Solutions for Advanced Financial
Accounting - CHAPTER 1(1st edition by
Nathalie Johnstone)
Spin-Off - ANSoccurs when the ownership of a newly created or existing subsidiary is
distributed to the parent's stockholders without the stockholders surrendering any of their stock
in the parent company.
- Thus, the company divests itself of the subsidiary because it is owned by the company's
shareholders after the spin-off.
Split-Off - ANSThus, the company divests itself of the subsidiary because it is owned by the
company's shareholders after the spin-off.
- Thus, some of the P shareholders will keep their P shares while others will trade them for S
shares, essentially dividing the original P shareholders.
Controlling ownership - ANSA business combination in which the acquired company remains as
a separate legal entity with a majority of its common stock owned by the purchasing company
leads to a parent-subsidiary relationship.
Accounting standards normally require that the financial statements of the parent and subsidiary
be consolidated for general-purpose reporting so the companies appear as a single entity.
The treatment is the same if the subsidiary is created rather than purchased.
The treatment is also the same when the other entity is unincorporated and the investor
company has control and majority ownership.
Merger - ANSA merger is a business combination in which the acquired business's assets and
liabilities are combined with those of the acquiring company.
Thus, two companies are merged into a single entity. In essence, the acquiring company
"swallows" the acquired business.
When the two companies merge, one of them ceases to exist as a separate entity and the name
of the acquiring company continues.
Noncontrolling ownership - ANSThe purchase of a less-than-majority interest in another
corporation does not usually result in a business combination or controlling situation.
, A similar situation arises when a company creates another entity and holds less than a
controlling position in it or purchases a less-than-controlling interest in an existing partnership.
In its financial statements, the investor company reports its interest in the investee as an
investment with the specific method of accounting (cost method, equity method, consolidation)
dictated by the circumstances.
Other beneficial interest - ANSOne company may have a beneficial interest in another entity
even without a direct ownership interest.
The beneficial interest may be defined by the agreement establishing the entity or by an
operating or financing agreement.
When the Page 8beneficial interest is based on contractual arrangements instead of majority
stock ownership, the reporting rules may be complex and depend on the circumstances.
Similarities between spin-off and split-off - ANSboth types of divestiture are used as a means of
disposing of unprofitable operations
both types of divestiture result in a reduction of consolidated assets and liabilities
Which of the following is true of a business combinations? - ANS- In a business combination,
control over another company may be gained by acquiring a majority of the company's common
stock
- In a business combination, the acquirer obtains control of one or more businesses
- In a business combination, the acquirer will have the ability to direct policies and management
NOT CORRECT ANSWER: In a business combination, a company divides its existing shares
into multiple shares
Which of the following is true of a spin-off? - ANSThe ownership of a subsidiary is distributed to
the parent's stockholders *without* their surrendering any of their stock in the parent company.
Identify the reasons for business combinations? - ANS- To obtain control over the management
of another company
- To acquire the position to direct the policies of another company.
*INCORRECT ANSWERS:*
- To create a healthy competition with the acquired company
- To generate the income from another company by investing idle cash in the business
Accounting - CHAPTER 1(1st edition by
Nathalie Johnstone)
Spin-Off - ANSoccurs when the ownership of a newly created or existing subsidiary is
distributed to the parent's stockholders without the stockholders surrendering any of their stock
in the parent company.
- Thus, the company divests itself of the subsidiary because it is owned by the company's
shareholders after the spin-off.
Split-Off - ANSThus, the company divests itself of the subsidiary because it is owned by the
company's shareholders after the spin-off.
- Thus, some of the P shareholders will keep their P shares while others will trade them for S
shares, essentially dividing the original P shareholders.
Controlling ownership - ANSA business combination in which the acquired company remains as
a separate legal entity with a majority of its common stock owned by the purchasing company
leads to a parent-subsidiary relationship.
Accounting standards normally require that the financial statements of the parent and subsidiary
be consolidated for general-purpose reporting so the companies appear as a single entity.
The treatment is the same if the subsidiary is created rather than purchased.
The treatment is also the same when the other entity is unincorporated and the investor
company has control and majority ownership.
Merger - ANSA merger is a business combination in which the acquired business's assets and
liabilities are combined with those of the acquiring company.
Thus, two companies are merged into a single entity. In essence, the acquiring company
"swallows" the acquired business.
When the two companies merge, one of them ceases to exist as a separate entity and the name
of the acquiring company continues.
Noncontrolling ownership - ANSThe purchase of a less-than-majority interest in another
corporation does not usually result in a business combination or controlling situation.
, A similar situation arises when a company creates another entity and holds less than a
controlling position in it or purchases a less-than-controlling interest in an existing partnership.
In its financial statements, the investor company reports its interest in the investee as an
investment with the specific method of accounting (cost method, equity method, consolidation)
dictated by the circumstances.
Other beneficial interest - ANSOne company may have a beneficial interest in another entity
even without a direct ownership interest.
The beneficial interest may be defined by the agreement establishing the entity or by an
operating or financing agreement.
When the Page 8beneficial interest is based on contractual arrangements instead of majority
stock ownership, the reporting rules may be complex and depend on the circumstances.
Similarities between spin-off and split-off - ANSboth types of divestiture are used as a means of
disposing of unprofitable operations
both types of divestiture result in a reduction of consolidated assets and liabilities
Which of the following is true of a business combinations? - ANS- In a business combination,
control over another company may be gained by acquiring a majority of the company's common
stock
- In a business combination, the acquirer obtains control of one or more businesses
- In a business combination, the acquirer will have the ability to direct policies and management
NOT CORRECT ANSWER: In a business combination, a company divides its existing shares
into multiple shares
Which of the following is true of a spin-off? - ANSThe ownership of a subsidiary is distributed to
the parent's stockholders *without* their surrendering any of their stock in the parent company.
Identify the reasons for business combinations? - ANS- To obtain control over the management
of another company
- To acquire the position to direct the policies of another company.
*INCORRECT ANSWERS:*
- To create a healthy competition with the acquired company
- To generate the income from another company by investing idle cash in the business
