equity under acquisition method different, interest, original, capital, equity

bcp901

I found two different ways in calculating this:

1. CFAI Mock AM Q46

Total equity = non-controlling interest(40%) + amount paid for 60% interest + acquirer's original capital stock + retained earning

2. CFAI Book, P183, Q26

Total equity = non-controlling interest (50%) + acquirer's original capital stock + retained earning

THE AMOUNT PAID FOR 50% INTEREST IS NOT INCLUDED, WHICH ONE IS CORRECT??

DSquaredSlim

This is messing up my head too. I usually use the first method.

ayodayo

first one. If you issue new stock/equity to buy this thing then you must include that in your new equity

thecfawannabe

Thanks Andrew, so it seems to me:

In case of share purchase, use first one;

In case of cash purchase, use second one, am I right?

ppls

yes. can you find any EOCs or anything that illustrate this?

hassan

cash is coming off the balance sheet to pay for the difference. that reduces shareholders equity. it's cut and dry. if you issue stock, there is no cash paid out.

spreads

I couldn't..so i came ask.

But it totally makes sense:

in a cash offer, ttl assets is reduced by cash paid, and no additional stock is included in SE;

in a stock offer, ttl assets remain unchanged and SE is increased by additional stocks issued.

economicz

To elaborate more on the stock offer:


Total Equity = CS + RE + Amount paid (putting 60% and 40% of amount paid is same as lump sum amount paid) however;

If there is good will :


Total Equity = CS + RE + Amount paid + non controlling interest

Under full goodwill method non control interest = (Amount paid / controlled interest) x non controlling interest

Under Partial Goodwill method non control interest = (FV asset - FV liab) x non controlling interest



Under the cash method with no good will, u just multiply non control interest by amount of $ paid.



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 10:36AM by Bilal.

madaochenggong

Bilal Wrote:
-------------------------------------------------------

>
> Under the cash method with no good will, u just
> multiply non control interest by amount of $ paid.




Sorry, you multiply it by amount of SHE acquired (CS + RE ) x non control interest

wxs1986

Within this same item set from CFAI AM, #44:

Are you always supposed to subtract the pro rata amortization of the PPE from the investment account if this information is given? That threw me off.