Spellman Company acquires 90% of Moore Company in a business combination. The total consideration is agreed upon, but the exact nature of Spellman’s payment is not yet fully specified. This business combination is accounted for as a purchase. It is expected that at the date of the business combination, the fair value will exceed the book value of Moore’s assets minus liabilities. Spellman desires to prepare consolidated financial statements that include the financial statements of Moore.
Required:
a. Explain how the method of accounting for a business combination affects whether goodwill is reported.
b. If goodwill is recorded, explain how to determine the amount of goodwill.
c. From a conceptual standpoint, explain why consolidated financial statements should be prepared.
d. From a conceptual standpoint, identify the first necessary condition before consolidated financial statements are prepared.
