Question 1

In a purchase business combination in which common stock was acquired, the target company's liabilities are not revalued to their current values for consolidated reporting purposes.

Accepted Answer

In a purchase business combination, the target company's assets and liabilities are revalued to their fair market values on the acquisition date for consolidated reporting purposes.

Question 2

In a purchase business combination in which common stock of the target company was acquired, the acquiring company cannot revalue its own assets to their current values.

Accepted Answer

In a purchase business combination, the acquiring company revalues the assets and liabilities of the target company to their fair values at the acquisition date, not its own assets.

Question 3

In purchase accounting, when common stock was acquired, the liabilities of the newly acquired subsidiary may be revalued upward but never downward for consolidated reporting purposes.

Accepted Answer

In purchase accounting, both assets and liabilities of the acquired subsidiary can be revalued either upward or downward to reflect their fair values at the acquisition date for consolidated reporting purposes.

Question 4

After consummating the purchase of 100% of the target company's common stock, the parent has the power to direct the newly acquired subsidiary to revalue its assets and liabilities to their current values based on the purchase price.

Accepted Answer

Upon acquiring 100% of a target company's common stock, the parent company gains control over the subsidiary, including the authority to direct financial and operational decisions such as revaluing assets and liabilities to reflect their current fair values based on the purchase price. This process is often part of purchase price allocation in accordance with accounting standards.

Question 5

Under push-down accounting, the subsidiary's assets are revalued to their current values in preparing consolidated statements.

Accepted Answer

Under push-down accounting, the subsidiary's assets are not revalued to their current values in preparing consolidated statements. Instead, the assets are recorded at their historical cost.

Question 6

Costs incurred to maintain goodwill cannot be capitalized.

Accepted Answer

Costs incurred to maintain goodwill are considered operating expenses and cannot be capitalized; instead, they must be expensed in the period in which they are incurred.

Question 7

Goodwill must be amortized if management believes a diminishment of value has occurred.

Accepted Answer

Goodwill is not amortized under current accounting standards (e.g., IFRS and US GAAP). Instead, it is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

Question 8

Goodwill must be amortized over 40 years.

Accepted Answer

Goodwill is not amortized under current accounting standards. Instead, it is subject to an annual impairment test to determine if its value has decreased.

Question 9

In a purchase business combination in which a bargain purchase element exists, goodwill existing on the target company's books at the acquisition date is eliminated for consolidated reporting purposes.

Accepted Answer

In a purchase business combination involving a bargain purchase, the existing goodwill on the target company's books is eliminated because the acquisition is accounted for at fair value, and any pre-existing goodwill is not considered part of that fair value assessment for consolidated reporting.

Question 10

For consolidated reporting purposes, goodwill existing on a target company's books at the acquisition date must be amortized if it arose before the issuance of FAS 141.

Accepted Answer

Goodwill is not amortized but is tested annually for impairment, according to the accounting standards issued after FAS 141 (now codified as ASC 350 by the FASB).

Question 11

Goodwill and a covenant not-to-compete are the same thing.

Accepted Answer

Goodwill is an intangible asset that represents the value of a business's brand, reputation, customer loyalty, etc., while a covenant not-to-compete is a specific agreement that restricts a seller from starting a competing business within a certain area for a certain period.

Question 12

Bargain purchase elements are accounted for in a symmetrical manner to accounting for goodwill.

Accepted Answer

Bargain purchase elements are accounted for differently than goodwill. Bargain purchases occur when the purchase price of an acquisition is less than the fair value of its net assets, leading to a gain in the acquirer's financial statements, whereas goodwill represents an excess of purchase price over the fair value of the net assets acquired and is recorded as an asset.

Question 13

A portion of a bargain purchase element that remains after the required allocation procedure is performed is reported as an extraordinary gain.

Accepted Answer

The answer of A portion of a bargain purchase element...

Question 14

Bargain purchase elements are allocated to the extent possible against certain noncurrent assets.

Accepted Answer

In accounting, bargain purchase elements are allocated to noncurrent assets to the extent possible, as per the guidelines for business combinations under IFRS 3 and ASC 805.

Question 15

Bargain purchase elements are allocated to the extent possible against fixed assets.

Accepted Answer

The answer of Bargain purchase elements are allocated to the...

Question 16

Bargain purchase elements are allocated to the extent possible against all noncurrent assets.

Accepted Answer

Bargain purchase elements are first allocated against the fair values of identifiable assets acquired and liabilities assumed, with any excess recognized as a gain in the acquirer's income statement.

Question 17

Bargain purchase elements need not be extinguished in the required allocation procedure.

Accepted Answer

Bargain purchase elements are not extinguished in the required allocation procedure because they represent a gain on the acquisition of an asset and are therefore recognized in the income statement.

Question 18

Acquired research and development costs in process must be expensed at the business combination date.

Accepted Answer

In accordance with accounting standards, acquired in-process research and development costs are expensed immediately at the acquisition date because they do not meet the criteria for capitalization.

Question 19

Acquired research and development costs in process are subsumed into goodwill at the business combination date.

Accepted Answer

Acquired in-process research and development (IPR&D) costs are recognized as an intangible asset at the acquisition date, not subsumed into goodwill.

Question 20

Acquired research and development costs in process must be capitalized as an asset that is subject to impairment testing.

Accepted Answer

The answer of Acquired research and development costs in process...

Quiz 5: The Purchase Method: at Date of Acquisition-100 Ownership