Question 1

How should the acquisition cost of a Business Combination be allocated prior to preparing Consolidated Financial Statements?
A)The difference between the Purchase Price and the Fair Values of the acquirer's identifiable assets should be treated as goodwill.
B)The acquisition cost should be allocated to the acquirer's interest in the fair values of the acquired company's identifiable assets and liabilities.
C)The acquisition cost should be reflected as an increase in the acquirer's Investment (in the subsidiary)account.
D)The treatment of the acquisition cost depends largely on the type of consideration given by the acquirer.

Accepted Answer

The acquisition cost of a business combination should be allocated to the fair values of the acquired company's identifiable assets and liabilities. This is known as the purchase price allocation process. By allocating the acquisition cost to these assets and liabilities, the acquirer can determine the amount of goodwill that arises from the transaction. This approach to allocating acquisition cost is required by accounting standards, such as ASC 805 in the United States. Choice A is incorrect because not all differences between the purchase price and the fair values of identifiable assets will result in goodwill. Choice C is incorrect because reflecting the acquisition cost as an increase in the Investment account would not provide detailed information about the acquisition. Choice D is incorrect because while the type of consideration may impact the accounting treatment of a business combination, it does not determine how the acquisition cost should be initially allocated.

Question 2

The following data pertains to Questions
IOU Inc.purchased all of the outstanding common shares of UNI Inc.for $800,000.On the date of acquisition,UNI's assets included $2,000,000 of Inventory and Land with a Book value of $120,000.UNI also had $1,400,000 in Liabilities on that date.UNI's book values were equal to their fair market values,with the exception of the company's Land,which was estimated to have a fair market value which was $50,000 higher than its book value.
-Which of the following is the correct journal entry to record IOU's acquisition of UNI?

Accepted Answer

A

Question 3

In a Business Combination involving two companies,when can a company ALWAYS be deemed to be the acquirer?
A)The company is significantly larger than the other.
B)The company holds more than 50% of the voting shares of the combined entity.
C)The company has a larger Board of Directors
D)A company can be deemed to be the acquirer only when it holds 50% of the voting shares of the combined entity AND has a larger Board of Directors than the other company.

Accepted Answer

According to the accounting standard ASC 805, the acquirer is the entity that obtains control of the other entity. Control is generally achieved by holding more than 50% of the voting shares of the combined entity. Therefore, when a company holds more than 50% of the voting shares of the combined entity, it can always be deemed to be the acquirer. The other criteria, such as size and Board of Directors, are not relevant to determining the acquirer.

Question 4

The process of preparing Consolidated Financial Statements involves the elimination of inter-company transactions between a Parent Company and its subsidiary.Where would these entries be recorded?
A)On the Parent's books only.
B)On the Subsidiary's books.
C)The entries are not recorded in the books of either company.The entries are only made on the working papers.
D)The effect of any inter-company transaction must be reflected on the books of both companies.

Accepted Answer

The answer of The process of preparing Consolidated Financial Statements...

Question 5

Company Y purchases a controlling interest in Company Z on January 1,2002.Which of the following would appear as the Shareholder Equity amount on Company Y's Consolidated Balance Sheet on the date of acquisition?
A)Company Y's Shareholder Equity
B)The sum of the Shareholder Equity of both companies.
C)Company Y's Shareholder Equity as well as Company Y's proportional share of company Z's net assets at book value.
D)Company Y's Shareholder Equity as well as Company Y's proportional share of company Z's net assets at Fair Market Value.

Accepted Answer

When a company acquires a controlling interest in another company, the consolidated balance sheet reflects the parent company's shareholder equity, not the sum of both companies' equity or the proportional share of the subsidiary's net assets.

Question 6

Which of the following would NOT be included in the Acquisition Cost?
A)Share issue costs.
B)The Fair Market Value of any Shares Issued)
C)Contingent Consideration.
D)Direct expenses arising from a Business Combination.

Accepted Answer

Share issue costs would not be included in the acquisition cost as they are not direct expenses arising from a business combination.

Question 7

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on December 31,2008:  On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-The Goodwill arising from this Business Combination would be:
A)$7,000
B)($17,000)
C)$17,000
D)$120,000

Accepted Answer

The answer of The following data pertains to questions 
Parent...

Question 8

Which of the following pertaining to Consolidated Financial Statements is correct?
A)The preparation of consolidated Financial Statements means that the companies involved cease to operate as separate legal entities.
B)The preparation of Consolidated Financial Statements is at the Parent Company's discretion.
C)When one company has control over another,Consolidated Financial Statements must be prepared for the combined entity.
D)Before preparing Consolidated Financial Statements,a subsidiary's Financial Statements prior to the date of acquisition must be restated)

Accepted Answer

When one company has control over another, Consolidated Financial Statements must be prepared for the combined entity. This is because the controlling company (parent company) is responsible for the activities and financial performance of the subsidiary, and therefore, the financial statements of both companies must be combined to show the overall financial position and performance of the combined entity. Choices A, B, and D are incorrect.

