Introduction to Business Combinations

Question 1

What is a business combination?

Answer 1

a transaction or an event where an acquirer obtains control of a business

Question 2

How is “control” defined in business combinations?

Answer 2

Voting control and is essentially greater than 50% voting interest

Question 3

What is defined as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return?”

Answer 3

A business. Does not have to be profitable to be considered a business

Question 4

What are the 3 types of business combinations?

Answer 4

1. ) Merger
2. ) Consolidation
3. ) Acquisition

Question 5

What method of accounting must be used to record all business combinations for which the date is on or after December 15, 2008?

Answer 5

Acquisition method. Prior to that could be accounted for using the purchase method or pooling of interest method

Question 6

What is a merger?

Answer 6

One preexisting entity acquires either a group of assets that constitute a business or controlling equity interest of another preexisting entity and “Collapses” the acquired assets or entity into the acquiring entity.

Only one entity survives. The merged company ceases to exist

Question 7

What is a consolidation?

Answer 7

A new entity consolidates the net assets or the equity interest of two(or more) preexisting entities

Only one entity exists. The consolidated entities cease to exist as legal entities

Question 8

What is an acquisition?

Answer 8

One preexisting entity acquires controlling equity interest of another preexisting entity, but both continue to exist and operate as separate legal entities.

Question 9

In a merger or consolidation how are the assets of the merged entity treated?

Answer 9

The acquirer buys either a group of assets that constitute a controlling interest(>50% of common stock) and the assets and liabilities become a part of the acquirer firm.

Question 10

What is the accounting entry to record the assets and liabilities of a firm that has been merged or consolidated?

Answer 10

DR: Assets
CR: Liabilities (Assumed)
CR: Consideration given

using acquisition method of accounting

Question 11

Does a merger or consolidation result in the need for Consolidated Financial Statements?

Answer 11

No, because only one entity exists in these types of combinations

Question 12

In an acquisition how are the assets of the acquired entity treated by the acquirer?

Answer 12

One entity buys controlling interest of the voting stock of a target entity. Both entities continue as separate legal and accounting entities, therefore, all assets stay on the books of the acquired company, not the acquirer

Question 13

What is the accounting entry when an entity acquires another entity? (On the acquirer’s books)

Answer 13

DR: Investment in subsidiary
CR: Consideration Given

Question 14

Does an acquisition result in the need for Consolidated Financials?

Answer 14

Yes, since after the acquisition two entities exist, one controlled by the other

Question 15

List the primary mean of accomplishing a business combination.

Answer 15

The acquisition by one entity of the common stock of another entity to gain control of the investee

Question 16

Define “parent company” as it relates to business combinations

Answer 16

Designation of the Investor in a business combination

Question 17

Describe how income is determined at the date of a combination

Answer 17

Only acquirer’s operating results up to the date of combination enter into determination of “consolidated” net income

Question 18

What is the designation of the investee in a business combination?

Answer 18

Subsidiary company

Question 19

Describe how income is determined for subsequent years of a combination

Answer 19

Acquirer’s and Acquiree’s operating results enter into determination of consolidated net income

Question 20

Describe how income is determined at the end of the year for a combination.

Answer 20

Acquirer’s operating results for the year plus acquiree’s operating results after the combination enter into the determination of consolidated income for the year of combination.

Question 21

Define/describe a “legal acquisition”

Answer 21

One entity acquires controlling interest of another entity, but both continue to exist and operate as separate legal entities

Question 22

Define/describe a “legal consolidation”

Answer 22

A new entity is formed to combine (consolidate) two or more preexisting entities

Question 23

In a business combination is the Income of an acquired entity included in the consolidated net income?

Answer 23

Not the income before consolidation, only the income after. Also, retained earnings before the consolidation is excluded as well