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 $1,388,000. As of the acquisition date (in 2008), 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?
A. Consolidated expenses will be equal to the sum of the expenses of the individual companies plus the depreciation of the excess of the purchase price over the book value of the equipment only.
B. Consolidated expenses will be equal to the sum of the expenses of the individual companies plus the depreciation of the excess of the purchase price over the book value of the land and equipment.
C. Consolidated sales will be equal to the sum of the sales of both companies less any intercompany sales, and consolidated net income will equal the reported net income of the parent company only.
Explanation: B is false only to the extent that land is not a depreciable asset and depreciation expense on the excess purchase price is not recorded. All of the remaining statements are true as U.S. GAAP only allows the acquisition method of accounting for business combinations.

User Contributed Comments 9

User Comment
crier How is A right (the net income part) unless the combination happened on December 31?
lenzo The income is not combined under the acquisition method. A would be false under the pooling of interest method.
Luke41 Isn't B also incorrect, since it is stating land should be depreciated?
dblueroom yeah, first time heard net income is not combined, never thought about it, since we are too occupied with balance sheet accounts. however, you never depreciate land, which pinpoints B is incorrect.
tim2 C is kind of odd that consolidated income is the income of the parent company only - what about the other income?
neerav1984 @tim2: this is beacuse Parent's net income already includes income from its subsidiary
rhardin C - the consolidated income only includes the parent's income. I guess it is because we bring over all revenue and expenses, then add them up to get total income? So technically, the net income is not consolidated, but revenues and expenses are?
pikusa I guess net income will be combined only in the period following aquisition. NI in the past is not combined in order to avoid "NI management".
jpducros pikusa is right,neerav1984 is wrong. NI from the acquired company will only be incorporated at end of first period after acquisition.
You need to log in first to add your comment.