Solution Manual For Advanced Accounting, 11th Edition

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Chapter 1BUSINESS COMBINATIONSAnswers to Questions1A business combination is a union of business entities in which two or more previously separate andindependent companies are brought under the control of a single management team.Three situationsestablish the control necessary for a business combination, namely, when one or more corporations becomesubsidiaries, when one company transfers its net assets to another, and when each combining companytransfers its net assets to a newly formed corporation.2The dissolution of all but one of the separate legal entities isnotnecessary for a business combination. Anexample of one form of business combination in which the separate legal entities are not dissolved is whenone corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, eachcombining company continues to exist as a separate legal entity even though both companies are under thecontrol of a single management team.3A business combination occurs when two or more previously separate and independent companies arebrought under the control of a single management team. Merger and consolidation in a generic sense arefrequently used as synonyms for the termbusiness combination. In a technical sense, however, amergerisa type of business combination in which all but one of the combining entities are dissolved and aconsolidationis a type of business combination in which a new corporation is formed to take over theassets of two or more previously separate companies and all of the combining companies are dissolved.4Goodwill arises in a business combination accounted for under theacquisitionmethod when the cost of theinvestment (fair value of the consideration transferred) exceeds the fair value of identifiable net assetsacquired. UnderGAAP, goodwill is notamortized for financial reporting purposes and will have no effecton net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will berecognized.5A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assetsacquired. The acquirer records the gain from a bargain purchase asan ordinary gainduring the period of theacquisition.The gain equals the difference between the investment cost and the fair value of theidentifiable net assets acquired.

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