Question 1

Which of the following defines goodwill resulting from an acquisition?
A)The historical value of the stock received less the current value of the stock issued.
B)The excess purchase price over the fair value of the entity acquired.
C)The difference between the designated market value and the book value of the target company.
D)The amount of the contingent performance obligation less the purchase price adjustment made upon signing the letter of intent.

Accepted Answer

Goodwill resulting from an acquisition is the excess purchase price paid over the fair value of the entity acquired. This represents the value of intangible assets such as reputation, brand, customer loyalty, etc. that are not reflected in the fair value of the assets and liabilities acquired. Option A, C, and D are incorrect as they do not define goodwill resulting from an acquisition.

Question 2

Which of the following does not identify a reporting unit for purposes of impairment testing?
A)Separate accounting.
B)Could be easily separated from the company.
C)Is managed as a separate segment.
D)Has similar assets.

Accepted Answer

Similarity of assets is not a relevant factor in identifying a reporting unit for impairment testing. The other options, such as separate accounting, ease of separation from the company, and management as a separate segment, are all important criteria for identifying a reporting unit.

Question 3

Rapture,Inc.compares the fair value of the reporting unit related to goodwill to the reporting unit's carrying value,including goodwill.The fair value is less than the carrying value.This implies which of the following?
A)that the difference must be reported as impairment expense in the balance sheet.
B)that impairment exists and that goodwill must be written-down.
C)that the goodwill is supported by valid assumptions and may remain.
D)that the impaired value of the goodwill is greater than the implied value of the underlying assets.

Accepted Answer

If the fair value of the reporting unit is less than its carrying amount, it indicates that there is impairment, and the goodwill should be written down to its implied fair value. Therefore, option B is the correct choice. Option A is not appropriate because impairment expense is recorded only for the amount of goodwill that exceeds its implied fair value. Option C is incorrect because if the fair value is less than the carrying value, it implies that the goodwill is impaired. Option D is not relevant, as it refers to the implied value of underlying assets.

Question 4

Jakobe Company acquires an average of two companies per year in its efforts to integrate and expand.Which of the following statements best represents Jakobe's treatment of multiple goodwill in the assessment of impairment?
A)All goodwill must be netted at the reporting level for testing and isolated at the individual subsidiary level.
B)The goodwill of a single unit will be selected at random each year for testing and all operating units must be cycled in testing every five years.
C)Goodwill within operating segments can be netted,but goodwill that exists in different operating segments cannot be offset.
D)Goodwill is not a factor in the testing of impairment,only the undiscounted cash flows of an individual reporting unit will be considered.

Accepted Answer

According to the statement, Jakobe Company acquires multiple companies and expands its operations. Therefore, it has multiple operating segments, and the goodwill within those segments can be netted. However, since the goodwill exists in different operating segments, it cannot be offset. Hence, option C is the correct answer. Option A is incorrect because it suggests netting all goodwill at the reporting level, which may not provide an accurate picture of the individual subsidiaries. Option B is incorrect because it is a random selection basis rather than a systematic approach. Option D is incorrect because goodwill is an essential factor in evaluating impairment.

Question 5

According to current accounting principles,for the purposes of testing impairment,goodwill resulting from the acquisition process must be identified
A)as an expense on the income statement.
B)on the books of the parent company.
C)on the basis of present value.
D)with an operating or reporting unit.

Accepted Answer

Goodwill resulting from the acquisition process needs to be tested for impairment on the basis of an operating or reporting unit. This means that the goodwill must be allocated to the specific segment of the business that it relates to, and then tested for impairment based on the performance of that segment. This approach ensures that any impairment charges are allocated to the specific area that is responsible for the impairment, rather than affecting the overall financial statements of the parent company.

Question 6

How is the valuation and testing of goodwill for impairment best facilitated by a company?
A)Through physical inspection of the goodwill.
B)By the CPA firm hired to perform the audit of financial statements.
C)With the use of a formal budgeting process.
D)Through the development of new products and services.

Accepted Answer

A formal budgeting process helps in estimating future cash flows and assessing whether the carrying amount of goodwill is recoverable, which is essential for impairment testing.

Question 7

Current accounting principles require that goodwill be expensed according to which of the following?
A)systematically over its estimated useful life.
B)arbitrarily over a period of no more than 20 years.
C)as impairment occurs.
D)at the completion of the acquisition.

Accepted Answer

Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

Question 8

Costs associated with the restructuring of operations are recorded
A)when the commitment is put into action.
B)when the auditor deems them significant.
C)when the decision is made and planned by the board of directors.
D)as assets on the balance sheet until realized.

