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Chapter 1
BUSINESS COMBINATIONS
Answers to Questions1
A business combination is a union of business entities in which two or more previouslyseparate and independent companies are brought under the control of a singlemanagement team.
 FASB Statement No. 141R
describes three situations that establish thecontrol necessary for a business combination, namely, when one or more corporations become subsidiaries, when one company transfers its net assets to another, and wheneach combining company transfers its net assets to a newly formed corporation.
2
The dissolution of all but one of the separate legal entities is
not 
necessary for a businesscombination. An example of one form of business combination in which the separatelegal entities are not dissolved is when one corporation becomes a subsidiary of another.In the case of a parent-subsidiary relationship, each combining company continues toexist as a separate legal entity even though both companies are under the control of asingle management team.
3
A business combination occurs when two or more previously separate and independentcompanies are brought under the control of a single management team. Merger andconsolidation in a generic sense are frequently used as synonyms for the term
businesscombination
. In a technical sense, however, a
merger 
is a type of business combination inwhich 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 twoor more previously separate companies and all of the combining companies are dissolved.
4
Goodwill arises in a business combination accounted for under the acquisition methodwhen the cost of the investment (fair value of the consideration transferred) exceeds thefair value of identifiable net assets acquired. Under 
 FASB Statement No. 142
, goodwill isno longer amortized for financial reporting purposes and will have no effect on netincome, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be reocnized.
5
A bargain purchase occurs when the acquisition price is less than the fair value of theidentifiable net assets acquired. The acquirer records the gain from a bargain purchase
© 2009 Pearson Education, Inc. publishing as Prentice Hall19-1
 
amount as an extraordinary gain during the period of the acquisition, under 
 FASBStatement No. 141R
.
© 2009 Pearson Education, Inc. publishing as Prentice Hall19-2
 
SOLUTIONS TO EXERCISESSolution E1-11
a
2
 b
3
a
4
a
5
d
Solution E1-2
[AICPA adapted]
1a
Plant and equipment should be recorded at the $55,000 fair value.
2
cInvestment cost$800,000Less: Fair value of net assetsCash$ 80,000Inventory 190,000Property and equipment — net 560,000Liabilities(180,000
 
) 650,000Goodwill$150,000
Solution E1-3
Stockholders’ equity — Pillow Corporation on January 3
Capital stock, $10 par, 300,000 shares outstanding$3,000,000Additional paid-in capital[$200,000 + $1,500,000 – $5,000] 1,695,000Retained earnings 600,000Total stockholders’ equity$5,295,000
 Entry to record combination
Investment in Sleep-bank 3,000,000Capital stock, $10 par 1,500,000Additional paid-in capital 1,500,000Investment expense 10,000
© 2009 Pearson Education, Inc. publishing as Prentice Hall19-3
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