R19 Q27 - better answer anyone?

CFA Level II FRA
#1

Guys I’m just not following the book and this is the third time I’ve tackled this chapter in the last 3 weeks. I don’t understand the logical steps to their answer.

Question 27 Based on Byron’s forecast, if NinMount deems it has acquired control of Boswell, NinMount’s consolidated 2009 depreciation and amortization expense (in£ millions) will be closest to: A 102. B 148. C. 204. Answers 27 C is correct. The projected depreciation and amortization expense will include NinMount’s reported depreciation and amortization (£102), Boswell’s reported depreciation and amortization (£92), and amortization of Boswell’s licenses (£10 million). The licenses have a fair value of £60 million. £320 purchase price indicates a fair value of £640 for the net assets of Boswell. The net book (fair) value of the recorded assets is £580. The previously unrecorded licenses have a fair value of £60 million. The licenses have a remaining life of six years; the amortization adjustment for 2008 will be £10 million. Therefore, Projected depreciation and amortization = £102 + £92 + £10 = £204 million.

#2

The answer pretty much explains it… what particular bit are you not understanding?

Remember that Ninmount paid £320m for 50% of the net assets of Boswell (valued at £290m). The £30m excess was for intangibles which would mean that the total value of intangibles is £60m (remember Ninmount only owns 50% of this).

Using straight line amortization, the amortization of this asset is £10m (which is not included on the balance sheet as the asset is unrecognised).

£102m (from Ninmount BS) + £92m (from Boswell BS) + £10m (above) = £204m (This is depreciation and amortization expense assuming Ninmount has control over Boswell i.e. consolidation)

#3

Thank you, for some reason I understand your answer much better than the books. This definitely clears it up. Appreciate the help!

#4

I know this is obvious but I cannot see it. How did you get the net assets of Boswell to be valued at £290?

NinMount PLC and Boswell Company Income Statements for the Year Ended 31 December 2018 (£ millions)

NinMount** Boswell** Net sales 950 510 Cost of goods sold (495) (305) Selling expenses (50) (15) Administrative expenses (136) (49) Depreciation & amortization expense (102) (92) Interest expense (42) (32) Income before taxes 125 17 Income tax expense (50) (7) Net income 75 10

Exhibit 2

NinMount PLC and Boswell Company Balance Sheets at 31 December 2018 (£ millions)

NinMount** Boswell** Cash 50 20 Receivables—net 70 45 Inventory 130 75 Total current assets 250 140 Property, plant, & equipment—net 1,570 930 Investment in Boswell 320 — Total assets 2,140 1,070 Current liabilities 110 90 Long-term debt 600 400 Total liabilities 710 490 Common stock 850 535 Retained earnings 580 45 Total equity 1,430 580 Total liabilities and equity 2,140 1,070

I am really struggling with this but I cant see it

#5

290 = 50% of 580 where 580 is the net assets of Boswell (bolded below)

#6

@CMLSML

Thank you so much! I knew I would feel so stupid but I really couldn’t see it. I really appreciate it.