Introduction to Acquisition Method of Accounting

Question 1

What type of accounting is required in business combinations?

Answer 1

the acquisition method, this is a variation of the purchase method of accounting

Question 2

Acquisition accounting should be used in all business combinations where one entity acquires control of another except when?

Answer 2

1. ) Formation of a JV
2. )Acquisition of an asset or group of assets that does not constitute a business
3. ) Combination between entities under common control
4. ) Combination between not-for-profit entities
5. ) Acquisition of a for-profit entity by a non-profit entity

Question 3

In regards to ASC 805 (Acquisition Accounting method) how should an acquirer account for a business combination?

Answer 3

1. ) Recognize and measure the identifiable assets acquired, the liabilities assumed, and the noncontrolling interest in the acquired business
2. ) Recognize and measure goodwill or a bargain purchase amount
3. ) Disclose information about a business combination

Question 4

When applying the acquisition method of accounting to business combinations, what steps are needed?

Answer 4

1. ) IDentifying the acquiring entity (acquirer)
2. ) Determing the acquisition date and measurement period
3. ) Determining the cost of the acquisition
4. ) Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business (the acquiree)
5. ) Recognizing and measuring goodwill or gain from a bargain purchase

Question 5

What is the Acquisition date under a business combination?

Answer 5

Date on which the acquirer obtains control of the acquiree. It is normally the date on which the acquirer legally transfers consideration for, and acquires the assets and assumes the liabilities of, the acquiree. Also called the closing date

Question 6

When a business combination is effected through an exchange of equity interest, what are five factors to consider that indicate which entity is the acquirer?

Answer 6

Which combining entity/entities

1. )Issued new equity interest;
2. )Owners have the larger portion of the voting rights;
3. )Owners can select or remove a voting majority of the governing body;
4. )Former management dominates that of the combined entity;
5. )Paid a premium over the precombination fair value of the equity interest of the other combining entities

Question 7

Define “measurement period” in Business Combinations

Answer 7

The period after the acquisition date during which the acquirer may adjust any provisional amounts recorded at the acquisition date. It provides the acquirer reasonable time to obtain information needed to identify and measure accounts and amounts that existed as of the acquisition date. It ends when the acquirer obtains that information or determines that no additional information is available, but in no case should it exceed one year

Question 8

For the purposes of applying the acquisition method to a business combination, what may constitute a “business?”

Answer 8

A business may be:

1. )A group of assets or a group of net assets (that constitute a business);
2. )A separate legal entity (that is a business).

Question 9

What are the steps in applying the acquisition method of accounting?

Answer 9

1. ) Identify the acquirer
2. ) Determine the acquisition date
3. ) Determine cost of acquired business
4. ) Recognize and measure what you receive (assets, etc)
5. ) Recognize and measure goodwill

Question 10

What is the “Acquisition Date” in a business combination?

Answer 10

Usually when the acquirer transfers consideration and acquires the assets. Also called the “closing date” Can be before or after the closing date if agreed upon before

Question 11

Can entries be changed after 1 year for a business combination?

Answer 11

Yes, but only to correct an error