1.Nicole Zimmerman, CFA, is a portfolio manager for an investment firm in New York. She is considering purchasing common shares in Montserrat Inc., a publicly traded residential home builder in the Southwest U.S. Zimmerman believes the company is currently undervalued due to investors’ disappointment in Montserrat’s earnings over the past several years after the acquisition of a competitor, American Homes. Zimmerman’s opinion is that any difficulties lingering from the 2000 acquisition should be over now, and is anticipating high levels of growth for the company in the foreseeable future. Zimmerman reviews past and current financial statements of Montserrat, paying careful attention to the 2000 acquisition. It is noted that the acquisition was an all-equity transaction, and was accounted for under the pooling of interests method. Both Montserrat and American Homes were profitable prior to the acquisition. At the time of the transaction, the fair market value of American Home’s assets was approximately 10% higher than book value. In addition, unknown to Zimmerman, the management of Montserrat is currently considering the acquisition of another smaller competitor, Hometown Homes. Montserrat’s proposed $25 million cash offer to the owners of Hometown represents approximately a 50% stake in the company. Montserrat had reviewed the possibility of repurchasing its own shares in the market at the currently depressed price, but determined that pursuing this acquisition of Hometown Homes would allow them to enter a new geographic market and would present a very attractive growth opportunity. Should they move forward with the acquisition, the management of Montserrat believes that investors will see the move as a positive, and it will have a buoying effect on its stock price. Montserrat’s planned acquisition of Hometown Homes must be approved by shareholder vote, and management anticipates that approval will be obtained. However, as a contingency plan, Montserrat has explored the possibility of entering into a joint venture with Hometown and financing it through the establishment of a special purpose entity (SPE). Montserrat would supply the initial equity investment representing approximately 10% of the transaction, and would finance the remainder through the issuance of debt. In addition, Montserrat would have to guarantee the debt of the new entity, but would receive 85% of future earnings generated by the SPE. The pooling of interests method of accounting for acquisitions has several significant differences from the purchase method. Which of the following is the most significant difference between the two methods? Under the pooling of interests method: A) operating results prior to the acquisition are not restated, and therefore pre-and post-acquisition financial statements are not comparable. B) assets and liabilities of the two firms are combined, and neither company is considered to have acquired the other. C) any amount of the purchase price that exceeds fair market value is allocated to intangible asset accounts. D) the two companies are combined using their prevailing fair market values. The correct answer was B) The pooling method treats the transaction more as a merger, while the purchase method more closely resembles an acquisition. 2.If Montserrat had elected to account for the American Homes acquisition using the purchase method rather than the pooling of interests method, the company’s: A) return on assets would be higher because net income is higher and assets are higher. B) profit margin would be lower because net income is lower but sales are the same. C) return on equity would be higher because net income is higher and equity is higher. D) return on assets would be lower because net income is lower but assets are the same. The correct answer was B) In general, performance measures are more favorable using the pooling method rather than using the purchase method. In this example, under the purchase method, net income declines because depreciation expenses are increased as tangible assets are written up to their market value at the time of the transaction. 3.If Montserrat purchases the proposed $50 million position in Hometown Homes, which of the following accounting methods for intercorporate investments should be applied? A) Cost method. B) Market method. C) Equity method. D) Consolidation method. The correct answer was D) A purchase that represents an ownership stake of 50% or more in another entity represents a controlling influence of the acquiring company over the acquisition, and should be accounted for using the consolidation method. 4.Assume that the book value of a 50% stake in Hometown Homes is currently valued at $20 million. The $5 million difference between the book value and the acquisition price is assigned to depreciable assets, and will be amortized over five years. Under the consolidation method, which of the following scenarios would be the most accurate of Montserrat’s accounting for the acquisition? Montserrat should report 100% of its revenues and expenses: A) 50% of Hometown’s revenues and expenses, and the depreciation adjustment, minus its minority share of consolidated income in Hometown. B) 50% of Hometown’s revenues and expenses, and the depreciation adjustment. C) 100% of Hometown’s revenues and expenses, the depreciation adjustment, minus its minority share of consolidated income in Hometown. D) 100% of Hometown’s revenues and expenses and the depreciation adjustment. The correct answer was C) When an acquisition is made for a purchase that is greater than the entity’s book value, the difference is booked in an asset account which is then amortized over its assumed useful life. Since Montserrat would be acquiring a 50% stake in Hometown, it would account for the transaction using the consolidation method. Going forward, Montserrat would report 100% of Hometown’s revenues and expenses on its financials, as well as the depreciation adjustment for the excess purchase price. Then the minority share of Hometown’s income (the 50% stake not owned by Montserrat) would be subtracted. 5.With regards to accounting for a variable interest entity (VIE) in accordance with FIN 46(R), which of the following statements is most accurate? A) A variable interest is a contractual, ownership, or other pecuniary interest in an entity that is based upon the fair value of the entity’s assets at inception. B) The primary beneficiary is the firm that receives the majority of the rewards associated with the VIE but not necessarily the majority of the risks. C) Firms must use factors other than voting control to determine whether a VIE should be consolidated. D) At-risk equity of at least 10% is in most cases consistent with a VIE. The correct answer was C) According to FIN 46(R), a VIE is an entity that meets any one of the following conditions: §
Insufficient at-risk equity investment (usually less than 10%) §
Shareholders lack decision-making rights §
Shareholders don’t absorb losses §
Shareholders don’t receive the expected residual returns 6.Given the information regarding the possible formation of a special purpose entity (SPE) to acquire Hometown Homes, which of the following statements is most accurate with regards to FIN 46(R)? The newly formed SPE would: A) be considered a VIE and should be consolidated on Hometown’s financial statements. B) be considered a VIE and should be consolidated on Montserrat’s financial statements. C) not be considered a VIE but should be consolidated on Montserrat’s financial statements. D) not be considered a VIE but should be consolidated on Hometown’s financial statements. The correct answer was B) In accordance with FIN 46(R), Montserrat’s initial 10% equity stake would not be considered sufficient to finance the newly formed entity’s operations, so it would be considered to be a VIE. If an entity is considered a VIE, then it must be consolidated by the primary beneficiary, which in this case is Montserrat.
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发表于 2008-4-12 18:32
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