doubt in fra question

[archived_user]

can someone explain the adjustments needed for retained earning and current assets when the effect of acquiring a company is removed?

 

[archived_user]

what do you mean by: “when the effect of acquiring a company is removed”?
when acquirer buys target and accounts for the transaction using acquisition method:
1) acquirer’s cash balance + target’s cash balance - cash paid for target = post-acquisition cash balance
2) acquirer’s paid-in capital goes up by the amount of stock issued to fund the acquisition, and this becomes the post-acquisition equity balance (along with acquirer’s retained earnings). (target’s equity accounts are discarded.)
3) total equity goes up by minority interest
edit: updated to clarify point 1

 

[archived_user]

iceman_1212 wrote:
what do you mean by: “when the effect of acquiring a company is removed”?

the question says ” if adam removes from company A’s financial statements the effects of purchase of B”
the only changes in the adjusted statements found in the solution are in cash( increased ) and retained earnings( decreased)
i’m not able to understand both these adjustments

 

[archived_user]

tough to say without seeing the question - is it from CFAI material? if so, what question #? most likely it is referring to adjustments #1 and #3 in my response above

 

[archived_user]

I’m not really sure about point 1. When an acquirer pays for a piece of the company in cash. The cash balance in the books of acquirer reduces but it does not get added to the cash balance of the target company. It goes to the departing shareholders.

 

[archived_user]

RocketSpeed wrote:
I’m not really sure about point 1. When an acquirer pays for a piece of the company in cash. The cash balance in the books of acquirer reduces but it does not get added to the cash balance of the target company. It goes to the departing shareholders.

Poor word choice by me. What I’d meant to convey was that the final cash balance of consolidated entity is Acquirer’s starting cash balance - cash paid for target plus + target’s cash balance. I’ll reword to make it clearer.