- CFA Exams
- CFA Level I Exam
- Study Session 5. Financial Reporting and Analysis (1)
- Reading 13. Intercorporate Investments
- Subject 5. Business Combinations
CFA Practice Question
Assume Northern Communications acquires WorldTel in a stock transaction valued at $1,388 million. As of the acquisition date, the WorldTel reports the following balance sheet:
Land: 165,000.
Buildings (net): 419,000.
Equipment (net): 286,000.
Total assets: 1,188,000.
Current Assets: 318,000.
Land: 165,000.
Buildings (net): 419,000.
Equipment (net): 286,000.
Total assets: 1,188,000.
Northern is willing to pay the purchase price because it feels that land is undervalued by $90,000, equipment by $50,000, and it will realize synergies from the acquisition valued at $60,000.
Under the acquisition method, the investment will be recorded on Northern's balance sheet at
A. $1,328,000.
B. $1,248,000.
C. $1,388,000.
Explanation: The investment is accounted for on the investor's balance sheet at its fair market value, which is the purchase price of $1,388 million as of the acquisition date.
User Contributed Comments 3
| User | Comment |
|---|---|
| tmeeker | So $200k would be reported as goodwill? |
| alex2001 | Hello Tmeeker, I believe you will record as goodwill the value of 60 K (potential synergies). The difference of 140 K will be shared among land and equipment because you should account the transaction within the balance sheet at Fair Value incorporating the asset book value and the extra value from mkt value. Am I right? |
| bjw699 | That's correct. Consideration above net identifiable assets' fair value = goodwill. You would amortize the 50K for the equipment. Land would be carried at new fair value and not amortized. |