Advanced accounting Ch 1 solution Essay

1A line of credit crew is a union of business entities in which two or more antecedently wear out 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 unmatchable or more corporations become subsidiaries, when one company transfers its net assets to another, and when each corporate trust company transfers its net assets to a newly formed corporation.2The dissolution of solely but one of the separate legal entities is not necessary for 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-subsidiary relationship, each combining company continues to inhabit as a separate legal entity even though both companies are under the control of a single management team.3A business combination occurs when two or more pre viously 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 combination. 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.4Goodwill 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 specifiable net assets acquired. Under GAAP, good will 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.5A bar g et through purchase occurs when the acquisition price is less than the fair value of the distinctive 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.