Chapter 8, Problem 2UTI

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 business combination, the entities having separate control merges into one having 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 both the entities about financial information.

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 Identify:

The impact on parent company’s investment account on issue of new 20,000 shares by its subsidiary at $45 per share.