FAR3 Flashcards
Intro to Business Combination to
What is the designation of the investee
in a business combination?
Subsidiary company
Define/describe a “legal merger.”
One entity acquires either a group of assets constituting a business or a controlling interest of another entity and "collapses" the acquired assets/entity into the acquiring company
Describe how income is determined at
the date of a combination.
Only the acquirer’s operating results up
to the date of combination enter into
determination of “consolidated” net
income
What may be acquired in a business
combination?
A business entity acquires either a
group of net assets that constitutes a
business or equity interest in an entity.
Define “parent company” as it relates
to business combinations.
Designation of the investor in a
business combination
List the three legal forms of business
combinations.
- Merger
- Consolidation
- Acquisition
List the primary means of
accomplishing a business combination.
The acquisition by one entity of the
common stock of another entity to gain
control of the investee
Describe how income is determined at
the end of the year for a combination.
The acquirer's operating results for the year plus the acquiree's operating results after the combination enter into the determination of consolidated income for the year of combination.
Define/describe a “legal acquisition.”
One entity acquires controlling interest
of another entity, but both continue to
exist and operate as separate legal
entities
Identify the legal forms of business
combination that will not require
preparation of consolidated financial
statements.
A legal merger or a legal consolidation will not require preparation of consolidated financial statements. Only a legal acquisition will require preparation of consolidated financial statements.
Define/describe a “legal
consolidation.”
A new entity is formed to combine
(consolidate) two or more preexisting
entities.
Describe how income is determined for
subsequent years of a combination.
The acquirer’s and the acquiree’s
operating results enter into the
determination of consolidated net
income.
In which of the following legal forms of business combination does at least one preexisting entity cease to exist?
Merger
Consolidation
Acquisition
Merger - YES
Consolidation - YES
Acquisition - NO
In a merger and a consolidation, at least one preexisting entity ceases to exist, but in an acquisition, no entity ceases to exist. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities. In a legal merger, one preexisting entity is combined into another preexisting entity; one entity ceases to exist. In a legal consolidation, two or more existing entities are combined into one new entity; two or more entities cease to exist.
In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity?
Merger
Acquisition
Consolidation
Merger - YES
Acquisition - NO
Consolidation - YES
n a merger and in a consolidation, the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity, but in an acquisition, the assets and liabilities of the acquired entity remain on the books of the acquired entity. In a merger and in a consolidation, at least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities.
On December 1, 200X, Betaco agreed to be acquired 100% by Alphaco at a cost equal to Betaco’s book value. The combination was initiated at that time, and the closing date for the acquisition was December 31, 200X. Both firms have December 31 fiscal year-ends. There were no other transactions between the firms during 200X or 200Y. Each firm had the following net incomes for the periods shown:
Alphaco Betaco 1/1/0X–11/30/0X $20,000 $5,000 12/1/0X–12/31/0X 4,000 1,000 1/1/0Y–1/31/0Y 2,000 3,000
Which one of the following is the consolidated net income that Alphaco should recognize for 200X?
$24,000
The consolidated net income recognized by Alphaco for 200X would be its net income only. Therefore, the amount would be $20,000 for January 1 through November 30 and $4,000 for December, or a total of $24,000. Betaco’s net income before the closing of the combination (the acquisition date) would not be included in consolidated net income. Basically, Betaco’s net income for all of 200X was “paid for” by Alphaco in the consideration it transferred to acquire Betaco.
In which of the legal forms of business combination does more than one entity survive?
Merger
Consolidation
Acquisition
Merger - No
Consolidation - No
Acquisition - YES
Only in a legal acquisition does more than one entity survive. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities. In a legal merger, one preexisting entity is combined into another preexisting entity; only one entity survives. In a legal consolidation, two or more existing entities are combined into one new entity; only the new entity survives.
In which of the following legal forms of business combination are two or more entities combined into one new entity?
Merger
Consolidation
Acquisition
Merger - No
Consolidation - Yes
Acquisition - No
Only a legal consolidation results from the combination of two or more existing entities into one new entity. In a merger, one preexisting entity is combined into another preexisting entity; no new entity is formed. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities; no new entity is formed.
Topco owns 60% of the voting common stock of Midco and 40% of the voting common stock of Botco. Topco wishes to gain control of Botco by having Midco buy shares of Botco’s voting stock. Which one of the following minimum levels of ownership of Botco must Midco additionally need to obtain in order for Topco to have controlling interest of Botco’s voting stock?
11%
In order for Topco to gain control of Botco, it must own, either directly or indirectly, more than 50% of Botco’s voting stock. Since it directly owns 40% of Botco’s voting stock, it must acquire control over 10+% more. Also, since Topco owns 60% of Midco, it controls Midco. Therefore, if Midco acquires 11% of Botco, Topco will be able to exercise 51% of Botco’s voting stock — 40% directly and 11% indirectly through its control of Midco.
On December 1, 200X, Betaco agreed to be acquired 100% by Alphaco at a cost equal to Betaco’s book value. The combination was initiated at that time, and the closing date for the acquisition was December 31, 200X. Both firms have December 31 fiscal year-ends. There were no other transactions between the firms during 200X or 200Y. Each firm had the following net incomes for the periods shown:
Alphaco Betaco 1/1/0X–11/30/0X $20,000 $5,000 12/1/0X–12/31/0X 4,000 1,000 1/1/0Y–1/31/0Y 2,000 3,000
Which one of the following is the amount of consolidated net income that should be recognized for January 200Y?
$5,000
The correct amount is Alphaco’s net income for January 200Y ($2,000) plus Betaco’s net income for the period ($3,000), or $5,000. Income earned by the firms during 200X would not enter into 200Y income determination under any assumption.
On October 1, 200X, Parco acquired 100% controlling interest of Setco in a legal acquisition. There were no other transactions between the entities during 200X. The two companies reported the following net incomes/(losses) for the periods shown:
Parco Setco 1/1/0X - 9/30/0X $125,000 $40,000 10/1/0X - 12/31/0X 30,000 ($15,000)
Which one of the following would be the amount of income recognized by Parco in its consolidated financial statements for the year ended December 31, 200X?
$140,000
Consolidated income for the year ended December 31, 200X, would consist of Parco’s net income for the full year ($125,000 + $30,000 = $155,000) plus Setco’s net loss for the period following its acquisition by Parco ($15,000 loss). Therefore, Parco’s net income for the full year would be $155,000 − $15,000 = $140,000.
What method is required to be used in
accounting for most business
combinations?
Acquisition method
List the business combinations for
which the acquisition method of
accounting does not apply.
Joint ventures
Entities under common control
Between not-for-profit
organizations
For-profit entity acquired by a
not-for-profit organization
Acquisition of assets that do not
constitute a business
List the five elements (or steps)
involved in applying the acquisition
method of accounting to a business
combination.
- Identify the acquirer.
- Determine the acquisition date
and measurement period. - Determine the cost of the
acquisition. - Recognize and measure the
identifiable assets acquired,
liabilities assumed, and any
noncontrolling interest in the
acquired entity. - Recognize and measure goodwill
or a gain from a bargain
purchase.
Define “acquisition date.”
The date on which the acquirer obtains
control of another business (i.e., group
of assets that constitute a business or a
separate legal entity). It usually is also
the “closing date” for the combination.