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Basic Question 5 of 20
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?
B. $75,000.
C. $1,080,000.
A. $330,000.
B. $75,000.
C. $1,080,000.
User Contributed Comments 9
| User | Comment |
|---|---|
| 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? |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;
distinguish between IFRS and US GAAP in their classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;
analyze how different methods used to account for intercorporate investments affect financial statements and ratios.
CFA® 2025 Level II Curriculum, Volume 2, Module 10.