I get stuck with question 3 of FRA (reading 17: Intercorporate Investment) Practice problem
That being said:
At 31 December 2010, Cinnamon’s shareholders’ equity on its balance sheet would most likely be:
A. highest if Cinnamon is deemed to have control of Cambridge.
B. independent of the accounting method used for the investment in Cambridge.
C. highest if Cinnamon is deemed to have significant influence over Cambridge.
The answer is A . And they explain that Why C is not correct “. If Cinnamon is deemed to have significant influence, the equity method would be used and there would be no change in the shareholders’ equity of Cinnamon.” Why there would be no change in shareholder’s equity under equity method ? as I know, under equity method the NI of acquiree’s company will be “one line consolidation” with NI of acquirer and it increase NI of acquirer so it will increase the E of acquirer also. and it obviously that it is less than share holder Equity under Acquisition method.
It really depends on how you treat the minority interest.
Excluding minority interest, the parent’s shareholders’ equity is the same under the equity method, partial consolidation, and full consolidation. If you include minority interest in equity (which is a common practice, though I, personally, dislike it), then shareholders’ equity will be highest under full consolidation; it will be higher by exactly the amount of minority interest.
It used to be that minority interest was listed between liabilities and equity, in an area called the mezzanine. That makes more sense to me than the current approach. While the minority interest is certainly somebody’s shareholders’ equity, it isn’t remotely _ our _ shareholders’ equity.
Thank you for your information, but I think you might have misunderstood my post (maybe because of my bad english i’m so sorry about that) I know that NI will be the same under 3 methods but it still increase Equity under equity method
Let me give 1 small e.g about this
Under equity method
NI (acquirer) = 100 acquired 20% of acquiree NI (acquiree) = 100 => total NI = 100+ 20%(100)=120
=> Equity under equity method will be X + 120 (instead of 100) (I ignored all of OCI , Dividend …etc)
Under ACquisition It will be NI = 100 + 100 - 80% minority interest = 120 = NI under equity method But share holder E = X + minority interst + NI => under Acquisition E will be highest That the way I think But The curriculum said that : There would be"no change" in the share holder E under Equity method. “No change” means they didnt’ count 20% of NI of acquiree . so there would be no change . that what make me confused
When the curriculum refers to shareholders’ equity in this instance, they’re excluding the minority interest.
As I wrote above, if you exclude minority interest shareholders’ equity is the same under the equity method, partial consolidation, and full consolidation (acquisition method).
I understood your post perfectly; your English is fine.
So does this mean, to confirm if I have understood correctly,
Full Goodwill method and Partial Goodwill method have the same amount of debt - which will be [% Ownership of Acquiree * Debt of Acquiree] added to Acquirer’s Debt
Shareholder’s Equity under the Full Goodwill Method will add the Acquiree’s entire goodwill to the Acquirer’s Goodwill and then add [% Ownership of Acquiree * Acquiree’s Full Goodwill] to the Minority Interest
Shareholder’s Equity under the Partial Goodwill Method will only have Minority Interest pertaining to the Acquiree’s Assets (excluding goodwill) and liabilities added to the Acquirer’s Balance Sheet - as only Acquirer’s share of Acquiree’s goodwill is added to the former’s balance sheet