AFAR theory

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A transaction or other event in which an acquirer obtains control of one or more businesses

business combination

Definition of control

investor controls an investee

How may percentage should the acquiree acquired to have control

more than 50%

Business combinations are accounted for using the :

acquisition method Signup and view all the answers

the entity thay obtains control of the acquiree

acquirer Signup and view all the answers

the business that the acquirer obtains control of in a business combination

acquiree Signup and view all the answers

date on which acquirer obtains control of the acquiree

acquisition date Signup and view all the answers

How should long term debt of the acquired company generally be recognized on acquisition date

Fair value (B) Signup and view all the answers

how should the excess fair value be reported

as negative goodwill (A) Signup and view all the answers

the cost of issuing equity securities in business combination

treated as direct reduction in equity (C) Signup and view all the answers

costs of issuing debt securities

b and c (D) Signup and view all the answers

A business combination is accounted for properly as an acquisition. Direct costs of combination other than registration and issuance costs of equity securities, should be:

Deducted in determining the net income of the combined corporation for the period in which the costs were incurred. (C) Signup and view all the answers

PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general guidelines for assigning amounts to the inventories acquired provide for:

Raw materials to be valued at original cost. (C) Signup and view all the answers

Which of the following expenses related to the business combination should be included, in total, in the determination of net income of the combined corporation for the period in which the expenses are incurred?

Fees of finders and consultants (A) Signup and view all the answers

Easton Company acquired Lofton Company in a business combination. Easton was able to acquire Lofton at a bargain price. The fair value of the net identifiable assets acquired exceeded the consideration transferred to Lofton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as

part of current income in the year of combination. (B) Signup and view all the answers

Goodwill may be capitalized

only when it arises in a business combination. (C) Signup and view all the answers

A contingent liability assumed in a business combination is recognized

all of the above (D) Signup and view all the answers

Business Combination

A transaction in which an acquirer gains control of one or more businesses.

Control

When an investor has the power to direct the activities of an investee that significantly affect the investee's returns.

How much ownership for control?

Usually, the acquirer needs to own more than 50% of the acquiree's voting shares to establish control.

Acquisition Method

The accounting method used to record a business combination, where the acquirer's investment is recorded at fair value and any excess over the fair value of identifiable net assets is recorded as goodwill.