CFA Practice Question

There are 334 practice questions for this study session.

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:

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.
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