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14.5 Retained earnings vanishing during an acquisition

In the first pic, you see retained earnings for the acquirer (12K) and the target company (4K)

https://ibb.co/MMB5Tmz

The acquirer pays 8,000 to get an 80% interest in the target company. So retained earning should sum up, at least partially, right? How come the retained earnings on the new balance sheet is still only $12K?

https://ibb.co/d4QjrKD

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You don’t add in any of the subsidiary’s equity: no preferred stock, no common stock, no additional paid-in capital, no retained earnings.

Nada.

Simplify the complicated side; don't complify the simplicated side.

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Your math sounds like frigging sorcery so I made an example.

Let’s say the the acquirer has

Assets: 10M (for the sake of simplicity we say it’s all cash too)

Liabilities: 6M

Equity: 4M

Let’s say the target company is

Assets: 9M

Liabilities: 6M

Equity: 3M

Let’s say that the acquirer buys out 100% of the company for 3.5M cash

New Assets = 10M + 9M - 3.5M for the acquisition = 15.5M

New Liabilities = 6M+6M = 12M

New Equity = 4M+0 (since you told me not to add any equity from the target) = 4M

Logically, Assets = Liabilities + Equity, so this has to be 15.5M-12M = 3.5M, so I’m not getting where the difference is.

In your example you paid 3.5 million for net assets worth 3 million (= 9 million – 6 million).  That extra 0.5 million has to be allocated either to identifiable assets or to goodwill.  Either way, the new assets are:

10 million + 9 million – 3.5 million + 0.5 million = 16 million

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/