One Company Is Considering Entering into a Business Combination with Another

question 2

Multiple Choice

One company is considering entering into a business combination with another. The potential acquirer wishes to acquire the subsidiary's assets and liabilities but wishes to prepare Consolidated Financial Statements using the fair market values of its own assets and liabilities as well of those of its potential subsidiary. Can this be accomplished? (Assume that each of the methods is allowable)

• A) Yes, this is permissible under the Acquisition Method.
• B) Yes, this is permissible under the Purchase Method under certain circumstances.
• C) Yes, this is permissible under the New Entity Method is used.
• D)No, this would not be possible under any circumstances.

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Definitions:

Average cost method

An inventory costing method where all costs of inventory are averaged out to determine the cost of goods sold and the ending inventory value.

Cost of merchandise sold

The entire expense directly tied to the production and sale of products in inventory that were sold during a specific period.

Year amount

An expression referring to the total amount or figures calculated over a year's period.

Average cost method

An inventory costing method where the cost of goods sold and ending inventory is calculated based on the average cost of all units available for sale during the period.