accounting 406 chapter 2

accounting 406 chapter 2 - Chapter 2 1. Why to firms...

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Chapter 2 1. Why to firms combine? a. Strategy to maximize shareholder value b. Strategy for growth and competitiveness c. Expansion into diverse area 2. The Consolidation Process a. The consolidation of financial info into a single set of statements becomes necessary whenever a single economic entity is created by the business combination of two or more companies b. 4 Types of Combinations i. Statutory Merger through asset acquisition 1. only one of the original companies remains in business as a legally incorporated enterprise 2. Acquiring company takes control of assets and sometimes liabilities 3. Acquired company goes out of business ii. Statutory Merger through capital stock acquisition 1. Acquires all stock and then transfers assets and liabilities to its own books 2. Acquired company dissolves as a separate corp, often remaining as a division of the acquiring company iii. Statutory Consolidation through capital stock or asset acquisition 1. Acquiring company is a newly created company designed to receive assets or capital stock of original companies 2. Original companies may dissolve while remaining as separate divisions of newly created company iv. Acquisition of more than 50% of the voting stock 1. Acquiring company acquires stock that is recorded as an investment a. Controls decision making of acquired company 2. Acquired company remains in existence as legal corporation, although now a subsidiary of the acquiring company 3. Consolidation of Financial information a. For a statutory merger or a statutory consolidation when the acquired company is legally dissolved, only one accounting consolidation ever occurs b. If it is a company that does not dissolve the consolidation process must be carried out anew each time that the reporting entity prepares financial statements 4. The Purchase Method a. The acquisition cost to the new owners provides the valuation basis for the net assets acquired b. Purchase method is distinguished by 2 characteristics i. One company is clearly in a dominant role as the purchasing party ii. A bargained exchange transaction ahs taken place to obtain control over the second company iii. An historical cost figure can be determined based on the acquisition price being paid 1. the cost of the acquisition includes any direct combination costs 2. stock issuance costs are recorded as a reduction in paid-in capital and are not considered to be a component of the acquisition price 5. Purchase Method When Dissolution Takes place a. Purchase Price Equals Fair Value of Net Assets
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i. At the date of acquisition the purchase method consolidates all subsidiary assets and
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This note was uploaded on 03/31/2008 for the course ACCT 406 taught by Professor Holder-webb during the Spring '08 term at Wisconsin.

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accounting 406 chapter 2 - Chapter 2 1. Why to firms...

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