Question 9

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on December 31,2008:  On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-The Shareholder's Equity section of the Consolidated Balance Sheet would show what amount?
A)$121,000
B)$90,000
C)$19,000
D)$98,000

Accepted Answer

The consolidated balance sheet would combine Parent and Sub Inc's assets and liabilities. Since Parent purchased all of Sub Inc's common shares for $40,000 in cash, Sub Inc is now a wholly-owned subsidiary of Parent. As such, the common shares account in Sub Inc's shareholder's equity section would be eliminated and replaced with a new line item called "Non-controlling Interest" to reflect any portion of Sub Inc's equity that is not owned by Parent. 
The consolidated balance sheet shares Parent's equity and Sub's equity at the time of the acquisition, which was $71,000 and $27,000 respectively. Therefore, the Shareholder's Equity section of the Consolidated Balance Sheet would show a total of $98,000 ($71,000 + $27,000). So, the correct answer is D.

Question 10

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on December 31,2008:  On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-The Current Assets of the combined entity should be valued at:
A)$7,000
B)$170,000
C)$86,000
D)$114,000

Accepted Answer

When Parent purchases all of Sub Inc's Common shares, it implies that Parent now has control over Sub Inc. Thus, the financial statements of both companies should be consolidated to reflect the economic substance of the transaction. 
The consolidated Current Assets will be equal to the sum of Parent's Current Assets and Sub Inc's Current Assets at fair value on the date of acquisition, which is $60,000 ($34,000 + $26,000). 
Therefore, the correct choice is C) $86,000.

Question 11

Which of the following statement(s)pertaining to Business Combinations is FALSE?
A)They are long-term in nature.
B)They cannot include unincorporated entities.
C)They can never arise from the purchase of assets.
D)They can never arise from the purchase of assets nor can they include unincorporated entities.

Accepted Answer

Business combinations can arise from the purchase of assets and can include unincorporated entities.

Question 12

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on December 31,2008:  On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-The Fixed Assets of the combined entity should be valued at:
A)$70,000
B)$154,000
C)$160,000
D)$120,000

Accepted Answer

The fixed assets of the combined entity should be valued at $154,000, as this is the correct valuation given the context provided.

Question 13

The following data pertains to Questions
IOU Inc.purchased all of the outstanding common shares of UNI Inc.for $800,000.On the date of acquisition,UNI's assets included $2,000,000 of Inventory and Land with a Book value of $120,000.UNI also had $1,400,000 in Liabilities on that date.UNI's book values were equal to their fair market values,with the exception of the company's Land,which was estimated to have a fair market value which was $50,000 higher than its book value.
-Assuming that the acquisition was properly recorded at cost,which of the following journal entries is required to prepare Consolidated Financial Statements the day following the acquisition?

Accepted Answer

The answer of The following data pertains to Questions
IOU Inc.purchased...

Question 14

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on December 31,2008:  On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-Assuming this Business Combination was to be accounted for under the Pooling of Interests Method,the Shareholder's Equity section of the Consolidated Balance Sheet would show what amount?
A)$121,000
B)$90,000
C)$19,000
D)$98,000

Accepted Answer

Under the pooling of interests method, the balance sheets of both the parent and subsidiary are combined without any adjustments to the carrying value of assets and liabilities. Therefore, the consolidated balance sheet would show the following:

- Current Assets: $26,000 (Sub's current assets) 
- Fixed Assets: $54,000 (Sub's fixed assets) 
- Cash: $40,000 (paid to purchase Sub's common shares) 
- Shareholder's Equity: $1,000 (Parent's common shares) + $20,000 (Sub's common shares) = $21,000

Thus, the total consolidated shareholder's equity would be $121,000 ($26,000 + $54,000 + $40,000 + $1,000 + $20,000). Therefore, the correct choice is A) $121,000.

Question 15

Company A has made an offer to purchase all of the outstanding shares of Company B for $10 per share (the current market value of the shares).In response to Company A's offer,the shareholders of Company B were given rights to purchase additional shares at $8 per share.Which of the following tactics was employed by Company B to prevent Company A from acquiring control of Company B?
A)Pac-man defence.
B)Selling the crown jewels.
C)Poison Pill.
D)A Reverse-takeover.

Accepted Answer

The tactic employed by Company B is known as a poison pill. This is a strategy used by a target company to make its stock less attractive to the acquiring company. By offering its shareholders the opportunity to purchase additional shares at a discounted price, Company B effectively dilutes the value of its stock and makes it more expensive for Company A to acquire a controlling stake.

Question 16

Parent Company acquires Sub Company's common shares for cash.On the date of acquisition,Sub had Goodwill of $100,000 on its books.Which of the following statements regarding Sub's Goodwill on the date of acquisition is correct?
A)Sub's goodwill is considered an identifiable asset and should therefore be included in Parent Company's Acquisition Differential calculation.
B)Sub's goodwill is considered an identifiable asset and should therefore be excluded from Parent Company's Acquisition Differential calculation.
C)Sub's goodwill is not considered an identifiable asset and should therefore be excluded from Parent Company's Acquisition Differential calculation.
D)Sub's goodwill is not considered an identifiable asset and should therefore be included in Parent Company's Acquisition Differential calculation.

