yet been made. Lubbock decides to use his existing forccasts for both companies' financial statements to compare the outcomes of alternative accounting treatments. Lubbock assembles abbreviated financial statement data for Cinnamon (Exhibit 1) and Cambridge (Exhibit 2) for this purpose. EXHIBIT 1 Selected Financial Statement Information for Cinnamon, Inc. (E Millions) Year ending 31 December 2010 2009 Revenue 1,400 1,575 Operating income 126 142 Net income 31 December 62 69 2009 2010 Total assets 1,170 1,317 Shareholders' equity 616 685 "Estimates made prior to announcement of increased stake in Cambridge. Chapter 15 Intercorporate Investments 791 EXHIBIT 2 Selected Financial Statement Information for Cambridge Processing (E Millions) Year ending 31 December 2009 2010 Revenue 1,000 1,100 Operating income 80 88 Net income 40 44 Dividends paid 20 22 31 December 2009 2010 Total assets 800 836 Shareholders' equity 440 462 "Estimates made prior to announcement of increased stake by Cinnamon.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Question

In 2010, Cinnamon’s net profi t margin would be highest if:
A . it is deemed to have control of Cambridge.
B . it had not increased its stake in Cambridge.
C . it is deemed to have signifi cant infl uence over Cambridge.

The following information relates to Questions 1-6
Cinnamon, Inc. is a diversified manufacturing company headquartered in the United King-
dom. It complies with IFRS. In 2009, Cinnamon held a 19 percent passive equity ownership
interest in Cambridge Processing that was classified as available-for-sale. During the year, the
value of this investment rose by £2 million. In December 2009, Cinnamon announced that
it would be increasing its ownership interest to 50 percent effective 1 January 2010 through a
cash purchase. Cinnamon and Cambridge have no intercompany transactions.
Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the
increased stake will affect Cinnamon's consolidated financial statements. He asks Cinnamon's
CFO how the company will account for the investment, and is told that the decision has not
yet been made. Lubbock decides to use his existing forccasts for both companies' financial
statements to compare the outcomes of alternative accounting treatments.
Lubbock assembles abbreviated financial statement data for Cinnamon (Exhibit 1) and
Cambridge (Exhibit 2) for this purpose.
EXHIBIT 1
Selected Financial Statement Information for
Cinnamon, Inc. (E Millions)
Year ending 31 December
2010
2009
Revenue
1,400
1,575
Operating income
126
142
Net income
31 December
62
69
2009
2010
Total assets
1,170
1,317
Shareholders' equity
616
685
"Estimates made prior to announcement of increased stake in Cambridge.
Chapter 15 Intercorporate Investments
791
EXHIBIT 2 Selected Financial Statement Information for
Cambridge Processing (E Millions)
Year ending 31 December
2009
2010
Revenue
1,000
1,100
Operating income
80
88
Net income
40
44
Dividends paid
20
22
31 December
2009
2010
Total assets
800
836
Shareholders' equity
440
462
"Estimates made prior to announcement of increased stake by Cinnamon.
Transcribed Image Text:The following information relates to Questions 1-6 Cinnamon, Inc. is a diversified manufacturing company headquartered in the United King- dom. It complies with IFRS. In 2009, Cinnamon held a 19 percent passive equity ownership interest in Cambridge Processing that was classified as available-for-sale. During the year, the value of this investment rose by £2 million. In December 2009, Cinnamon announced that it would be increasing its ownership interest to 50 percent effective 1 January 2010 through a cash purchase. Cinnamon and Cambridge have no intercompany transactions. Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the increased stake will affect Cinnamon's consolidated financial statements. He asks Cinnamon's CFO how the company will account for the investment, and is told that the decision has not yet been made. Lubbock decides to use his existing forccasts for both companies' financial statements to compare the outcomes of alternative accounting treatments. Lubbock assembles abbreviated financial statement data for Cinnamon (Exhibit 1) and Cambridge (Exhibit 2) for this purpose. EXHIBIT 1 Selected Financial Statement Information for Cinnamon, Inc. (E Millions) Year ending 31 December 2010 2009 Revenue 1,400 1,575 Operating income 126 142 Net income 31 December 62 69 2009 2010 Total assets 1,170 1,317 Shareholders' equity 616 685 "Estimates made prior to announcement of increased stake in Cambridge. Chapter 15 Intercorporate Investments 791 EXHIBIT 2 Selected Financial Statement Information for Cambridge Processing (E Millions) Year ending 31 December 2009 2010 Revenue 1,000 1,100 Operating income 80 88 Net income 40 44 Dividends paid 20 22 31 December 2009 2010 Total assets 800 836 Shareholders' equity 440 462 "Estimates made prior to announcement of increased stake by Cinnamon.
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