If Company X elected to account for the Company Y acquisition using the purchase method rather than the pooling of interests method, the company’s: A) return on assets would be higher because net income and assets are higher. B) return on assets would be lower because net income is lower but assets are the same. C) profit margin would be lower because net income is lower but sales are the same.
C? I know pooling method has more favorable results than purchase method.
NI low, Sales same. C
Choice C Purchase method -> you are accounting for the FV of Assets of the target co. So as a result your assets go up. You have higher assets with Purchase - so more depreciation expense - leads to lower Net Income. Sales remains the same - assuming that the Purchase and Pooling happened on the same begin date (say Jan 1). NI lower, Sales same - so profit margin is lower. For the other choices: Return on Assets would be lower because a. Net Income is lower (higher depreciation) and Assets are higher - FV of Assets as against Book value of the assets of the target.
Busted out my notes - Purchase method effects PPE assets are higher since FMV > Historical cost (assuming inflationary market) written up to MV NI - Lower due to larger depreciation assuming tangible assets are written up. Equity - Higher. BV is replaced by purchase price.
C, profit margin would be lower because net income is lower but sales are the same. In general, performance measures are more favorable using the pooling method rather than using the purchase method. In this example, under the purchase method, net income declines because depreciation expenses are increased as tangible assets are written up to their market value at the time of the transaction. (Study Session 5, LOS 21.c) you guys are wicked smart
Easy one 