- 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
The acquisition method:
A. Reports the assets relating to the investment at fair market value.
B. Reports higher stockholder's equity than the equity method.
C. Reports the same net income as the equity method.
Explanation: The acquisition method replaces the investment account with the assets and liabilities of the investee company. Also, consolidated income (aside from amortization) is equal to the investment income reported by the investor under the equity method of accounting. This is because we replace equity earnings with the sales and expenses of the investee company, resulting in the same reported profit.
User Contributed Comments 6
| User | Comment |
|---|---|
| andrewevelyn | Why not also A? |
| danlan2 | The acquisition method reports the assets relating to the investment at book value and not fair market value. |
| aravinda | Danlan2: I am not too sure if that is correct.. Please refer to the CFA L2, FRA - reading 21, Page 44...The solution provided to the 1st question of Example 9 clearly shows that the Investee companies assets/liabilities are added to the Investor's balance sheet at fair value not at the book value. From the definition of 'acquisition method' standpoint, I feel both 'A' & 'C' are correct...but Answer to this question is specifically 'C' because, once the consolidation takes place, the parent will report a consolidated balancesheet where the Parents A?L are at book value PLUS investees at fair value... |
| broadex | A is wrong. You reports the acquired assets at fair value less depreciation of excess of fair value over book value of acquired assets. |
| kazec | OK, this may sound silly. Why not (B)? |
| JChewL2 | fair value, not fair market value |