Q1: Using the equity method, why does the after-acquisition purchasing company’s current asset change, since the reduction of the purchasing company’s cash is offset by the stock in the other company? Stock is also classified as a current asset. Q2: From page 33: It seems that when a purchasing company, P, buys 100% of a target company, T, that the total assets in the consolidated balance sheet is *SMALLER* than when P only acquires 80% of T. When P owns 100% of T, there is no minority interest, and that’s why the company is *SMALLER* based on assets. Please clarify this paradox. Q3: On page 35: Why isn’t the minority interest not equal to 80%*($1000 net income - $250 dividends paid out) = $750? It’s given as $600 here.
Excellent questions. What confuses me on question 1 is that they specifically say to treat the stock purchased as a current asset, when in the text they classify it as a seperate line item not in CA. The response to question 2 makes sense but only if they are referring to net assets, not total assets.
For question 3 above: 80% of (1000-250) = 80% of 750 = 600
For Q1:I’m not an accountant, but last time I looked at a set of financials, only shares held for trading purposes were listed under current assets, so in this case, the stock purchase would not be classified under current assets. I’m confused about Q2, however, as Minority Interest is listed as a Liability and not an Asset. As such, I don’t see how the Assets on the B/S of a post-consolidated company would differ if they were partially or wholly owned. I don’t have the books here, but are you sure the question stated Assets and not Liabilities or O/E?
Are you talking about Schweser or the texts?
jblazarus, Thanks for your insight. Let me get my CFA issued book out regarding FSA: When consolidated at 80% buyout (the example that the book cites): CA $14,000 Investment in Company S --------- Other assets $10,000 Total $24,000 CL 13,500 Minority Interest 500 Common Stock 7,000 Retained Earnings 3,000 Total $24,000 However, when P owns 100% of S, then we get: CA $13,500 --> due to the further reduction in cash Investment in Company S --------- Other assets $10,000 Total $23,500 CL 13,500 Minority Interest 0 Common Stock 7,000 Retained Earnings 3,000 Total $23,500 Therefore, we can see that the total assets *DECREASE* as a result of owning *more* of the target company. Regarding your opinion of the NetAssets (NA). The NA at 80% owndership is $24,000-$14,000 = $10,000. The NA at 100% is $23,500 - $13,500 = $10,000. I could be wrong. Please comment. Re: Reading 21: Analysis of Intercorporate Inv. Questions Posted by: jblazarus (IP Logged) [hide posts from this user] Date: April 1, 2008 06:24AM Excellent questions. What confuses me on question 1 is that they specifically say to treat the stock purchased as a current asset, when in the text they classify it as a seperate line item not in CA. The response to question 2 makes sense but only if they are referring to net assets, not total assets.
cpk123, I was careless. You’re right! Thanks my friend.
DarkHelmet, However, MinorityInterest, MI, would *decrease* the more of the targetcomapny is owned. Please refer to my example above. Re: Reading 21: Analysis of Intercorporate Inv. Questions Posted by: darkhelmet (IP Logged) [hide posts from this user] Date: April 1, 2008 12:31PM For Q1:I’m not an accountant, but last time I looked at a set of financials, only shares held for trading purposes were listed under current assets, so in this case, the stock purchase would not be classified under current assets. I’m confused about Q2, however, as Minority Interest is listed as a Liability and not an Asset. As such, I don’t see how the Assets on the B/S of a post-consolidated company would differ if they were partially or wholly owned. I don’t have the books here, but are you sure the question stated Assets and not Liabilities or O/E?
boston_level2_candidate Wrote: ------------------------------------------------------- a current asset. > > Q2: From page 33: It seems that when a > purchasing company, P, buys 100% of a target > company, T, that the total assets in the > consolidated balance sheet is *SMALLER* than when > P only acquires 80% of T. > > When P owns 100% of T, there is no minority > interest, and that’s why the company is *SMALLER* > based on assets. Please clarify this paradox. There isn’t really a paradox here. The consolidated numbers include the total assets of the subsidiary. They also include the assets of the parent. The more assets (ie cash) that you give to the owners of Sub to purchase it, the less you are left with pre-consolidation which produces the lower number with a 100% cash purchase. Note that if you were buying the sub for stock and not cash there would not be a difference. One caveat is that depending upon goodwill, etc, I’d need to think about how it affects the numbers… not sure if same relationships would hold true. Perhaps an easier way to conceptualize this would be to look at a case where you buy a home. If you have $1 million (all your, so all equity), and you buy 100% of a house for $500K cash, you still have $1 million in assets (half cash, half home), and $1 million in equity. If instead you only put down 20% and borrow the rest, you would have $1.4 million in assets (now $900K in cash and $500K in home), balanced by $400K in debt and $1 million in equity. This is analogous to the acquisition scenario where instead of debt financing the portion of the home (ie subsidiary) that you don’t own, it is financed by the minority shareholders in those assets. It’s basically the use of some form of leverage that increases total assets.
Q1: that “stock” should be classified as Marketable Securities/ intercompany investment, which is current asset.