Lesson: Business combinations - Practice Questions

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, dives into the complexities of business combinations and consolidations with a practical approach by exploring various practice questions. He begins by breaking down the concept of a bargain purchase, clarifying when goodwill is recognized and why the notion of negative goodwill doesn't apply. Nick then shifts to analyzing a consolidation scenario involving intercompany transactions, walking through the calculations needed to correctly report consolidated cost of goods sold. By engaging with these examples, Nick demystifies the process, offers tips for understanding common pitfalls, and provides clear strategies for tackling similar problems on the exam.

Updated: June 18, 2024 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Business combinations, consolidations, all the works. Let's look at some questions. How should the acquirer recognize a bargain purchase in a business acquisition? So you've got two possible situations when you buy a business. One is you pay more than the fair value of the company, and that should sound familiar. If it does, you'll know that if you pay more for a company than it's worth, you create goodwill. One note on goodwill, it cannot be internally created. Goodwill's an intangible asset. Like, what's the whole point of paying more for a company than it's worth? There's a bunch of reasons, but really, it's to show, like, what is goodwill? It's faith, like you're showing good faith. So that happens when you pay more than the fair value of the company. So we are not going to recognize goodwill in this one. That would be if we paid more, and that's not a bargain. If you pay more than the company's worth, it's not a bargain. Also, similarly, there's no such thing as goodwill, negative goodwill. There's no such thing, it does not exist. Trick answer there. Because you'd think, right, if you have goodwill when you pay for more, and if you have a bargain purchase, you're paying less, there's no such thing as goodwill. It's trying to trick you. Next, we have, as a deferred gain, that is advertised in earnings over the, blah, blah, blah, blah, not anything near the truth there. We're not gonna want that one. So as a gain in earnings at the acquisition date, it's basically a similar, like, if you were to buy a building and sell it, if you recognize a gain there because of you paid less than you should've, it's gonna be a taxable event. So similarly here,

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Intangibles, R&D and Software Costs, & Business Combinations

Module: 4 Concepts, 42 Lessons

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Tangible Versus Intangible Assets

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Classification of Intangible Assets

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