Questions and Answers
What is the main characteristic of the Pooling of Interests Method?
In the Absorption Method, the acquiring company records the net assets acquired at their fair value.
False
In the Purchase Method, the difference between the consideration paid and the net assets acquired is recorded as __________.
goodwill
What is the main purpose of a Horizontal Merger?
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In the Purchase Method, the assets and liabilities of the acquired company are recorded at their book values.
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What type of merger involves two companies that operate at different stages of the production or distribution process?
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What is the main purpose of a Conglomerate Merger?
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A merger in which a smaller company acquires a larger company is known as a __________ merger.
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Match the following amalgamation methods with their accounting treatments:
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What is the main purpose of a Vertical Merger?
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Study Notes
Amalgamation Methods
- Purchase Method: One company purchases the assets and liabilities of another company, and the acquired company is dissolved.
- Pooling of Interests Method: Two or more companies combine to form a new company, and the shareholders of the combining companies become shareholders of the new company.
- Absorption Method: One company absorbs the assets and liabilities of another company, and the acquired company is dissolved.
Accounting Treatment
-
Purchase Method:
- The acquiring company records the net assets acquired at their fair value.
- The difference between the consideration paid and the net assets acquired is recorded as goodwill.
-
Pooling of Interests Method:
- The assets and liabilities of the combining companies are recorded at their book values.
- No goodwill is recorded as the shareholders of the combining companies become shareholders of the new company.
-
Absorption Method:
- The acquiring company records the net assets acquired at their book values.
- No goodwill is recorded as the absorbed company is dissolved.
Merger Types
- Horizontal Merger: A merger between two companies that operate in the same industry, often to increase market share or reduce competition.
- Vertical Merger: A merger between two companies that operate at different stages of the production or distribution process, often to increase efficiency or reduce costs.
- Conglomerate Merger: A merger between two companies that operate in unrelated industries, often to diversify product offerings or reduce risk.
- Reverse Merger: A merger in which a smaller company acquires a larger company, often to gain access to new markets or capital.
Amalgamation Methods
- There are three amalgamation methods: Purchase, Pooling of Interests, and Absorption.
Purchase Method
- One company purchases the assets and liabilities of another company.
- The acquired company is dissolved.
- Net assets acquired are recorded at their fair value.
- The difference between the consideration paid and the net assets acquired is recorded as goodwill.
Pooling of Interests Method
- Two or more companies combine to form a new company.
- Shareholders of the combining companies become shareholders of the new company.
- Assets and liabilities of the combining companies are recorded at their book values.
- No goodwill is recorded.
Absorption Method
- One company absorbs the assets and liabilities of another company.
- The acquired company is dissolved.
- Net assets acquired are recorded at their book values.
- No goodwill is recorded.
Merger Types
- Horizontal Merger: A merger between companies in the same industry to increase market share or reduce competition.
Vertical Merger
- A merger between companies at different stages of production or distribution to increase efficiency or reduce costs.
Conglomerate Merger
- A merger between companies in unrelated industries to diversify product offerings or reduce risk.
Reverse Merger
- A merger in which a smaller company acquires a larger company to gain access to new markets or capital.
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Description
Learn about the different methods of amalgamation in accounting, including the purchase, pooling of interests, and absorption methods. Understand the accounting treatment for each method.
