Accounting for Business Combinations
Mock Exam
Course Introduction
Accounting for Business Combinations explores the principles and practices involved in the acquisition and consolidation of businesses. The course covers the application of relevant accounting standards, including IFRS and GAAP, to the processes of mergers, acquisitions, and the formation of group structures. Topics include purchase price allocation, goodwill measurement and impairment, intercompany transactions, non-controlling interests, and the preparation of consolidated financial statements. Emphasis is placed on understanding the economic substance of business combinations and the impact on financial reporting, equipping students with the skills necessary to analyze, account for, and report on complex organizational structures.
Recommended Textbook
Modern Advanced Accounting in Canada9th Edition by Darrell Herauf
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Chapter 1: Conceptual and Case Analysis Frameworks for Financial Reporting
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Sample Questions
Q1) Provide the procedures used to analyze a company's financial statements to determine its future prospects.
Answer: Procedures to analyze a company's financial statements: Perform common-size analysis and interpret the results.
Review the accounting policies and estimates used by the company to ensure that they are appropriate.
Adjust the financial statements, as necessary, to use appropriate accounting policies and estimates.
Calculate the ratios for one or more periods.
Compare the ratios to relevant benchmarks.
Interpret the results of the analysis to determine whether they are better, worse, or the same as the benchmark.
Decide whether to increase, decrease, or maintain the level of participation with the reporting entity.
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3
Chapter 2: Investments in Equity Securities
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Sample Questions
Q1) Gains and losses on fair value through profit or loss (FVTPL) securities:
A) are included in net income, regardless of whether they are realized or not.
B) are included in net income only when the investment has become permanently impaired.
C) are included in net income only when realized.
D) are never recorded until the securities are sold.
Answer: A
Q2) Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2019, for a cash consideration of $200,000. During 2019, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2019, shares of Stamp Company were trading for $11 each. If Posthorn Corporation accounts for its investment in Stamp Company at fair value through other comprehensive income (FVTOCI), what will the balance in the Investment in Stamp Company be at December 31, 2019
A) $200,000
B) $208,000
C) $220,000
D) $240,000
Answer: C
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Page 4
Chapter 3: Business Combinations
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Sample Questions
Q1) Which of the following statements is correct?
A) Under the new-entity method, both of the company's net assets are recorded at their fair market values for these assets on the date of acquisition.
B) Under the acquisition method, the acquirer company's net assets are revalued to fair value to reflect the substance of the transaction which, in essence is, a new company has been formed.
C) As of January 1st, 2011, the new-entity method must be used to account for business combinations where an acquirer can be identified.
D) The acquisition method is consistent with the historical cost principle while the New Entity Method is not.
Answer: A
Q2) Which of the following is NOT considered to be part of the acquisition cost of a subsidiary?
A) Any cash paid to the seller.
B) The fair value of contingent consideration.
C) Present value of any promises by the acquirer to pay cash in the future.
D) The cost of issuing shares as part of the consideration.
Answer: D
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Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Contingent consideration should be valued at:
A) the fair value of the consideration on the date of acquisition.
B) the book value of the consideration at the date of acquisition.
C) the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of acquisition.
D) the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition.
Q2) Under the proportionate consolidation method the non-controlling interest (NCI) is:
A) presented as a liability in the consolidated balance sheet.
B) presented as a separate component of shareholders' equity on the consolidated balance sheet.
C) not acknowledged at all.
D) presented as a component of retained earnings on the consolidated balance sheet.
Q3) Why might the fair value of the non-controlling interest in a subsidiary on the date that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?
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Page 6
Chapter 5: Consolidation Subsequent to Acquisition Date
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Q1) Consolidated Net Income would be:
A) higher if the parent chooses to use Equity Method rather than the Cost Method. B) higher if the parent chooses to use the Equity Method rather than the Cost Method, provided that the subsidiary showed a profit.
C) lower if the parent chooses to use Equity Method rather than the Cost Method. D) the same under both the Cost and Equity Methods.
Q2) Consolidated Net Income is equal to:
A) the sum of the net incomes of both the parent and its subsidiaries.
B) the sum of the net incomes of both the parent and its subsidiaries less any inter-company dividends.
C) the parent's net income excluding any income arising from its investment in the subsidiary.
D) the parent's net income excluding any income arising from its investment in the Subsidiary, plus the net income of the subsidiary less the amortization of the acquisition differential and the impairment of goodwill.
Q3) Prepare a consolidated balance sheet for Par Inc. as at June 30, 2021.
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Chapter 6: Intercompany Inventory and Land Profits
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Q1) Intercompany profits on sales of inventory are only realized:
A) once the seller receives payment for the sale.
B) once the inventory has been sold to outsiders.
C) when the inventory has been received by the purchaser.
D) when the inventory has been shipped to the purchaser.
Q2) How would any management fees charged by a Parent Company to its Subsidiary be accounted for during the consolidation process?
A) The Parent Company would only record its pro rata share of any management revenues.
B) The Parent Company's profit on the rendering of management services would be charged to retained earnings.
