In June 2001, the Financial Accounting Standards Board (FASB) eliminated the use
ID: 2619834 • Letter: I
Question
In June 2001, the Financial Accounting Standards Board (FASB) eliminated the use of pooling for merger accounting Since then, all mergers are handled as purchases for accounting purposes. Consider this case: Company A buys Company B for $50, when the net asset value of Company B's assets is $40 Which of the following statements best describes the effect of the merger on the merged company's consolidated balance sheet? O Company B's assets will be written down to reflect the purchase price relative to net asset value. O Company B's common equity will be written down to reflect the purchase price relative to net asset value. O Company B's common equity will be written up to reflect the purchase price relative to net asset value O Company B's liabilities will be deducted from Company A's liabilities in the consolidated balance sheet. When reporting merger transactions, the asset values acquired are often reappraised, and the change in value is reported in the financial statements. An increase in inventories will lead to a lead to cost of goods sold. This will in earnings per share. Suppose the fair market value of goodwill declines during the reporting year. Which of the following statements is true about the treatment of goodwill for finaiaeporting purposes? O The amount of the decline will not be charged to the earnings in the income statement. O The amount of the decline will be charged to the earnings in the income statement. Identify whether the following statements are true or false: The company with a larger market value in a merger is always the acquirer, and the company with a smaller market value in a merger is the target. The merger is expected to create synergistic benefits for only the target company.Explanation / Answer
1) The net asset value of Company B is $40 and the company A buys company B for $50 which is higher than the value of company B. Hence,Company B's common equity will be written down to reflect the purchase price relative to net asset value.
2) With increase in inventory the value of Cost of Goods sold would decrease/reduce due to which the earnings per share of the company would increase.
3) If the value of goodwill reduced that the amount of decline will be charged to the earnings in the income statement.
4) The statement is false. As the merger can create the synergistic benefits for the acquirer company also.
3)
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