Question 1

In a business combination,which of the following will occur?
A)All identifiable assets and liabilities are recorded at fair value at the date of acquisition.
B)All identifiable assets and liabilities are recorded at book value at the date of acquisition.
C)Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of the net assets acquired.
D)The Sarbanes-Oxley Act requires firms to report material aggregate amounts of goodwill as a separate balance sheet line item.

Accepted Answer

In a business combination, all identifiable assets and liabilities are recorded at fair value at the date of acquisition according to the acquisition method.

Question 2

Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved.Salt had no liabilities.The fair values of Salt's assets were $3,750,000.Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000,respectively,and fair values of $180,000 and $730,000,respectively.At what value will the buildings be recorded by Pepper?
A)$730,000
B)$520,000
C)$210,000
D)$0

Accepted Answer

When net assets are acquired for a price and the fair values of the assets acquired are higher than their book values, the assets are revalued to their fair values. In this case, the fair value of the buildings is $730,000, which is higher than their book value of $520,000. Therefore, Pepper will record the buildings at their fair value of $730,000.

Question 3

A business merger differs from a business consolidation because
A)a merger dissolves all but one of the prior entities,but a consolidation dissolves all of the prior entities and forms a new corporation.
B)a consolidation dissolves all but one of the prior entities,but a merger dissolves all of the prior entities.
C)a merger is created when two entities join,but a consolidation is created when more than two entities join.
D)a consolidation is created when two entities join,but a merger is created when more than two entities join.

Accepted Answer

A business merger is when two companies combine their assets and become one, but both companies cease to exist as separate entities. In contrast, a business consolidation is when multiple companies combine to form a new entity but the previous companies continue to exist as separate legal entities. Therefore, Option A is the correct answer as it describes these differences accurately.

Question 4

Which of the following methods does the FASB consider the best indicator of fair values in the evaluation of goodwill impairment?
A)Senior executive's estimates
B)Financial analyst forecasts
C)Fair value
D)The present value of future cash flows discounted at the firm's cost of capital

Accepted Answer

The FASB considers fair value as the best indicator of fair values in the evaluation of goodwill impairment, as it reflects the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date.

Question 5

Which of the following is not a reason for a company to expand through a combination,rather than by building new facilities?
A)A combination might provide cost advantages.
B)A combination might provide fewer operating delays.
C)A combination might provide easier access to intangible assets.
D)A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.

Accepted Answer

The option "A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results" is not a valid reason for a company to expand through a combination. It does not provide any strategic or operational benefit to the company, and it only focuses on financial gain without considering the long-term sustainability of the expansion strategy. The other options (A, B, and C) are valid reasons for a company to expand through a combination, as they provide cost advantages, operational efficiency, and access to intangible assets such as technology, skills, and knowledge.

Question 6

Use the following information to answer the question(s) below.

Polka Corporation exchanges 100,000 shares of newly issued $1 par value common stock with a fair market value of $20 per share for all of the outstanding $5 par value common stock of Spot Inc. and Spot is then dissolved. Polka paid the following costs and expenses related to the business combination:$\begin{array}{lr}
\text { Costs of special shareholders' meeting } & \
\quad \text { to vote on the merger } & \$ 12,000 \
\text { Registering and issuing securities } & 10,000 \
\text { Accounting and legal fees } & 18,000 \
\text { Salaries of Polka's employees assigned } & \
\quad \text { to the implementation of the merger } & 27,000 \
\text { Cost of closing duplicate facilities } & 13,000
\end{array}$

-In the business combination of Polka and Spot
A)the costs of registering and issuing the securities are included as part of the purchase price for Spot.
B)the salaries of Polka's employees assigned to the merger are treated as expenses.
C)all of the costs except those of registering and issuing the securities are included in the purchase price of Spot.
D)only the accounting and legal fees are included in the purchase price of Spot.

Accepted Answer

The salaries of Polka's employees assigned to the merger are treated as expenses because they are not directly related to the acquisition of Spot's net assets.

Question 7

Pitch Co.paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company.Pitch will treat the $50,000 as
A)an expense for the current year.
B)a prior period adjustment to retained earnings.
C)additional cost to investment of Slope on the consolidated balance sheet.
D)a reduction in additional paid-in capital.

Accepted Answer

The answer of Pitch Co.paid $50,000 in fees to its...

Question 8

Under the current GAAP,Goodwill arising from a business combination is
A)charged to Retained Earnings after the acquisition is completed.
B)amortized over 40 years or its useful life,whichever is longer.
C)amortized over 40 years or its useful life,whichever is shorter.
D)never amortized.

Accepted Answer

Under current GAAP, goodwill arising from a business combination is not amortized but is subject to an annual impairment test. This means that the value of goodwill is not reduced over time, but if its value decreases below its carrying amount, an impairment loss must be recognized.

Question 9

Historically,much of the controversy concerning accounting requirements for business combinations involved the ________ method.
A)purchase
B)pooling of interests
C)equity
D)acquisition

Accepted Answer

The controversy surrounding accounting for business combinations involved the pooling of interests method, which allowed companies to combine their financial statements without recording assets and liabilities at fair value. This method was criticized for not providing users with useful information and for allowing companies to manipulate earnings through various accounting techniques.

