Which of the following is a potential abuse that may arise when business combina

Question

Which of the following is a potential abuse that may arise when business combination is accounted for as a pooling of interests?

a. Assets of the buyer may be overvalued when the price paid by the investor is allocated among specific assets.

b. Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient operations.

c. Liabilities may be undervalued when the price paid by the investor is allocated to specific liabilities.

d. An undue amount of cost may be assigned to goodwill, thus potentially allowing an understatement of pooled earnings.

Explanation / Answer

The correct answer is option (B). Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient operations. It a potential abuse that may arise when business combination is accounted for as a pooling of interests. It may involve asset selection and its allocation in the business for effective outputs.

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