One Company Acquires Another Company in a Combination Accounted for as an Acquisition

question 43

Multiple Choice

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

• A) It is the only method allowed by the SEC.
• B) It is relatively easy to apply.
• C) It is the only internal reporting method allowed by generally accepted accounting principles.
• D) Operating results on the parent's financial records reflect consolidated totals.
• E) When the equity method is used, no worksheet entries are required in the consolidation process.

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Definitions:

Contribution Margin Ratio

The proportion of sales revenue that is not consumed by variable costs and therefore contributes to covering fixed costs.

Fixed Expenses

Costs that remain constant for a period of time regardless of production levels or business activity.

Combined ROI

The total return on investment generated from a set of investments or projects, combined into a single measure.

Net Operating Income

Represents the profit a company generates from its operations, minus all operating expenses except interest and taxes.