Accepted Answer

Costs associated with the restructuring of operations are recorded when the commitment is put into action, as this is when the company actually incurs the expenses. The other options are not accurate: B is not necessarily true as the auditor's assessment of significance may not align with the company's accounting treatment, C is not accurate as the decision alone does not result in accounting treatment, and D is not accurate as these costs should not be recorded as assets on the balance sheet but rather as expenses in the period they are incurred.

Question 9

What are the most important attributes that an auditor must possess in testing client's assessment of goodwill?
A)Expertise in the laws surrounding mergers and acquisitions and the legal implications of such endeavors.
B)Sound judgment and a knowledge of the client's business and the related accounting principles.
C)Trustworthiness in attitude and a loyalty to the client as its business advisor.
D)Experience with business failures and audit scandals so that such issues can be brought to the table.

Accepted Answer

An auditor must possess sound judgment and a knowledge of the client's business and the related accounting principles in order to test their assessment of goodwill. This includes an understanding of the assumptions and estimates made by management in determining the fair value of goodwill. Expertise in the laws surrounding mergers and acquisitions may be helpful, but is not necessarily the most important attribute. Trustworthiness and loyalty to the client are important qualities for an auditor to have, but they do not specifically relate to testing goodwill. Experience with business failures and audit scandals may be important in terms of identifying potential risks and control weaknesses, but does not directly relate to testing goodwill.

Question 10

Which one of the following disclosures is required for reporting classes of stock in the financial statements?
A)Number of shareholders of record.
B)Retirement value.
C)Voting rights.
D)Price-to-earnings ratio.

Accepted Answer

Reporting classes of stock in the financial statements requires the disclosure of voting rights, which distinguishes the different classes of stock. The other options do not provide information about the different classes of stock.

Question 11

All of the following are significant issues for consideration when auditing for the impairment of goodwill,except for which of the following?
A)timing of the assessment by management.
B)amortization in years of the goodwill.
C)clear objective evidence supporting the assessment.
D)understanding the client's business and its risks.

Accepted Answer

Amortization of goodwill is no longer permitted under GAAP. The other options listed are significant issues for consideration when auditing for the impairment of goodwill.

Question 12

Simco's shaving products division was acquired over ten years ago in a purchase transaction by BlizzardCraft.The related goodwill was amortized until 2002 and $4.5 million remained on the books thereafter.In 2008,Simco's production machinery was assessed for impairment as a long-lived asset because of obsolescence issues.What relationship will the auditors most likely make between the facts stated above?
A)BlizzardCraft erroneously treated the acquisition of Simco as a purchase transaction when it should have been a pooling of interests.
B)Simco should not have amortized goodwill previous to 2002.
C)The goodwill related to Simco may have been impaired during 2008.
D)Simco's goodwill should have been written off when purchased by BlizzardCraft in a one-time transaction.

Accepted Answer

The auditors are most likely to make the relationship between the fact that Simco's shaving products division was acquired over ten years ago and its related goodwill was amortized until 2002, with the fact that in 2008, Simco's production machinery was assessed for impairment as a long-lived asset due to obsolescence issues. As a result, the auditors may infer that the goodwill related to Simco could also have been impaired during 2008.

Question 13

When stock is valued at amounts substantially greater than the value of the assets transferred to the corporation,it is called
A)no par stock.
B)watered stock.
C)par value stock.
D)preferred stock.

Accepted Answer

When stock is valued at amounts substantially greater than the value of the assets transferred to the corporation, it is called watered stock. This means that the stock is over-priced and shareholders have paid more than the actual value of the assets, resulting in a false or inflated value. No par stock does not have a designated value, par value stock has a fixed value per share, and preferred stock has priority over common stock in receiving dividends and assets upon liquidation.

Question 14

Which of the following factors would most likely trigger the need for impairment testing on the recorded goodwill of a nutritional products company?
A)the FDA halts the distribution of the acquired subsidiary's only product.
B)management hires a new tax director at the corporate level.
C)there is no doubt about the acquired subsidiary's ability to continue as a going concern.
D)goodwill testing occurred eight months previously.

Accepted Answer

The FDA halting the distribution of the acquired subsidiary's only product would significantly impact the financial performance of the subsidiary and potentially lead to impairment of its goodwill. This would trigger the need for impairment testing to assess the fair value of the subsidiary and its assets. The other options do not indicate any significant changes or events that would require impairments testing.

Question 15

If the auditor is hesitant to rely on the appraisal of a specialist hired by management,which of the following will be performed?
A)The auditor will make the appraisal.
B)The auditor will adjust the values to zero.
C)The auditor will resign from the engagement.
D)The auditor will hire a specialist to test the appraisal.

