Business Combinations

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Chapter 1

BUSINESS COMBINATIONS

Answers to Questions

1A business combination is a union of business entities in which two or more previously separate and independent companies are brought under the control of a single management team. FASB Statement No. 141R describes three situations that establish the control necessary for a business combination, namely, when one or more corporations become subsidiaries, when one company transfers its net assets to another, and when each combining company transfers its net assets to a newly formed corporation.

2The dissolution of all but one of the separate legal entities is not necessary for a business combination. An example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team.

3A business combination occurs when two or more previously separate and independent companies are brought under the control of a single management team. Merger and consolidation in a generic sense are frequently used as synonyms for the term business combination. In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of the combining companies are dissolved.

4Goodwill arises in a business combination accounted for under the acquisition method when the cost of the investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets acquired. Under FASB Statement No. 142, goodwill is no longer amortized for financial reporting purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be reocnized.

5A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assets acquired. The acquirer records the gain from a bargain purchase amount as an extraordinary gain during the period of the acquisition, under FASB Statement No. 141R.

SOLUTIONS TO EXERCISES

Solution E1-1

1a
2b
3a
4a
5d

Solution E1-2 [AICPA adapted]

1a
Plant and equipment should be recorded at the $55,000 fair value.

2c
| |Investment cost | |$800,000 | | | | | | | |Less: Fair value of net assets | | | | | Cash |$ 80,000 | | | | Inventory | 190,000 | | | | Property and equipment — net | 560,000 | | | | Liabilities |(180,000) | 650,000 | | |Goodwill | |$150,000 |

Solution E1-3

Stockholders’ equity — Pillow Corporation on January 3

|Capital stock, $10 par, 300,000 shares outstanding |$3,000,000 | | | | |Additional paid-in capital...
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