Question 10

Picasso Co.issued 5,000 shares of its $1 par common stock,valued at $100,000,to acquire shares of Seurat Company in an all-stock transaction.Picasso paid the investment bankers $35,000 and will treat the investment banker fee as
A)an expense for the current year.
B)a prior period adjustment to Retained Earnings.
C)additional goodwill on the consolidated balance sheet.
D)a reduction to additional paid-in capital.

Accepted Answer

The answer of Picasso Co.issued 5,000 shares of its $1...

Question 11

In reference to the FASB disclosure requirements about a business combination in the period in which the combination occurs,which of the following is correct?
A)Firms are not required to disclose the name of the acquired company.
B)Firms are not required to disclose the business purpose for a combination.
C)Firms are required to disclose the nature,terms and fair value of consideration transferred in a business combination.
D)Firms are not required to disclose the details about step acquisitions.

Accepted Answer

According to FASB disclosure requirements, firms are required to disclose the nature, terms, and fair value of consideration transferred in a business combination. Disclosure of the name of the acquired company and business purpose for a combination is not required. However, firms are required to disclose the details about step acquisitions.

Question 12

Following the accounting concept of a business combination,a business combination occurs when a company acquires an equity interest in another entity and has
A)at least 20% ownership in the entity.
B)more than 50% ownership in the entity.
C)100% ownership in the entity.
D)control over the entity,irrespective of the percentage owned.

Accepted Answer

According to the accounting concept of a business combination, it occurs when a company acquires control over another entity, irrespective of the percentage of ownership. Therefore, option D, which states that control over the entity determines a business combination, is the best choice. Options A, B, and C are incorrect as they focus on the percentage of ownership, which may not always indicate control over the entity.

Question 13

According to ASC 810-10,liabilities assumed in an acquisition will be valued at the ________.
A)fair value
B)historical book value
C)current replacement cost
D)present value using market interest rates

Accepted Answer

According to ASC 810-10, liabilities assumed in an acquisition should be valued at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This approach provides more relevant information about the fair value of the acquired entity's net assets and the cost of the acquisition.

Question 14

When considering an acquisition,which of the following is NOT a method by which one company may gain control of another company?
A)Purchase of the majority of outstanding voting stock of the acquired company.
B)Purchase of all assets and liabilities of another company.
C)Purchase of all the outstanding voting stock of the acquired company.
D)Purchase of 25% of outstanding voting stock of the acquired company.

Accepted Answer

Purchasing only 25% of the outstanding voting stock of the acquired company may not grant enough control to the acquiring company to make significant management decisions or changes. The other options (A, B, and C) all involve ways in which an acquiring company may gain control of another company through purchasing either a majority or all of the outstanding voting stock or assets and liabilities.

Question 15

Use the following information to answer the question(s) below.

Polka Corporation exchanges 100,000 shares of newly issued $1 par value common stock with a fair market value of $20 per share for all of the outstanding $5 par value common stock of Spot Inc. and Spot is then dissolved. Polka paid the following costs and expenses related to the business combination:$\begin{array}{lr}
\text { Costs of special shareholders' meeting } & \
\quad \text { to vote on the merger } & \$ 12,000 \
\text { Registering and issuing securities } & 10,000 \
\text { Accounting and legal fees } & 18,000 \
\text { Salaries of Polka's employees assigned } & \
\quad \text { to the implementation of the merger } & 27,000 \
\text { Cost of closing duplicate facilities } & 13,000
\end{array}$

-In the business combination of Polka and Spot,
A)all of the items listed above are treated as expenses.
B)all of the items listed above except the cost of registering and issuing the securities are included in the purchase price.
C)the costs of registering and issuing the securities are deducted from the fair market value of the common stock used to acquire Spot.
D)only the costs of closing duplicate facilities,the salaries of Polka's employees assigned to the merger,and the costs of the shareholders' meeting would be treated as expenses.

Accepted Answer

The costs of registering and issuing securities are directly associated with the issuance of stock and are typically deducted from the proceeds of the stock issuance, affecting the recorded value of the transaction rather than being expensed or included in the purchase price of the acquisition.

Question 16

In reference to international accounting for goodwill,U.S.companies have complained that past U.S.accounting rules for goodwill placed them at a disadvantage in competing against foreign companies for merger partners.Why?
A)Previous rules required immediate write off of goodwill which resulted in a one-time expense that was not required under international rules.
B)Previous rules required amortization of goodwill which resulted in an ongoing expense that was not required under international rules.
C)Previous rules did not permit the recording of goodwill,thus resulting in a lower asset base than international counterparts would recognize.
D)Previous rules required the immediate write of goodwill to stockholder's equity.

Accepted Answer

Previous U.S. accounting rules for goodwill required amortization, which resulted in an ongoing expense that was not required under international rules. This ongoing expense made U.S. companies less attractive merger partners compared to foreign companies who did not have to incur this expense.

