- CFA Exams
- CFA Exam: Level II 2021
- Study Session 5. Financial Reporting and Analysis (1)
- Reading 13. Intercorporate Investments
- Subject 5. Business combinations
CFA Practice Question
There are 334 practice questions for this study session.
CFA Practice Question
Able Manufacturing purchased 70 percent of Clark Enterprises. At the acquisition date, Able had common stock and retained earnings of $45,000 and $780,000, respectively. Clark had stock of $30,000 and retained earnings of $300,000. Under the acquisition method, what amount of stockholders' equity is eliminated when preparing the consolidated financial statements at the acquisition date?
Correct Answer: A
300,000 + 30,000.
User Contributed Comments 9
|katybo||I think it it because you purchase assets and liabilities, not equity so you can eliminate all.|
|siggy25||How does the fact that Able only purchased 70% come into play? I expected this to be $231k (=70% x $330k).|
|RichardWang||70% is greater than 50%, so you use consolidation method to include 100% of the investee (the other 30% is recorded as minority interests).|
|solnce||Under the acquisition method you don't eliminate the equity of the acquired company. The acquisition method applies to business combinations (mergers and acquisitions), t.i 100% of stock. Under the consolidation method you eliminate the equity of the acquired company.|
|noonah||Acquisition method: the acquiring company, Able, issues common stock worth the value of the common stock and R.E. of the acquired company, Clark, worth 300k+30k=330k. Stockholders equity "eliminated" refers to Clark's CS and RE. We always assume acquisition is financed by issuance of new CS of acquirer, unless we are told otherwise, eg cash paid.|
|vi2009||For this case, we need to focus at the equity of the parent level: which is existing parent equity + amount parent paid for the new aquisition. (p37 e.g. 10). The target's equity is "eliminated" in that sense .. as in we don't involve them in our calculations.|
|Dalila||1)at acquisition date, the parent company doesnt have have a share of the subsidiary's RE(300), only account for the post acquisition RE.
2)For the SC (30), it is never included in consolidation because it would be double accounting since that is what you are purchasing, so it is also excluded
|PJMOHAN||I think that the explanation provided by Dalila is the perfect answer!!!
|blackyosh1||vi2009, "pg. 37 e.g.10" -- what are you referring to? cfainstitute curriculum? or analystnotes?|