Question 1

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the:
A)bonus.
B)goodwill.
C)implied offering price.
D)takeover premium.

Accepted Answer

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is known as the takeover premium. It is the additional amount paid by the acquiring company to convince the shareholders of the target company to sell their shares. The takeover premium is expressed as a percentage over the current market price of the target company's stock.

Question 2

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities,the result is a statutory:
A)acquisition.
B)combination.
C)consolidation.
D)merger.

Accepted Answer

A consolidation results in the formation of a new corporation to which the existing corporations transfer their assets and liabilities. In this process, the acquired corporations cease to exist separately as legal entities. A merger is a similar process but involves the combination of two or more corporations into an existing corporation, while an acquisition typically involves one company taking over another but both continue to exist as separate legal entities. A combination is not a specific term used in corporate law.

Question 3

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called:
A)poison pill.
B)pac-man defense.
C)greenmail.
D)white knight.

Accepted Answer

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called greenmail. This tactic is used to discourage a hostile takeover by making it too expensive for the acquiring company to continue purchasing shares at an inflated price. The practice of greenmail was prevalent in the 1980s but has since fallen out of favor.

Question 4

The impairment standard as it relates to goodwill is an example of a:
A)consumption of benefit approach.
B)loss or lack of benefit approach.
C)component of other comprehensive income.
D)direct matching of expenses to revenues.

Accepted Answer

The impairment standard as it relates to goodwill is an example of a loss or lack of benefit approach, because it requires companies to test their goodwill for any potential loss of value or lack of benefit to the company's future earnings. If such loss or lack of benefit is identified, then the company must write down the value of its goodwill on its balance sheet.

Question 5

The difference between normal earnings and expected future earnings is:
A)average earnings.
B)excess earnings.
C)ordinary earnings.
D)target earnings.

Accepted Answer

Normal earnings represent the average or typical earnings of a company, while expected future earnings are projections of future earnings potential. The difference between the two is referred to as excess earnings.

Question 6

Estimated goodwill is determined by computing the present value of the:
A)average earnings.
B)excess earnings.
C)expected future earnings.
D)normal earnings.

Accepted Answer

Goodwill is the difference between the fair market value of an acquired company and the net assets purchased. Excess earnings refer to the earnings of a business that exceed the normal or expected rate of return. To determine the estimated goodwill, one would need to calculate the present value of the excess earnings.

Question 7

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n):
A)agreeable combination.
B)friendly combination.
C)hostile combination.
D)unfriendly combination.

Accepted Answer

A friendly combination is a business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms. This is the opposite of a hostile combination, in which one company tries to take over or acquire another company without the agreement of the target company's board of directors.

Question 8

The third period of business combinations started after World War II and is called:
A)horizontal integration.
B)merger mania.
C)operating integration.
D)vertical integration.

Accepted Answer

The third period of business combinations, starting after World War II, is often referred to as "merger mania" due to the significant increase in corporate mergers and acquisitions during this time.

Question 9

Under the parent company concept,consolidated net income __________ the consolidated net income under the economic unit concept.
A)is the same as
B)is higher than
C)is lower than
D)can be higher or lower than

Accepted Answer

Under the parent company concept, consolidated net income is the same as under the economic unit concept because both concepts ultimately aim to present the financial performance of the parent and its subsidiaries as a single economic entity, despite differences in their theoretical approaches to consolidation.

Question 10

A merger between a supplier and a customer is a(n):
A)friendly combination.
B)horizontal combination.
C)unfriendly combination.
D)vertical combination.

Accepted Answer

A merger between a supplier and a customer is a vertical combination because it involves two companies operating in different stages of the same supply chain.

Question 11

The objectives of FASB 141R (Business Combinations)and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements)are as follows:
A)to improve the relevance,comparability,and transparency of financial information related to business combinations.
B)to eliminate the amortization of Goodwill.
C)to facilitate the convergence project of the FASB and the International Accounting Standards Board.
D)to improve the relevance,comparability,and transparency of financial information related to business combinations and to eliminate the amortization of Goodwill.

Accepted Answer

FASB 141R aims to improve the relevance, comparability, and transparency of financial information related to business combinations, while FASB 160 aims to improve the relevance, comparability, and transparency of financial information related to noncontrolling interests in consolidated financial statements. Additionally, FASB 141R eliminates the pooling of interests method for accounting for business combinations and requires the use of the acquisition method, which entails recognizing all identifiable assets and liabilities of the acquired entity at fair value at the date of the acquisition. FASB 141R also requires companies to recognize contingent assets and liabilities at fair value at the date of the acquisition. FASB 160 requires that noncontrolling interests be included in the consolidated financial statements at their fair value and that changes in the noncontrolling interest be reported as equity transactions. Finally, both FASB 141R and FASB 160 aim to facilitate the convergence project of the FASB and the International Accounting Standards Board.

