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.

Which of the following statements is false under U.S. GAAP?

I. WorldTel's land will initially be reported on the consolidated balance sheet at $255,000.
II. The excess of the purchase price over the book value of WorldTel's equipment ($50,000) will be depreciated in the consolidated income statement over its useful life.
III. The excess of the purchase price over the fair market value of the net assets acquired ($60,000) will initially be recorded as goodwill on the consolidated balance sheet.
IV. The recorded goodwill will be amortized on a straight-line basis over a period of up to 40 years.
A. II and IV
B. I, III and IV
C. IV only
Explanation: Goodwill is no longer amortized under U.S. GAAP. All of the other statements are true: the land is reported at its purchase price of $255,000, the excess value ascribed to equipment must be depreciated like any other depreciable asset, and the excess of the purchase price over the fair market value of the net assets (identifiable tangible and intangible assets less liabilities assumed) acquired is ascribed to goodwill.

User Contributed Comments 2

User Comment
dblueroom II talks specifically about a tangible asset - equipments. excess price paid over tangible assets should be depreciated however, I thought it should be remaining useful life of the assets. I tried to oversmart the question and got in trouble haha
CFAJ in the exam i assume that you will never outsmart the question (except for economics phds which supposedly frequently do this)
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