- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 11. Intercorporate Investments
- Subject 5. Business Combinations
CFA Practice Question
The acquisition method:
B. Reports the same net income as the equity method.
C. Reports the assets relating to the investment at fair market value.
A. Reports higher stockholder's equity than the equity method.
B. Reports the same net income as the equity method.
C. Reports the assets relating to the investment at fair market value.
Correct Answer: B.
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 10
| User | Comment |
|---|---|
| rhardin | I thought that the acquisition method reports assets at fair market value? |
| weiw | why C is wrong, anyone? |
| quanttrader | acquisition method, equity method and proportionate consolidation method all report same net income |
| arudkov | confused with C (((( |
| ericczhang | I think C is wrong because the acquisition method require the acquiring firm to report the fair market value of all the assets being acquired at the time of the acquisition. It doesn't force you to continually market-to-market those assets once you acquired them. |
| DCPWS | I believe C would be right if the question were about consolidation. Since the acquisition is about a 20-50% investment, only the assets of the acquiree are marked to market. Am I right? |
| Teeto | I second ericczhang. Once you acquire a company the acquired assets' FV becomes the new book cost on the acquirer's balance. |
| davidt876 | i third ericczhang. as for DCPWS: for a non-controlling significant influence (usually 20-50%): 1. equity method (which is also required for all joint ventures under both IFRS and GAAP) 2. proportional consolidation for a controlling interest (usually >50%): 1. acquisition method (required by both IFRS and GAAP) 2. pooling (discontinued) ...point is you seem to have crossed some wires |
| ashish100 | C reports asset related to investing in acquisition price. Which includes goodwill and the fmv value of asset Idk wth everyone else is talking about up here but that's my understanding brah |
| Levancho | Why note A? Per textbook, equity under the aquisition method is higher by the amount of minority interest. |