Question 1

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

Option A, B, and C all highlight the benefits of expanding through a combination of companies. However, option D does not provide a reason for expansion through a combination, but rather highlights a separate benefit of investing in a company without taking responsibility for its financial results.

Question 2

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

The accounting concept of a business combination focuses on control over the entity, rather than the percentage of ownership. Therefore, the best choice is D, as it emphasizes control over the entity, irrespective of the percentage owned.

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 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 4

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

FASB Statement No.141R requires that in a business combination, when 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. This gain is recognized immediately in the income statement as an extraordinary gain. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect as they describe allocation methods for the excess of fair value over investment cost, but they do not address the recognition of a gain from a bargain purchase.

Question 5

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 goodwill to be amortized over a period of up to 40 years, resulting in an ongoing expense that was not required under international rules. This created a disadvantage for U.S. companies in competing against foreign companies for merger partners.

Question 6

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. This is in accordance with the International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) in the United States. Goodwill is also recorded if the fair value of the net assets acquired exceeds the consideration paid for the acquisition.

Question 7

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 the assets, but not necessarily the liabilities, of another company previously in bankruptcy.
D) All of the above methods result in a company gaining control over another company.

Accepted Answer

All the methods mentioned - purchase of majority stock, purchase of all assets and liabilities, and purchase of assets from a bankrupt company - result in a company gaining control over another company.

Question 8

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 arising from a business combination is never amortized. Instead, it is subject to an annual impairment test to determine if the carrying value has declined below its fair value. If so, a write-down to goodwill is required.

Question 9

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 acquired should be recorded at fair market value. The fact that Sea Corp expensed the research and development costs for the patent does not preclude the recording of its fair market value at acquisition by Durer Inc. Therefore, the patent should be recorded as an asset at fair market value.

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

With respect to goodwill, an impairment
A) will be amortized over the remaining useful life.
B) is a two-step process which analyzes each business reporting unit of the entity.
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 examines each business reporting unit of the entity. The first step involves comparing the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, the second step is needed to determine the amount of impairment loss to be recognized. This second step compares the implied fair value of goodwill with its carrying amount to determine the impairment loss. Goodwill is not amortized over its useful life, but instead, tested annually or when there is a triggering event that suggests an impairment may exist. Goodwill is also not created by adjusting asset values to fair value in a purchase, but instead represents the excess of purchase price over the fair value of identifiable net assets acquired.

Question 12

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 requirements for business combinations largely pertained to the pooling of interests method, in which the book values of the combining companies were merged rather than the cost of acquisition being reflected in the financial statements. This method was eventually phased out and replaced with the purchase method, which recognizes the actual cost of the acquisition.

Question 13

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.
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 involves combining two or more separate entities into one, creating a new entity. In a merger, one or more of the prior entities will cease to exist, while the surviving entity continues to operate. In contrast, a business consolidation involves combining two or more entities into a new entity where all of the prior entities cease to exist. Therefore, option A is correct as it correctly clarifies the difference between a merger and a consolidation.

Question 14

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

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 15

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 talented employee workforce
C) Noncontractual customer relationships
D) Employment contracts

Accepted Answer

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

Question 16

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 the FASB disclosure requirements, firms are required to disclose the nature, terms and fair value of consideration transferred in a business combination. They are not required to disclose the name of the acquired company or the business purpose for a combination. Therefore, option C is the correct answer.

Question 17

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 Which of the following methods does the...

Question 18

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 19

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 20

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

Accepted Answer

According to FASB Statement No.141, liabilities assumed in an acquisition will be valued at the estimated fair value, which is the amount that would be paid to settle the obligation in an orderly transaction between market participants at the acquisition date. This fair value determination takes into consideration factors such as the creditworthiness of the borrower, prevailing market interest rates, and other factors that may affect the future cash flows of the liability.

Quiz 1: Business Combinations

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

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?

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?

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

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

Goodwill arising from a business combination is

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,

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

With respect to goodwill, an impairment

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

A business merger differs from a business consolidation because

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

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?

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

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 No.141, liabilities assumed in an acquisition will be valued at the ________.