Vignette says: Viper purchased a 60% controlling interest in Gremlin Corporation for $900m. Viper paid for the acquisition with shares of its common stock.
Viper long term debt (book value) = 7,700m Viper long term debt (fair value) = 7,500m Viper stockholders equity = 5,800m Gremlin long term debt (book value) = 400m Gremlin long term debt (fair value) = 300m Gremlin stockholders equity = 750m 1. Post-acquisition long-term debt = 7,700+300(fair value of Gremlin debt)=8,000. Why do we use fair value for Gremlin debt and book value for Viper debt? 2. Post-acquisition equity = 5,800+900(shares to acquire Gremlin) + 600 noncontrolling interest. Isn’t the 900 paid to Gremlin shareholders, so it isn’t part of post-acquisition equity? 3. Why do we include 600 noncontrolling interest in calculating equity?
Consolidation is done by adding the FV of the sub’s assets and liabilities to the b/s of the parent.
Additional shares were issued by the company so it is reflected on the company’s balance sheet.
This reflects the portion of the sub owned by third parties and is presented as a separate component of SE. Basically it allows the balance sheet to balance when the acquisition is less than 100%.
To get noncontrolling interest, they use the full goodwill method: 1,500 * 0.4=600. Elsewhere in the text, it says that for noncontrolling interest, we use the subsidiary’s equity * % of subsidiary not owned = 750 * 0.4 = 300. Why are these different?
Still confused, because Schweser text says that under the acquisition method, where a parent owns less than 100% of subsidiary, a minority interest is created by: subsidiary equity * % of subsidiary not owned by parent. So in the above question, why isn’t minority interest 750(Gremlin equity) *0.4(% not owned by parent)=300? They use the full goodwill method to get 600, not the method of equity * % not owned by parent.
Under the full goodwill method, it is assumed that the price you paid for X% of the company is the fair price. Hence to get the fair value for the entire company you divide the purchase price by acquired percent. Fair value for the entire company is $900 / .60 = $1,500. So, minority interest is then $1,500 - 900 = $600 or, .40x$1,500=$600.
What page in the Schweser book does it say something along the lines of “Schweser text says that under the acquisition method, where a parent owns less than 100% of subsidiary, a minority interest is created by: subsidiary equity * % of subsidiary not owned by parent.”? I’ll check it out when I get home…
I understand the full goodwill method, but just confused why they have used full goodwill when they mention previously that to create a minority interest you use subsidiary equity * % of subsidiary not owned by parent. If you are looking at Schweser 2014, it is book 2, page 82, figure 5 (an acquisition of 80%). The subsidiary’s equity is 10,000, so under the acquisition method, minority interest of 10,000*0.2=2,000 is reported in equity.
That’s just a very simplified example where they paid book value for the equity… It works either way in this example. They paid $8,000 for 80% of the company, so fair value is assumed to be 8,000 / .8 = $10,000 and Common Stock of $6,000 plus retained earnings of $4,000 = $10,000 book value of equity. Hence, the fair value of the equity = book value of the equity. I think it was a poorly worded example.