Chapter 1 - Business Combinations Flashcards
Acquisition Method
method to record business combinations on fair value of net assets acquired
Goodwill
Investment cost greater than fair value of assets acquired in business combination
Goodwill Amortization
Not for public companies; 10 year amortization for private companies
Good Time to Acquire Another Company
When acquiring companies stock is overvalued
If acquired company survives as a legal entity
Investment in Sparrow $2,640,000
Cash 640,000
Notes Payable 2,000,000
If acquired company does not survive as a legal entity
Acquiring company absorbs net assets at fair value
Conglomeration
Combination of firms with unrelated and diverse products or service functions
Advantages to Combination Over Organic Growth
Cost advantage; lower risk; fewer operating delays; avoidance of takeovers; acquisition of intangible assets
Merger
When one corporation takes over all the operations of another business entity and that entity is dissolved
Consolidation
When a new corporation is formed to take over the assets and operations of two or more separate business entities and dissolves the previously separate entities
Acquisition
When one corporation acquires the productive assets of another business entity and integrates those assets into its own operations
Subsidiary
A corporation becomes a subsidiary corporation when another corporation purchases a majority of its voting stock
If subsidiary corporation is dissolved in a business combination then the investment cost that exceeds fair value of net assets is ______________.
Goodwill
Three Levels of Reliability in assessing fair value of tangible and intangible assets in business combination
Level 1: established market prices
Level 2: PV of estimated future cash flows, discounted based on established market prices
Level 3: internally derived estimations
No value is assigned to goodwill on the books of an acquired subsidiary.
No value is assigned to goodwill on the books of an acquired subsidiary.