C) Both the Parent's management fees and the subsidiary's related expense would be eliminated when preparing Consolidated Financial Statements.
D) No special accounting treatment is required, since this would have no effect on Consolidated Net Income.
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8
Chapter 7: A Intercompany Profits in Depreciable Assets B
Intercompany
Bondholdings
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Q1) Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2020 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030.
There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used.
Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2020, Paddy earned a net income of $80,000 and paid dividends of $20,000. What amount would be shown on Duff's 2020 Consolidated Statement of Financial Position under bonds payable?
A) $110,000
B) $111,000
C) $112,000
D) $220,000
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Page 9
Chapter 8: Consolidated Cash Flows and Changes in Ownership
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Q1) Which of the following statements pertaining to preferred shares is correct?
A) If the preferred shares are non-cumulative, the current year's net income would be allocated to the preferred shares whether or not preferred dividends are declared.
B) If the preferred shares are non-cumulative, only the current year's net income would be allocated to preferred shares if preferred dividends are declared, since dividends are never in arrears with non-cumulative preferred shares.
C) If the preferred shares are cumulative, the current year's net income would be allocated to the shares, only if dividends are declared in the year.
D) There can never be any dividends in arrears when preferred shares are cumulative.
Q2) X owns 70% of Y, which in turn owns 25% of Z. X, also owns 20% of Z. Which of the following statements is correct?
A) X has direct control over Z.
B) X has indirect control over Z.
C) X has no control over Z.
D) X has contingent control over Z.
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Chapter 9: Other Consolidation Reporting Issues
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Q1) JNG Corp has 4 segments, the details of which are shown below. All figures are in thousands of dollars. \(\begin{array}{|l|r|r|r|}
\hline \text { Segment } & \text { Revenues } & \text { Profits } & \text { Assets } \\
\hline \mathrm{A} & \$ 12 & \$ 6 & \$ 40 \\
\hline \mathrm{B} & \$ 60 & \$ 2 & \$ 80 \\
\hline \mathrm{C} & \$ 35 & \$ 10 & \$ 80 \\
\hline \mathrm{D} & \$ 200 & \$ 80 & \$ 20\\\hline \end{array}\) Using only the Revenue test, which of the following segment(s) would be reportable?
A) A
B) A, B, and D
C) B, C, and D
D) C and D
Q2) How are intercompany transactions handled in a joint venture?
A) They are ignored.
B) They are completely eliminated.
C) Only the venturer's share of any after tax profit is eliminated.
D) Intercompany profits are treated as an adjustment to the acquisition differential.
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Chapter 10: Foreign Currency Transactions
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Q1) Which of the following would NOT be considered a foreign exchange hedge?
A) The placement of large amounts of Canadian funds with a bank in Zurich, Switzerland.
B) A foreign currency futures contract.
C) A foreign currency option contract.
D) A forward exchange contract.
Q2) Which of the following statements is correct?
A) The historical rate is the exchange rate on the date of the transaction and the closing rate is the exchange rate at the end of the reporting period.
B) The historical rate is the exchange rate on the date of the transaction and the closing rate is the rate on which any hedge transactions mature.
C) The spot rate is the rate on the date of the transaction and the relevant forward rate is the exchange rate used at the end of the reporting period.
D) The average rate is the exchange rate used for all transactions on transaction date.
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Chapter 11: Translation and Consolidation of Foreign Operations
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Q1) Which of the following statements is correct?
A) If the functional currency of the foreign operation is different than the parent's functional currency, the contributed capital must be translated using closing rates.
B) If the functional currency of the foreign operation is different than the parent's functional currency, the contributed capital must be translated using average rates.
C) If the functional currency of the foreign operation is different than the parent's functional currency, the contributed capital must be translated using historical rates.
D) If the functional currency of the foreign operation is the same as the parent's functional currency, the contributed capital must be translated using average rates.
Q2) If the functional currency of a foreign operation is different than the parent's, functional currency, how are exchange gains and losses to be reported?
A) As part of other comprehensive income.
B) In an exchange account.
C) As part of the non-controlling interest.
D) As part of the acquisition differential amortization.
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Page 13
Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) How should investment income earned from the investment of endowment contributions be accounted for if the not-for-profit organization uses the restricted fund method of accounting and the use of the investment income is restricted to a specific purpose for which the not-for-profit organization has a restricted fund?
A) As investment income in the endowment fund
B) As a deferred contribution
C) As investment income in the general fund
D) As investment income in the specific restricted fund
Q2) Which of the following is NOT among the choices available to a not-for-profit organization with two-year average annual revenues of less than $500,000?
A) Capitalize and amortize capital assets.
B) Capitalize and not amortize capital assets.
C) Expense capital assets when acquired.
D) Make no entries when capital assets are acquired.
Q3) Net assets could be broken down into any of the following categories EXCEPT:
A) internally restricted and other externally restricted net assets.
B) net assets maintained permanently in endowments.
C) unrestricted net assets.
D) net assets invested in operations.
Page 14
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