Advanced Accounting 400 Chapter 1

In a business combination, the direct costs of registering and issuing securities are:

charged against the additional paid-in capital of the combined entity.

Costs to close duplicate facilities, and other indirect costs are

expensed

Reasons companies choose to expand through combination rather than by building new facilities include:

1 Cost advantage- may be less expensive to acquire rather than build facilities or develop R&D 2 Lower risk- may be less risky to acquire product lines or markets rather than develop new products, particularly if the goal is diversification 3 Fewer operating delays- the facilities are in place, thereby shortening the time to market 4 Avoidance of takeovers 5 Acquisition of intangible assets 6 Other reasons- business tax advantages, such as tax loss carryforwards

Acquisition:

1 One corporation acquires the productive assets of another business entity and integrates those assets into its own operations (see B & C below), or 2 One corporation obtains operating control over the productive facilities of another entity by acquiring a majority of its outstanding voting stock. A + B = A + B (usually requires consolidated statements)

What is a bargain purchase price? Describe the accounting procedures necessary to record and account for a bargain purchase.

A 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 as an ordinary gain during the period of the acquisition. The gain equals the difference between the investment cost and the fair value of the identifiable net assets acquired.

What is the accounting concept of a business combination?

A 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. Three situations establish the control necessary for a business combination, namely, when one 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.

What are the legal distinctions between a business combination, a merger, and a consolidation?

A 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 consolidation. 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.

Business combination:

A corporation and one or more incorporated or unincorporated businesses are brought together under the control of a single management team. That control is established when: 1 One or more corporations becomes a subsidiary (i.e., when another corporation acquires a majority of its outstanding voting stock), 2 One company transfers its net assets to another, or 3 Each company transfers its net assets to a newly formed corporation.

Consolidation:

A new corporation is formed to take over the assets and operations of two or more separate business entitiesand all the combining companies are dissolved (see Illustration 1-1). A + B = C

Cork Corporation acquires Dart Corporation in a business combination. Which of the following would be excluded from the process of assigning fair values to assets and liabilities for purposes of recording the acquisition? (Assume Dart Corporation is dissolved.) a. Patents developed by Dart because the costs were expensed under GAAP b. Dart's mortgage payable because it is fully secured by land that has a market value far in excess of the mortgage c. An asset or liability amount over- or underfunding of Dart's defined-benefit pension plan d. none of the above

An asset or liability amount over- or underfunding of Dart's defined-benefit pension plan.

Identifiable Assets

An identifiable asset is an asset of an acquired company that can be assigned a fair value and can be reasonably expected to provide a benefit for the purchasing company in the future. Identifiable assets can be both tangible and intangible assets. Assets that are not identifiable are usually considered to be goodwill.

When does an impairment occur?

An impairment occurs when the recorded value (on the date of acquisition) of goodwill is greater than its current fair value.

In a business combination in which a new corporation is formed to take over the assets and operations of two or more separate business entities, with previously separate entities being dissolved, is a/an:

Consolidation

When does goodwill result from a business combination, a merger, and a consolidation?

Goodwill 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 GAAP, goodwill is not 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 recognized. An impairment occurs when the fair value drops below the value recognized on the day of the acquisition.

Define goodwill

Goodwill is defined as the excess of the investment cost over the fair value of assets received.

Is goodwill amortized for financial reporting purposes?

Goodwill is no longer amortized for financial reporting purposes. In certain cases, it can be amortized and deducted over 15 years.

Merger:

One corporation takes over all the operations of another business entityand that entity is dissolved (see Illustration 1-1). A + B = A

An excess of the fair value of net assets acquired in a business combination over the price paid is:

Reported as a gain in a bargain purchase

Is dissolution of all but one of the separate legal entities necessary in order to have a business combination?

The dissolution of all but one of the separate legal entities is not necessary in order to have 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-sibsidiary 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.

Direct costs of registering and issuing securities are charged against:

additional paid-in capital.

Other direct costs of combining (accounting and legal fees) are:

expensed

Horizontal integration

is the combination of firms in the same business lines and markets.

Vertical integration

is the combination of firms in the same business, but with operations in different, successive, stages of production and/or distribution.

Conglomeration

is the combination of firms with unrelated and diverse productsand/or service functions.