Morgan Bertone Chapter Two Short Answer Advanced Accounting 1.

A business combination is a transaction or other event in which an acquirer obtains control over one or more business. Two or more enterprises are being united into a single economic entity so that consolidated financial statements are required. The purpose of this is to make a single economic entity. A business combination is established when on company gains control over another company 2. There are five different types of business combinations a. Statutory merger through asset acquisition b. Statutory merger through capital stock acquisition c. Statutory consolidation through capital stock or asset acquisition d. Acquisition of more than 50 percent of the voting stock e. Control though ownership of variable interest. Risk and rewards often flow to a sponsoring firm rather than the equity holders 3. Consolidated financial statements of a company is done when financial data is gathered from the individual companies and then are brought together to form a single set. The objective of consolidated financial statements is to report the financial position, results of operations, and cash flows from the combined entity. 4. The purpose of a worksheet in the consolidated process is used when companies decided to keep their records separate. This makes a unique problem for accountant because the financial information must be brought together periodically without disturbing the accounting system of the individual companies. The worksheet help make an efficient structure for organizing and adjusting the information used to prepare externally reported consolidated statements. The worksheet is not part of the companys accounting records or the results of the financial statements. 5. The acquisition price in this case may be difficult because the companies have to figure out the market and fair value of each stock at time of the sale. That date would be very important but since you did not pay with cash and instead stock the acquisition price would be hard to compute. Also, it would be difficult to show on financial statements that transfer of property and how you acquired the business. 6. The accounting basis used when a company consolidates assets and liabilities in a business combination is to identify the assets acquired and the liabilities assumed. The acquirer must measure both the assets and liabilities at the fair value on the date of acquisition. There are three approaches to doing this and they are the market approach, income approach, and cost approach. a. The market approach- the fair value can be estimated with other market transactions involving similar assets or liabilities. b. Income approach- relies on the multiperiod estimates of the future cash flows projected to be generated by the asset.

c. Cost approach- estimated fair value by reference to the current cost of replacing an asset with another comparable economic utility. 7. Subsidiarys revenues and expenses are consolidated only if they are subsidiarys revenues, expenses, dividends, and equity transactions that occur subsequent to the takeover. The regular expenses and revenues just get closed out like the business never existed. If they maintain their own records the businesss revenues and expenses just stay open. 8. The payment in excess of fair value should be accounted for under the acquisition method as good will. Goodwill is defined as the asset representing the future economic benefit arising in a business combination that are not individually identified and separately recognized. Goodwill embodies the expected synergies that the acquirer expects to achieve through control of the acquired firms asset. 9. The reduction in price is accounted for within the consolidation process under the acquisition method crediting a gain on bargain purchase. This is considered an unrealized gain on the bargain price. A bargain price occurs because the collective fair value of the net identified assets acquired and liabilities assumed exceeds the consolidation transferred.