Target Is a Wholly Owned Subsidiary of MegaCorp Inc

question 69

Multiple Choice

Target is a wholly owned subsidiary of MegaCorp Inc. MegaCorp supplies a number of services to target. Target sells some of its products to other MegaCorp subsidiaries. Target also buys products from other MegaCorp subsidiaries that are used as inputs in producing Target's products. Which of the following adjustments should the acquirer make to Target's financial statements before valuing the firm?

• A) Deduct the actual cost of services required by Target that are being supplied by the parent without charge from target's cost of sales.
• B) Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at below market prices and the actual market prices for such products from Target's cost of sales.
• C) Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at above market prices and actual market prices from Target's cost of sales
• D) A and B only.
• E) None of the above.

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Definitions:

Cognitive Dissonance

is the psychological discomfort experienced when holding two or more contradictory beliefs, ideas, or values.

Caveat Emptor

A Latin phrase meaning "let the buyer beware," implying that the buyer is responsible for checking the quality and suitability of goods before a purchase is made.

Approach-Avoidance

A psychological conflict that occurs when a situation or objective has both desirable and undesirable aspects that make it simultaneously appealing and repelling.

Utilitarian

Describes products, services, or actions that are practical and functional rather than decorative or ornamental.