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Business combination:
Business combination refers to the combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After the business combination, the entities having separate control merges into one. They then have a control over all the assets and liabilities. Merging and acquisition are types of business combinations.
Consolidated financial statements:
The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merge to form the new entity. The consolidated financial statements serve the purpose of financial information for/about both the entities.
Equity method of recording the investment:
The equity method is used by the entities to assess the increase or decrease in their investment made in other entities. The equity method is used when the acquiring company is having significant influence over the other entity. The criteria for determining whether the investor should apply the equity method of accounting to this investment or not is as follows:
- The investor should invest at least 20% or it should acquire at least 20% of the investee’s share.
- The investor should be able to exercise the significant influence over the investee.
If the above two conditions are fulfilled, then the organization can use the equity method.
:
To prepare: the entry which would be made on the consolidated worksheet to eliminate the investment.
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Chapter 2 Solutions
Advanced Accounting
- Otter Tail, Inc., began operations in January 2015 and had the following reported net income or loss for each of its 5 years of operations: At December 31, 2019, Otter Tails capital stock was comprised of the following: Otter Tail has never paid a cash or stock dividend. There has been no change in the capital accounts since Otter Tail began operations. The appropriate state law permits dividends only from retained earnings. Required: Prepare a worksheet showing the maximum amount available for cash dividends on December 31, 2019, and how it would be distributable to the holders of the common shares and each of the preferred shares. Show supporting computations in good form.arrow_forwardHamilton Companys balance sheet on January 1, 2019, was as follows: Korbel Company is considering purchasing Hamilton (a privately held company) and discovers the following about Hamilton: a. No allowance for doubtful accounts has been established. A 10,000 allowance is considered appropriate. b. Marketable securities are valued at cost. The current market value is 60,000. c. The LIFO inventory method is used. The FIFO inventory of 140,000 would be used if the company is acquired. d. Land, included in property, plant, and equipment, which is recorded at its cost of 50,000, is worth 120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost. e. The company has an unrecorded trademark that is worth 70,000. f. The companys bonds are currently trading for 130,000. g. The pension liability is understated by 40,000. Required: 1. Compute the amount of goodwill if Korbel agrees to pay 500,000 cash for Hamilton. 2. Next Level What are the reasons that the book value of Hamiltons net identifiable assets differ from their market value? 3. Prepare the journal entry to record the acquisition on the books of Korbel assuming Hamilton is liquidated. 4. If Korbel agrees to pay only 400,000 cash, how much goodwill exists? 5. If Korbel pays only 400,000 cash, prepare the journal entry to record the acquisition on its books, assuming Hamilton is liquidated.arrow_forward
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning