Accounting for Business Combinations Exam
Bank
Course Introduction
Accounting for Business Combinations explores the principles and practices involved in the consolidation of financial statements following mergers, acquisitions, and other forms of business combinations. The course covers topics such as the identification and measurement of assets and liabilities, goodwill calculation, non-controlling interests, and the application of IFRS and GAAP standards. Students will also examine the accounting treatment for joint ventures, step acquisitions, and the disclosure requirements in consolidated financial reports, equipping them with the knowledge needed to accurately reflect business combinations in corporate financial statements.
Recommended Textbook Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011?
A) $16,500.
B) $9,000.
C) $25,500.
D) $7,500.
E) $50,000.
Answer: B
Q2) Which of the following results in a decrease in the investment account when applying the equity method?
A) Dividends paid by the investor.
B) Net income of the investee.
C) Net income of the investor.
D) Unrealized gain on intra-entity inventory transfers for the current year.
E) Purchase of additional common stock by the investor during the current year.
Answer: D
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3
Chapter 2: Consolidation of Financial Information
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Q1) An example of a difference in types of business combination is:
A) A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition.
B) A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition.
C) A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution.
D) A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution.
E) Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.
Answer: C
Q2) What term is used to refer to a business combination in which only one of the original companies continues to exist?
Answer: The appropriate term is statutory merger.
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4
Chapter 3: Consolidationssubsequent to the Date of Acquisition
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Sample Questions
Q1) How does the partial equity method differ from the equity method?
A) In the total assets reported on the consolidated balance sheet.
B) In the treatment of dividends.
C) In the total liabilities reported on the consolidated balance sheet.
D) Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account.
E) Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary.
Answer: E
Q2) What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?
Answer: The partial equity method is a compromise between the initial value method and the equity method. It provides some of the advantages of the equity method but is easier to use. Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary's income and decreased when the subsidiary pays dividends. The method is simpler than the equity method because amortization of excess fair value allocations is not done.
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Page 5
Chapter 4: Consolidated Financial Statements and Outside Ownership
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Sample Questions
Q1) Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition?
A) $120,000.
B) $150,000.
C) $280,000.
D) $350,000.
E) $370,000.
Q2) Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal.
Required:
Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?
Q3) How does a parent company account for the sale of a portion of an investment in a subsidiary?
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Q1) Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2010, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2010?
A) $105,000.
B) $100,000.
C) $95,000.
D) $80,000.
E) $85,000.
Q2) King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2011, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/11, 25% of the goods were still in James' inventory. Required:
Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2011 while Kaspar reports $250,000. Kaspar transferred inventory during 2011 to Johnson at a price of $50,000. On December 31, 2011, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2011 was $120,000, and on December 31, 2011 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers in the consolidated statement of cash flows?
A) $590,000.
B) $610,000.
C) $625,000.
D) $635,000.
E) $650,000.
Q2) On January 1, 2011, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?
Q3) What documents or other sources of information would be used to prepare a consolidated statement of cash flows?
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Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?
A) Discount revenue.
B) Premium revenue.
C) Discount expense.
D) Premium expense.
E) Both discount revenue and premium expense.
Q2) What is meant by the spot rate?
Q3) A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?
A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.
Q4) What is the purpose of a hedge of foreign exchange risk?
Page 9
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Chapter 8: Translation of Foreign Currency Financial Statements
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Q1) Under the temporal method, property, plant & equipment would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) Under the temporal method, inventory at market would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q3) What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?
Q4) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
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Q5) What is the justification for the remeasurement of foreign currency transactions?
Chapter 9: Partnerships: Formation and Operation
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Q1) On January 1, 2011, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: Salary of $40,000 a year to Noris.
Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%
During the fiscal year ended December 31, 2011, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.
Q2) What is the dissolution of a partnership?
Q3) What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?
Q4) Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?
Q5) How is accounting for a partnership different from accounting for a corporation?
Q6) By what methods can a person gain admittance to a partnership?
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11
Chapter 10: Partnerships: Termination and Liquidation
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Q1) Which one of the following statements is correct?
A) If a partner of a liquidating partnership is unable to pay a capital account deficit, the deficit is absorbed by the other partners in the profit and loss ratio of those partners.
B) Gains and losses from the sale of noncash assets are divided in the ratio of the partners' capital account balances if there is no income-sharing plan in the partnership contract.
C) A loan receivable from a partner is added to the partner's capital account balance in the preparation of a cash distribution plan.
D) Partners may not receive any cash before partnership creditors receive cash when liquidating a partnership.
E) All cash payments to partners are made using their profit and loss ratio when liquidating the partnership.
Q2) What should occur when a solvent partner has a deficit balance?
Q3) Why is a Schedule of Liquidation prepared?
Q4) What is the purpose of a predistribution plan?
Q5) For a partnership, how should liquidation gains and losses be accounted for?
Q6) What is the role of the accountant during the liquidation process?
Q7) What is a safe cash payment?
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Chapter 11: Accounting for State and Local Governments
Part 1
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Sample Questions
Q1) Salaries and wages that have been earned by governmental employees that have not yet been paid are recorded in the general fund as:
A) An expenditure.
B) An encumbrance.
C) An appropriation.
D) An expense.
E) An investment.
Q2) What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?
Q3) The town council adopted an annual budget estimating general revenues of $2,000,000, approved expenditures of $1,700,000 and other financing for other funds of $130,000.
Required:
Record the journal entry to record the budget and identify the fund in which it is recorded.
Q4) What is the purpose of government-wide financial statements?
Q5) What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund?
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Chapter 12: Accounting for State and Local Governments
Part 2
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Sample Questions
Q1) The city operates a public pool where each person is assessed a $2 entrance fee. Which fund is most appropriate to record these revenues?
A) General Fund.
B) Enterprise Fund.
C) Special Revenue Fund.
D) Internal Service Fund.
E) Capital Projects Fund.
Q2) The City of Nextville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been collected. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest.
Required:
Prepare the journal entries for these transactions that are necessary to prepare government-wide financial statements.
Q3) What are the three broad sections of a state or local government's CAFR?
Q4) What is meant by the term legally independent?
Q5) What is meant by the term fiscally independent?
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