Accepted Answer

If the auditor is hesitant to rely on the appraisal of a specialist hired by management, the auditor may hire a specialist to test the appraisal. This will provide the auditor with independent and objective evidence to support the accuracy and reliability of the appraisal. The other options, such as making the appraisal, adjusting the values to zero, or resigning from the engagement, are not practical solutions and do not address the underlying concerns with the specialist hired by management.

Question 16

In testing goodwill for impairment,the audit team will evaluate management's
A)estimated allowance for goodwill losses as a percent of sales.
B)ability to utilize the purchase method of accounting.
C)assessment of the initial purchase price of the acquired company in relation to its assets.
D)methodologies for assessing impairment.

Accepted Answer

In testing goodwill for impairment, the audit team will evaluate management's methodologies for determining and assessing goodwill impairment. These methodologies may include estimating fair value, assessing the carrying value of assets and liabilities, and evaluating current and future economic conditions. While the other options may be relevant to accounting for goodwill, they are not directly related to testing goodwill for impairment.

Question 17

The evidence that an auditor will most likely review to assess the recording of restructuring charges includes which of the following?
A)bank statements.
B)confirmations.
C)employment agreements.
D)acquisition indentures.

Accepted Answer

Employment agreements would provide information on any severance payments or other compensation related to the restructuring charges. Bank statements, confirmations, and acquisition indentures are unlikely to provide relevant information on the recording of restructuring charges.

Question 18

Which represents the most significant risk associated with restructuring liabilities on the financial statements?
A)Understatement of assets in the period of recording the liabilities.
B)Future smoothing of income by releasing the reserves.
C)Related party transactions that are not recorded at arms-length.
D)Payroll liabilities that are not disclosed in the notes.

Accepted Answer

Restructuring liabilities can create reserves that can be used to smooth income in the future, which can potentially mislead stakeholders. This is the most significant risk associated with restructuring liabilities on the financial statements. Understatement of assets, related party transactions, and disclosure of payroll liabilities are also potential risks, but they are not as significant as the risk of income smoothing.

Question 19

Which of the following best represents the period in which testing will be performed for goodwill impairment by an audit client?
A)Year of final amortization.
B)Five year anniversary of acquisition.
C)As dictated by the internal auditors.
D)At least annually.

Accepted Answer

According to Accounting Standards Codification (ASC) 350, goodwill impairment testing should be performed at least annually or if events or changes in circumstances indicate that the fair value of the reporting unit may be below its carrying amount. The other options (A, B, and C) do not align with the requirements of ASC 350.

Question 20

All of the following represent a related entity to an organization except
A)the president's son.
B)an affiliate with common ownership.
C)customers.
D)primary owners.

Accepted Answer

The answer of All of the following represent a related...

Quiz 14: Audit of Longer-Term Liabilities, equity, acquisitions, and Related-Entity Transactions, long-Term Liabilities, and Equity

Which of the following defines goodwill resulting from an acquisition?

Which of the following does not identify a reporting unit for purposes of impairment testing?

Rapture,Inc.compares the fair value of the reporting unit related to goodwill to the reporting unit's carrying value,including goodwill.The fair value is less than the carrying value.This implies which of the following?

Jakobe Company acquires an average of two companies per year in its efforts to integrate and expand.Which of the following statements best represents Jakobe's treatment of multiple goodwill in the assessment of impairment?

According to current accounting principles,for the purposes of testing impairment,goodwill resulting from the acquisition process must be identified

How is the valuation and testing of goodwill for impairment best facilitated by a company?

Current accounting principles require that goodwill be expensed according to which of the following?

Costs associated with the restructuring of operations are recorded

What are the most important attributes that an auditor must possess in testing client's assessment of goodwill?

Which one of the following disclosures is required for reporting classes of stock in the financial statements?

All of the following are significant issues for consideration when auditing for the impairment of goodwill,except for which of the following?

When stock is valued at amounts substantially greater than the value of the assets transferred to the corporation,it is called

Which of the following factors would most likely trigger the need for impairment testing on the recorded goodwill of a nutritional products company?

If the auditor is hesitant to rely on the appraisal of a specialist hired by management,which of the following will be performed?

In testing goodwill for impairment,the audit team will evaluate management's

The evidence that an auditor will most likely review to assess the recording of restructuring charges includes which of the following?

Which represents the most significant risk associated with restructuring liabilities on the financial statements?

Which of the following best represents the period in which testing will be performed for goodwill impairment by an audit client?

All of the following represent a related entity to an organization except