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Merger takes place when one company acquires the assets of another company in exchange of cash, stock or other combinations. The acquiring company would continue to be in existence as a separate legal entity but the company that has been acquired ceases to be in existence as a separate legal entity and its stocks would be canceled and its books closed. The separate assets and liabilities would be recorded in the books of the acquiring company.
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Consolidation results in a new firm whereby the stock of one firm is issued in exchange for the stock of two or more combining or consolidating The firms that are acquired would generally cease to exist as a separate legal entity and thus the new firm would be recording the separate assets and liabilities of the acquired firms.
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Acquisition results when a company acquires a majority of the common stock of another company and each company would be continuing to exist as per law. The acquiring company would be recording an "investment in acquired company's stock" in the combination entry.
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There are two methods which are generally used for the business combinations: Pooling Method and Purchase Method.
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The pooling method assumes a combination of the stockholder's interest. The basis of the valuation is the pooling of book values of the assets acquired by the acquiring company. No goodwill is created at the date of the combination when this method is adopted.
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In the purchase method, it would be required to determine the fair market value of the acquired company's identifiable tangible, intangible assets and the liabilities at the date of combination.
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