Advanced Accounting
by Debra Jeter 3>and Paul Chaney
Chapter 2: Methods of Accounting for Business Combinations
Accounting Methods for
Business Combinations
4>Purchase Method
treats the combination as the purchase of one or more companies by
another.
Pooling of Interests Method
treats the combination as two or more groups of stockholders uniting
their ownership interests by an exchange of common stock.
Comparison of Purchase and
Pooling of Interests
Purchase
Assets and liabilities acquired are recorded at their fair values.
Any excess of cost over fair value of net assets acquired is recorded
as goodwill.
Pooling of Interests
Assets and liabilities are recorded at their precombination book
values.
No excess of cost over book value exists, and no new goodwill is
recorded
Comparison of Purchase and
Pooling of Interests
Purchase
The acquired company’ s retained earnings are not added into the
acquiring company’ s retained earnings.
Equity securities issued are recorded at their fair market value.
Pooling of Interests
The acquired company’ s retained earnings are added into the
acquiring company’ s retained earnings.
Equity 6>shares issued are recorded at the book value of the acquired
shares.
Comparison of Purchase and