Schweser: ‘’ Equity after the transaction is higher under the purchase method’’ What is you purchase the company with 100% debt: - Under the purchase method you keep the original equity + 0 new equity - Under pooling you add the 2 equities together. How can equity be higher under purchase method?
i think that means if you pay more than book price for a firm. so firm A buys firm B. B is worth 100 in book value. A buys it for 110. in purchase method you account for the extra 10 bucks in assets and equity, but pooling you dont account for that extra 10
Sims Wrote: ------------------------------------------------------- > Schweser: ‘’ Equity after the transaction is > higher under the purchase method’’ > > What is you purchase the company with 100% debt: > - Under the purchase method you keep the original > equity + 0 new equity > - Under pooling you add the 2 equities together. > > How can equity be higher under purchase method? This won’t happen as pooling method was not allowed if equity was not used for acquiring the company.
purchase method implies reevaluation of assets of aquired at market value pooling is based on book values
florinpop Wrote: ------------------------------------------------------- > purchase method implies reevaluation of assets of > aquired at market value > pooling is based on book values And the extra price you paid over current market value will be classified as goodwill on asset side, and paid-in capital on equity side. so retained earning of two companies is NOT combined. and Goodwill of two companies is NOT combined, either. just worked on this yesterday. a good review!
taking mike0021’s example: you paid 110 (=market value, ie no goodwill) for 100 book value you financed with 20 equity 90 debt=110 Purchase method: Asset: +110 Liabilities: +90 Equity: +20 Pooling method: Asset: +100 Liabilities: +90 Equity: +20 -10?? How do we get this to balance?
I think in your example you have to start with EQ=10 for the target. In purchase method you add the 10 premium to intangible assets and depreciate it over time, and the ten to Equity. In pooling it would just be assets +100, debt 90 and equity 10, so everything balances nicely now =)