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Postby canipungoel » Wed Mar 18, 2015 5:25 am

Que-1 The shareholders equity is equal to the intrinsic value of the firm. Is is true or false?

Que-2 Deffered tax provided on the reinvested earning of the for foreign and unconsolidated domestic affiliates. Please explain with example.

Que-3 No deffered tax on undistributed profit from an investment in a foreign subsidiary that meet the indefinite reversal criteria. Please explain with example.

Que-4 What is the impact on of interest during the construction phase on the cash flow from Operation and cash flow from Investing activity when the interest is expensed when it is incurred or capitalised in the balance sheet.

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Postby edupristine » Thu Mar 19, 2015 11:41 am

Hi, answers to your queries are as follows:

Ans 1: Shareholder's equity is based on market value of company and not intrinsic value. Hence it is false.

Ans 2: Reinvested earnings of foreign and unconsolidated domestic affiliates creates deferred tax due to the difference in the effective tax rate and statuary tax rate. For example company "A" has a foreign affiliate in Singapore. Earnings of foreign affiliate are reinvested by "A" led to a tax deferred tax because company will charge tax on different tax rate and government will use different tax rate and hence deferred taxes will be created.

Ans 3: When we are sure that deferred taxes will reverse in foreseeable future we record deferred tax. When deferred tax will not reverse in future for indefinite period we do not record deferred tax. For example a company "X" has earned profits from the investment in foreign subsidiary operating in China. Analyst recognized that difference in taxes will not reverse in foreseeable future hence it is a permanent tax difference and we do not record the deferred taxes.

Ans 4: When construction is for own use then interest accrued is capitalized. Capitalized interest is not recorded in the income statement as interest expense. Capitalized interest is an outflow from CFI (cash flow from investment) and when interest is capitalized after construction, interest is allocated to income statement as depreciation expense or COGS.

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