- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 10. Intercorporate Investments
- Subject 5. Business Combinations
CFA Practice Question
On September 1, 2009 Mountainview Company acquired all of the outstanding common stock of Ward Company in a business combination. Both companies have a December 31 year-end and have been operating for five years. Consolidated net income for the year ended December 31, 2009 should include:
B. 12 months of net income for Ward only.
C. no income for Mountainview or Ward.
D. 12 months of net income for both Mountainview and Ward.
E. 12 months of net income for Mountainview and 4 months of net income for Ward.
A. 12 months of net income for Mountainview only.
B. 12 months of net income for Ward only.
C. no income for Mountainview or Ward.
D. 12 months of net income for both Mountainview and Ward.
E. 12 months of net income for Mountainview and 4 months of net income for Ward.
Correct Answer: E
Pre-acquisition income should not be recognized for Ward.
User Contributed Comments 4
| User | Comment |
|---|---|
| malina | It seems to me that D is correct only for the pooling method, which was discontinued in 2001, in which case the consolidated IS as of 12/31/09 should include 12 month of Mountainview's income and 4 month of Ward's income. Please explain. |
| robkaz | I agree. But does "if Ward's NI at least 30% of consolidated NI" make this situation exceptional? Anyone? |
| vi2009 | Acquisition method: start afresh from date of acquisiton for new entity that has just been acquired. Therefore E is correct. |
| Dalila | In consolidation, only include POST-acquition Net Income, which is from 1sept till 31 december, making 4 months. You only have the right to the post acquision profits because when you buy a company, you are paying for equity(net assets), therefore you have already paid for the other months(1st jan to 31aug) in your purchase price. Therefore to include is again would be double accounting |