Accepted Answer

Goodwill is not considered an identifiable asset because it cannot be separated from the business or sold independently. Therefore, it should be excluded from the acquisition differential calculation.

Question 17

A Inc.has purchased all of the outstanding voting shares of B Inc on January 1,20X1.On the date of acquisition,the book value of B's identifiable assets was equal to their fair market values with the exception B's Plant and Equipment,which had a Fair Market Value of $1,200,000.On the date of acquisition,A and B had Plant and Equipment with book values of $2,000,000 and $1,000,000 respectively.Both companies' Plant and Equipment are fully depreciated)Assuming that any excess fair market value on Plant and Equipment is to be amortized over ten years,the Plant and Equipment would be shown on A's Consolidated Balance Sheet in what amount on December 31,20x3?
A)$3,200,000
B)$3,140,000
C)$3,000,000
D)$2,940,000

Accepted Answer

The excess fair market value on B's Plant and Equipment is $1,200,000 - $1,000,000 = $200,000. This excess fair market value is to be amortized over ten years, so the annual amortization expense is $200,000 / 10 = $20,000.
On the consolidated balance sheet, A's Plant and Equipment would be shown at its book value of $2,000,000.
B's Plant and Equipment would be shown at its fair market value of $1,200,000, reduced by accumulated amortization of $20,000 * 3 = $60,000. Therefore, the net amount shown for B's Plant and Equipment would be $1,200,000 - $60,000 = $1,140,000.
The total amount shown for Plant and Equipment on the consolidated balance sheet would be $2,000,000 + $1,140,000 = $3,140,000. Therefore, the correct answer is B.

Question 18

During an acquisition,when should intangible assets NOT be recognized apart from Goodwill?
A)The assets have been identified but not accounted for by the subsidiary.
B)The assets have been identified and accounted for by the subsidiary.
C)The assets can be sold,licensed or exchanged)
D)The assets have been accounted for by the subsidiary but have no Fair Value on the date of acquisition.

Accepted Answer

Intangible assets should only be recognized apart from Goodwill if they have a Fair Value on the date of acquisition. If the assets have been identified and accounted for by the subsidiary, but have no Fair Value, they should not be recognized separately from Goodwill. This is in accordance with accounting principles that require assets to have a reliable and measurable Fair Value in order to be recognized separately on the balance sheet.

Question 19

The following data pertains to Questions
IOU Inc.purchased all of the outstanding common shares of UNI Inc.for $800,000.On the date of acquisition,UNI's assets included $2,000,000 of Inventory and Land with a Book value of $120,000.UNI also had $1,400,000 in Liabilities on that date.UNI's book values were equal to their fair market values,with the exception of the company's Land,which was estimated to have a fair market value which was $50,000 higher than its book value.
-How much goodwill would be created by IOU's acquisition of UNI?
A)$30,000
B)$50,000.
C)$80,000.
D)Nil.

Accepted Answer

The goodwill is calculated as the purchase price minus the fair market value of net assets acquired. The fair market value of net assets is $2,000,000 (Inventory) + $170,000 (Land: $120,000 book value + $50,000 fair value adjustment) - $1,400,000 (Liabilities) = $770,000. The purchase price is $800,000, so goodwill is $800,000 - $770,000 = $30,000.

Question 20

Which of the following statements regarding the Pooling of Interests Method is false?
A)It will result in a higher net income being shown when the Fair Market Values of a company's assets exceeds its book values.
B)It is currently the required method for accounting for Business Combinations in Canada when an acquirer cannot be identified)
C)It is more widely used in the United States than in Canada)
D)The Purchase Method was created under the assumption that all parties involved in a Business Combination would essentially be considered equal.

Accepted Answer

The statement that the Pooling of Interests Method is currently the required method for accounting for Business Combinations in Canada when an acquirer cannot be identified is false. This method has been prohibited by the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (GAAP) in recent years. The Purchase Method is now the required method for accounting for Business Combinations under these standards.

Quiz 3: Business Combinations

How should the acquisition cost of a Business Combination be allocated prior to preparing Consolidated Financial Statements?

In a Business Combination involving two companies,when can a company ALWAYS be deemed to be the acquirer?

The process of preparing Consolidated Financial Statements involves the elimination of inter-company transactions between a Parent Company and its subsidiary.Where would these entries be recorded?

Company Y purchases a controlling interest in Company Z on January 1,2002.Which of the following would appear as the Shareholder Equity amount on Company Y's Consolidated Balance Sheet on the date of acquisition?

Which of the following would NOT be included in the Acquisition Cost?

Which of the following pertaining to Consolidated Financial Statements is correct?

Which of the following statement(s) pertaining to Business Combinations is FALSE?

Parent Company acquires Sub Company's common shares for cash.On the date of acquisition,Sub had Goodwill of $100,000 on its books.Which of the following statements regarding Sub's Goodwill on the date of acquisition is correct?

During an acquisition,when should intangible assets NOT be recognized apart from Goodwill?

Which of the following statements regarding the Pooling of Interests Method is false?