solution

In June 2001, the Financial Accounting Standards Board (FASB) eliminated the use of pooling for merger accounting. Since then, all mergers are handled using purchase accounting.

Consider this case:

Company A buys Company B for $30, when the net asset value of Company B’s assets is $50.

A _ Which of the following statements best describes the effect of the merger on the merged company’s consolidated balance sheet?

1- Company B’s assets will be written up to reflect the purchase price relative to net asset value.

2- Company B’s assets will be written down to reflect the purchase price relative to net asset value.

3- Company B’s common equity will be written up to reflect the purchase price relative to net asset value.

4- Company B’s liabilities will be deducted from Company A’s liabilities in the consolidated balance sheet.

B_ When reporting merger transactions, the asset values acquired are often reappraised, and the change in value is reported in the financial statements. An increase in asset value will lead ………. ( lower or higher ) depreciation charges. This will lead to………….. ( decrease or increase ) in earnings per share.