I’m having some trouble understanding the answer to Q13 of the practice questions in book 2 under ‘intercorporate investments’ in the schweser notes material (assigned reading #22 - intercorporate investments).
Not sure if it’s a mistake, but the answer to the question below says that under consolidation method, minority interest is increased by income received from the sub and decreased by dividends paid.
Doesnt that only apply to the equity method? How is minority interest treated in subsequent periods after initial recognition?
Assume company p acquires 80% of the common stock in company s on dec.31/08, by paying $120k cash to s/h of company s. The two firms pre-acquisition b/s as of dec.31/08 and i/s for the yr ending dec.31/09, follows:
Pre-acquisition balance sheet:
Current assets: 720k
Other assets: 480k
Total assets: $1,200k
Current liabilities: 600k
Common stock: 420k
Retained earnings: 180k
Total liabilities and equity: 1,200k
Current assets: 240k
Other assets: 120k
Total assets: 360k
Current liabilities: 210k
Common stock: 90k
Retained earnings: 60k
Total liabilities and equity: 360k
Net income: 300k
Net Income: 60k
q13: On it’s dec.31/09, consolidated b/s, company p should report a minority interest of:
Why is the answer B? This is clearly consolidation, so why are they treating it like equity method?