i have taken this question from Stalla review but i think there is an error with their answers so i will not post the options Company A cquire 50% of B, with no control but significant influence Paid $10 million premium over the their share of B’s assets $8 million of this attribuatable to identifiable assets with a remaining life of 4 yrs Company A Net income 222 net Assets 3885 Company B net income 35 Dividends 14 The effect of this investment on B’s net earnings is closest to?
2 Mill in premium excess Purchase price paid attributable to net identifiable assets = 2*0.5 = 1 Mill now on earnings - 0.5 * 35 - 1/4 (Depreciation of excess purchase price) = 17.25 I think this below is the source of confusion. (Dividends do not affect the earning)
CP this is what i thought - we are using equity method so 50% of 35= 17.5 less 50% div 14= 7 less excess dep 8/4=2 i.e. 17.5-7-2=8.5 beacuse the said 10 was premiun of (only) A’s share of B’s assets thats why i did not take 50 % of the excess dep. I thought $2 goodwill not affect A’s earnings. Am i right? there is an errata on stalla knowledgebase but i cant access if anyone is using stalla pls verify
dividends would not affect the Earnings … the 2 Mill $ of Goodwill - 50% of that is attributable to net assets on Parent. So those would be subject to depreciation and will reduce earnings… I feel 17.5 - 0.25 = 17.25 Mill is teh answer. Do you have a study session #/Question number for this?
50% of Income is 17.5. 2M in additional depreciation from PPA to identifiable assets (step up assets). 15.5, right?
my bad… 17.5 - 2/4 = 17
The 2M is goodwill and is not depreciated. The excess depreciation is 2 and relates to the 8M.
Should be 15.5. 50% of income (17.5) - 8M/4 (2) = 15.5 NM definitely says 8M is attributable. Giving a very confusing old account definition, will delete :).
CP do you have stalla? if you do check the example on page 15 They have reduced earnings not by Goodwill but by excess dep. so going with the example i think it would be Earning will be affected by 50% of 35= 17.5 less excess depreciation (8/4) 2= 15.5 (like jmac01) Balance sheet would be affected by 17.5- 7(div)- 2 (dep) =8.5 specifically for this question its question number 5 from stalla lecture notes page 17
excess depreciation is 2 not 8… $8 million of this attribuatable to identifiable assets with a remaining life of 4 yrs So 2 Million is the excess… since 10 Mill was the purch price. so excess is 10-8 = 2 so 17.5 - 2/4 = 17 is the answer…
8m in assets depreciated over 4 years - 8/4=2. 2M each year in depreciation The 2M excess is goodwill. Do not depreciate this like CP is trying to tell you to.
Why is cp trying to depreciate goodwill?
Paraguay Wrote: ------------------------------------------------------- > Why is cp trying to depreciate goodwill? he thinks 10 is purchase price let him read the question once again
yeah I did… RTFQ all over again.
Write it on top of the test…or anywhere you can. I seriously need the reminder when I am taking the test over and over. RTFQ…
so whats the right answer?
let me guess RTFQ- read the fing question…if yes… i love it.
Excess is $8 million paid for PP&E. ( to be amortized over 4 years ) Per year charge to income is $2 Million. Income = $35 million * 0.5 ( equity method) Charge= $2 million Net effect = 17.5-2 = 15.5