Question 1

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 merger is when two or more companies combine to form a new entity. It does not dissolve any of the prior entities, but instead, they are all combined under the new entity. A consolidation, on the other hand, is when all of the prior entities are dissolved and a new corporation is formed. Therefore, option A is the correct answer as it correctly differentiates between a business merger and a business consolidation.

Question 2

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:
 
-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

B

Question 3

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:
 
-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) All of the above are correct.

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. While firms are not required to disclose the name of the acquired company or the business purpose for a combination, they may choose to do so for transparency purposes.

Question 4

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 which first compares the book value of the reporting unit to its fair value. If the fair value of the reporting unit is less than its book value, then a second step is required to determine the amount of impairment loss to be recognized. This impairment loss is recognized as a reduction in the carrying amount of goodwill. Other options are incorrect: A is incorrect as goodwill is no longer amortized but tested for impairment, C is incorrect because goodwill impairment is not a one-step process considering the entire firm, and D is incorrect as the adjustment of asset values to fair value in a purchase does not necessarily imply any goodwill impairment.

Question 5

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:
 
-According to FASB Statement No. 141, liabilities assumed in an acquisition will be valued at the ________.
A) reasonably estimated fair value
B) historical book value
C) current replacement cost
D) present value using market interest rates

Accepted Answer

FASB Statement No. 141 requires that liabilities assumed in an acquisition are valued at their reasonably estimated fair value.

Question 6

Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value of identifiable net assets acquired exceeds the investment cost, which of the following statements is correct?
A) A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.
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

Under FASB Statement No. 141R, if the fair value of identifiable net assets acquired exceeds the investment cost, a gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price. Therefore, option A is the correct answer. Option B, C, and D are incorrect as they do not reflect the correct allocation of the difference between the fair value and investment cost.

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 $50,000 paid in fees for the acquisition of Slope Company is considered as an expense for the current year, as it is directly related to the purchase transaction and should be expensed in the period it was incurred.

Question 8

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:
 
-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

Goodwill is no longer amortized under current GAAP. Instead, it is subject to an annual impairment test.

Question 9

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:
 
-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) All of the above are correct.

Accepted Answer

Previous U.S. accounting rules required the amortization of goodwill, which resulted in an ongoing expense that was not required under international rules. This put U.S. companies at a disadvantage in competing against foreign companies for merger partners because they had higher reported expenses and lower reported net income.

Question 10

According to FASB Statement 141R, 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

The answer of According to FASB Statement 141R, which one...

Question 11

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:
 
-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) Market value
D) The present value of future cash flows discounted at the firm's cost of capital

Accepted Answer

The answer of Use the following information to answer the...

Question 12

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) None of the above is correct.

Accepted Answer

In a business combination, all identifiable assets and liabilities are recorded at fair value at the date of acquisition as per the accounting standard ASC 805. This ensures that the financial statements provide reliable and relevant information about the acquired assets and liabilities. Additionally, goodwill is recorded if the fair value of the net assets acquired exceeds the purchase price, not the book value of the net assets acquired.

Question 13

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:
 
-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 14

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, assets are recorded at fair market value. Therefore, the patent recorded on Sea Corp's books at the patent office filing cost is revalued at fair market value by Durer.

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:
 
-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

In a business combination, costs related to registering and issuing securities are generally capitalized and deducted from the fair market value of the common stock used to acquire the target company. The other costs listed are typically considered expenses and are not included in the purchase price.

Question 16

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

In the past, there was much debate and controversy surrounding the accounting treatment of business combinations using the pooling of interests method. This method allowed for the combining companies to essentially merge their financial statements and report the transaction as if no purchase or sale had taken place. The pooling of interests method was eventually eliminated by the Financial Accounting Standards Board (FASB) in 2001, and the purchase method became the standard for accounting for business combinations.

Question 17

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...

Question 18

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 reason for a company to expand through a combination rather than building new facilities. Rather, it is a reason for an investor to invest in a company through a combination such as a merger or acquisition. The other options (A, B, and C) are all potential benefits of expanding through a combination.

Question 19

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, a business combination occurs when a company acquires control over another entity, irrespective of the percentage owned. Control is defined as the power to govern the financial and operating policies of an entity to obtain benefits from its activities. Therefore, choice D is the best answer.

Question 20

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:
 
-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 all the outstanding voting stock of the acquired company.
D) All of the above methods result in a company gaining control over another company.

Accepted Answer

All the methods listed (A, B, and C) are ways in which a company can gain control over another company. Therefore, option D is incorrect as it states that all methods result in gaining control, which is true.

Quiz 1: Business Combinations

A business merger differs from a business consolidation because

With respect to goodwill, an impairment

Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value of identifiable net assets acquired exceeds the investment cost, which of the following statements is correct?

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

According to FASB Statement 141R, which one of the following items may not be accounted for as an intangible asset apart from goodwill?

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

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,

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

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

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