Purchase of Real Estate on 3 Statements
I had an interview question that involved purchase of real estate. Question was: if xyz company were to buy a factory. Factory’s fair market value is 50, but buyer purchased for 20. How does this impact the 3 statements of the buyer? Also, say factory depreciates over 5 years, straight line. I said:
IS: Gain +30 (not sold but treated like a gain) D&A -10 EBT +20 NI +15
CFS NI +15 D&A +10 CFO: +25 CFI: -20 Cash +5
BS Cash +5 PPE +40 net of depreciation Goodwill: -30 Asset Change: +15
SE change: +15
Is this right or should answer have been different?
Where’s the monkeybot when we need him
Hey there! Based on the most helpful WSO content, your approach to the question seems mostly correct, but there are a few points that might need some adjustment.
For the Income Statement (IS): - The gain of $30 might not be recognized immediately as it's an unrealized gain. Usually, gains are recognized when the asset is sold, not when it's purchased at a discount. So, there might not be any immediate impact on the IS.
For the Cash Flow Statement (CFS): - The purchase of the factory would be a cash outflow under investing activities (CFI), which you correctly identified as -$20.
For the Balance Sheet (BS): - The factory would be recorded under Property, Plant, and Equipment (PPE) at its purchase price of $20, not the fair market value of $50. The depreciation would then be recorded over the next 5 years. - Goodwill is usually only recorded when purchasing a business, not an individual asset like a factory. So, there might not be any goodwill recorded in this case.
Remember, these are just general guidelines and the actual accounting treatment can vary based on specific company policies and accounting standards. Always best to double-check with a trusted source or mentor!
Sources: How does the sale of PPE after 3 years affect three statements?, Got asked this question in an interview, Today's Investment Banking Interview Question?, 21 Finance Interview Questions and Answers
bro - this is real estate. we slap 2-6% rent growth and pump down that cap rate to get a strong IRR. we don't know accounting! go to the IB room, and they will help you answer that. don't ask questions that CHAPGPT can give you an answer to. not for the real estate vest bros and sororstitutes.
worst case, they ask us about waterfalls and what market is good to invest in. no need to know accounting my guy.
Exactly. This isn’t IB
I've never heard of accounting questions in a real estate interview lol, what role are you applying for?
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