when you make the purchase, there will be an investment account pre consolidation under equity, it it easy but how to deal with it under proportionate con / con? if you don’t eliminate it, there could be double counting i suppose you should remove the investment account (money paid for the acquisition) and replace with something else, am I correct?
Total asset turnover = Net sales / Total Assets Net Sales Equity Method: parent sales = 950 Consolidation method: 950 + 510 = 1460 Prop Consolidation: 950 + .5(510) = 1205 Total assets: Equity: 2140 Consolidation: remove 320 due to equity. Now 320 was paid for 50% of net assets (580) 290. So 30 was goodwill for 50% of company. So because you are doing consolidation method -> this goodwill will become 60. Total assets with Consolidation = 2140 - 320 + 1070 + 60 = 2950 Total assets with Prop. Consolidation : 2140 - 320 + 0.5 (1070+60) = 2385 TAT: Equity: .443 Prop Consolidation: 1205/2385 = .5052 Consolidation: 1460/2950 = .4949 So Choice B: Prop Consolidation (There is an erratum item on CFAI for this same problem).
CP, I would agree with most of your calculation, but I think the goodwill should be 30 under either propor con or con, since goodwill = 320 - 0.5*580. it says using propor con or con, which only refers to accounting method, in the end you still hold 50% stake in either case. let me know what you think.
nope… it has to be the full value under consolidation see. 50% of value is 30 - so full value is 60.
but he only paid 320, goodwill should be “excess” value right?
you forget the 50% part of the company. look at the answer erratum correction of cfai for this same question. and then you’ll see. 30 would be considered for the Prop Consolidation. When it comes to Consolidation full value has to be taken, right. So 60 on the total assets side.
thank you CP, will check that sleep now, 1:00am now, need to work tomorrow …
actually just checked. the explanation of the errata is still confusing to me it says adjustment of asset for fair value 60, not goodwill though, but the question never mention this 60
to address the 50% you mentioned, I believe it should be part of minority interest under consolidation: total post asset = 2140 + 1070 -320 +30 = 2920 total liability = 710 + 490 = 1200 minority interest = 580/2 = 290 equity = 1430 only in this way, the whole thing can be balance proportional consolidation: total post asset = 2140 + 1070/2 -320 +30 = 2385 total liability = 710 + 245 = 955 total equity = 1430 there is no minority interest, the whole thing balance again
consolidation - remember they paid 50% for (320-290) = 30. so for 100% on consolidation -> that 30 becomes 60 as goodwill (that is the 60 they are showing in the guideline answer) That 60 will be added to the equity of the sub - an extra 30 added to Equity of sub - and hence you will get a 50% of that in your minority interest. Both will balance at 2950.
thanks CP, I guess I will need to remember this