CFAI book, P182/Q24. If Supreme Healthcare sells its receivables to the SPE, why won’t its consolidated financial results show a higher revenue and a higher cash balance? (i.e., why A and B is wrong?) P184/Q30: from the solution,total assets = 2140-320+1070+60. I understand the first three items, why we have to add another 60 to get ttl assets? Thanks a lot!
it is an SPE, also says IFRS for SupremeCare. So the consolidated balance sheet applies. On the Consolidated Balance sheet - the Accounts Receivable would be the same. P184/30 … 60 = 30 difference / 0.5 (due to 50% ownership) which can be attributed to the patents (or goodwill, I forget which). since you are moving to a Consolidated position from equity accounting…
for P184/30 recall that the part where it says “Ninmount paid $320 for a 50% stake in Boswell company” Looking at Boswell’s Balance Sheet, you can see that the net asset value of the company (or equity) is $580, so a 50% stake should, according to the firm’s book value, only go for $290. The question addresses this by saying the difference between book value and Fair value can be attributed to the licenses, but it doesn’t really matter what it’s attributed to specifically; the point is that the fair value of the company is greater than what the subsidiary is recording on its books. When you consolidate companies, you take the fair value of the Assets of the subsidiary you are acquiring, and you add that shit to your balance sheet. Here’s the key; If a 50% fair value stake is worth $320, then the full fair value of the company’s net assets (or equity) is worth 640. However, the subsidiary’s balance sheet only shows 580 (ie the book value). As the company acquiring that subsidiary, I am not going to record that subsidiary’s book value on my balance sheet, I am going to record the fair value (and if I overpaid beyond the fair value, a goodwill amount, but that’s not happening in this question). The total value of the consolidated Assets is as follows: NinMount’s starting Assets 2140 + Book Value of Boswell’s Assets +1070 + Fair value less BV of ac. Assets + 60 = 640 - 580 - initial investment in 50% stake - 320 = Total consolidated Assets = 2950 The consolidated Liabilities can just straight up be added together from the Balance sheet as is because there was no indication given that fair value of them is any different than book value: Ninmount L 710 Boswell L 490 = total consolidated L =1200 Net Assets (equity) = 1750 = 2950 - 1200 = 1430 + 320 minority interests = 320 = 640 x 50% All this being said; equity method asset turnover is as follows: Sales/Assets = 950/2140 = .4439 Acquisition (or Consolidated) Method Asset turnover is as follows: Sales/Assets = (950 + 510)/2950= .4949 With the equity method, the subsidiary’s performance will have no effect on the parent’s Asset Turnover ratio.
Thanks so much, magicskyfairy and CP!
On Q24, I understand that C (same acc rec) is correct, but isn’t B (higher cash balance) also correct? I keep reading this question over and over thinking that i must have missed something… Thanks in advance.