Chapter 2, Problem 9.4E

To determine

Business combination:

Business combination refers to the combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After the business combination, the entities having separate control merges into one. They then have a control over all the assets and liabilities. Merging and acquisition are types of business combinations.

Consolidated financial statements:

The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merge to form the new entity. The consolidated financial statements serve the purpose of financial information for/about both the entities.

Equity method of recording the investment:

The equity method is used by the entities to assess the increase or decrease in their investment made in other entities. The equity method is used when the acquiring company is having significant influence over the other entity. The criteria for determining whether the investor should apply the equity method of accounting to this investment or not is as follows:

• The investor should invest at least 20% or it should acquire at least 20% of the investee’s share.

• The investor should be able to exercise the significant influence over the investee.

If the above two conditions are fulfilled, then the organization can use the equity method.

:

To prepare: the entry which would be made on the consolidated worksheet to eliminate the investment.