Which of the following situations best describes a business combination to be accounted for as a statutory merger?

 Which of the following situations best describes a business combination to be accounted for as a statutory merger?

Multiple Choice

Both companies in a combination continue to operate as separate, but related, legal entities.


Only one of the combining companies survives and the other loses its separate identity. Correct

Two companies combine to form a new third company, and the original two companies are dissolved.


One company transfers assets to another company it has created.

Explanation
Only one of the combining companies survives and the other loses its separate identity is correct. A statutory merger is a type of business combination in which only one of the combining companies survives and the other loses its separate identity. The acquired company’s assets and liabilities are transferred to the acquiring company, and the acquired company is dissolved, or liquidated. The operations of the previously separate companies are carried on in a single legal entity following the merger.

Both companies in a combination continue to operate as separate, but related, legal entities is incorrect. This situation represents a stock acquisition: both companies in a combination continue to operate as separate, but related, legal entities.

Two companies combine to form a new third company, and the original two companies are dissolved is incorrect. This situation represents a statutory consolidation: two companies combine to form a new third company, and the original two companies are dissolved.

One company transfers assets to another company it has created is incorrect. This situation represents an internal expansion: one company transfers assets to another company it has created.