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Advanced Accounting 13e (Global Edition) Floyd Beams, Joseph Anthony, Bruce Bettinghaus, Kenneth Smith (Test Bank All Chapters, 100% Original Verified, A+ Grade) Advanced Accounting, 13e (Beams et al.) Chapter 1 Business Combinations 1.1 Multiple Choice Questions 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. Answer: D Objective: LO1.1 Understand the economic motivations underlying business combinations. Difficulty: Easy AACSB: Analytical thinking

2) 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. Answer: A Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting perspectives. Difficulty: Easy AACSB: Analytical thinking

3) 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. Answer: D Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting perspectives. Difficulty: Easy AACSB: Analytical thinking

4) Historically, much of the controversy concerning accounting requirements for business combinations involved the ________ method. A) purchase B) pooling of interests C) equity D) acquisition Answer: B Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting perspectives. Difficulty: Easy AACSB: Analytical thinking

5) 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. Answer: A Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. Difficulty: Moderate AACSB: Application of knowledge

6) 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. Answer: D Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. Difficulty: Moderate AACSB: Application of knowledge

7) 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. Answer: C Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Moderate AACSB: Analytical thinking

8) 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) The Sarbanes-Oxley Act requires firms to report material aggregate amounts of goodwill as a separate balance sheet line item. Answer: A Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. Difficulty: Moderate AACSB: Analytical thinking

9) According to ASC 805-30, 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 Answer: B Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Easy AACSB: Analytical thinking

10) Under the provisions of ASC 805-30, in a business combination, when the investment cost exceeds the total fair value of identifiable net assets acquired, which of the following statements is correct? A) The excess is first assigned to identifiable net assets according to their fair values; then the rest is assigned to goodwill. 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. Answer: A Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Easy AACSB: Analytical thinking

11) 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. Answer: B Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Easy AACSB: Analytical thinking

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: Costs of special shareholders' meeting to vote on the merger Registering and issuing securities Accounting and legal fees Salaries of Polka's employees assigned to the implementation of the merger Cost of closing duplicate facilities

$12,000 10,000 18,000 27,000 13,000

12) 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. Answer: B Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. Difficulty: Moderate AACSB: Application of knowledge

13) 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. Answer: C Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. Difficulty: Moderate AACSB: Analytical thinking

14) 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) Fair value D) The present value of future cash flows discounted at the firm's cost of capital Answer: C Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Easy AACSB: Analytical thinking

15) 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 Answer: A Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Moderate AACSB: Application of knowledge

16) According to ASC 810-10, liabilities assumed in an acquisition will be valued at the ________. A) fair value B) historical book value C) current replacement cost D) present value using market interest rates Answer: A Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. Difficulty: Easy AACSB: Analytical thinking

17) 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) Firms are not required to disclose the details about step acquisitions. Answer: C Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Easy AACSB: Analytical thinking

18) 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. Answer: D Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Easy AACSB: Analytical thinking

19) 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) Previous rules required the immediate write of goodwill to stockholder's equity. Answer: B Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition. Difficulty: Moderate AACSB: Analytical thinking

20) 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 of all the outstanding voting stock of the acquired company. D) Purchase of 25% of outstanding voting stock of the acquired company. Answer: D Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting perspectives. Difficulty: Moderate AACSB: Analytical thinking