CFA Practice Question

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CFA Practice Question

Which of the following statements is (are) true with respect to constructing consolidated financial statements using the pooling method?

I. The equity of the target firm must be adjusted to reflect the purchase price paid by the acquiring company.
II. The acquiring company must record an amount for goodwill that's equal to what it paid for the acquiring company less the fair market value of the net assets of the acquired company.
III. Prior period results must be restated to reflect the financial situation as if the two firms had always been merged.
IV. If the acquired firm has any intangible assets, these items are first recognized in the consolidated balance sheet and then written off immediately.
A. III only
B. I and III
C. III and IV
Explanation: I is incorrect because the pooling method simply involved the summation of the historical values of all the balance sheet items of both companies. Hence, there is no adjustment made to any equity account.

II would be true under the acquisition method, but not in this case.

IV is incorrect because the pooling method simply sums up all balance sheet items that would have been recorded on a pre-merger basis. Therefore, there are no subsequent write-downs.

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