Formula for calculating Goodwill under equity method: Purchase Price - (%owned of BV of target’s net assets) - (difference in FV minus BV of % owned of PP&E of target) Formula for calculating Godwill under purchase method: Purchase Price - (%owned of BV of target’s net assets) - (%owned of FV of target’s net assets) Why is the formula different? Why don’t you value difference between FV minus BV of PP&E, and why do you subtract BV of target’s net assets AND FV of target’s net assets?
That is the method, sir. Purchase: Book Value of Parent - Fair Value of Sub. Pooling: Book Value of Parent and Book Value of Sub.
oh wait are you saying for purchase method it’s: Purchase Price - (%owned of BV of PARENTS Net assets) - (%owned of FV of TARGETS Net Assets)? OK I got that formula wrong and it makes more sense now cause you value target at FV when acquired under the purchase method, thus FV of targets net assets is subtracted.
Sorry I’m wrong it’s Purchase Price (%owned of FV of TARGETS Net Assets) that’s what I meant.
cpk, For a partial purchase (say, 60%), how does the purchase method work after the purchase? Will the Sub company still maintain its own financial report, but with Fair Value?
Purchase method is a 1 time thing. After you do the “purchase” you start then to account for the “combined” business either by the Minority Passive, Equity, or Consolidation methods. I know the book rambles on and on about various things and do not make this clear at all - but first you purchase - that is a one time deal. then you account for the combination. They deal with the combination later and the accounting treatment (Min. Passive, Active, etc. etc.) first in the texts.
with no offense to either of you I recommed all candidates do not read this post, it is more confusing and full of revisions than the text.
this how this works Purchase Price - Net Asset (Book Value) = Purchase Discrepancy Then FV amt over the book value x % purchase…these amounts will be deducted from the purchase discrepancy. any amount leftover becomes the goodwill