Question

A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be

a. Maintained at its initial value.
b. Adjusted to its equity method balance at the date of the second acquisition.
c. Adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded.
d. Adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital.

Answer 1

In a step acquisition, the original 32 percent acquisition should be adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded.

Step-by-step explanation:

In a step acquisition, the original 32 percent acquisition should be adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded. This means that the value of the initial 32 percent acquisition will be adjusted based on the fair value at the time of the second acquisition, and any resulting gain or loss will be recorded in the financial statements.

In a step acquisition, the initial 32 percent acquisition undergoes an adjustment to fair value at the date of the second acquisition. This necessitates a reassessment of the value of the original 32 percent stake based on the fair value prevailing at the time of the subsequent acquisition. The financial statements then reflect any resulting gain or loss from this adjustment. This accounting practice ensures that the reported value of the initial acquisition accurately aligns with the fair value at the time of the later transaction, providing a more precise representation of the economic realities. By recognizing and recording gains or losses stemming from these adjustments, financial statements strive to convey a transparent and faithful depiction of the financial impact of step acquisitions on the reporting entity.