Question 17

According to ASC 805-30,which one of the following items may not be accounted for as an intangible asset apart from goodwill?
A)A production backlog
B)A valuable employee workforce
C)Noncontractual customer relationships
D)Employment contracts

Accepted Answer

A valuable employee workforce is not recognized as an intangible asset apart from goodwill under ASC 805-30 because it cannot be separated from the acquired entity and sold, transferred, licensed, rented, or exchanged.

Question 18

With respect to goodwill,an impairment
A)will be amortized over the remaining useful life.
B)is a two-step process which first compares book value to fair value at the business reporting unit level.
C)is a one-step process considering the entire firm.
D)occurs when asset values are adjusted to fair value in a purchase.

Accepted Answer

Goodwill impairment is a two-step process that involves comparing the carrying value (book value) of the reporting unit to its fair value. If the carrying value exceeds the fair value, then a second step is performed to calculate the amount of impairment loss, which is the difference between the carrying value and the implied fair value of goodwill. This process is conducted at the business reporting unit level, not for the entire firm. Goodwill is not amortized over its useful life but is tested for impairment at least annually or whenever there is a triggering event that may indicate impairment. Goodwill can also arise when asset values are adjusted to fair value in a purchase, but this is not the only scenario for creating goodwill.

Question 19

Durer Inc.acquired Sea Corporation in a business combination and Sea Corp.went out of existence.Sea Corp.developed a patent listed as an asset on Sea Corp.'s books at the patent office filing cost.In recording the combination,
A)fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp.
B)Sea Corp.'s prior expenses to develop the patent are recorded as an asset by Durer at purchase.
C)the patent is recorded as an asset at fair market value.
D)the patent's market value increases goodwill.

Accepted Answer

In a business combination, the assets acquired are recorded at their fair market value, which includes intangible assets like patents. Even if Sea Corp. expensed the research and development costs related to the patent, its fair market value must still be determined at the acquisition date, and this value is then recorded as an asset by Durer. Option A is not correct because the fact that the research and development costs are expensed by Sea Corp. does not preclude the recognition of an asset by Durer. Option B is incorrect because the prior expenses are irrelevant to the determination of fair market value. Option D is incorrect because an increase in market value does not translate to goodwill, which is only recognized when the purchase price exceeds the fair market value of net identifiable assets acquired.

Question 20

Under the provisions of ASC 805-30,in a business combination,when the investment cost exceeds the total fair value of identifiable net assets acquired,which of the following statements is correct?
A)The excess is first assigned to identifiable net assets according to their fair values; then the rest is assigned to goodwill.
B)The difference is allocated first to reduce proportionately (according to market value)non-current assets,then to non-monetary current assets,and any negative remainder is classified as a deferred credit.
C)The difference is allocated first to reduce proportionately (according to market value)non-current assets,and any negative remainder is classified as an extraordinary gain.
D)The difference is allocated first to reduce proportionately (according to market value)non-current,depreciable assets to zero,and any negative remainder is classified as a deferred credit.

Accepted Answer

According to ASC 805-30, in a business combination, the excess of investment cost over the fair value of identifiable net assets acquired is assigned first to the identifiable net assets according to their fair values, and then the remaining excess is assigned to goodwill. Therefore, choice A is the correct answer. The other choices either allocate the excess amount differently or include incorrect classifications such as deferred credit or extraordinary gain.

Quiz 1: Business Combinations

In a business combination,which of the following will occur?

A business merger differs from a business consolidation because

Which of the following methods does the FASB consider the best indicator of fair values in the evaluation of goodwill impairment?

Which of the following is not a reason for a company to expand through a combination,rather than by building new facilities?

Pitch Co.paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company.Pitch will treat the $50,000 as

Under the current GAAP,Goodwill arising from a business combination is

Historically,much of the controversy concerning accounting requirements for business combinations involved the ________ method.

Picasso Co.issued 5,000 shares of its $1 par common stock,valued at $100,000,to acquire shares of Seurat Company in an all-stock transaction.Picasso paid the investment bankers $35,000 and will treat the investment banker fee as

In reference to the FASB disclosure requirements about a business combination in the period in which the combination occurs,which of the following is correct?

Following the accounting concept of a business combination,a business combination occurs when a company acquires an equity interest in another entity and has

According to ASC 810-10,liabilities assumed in an acquisition will be valued at the ________.

When considering an acquisition,which of the following is NOT a method by which one company may gain control of another company?

In reference to international accounting for goodwill,U.S.companies have complained that past U.S.accounting rules for goodwill placed them at a disadvantage in competing against foreign companies for merger partners.Why?

According to ASC 805-30,which one of the following items may not be accounted for as an intangible asset apart from goodwill?

With respect to goodwill,an impairment

Durer Inc.acquired Sea Corporation in a business combination and Sea Corp.went out of existence.Sea Corp.developed a patent listed as an asset on Sea Corp.'s books at the patent office filing cost.In recording the combination,

Under the provisions of ASC 805-30,in a business combination,when the investment cost exceeds the total fair value of identifiable net assets acquired,which of the following statements is correct?