Question 12

Stock given as consideration for a business combination is valued at:
A)fair market value
B)par value
C)historical cost
D)None of these

Accepted Answer

Stock given as consideration for a business combination is valued at fair market value, which is the current market price of the stock on the date of the business combination. This is because the stock represents an ownership interest in the acquiring company and its value should reflect what the market is willing to pay for it. Par value and historical cost are not appropriate measures for valuing stock in this context.

Question 13

Which of the following situations best describes a business combination to be accounted for as a statutory merger?
A)Both companies in a combination continue to operate as separate,but related,legal entities.
B)Only one of the combining companies survives and the other loses its separate identity.
C)Two companies combine to form a new third company,and the original two companies are dissolved.
D)One company transfers assets to another company it has created.

Accepted Answer

In a statutory merger, one of the companies involved retains its legal identity while the other company is absorbed and ceases to exist as a separate legal entity. This is what is described in option B.

Question 14

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
A)Cash
B)Issuing Debt
C)Issuing Stock
D)All of these

Accepted Answer

A firm can use any of these methods for financing an acquisition structured as either an asset or stock acquisition. The choice of financing method depends on various factors such as the cost of capital, availability of funds, and the impact on the firm's capital structure. Using cash would reduce the firm's cash balance, while issuing debt would increase the firm's debt levels and interest expenses. Issuing stock would dilute the ownership of existing shareholders but could be a good option if the firm's stock is trading at a high price. Therefore, a combination of these methods might be the best choice for financing an acquisition.

Question 15

Which of the following statements is correct?
A)Total elimination is consistent with the parent company concept.
B)Partial elimination is consistent with the economic unit concept.
C)Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.
D)none of these.

Accepted Answer

The answer of Which of the following statements is correct?
A)Total...

Question 16

The first step in estimating goodwill in the excess earnings approach is to:
A)determine normal earnings.
B)identify a normal rate of return for similar firms.
C)compute excess earnings.
D)estimate expected future earnings.

Accepted Answer

Identifying a normal rate of return for similar firms is the first step in the excess earnings approach to estimating goodwill. This rate is used to calculate the expected return on the tangible assets of the firm, which is then subtracted from the firm's total expected earnings to determine the excess earnings attributable to goodwill.

Question 17

Which of the following statements would not be a valid or logical reason for entering into a business combination?
A)to increase market share.
B)to avoid becoming a takeover target.
C)to reduce risk by acquiring established product lines.
D)the operating costs of the combined entity would be more than the sum of the separate entities.

Accepted Answer

A business combination is typically entered into with the goal of achieving benefits that cannot be achieved individually by the combining entities. These benefits may include synergies, increased market power, economies of scale, or access to new products, technologies, or markets. However, if the operating costs of the combined entity are expected to be higher than the sum of the separate entities, this would not be a valid or logical reason for entering into the business combination. It would not result in any significant benefits for the stakeholders of the combined entity.

Question 18

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
A)to provide information relevant to the controlling stockholders.
B)to represent the view that the affiliated companies are a separate,identifiable economic entity.
C)to emphasis control of the whole by a single management.
D)to include only a portion of the subsidiary's assets,liabilities,revenues,expenses,gains,and losses.

Accepted Answer

The parent company concept of consolidation focuses on providing information that is relevant to the controlling stockholders, emphasizing the perspective and interests of the parent company's shareholders.

Question 19

Which of the following is not a component of other comprehensive income under GAAP?
A)earnings.
B)gains and losses that bypass earnings.
C)impairment losses.
D)accumulated other comprehensive income.

Accepted Answer

The answer of Which of the following is not a...

Question 20

Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward:
A)an elevated status for the Statements of Financial Accounting Concepts.
B)convergence of standards.
C)fair value accounting.
D)representationally faithful reporting.

Accepted Answer

FASB has been moving towards fair value accounting in recent years, as seen in its pronouncements such as ASU 2016-01 (Financial Instruments-Overall) and ASU 2018-13 (Fair Value Measurement). These pronouncements require entities to measure certain financial instruments and other assets and liabilities at fair value. This indicates a shift away from historical cost accounting.

Quiz 1: Introduction to Business Combinations and the Conceptual Framework

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the:

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities,the result is a statutory:

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called:

The impairment standard as it relates to goodwill is an example of a:

The difference between normal earnings and expected future earnings is:

Estimated goodwill is determined by computing the present value of the:

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n) :

The third period of business combinations started after World War II and is called:

Under the parent company concept,consolidated net income __________ the consolidated net income under the economic unit concept.

A merger between a supplier and a customer is a(n) :

The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows:

Stock given as consideration for a business combination is valued at:

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

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?

Which of the following statements is correct?

The first step in estimating goodwill in the excess earnings approach is to:

Which of the following statements would not be a valid or logical reason for entering into a business combination?

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:

Which of the following is not a component of other comprehensive income under GAAP?

Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward: