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Purchase vs. pooling method for business combinations

A. When comparing the purchase method with the pooling method, which statement is true?

-Under the purchase method the acquired company's current year income is included in the acquiring company's income statement, even if the combining takes place on the last day of the fiscal period
-under both methods goodwill may be recorded
-total equity will be the same for both methods
-under the pooling method, the return on assets is higher

Solution Preview

For the 'no' answers, allocation of profits is calculated as of the date of purchase; there is no goodwill with the pooling method because the two company's assets are simply added together; total equity will not be the same because of the possible higher valuation of assets in the purchase method and the creation of goodwill.

True: Under the pooling method, the return on assets is normally higher because with the purchase method, assets can be written up to fair market value based on appraisal. Assuming the same amount of income, with a higher value of assets, the return will be less than on the lower value of pooled assets.

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Solution Summary

The 391 word cited solution explains each of the statements and provides good information about why each is true or not true.