CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

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

I. There are no adjustments made to the acquiring company's asset and liability accounts during the consolidation.
II. The amount of goodwill is reported as part of the equity account of the acquiring company.
III. If the in-process research and development of the acquired firm has some value, the value would be recorded on the consolidated balance sheet and then simultaneously written off.
IV. The book value of the retained earnings of both firms is summed up without any adjustments.
A. I and III
B. I and IV
C. II and III
Explanation: II is incorrect because the amount of goodwill is reported as part of the asset account of the acquiring company.

User Contributed Comments 6

User Comment
ThePessimist I is correct: only the acquired company's assets and liabilities get adjusted.
Xocrevilo But the acquirer's As and Ls are adjusted as a result of having the acquired's As and Ls consolidated with them?
Phlipsen The acquirer's As and Ls are adjusted for intercompany transactions
dblueroom the A&L are not adjusted except the addition of goodwill. Phipsen, you adjust the target's accounts to reflect these intercompany transactions.
malawyer So, the Asset Account of the parent with the value of the sub will stay untouched in the consolidated B/S? Wouldn't that be double-counting?
broadex malawyer: Adjustments means changing the values of the accounts presented by the entity. In the case of the acquired entity. The person preparing a consolidation will first adjust the accounts to reflect the fair values at acquisitions. No adjustments are made to the acquiring firm's accounts. This is before you start your consolidation journals, elimation of intercompany transactions etc
You need to log in first to add your comment.