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Sharp Company will acquire 90 percent of Moore Company in a business combination.  The total consideration has been agreed on, but the nature of Sharp's payment has not.  It is expected that on the date the business combination is to be consummated, the fair value will exceed the book value of Moore's assets minus liabilities.  Sharp desires to prepare consolidated financial statements that will include Moore's financial statements.

a. Explain how the amount of goodwill is determined.

b. From a theoretical standpoint, why should consolidated financial statements be prepared?

c. From a theoretical standpoint, what is the first necessary condition to be met before consolidated financial statements can be prepared?

Reference: Baker, R., Christensen, T. & Cottrell D., (2011). Advanced financial accounting (9th ed.). New York, NY: McGraw-Hill.


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