Business Consolidations

Question 1

Elimination of acquired entity’s SE against investment account

Answer 1

In accounting for business combinations, the stockholders’ equity of the acquired entity is eliminated against the investment account. As a result, consolidated retained earnings include only the retained earnings of the parent company.

Question 2

Statutory merger

Answer 2

A statutory merger is of the form “A + B = A” in which one enterprise (A) acquires another enterprise (B) with the latter (B) ceasing to exist after the combination.

Question 3

Statutory consolidation

Answer 3

A statutory consolidation is of the form “A + B = C” in which a new enterprise (C) is created to acquire the net assets of other enterprises (A and B). Enterprises A and B cease to exist after the combination.

Question 4

Acquisition

Answer 4

An acquisition is of the form “A + B = A + B” in which one enterprise (A) acquires a majority share of the stock of another enterprise (B), but both entities continue their legal existence after the combination in a parent-subsidiary relationship.

Question 5

Fusion

Answer 5

The statutory merger and statutory consolidation forms of business combinations may be categorized as fusions. In both forms, the acquired enterprise ceases to exist as a legal entity; thus, it is fused into the surviving enterprise.

Question 6

Calculating inter company profit on inventory

Answer 6

Gross profit rate x remaining g inventory

Question 7

Reporting dividends on consolidated financial statements

Answer 7

Only dividends paid to non controlling shareholders are reported. Inter company dividends are eliminated in consolidation