Accounting for Mergers and Acquisitions Test Bank
Course Introduction
Accounting for Mergers and Acquisitions explores the critical accounting principles, standards, and practices involved in the business consolidation process. The course examines the methods of accounting for business combinations, including purchase and acquisition methods, with a focus on the identification, measurement, and reporting of assets, liabilities, goodwill, and non-controlling interests. Students will analyze financial statement implications, valuation of acquired entities, preparation of consolidated financial statements, and disclosure requirements under relevant accounting standards such as IFRS and US GAAP. Real-world case studies and practical exercises illustrate the complexities, challenges, and ethical considerations faced by accountants during mergers and acquisitions.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) What is one of the primary reasons why securities commissions are often ineffective enforcement agencies for accounting standards?
A)Lack of knowledge
B)Lack of financing
C)Lack of independence
D)Lack of support from professional accounting bodies
Answer: B
Q2) A private company that is closely held and internally financed is most likely to report under ________.
A)IFRS
B)ASPE
C)NFP
D)PSAB recommendations
Answer: B
Q3) Which nation does not require a cash flow statement in its financial reporting?
A)United States
B)United Kingdom
C)Australia
D)Japan Answer: D
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Jonas Co. owned 60% of Kara Co.'s voting shares and 25% of Lynn Ltd.'s voting shares. Kara owns 30% of Lynn's voting shares. Which of the following statements is true?
A)Kara is the only subsidiary of Jonas.
B)Both Kara and Lynn are subsidiaries of Jonas.
C)Lynn is a subsidiary of both Kara and Jonas.
D)Lynn is the only subsidiary of Kara.
Answer: B
Q2) Jarrett Corporation uses the equity method to account for its 25% investment in Polo Corporation and receives $15,000 in dividends. How should Jarrett account for these dividends?
A)An increase in assets
B)A decrease in the investment
C)An increase in income
D)A decrease in income
Answer: B
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Chapter 3: Business Combinations
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Q1) Able Ltd. offers to buy shares from the existing shareholders of Wei Co. at a premium price. The current management and board of directors of Wei have let the Wei shareholders know that they do not approve of this. This is an example of a(n)________.
A)open market purchase
B)hostile takeover
C)poison pill strategy
D)reverse takeover
Answer: B
Q2) Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. How should Sya record Littman's assets and liabilities on its books?
A)At their original cost
B)At their net book value
C)At their fair market value
D)At their fair market value plus an allocated share of goodwill to each item
Answer: C
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Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) O'Ball Ltd. wants to acquire Kiro Ltd. to take advantage of its tax losses and credit carryforwards. In what way can O'Ball accomplish this?
A)O'Ball can purchase Kiro's net assets.
B)O'Ball can do a share exchange with Kiro.
C)O'Ball can either purchase Kiro's net assets or purchase Kiro's shares.
D)O'Ball can either purchase Kiro's net assets or do a share exchange with Kiro.
Q2) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the amount of the deferred tax liability on Castle's consolidated SFP?
A)$40,000
B)$60,000
C)$100,000
D)$280,000
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6
Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) A parent company records an investment in its subsidiary using the equity method. Which of the following statements about consolidated net income is true?
A)Consolidated net income is higher than the net income under the equity method.
B)Consolidated net income is lower than the net income under the equity method.
C)Consolidated net income is higher than the net income under the equity method only if the subsidiary is profitable and has not paid any dividends.
D)Consolidated net income is the same as the net income under the equity method.
Q2) What adjustment should be made to the consolidated financial statements for the year ended December 31, 20X6, for the fair value increment related to the capital assets?
A)The retained earnings at January 1, 20X6, will be increased by $20,000.
B)Amortization expense on the capital assets for 20X6 will be increased by $2,500.
C)Amortization expense on the capital assets for 20X6 will be increased by $7,500.
D)Retained earnings at the end of 20X6 will be increased by $12,500.
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Sample Questions
Q1) What deferred income tax adjustment must Morin make for its consolidated financial statements?
A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.
Q2) Which of the following statements is true with respect to adjusting the deferred tax account on consolidation?
A)Deferred taxes only need to be adjusted for unrealized profits in inventory at the end of the year.
B)Deferred taxes only need to be adjusted for unrealized profits in inventory at the beginning of the year.
C)Deferred taxes need to be adjusted for unrealized profits in inventory at both the beginning and the end of the year.
D)Deferred taxes do not need to be adjusted for unrealized profits.
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Sample Questions
Q1) Proudfoot Ltd. acquired all the shares of Jacob Ltd. several years ago. In conducting its goodwill impairment test for the current year, Proudfoot has determined that there has been an impairment related to revalued assets. On Proudfoot's consolidated financial statements, where should this impairment be reported?
A)As part of profit or loss
B)As part of other comprehensive income
C)As an adjustment to retained earnings
D)As a separate amount under shareholders' equity
Q2) For private enterprises that have acquired goodwill in a business combination, how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
Q3) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What portion of consolidated net income for 20X1 is attributable to Portia?
A)$6,120
B)$6,240
C)$6,600
D)$7,080
Q2) Sunny Co. purchased 80% of Reuben Ltd. for $1,200,000. At the date of acquisition, the carrying value of Reuben's net identifiable assets was $1,000,000, and the fair value was $1,300,000. What is the amount of the goodwill under the entity method?
A)$0
B)$200,000
C)$240,000
D)$300,000
Q3) Explain why a parent might want to own less than 100% of the shares of a subsidiary.
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10
Chapter 5: Appendix A: Step Purchases
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Q1) Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$50,000
B)$66,667
C)$200,000
D)$250,000
Q2) With respect to this addition purchase, which of the following is true?
A)On the consolidated statement of financial position, the goodwill balance will increase.
B)On the consolidated statement of financial position, the common shares balance will increase.
C)Frey must use the equity method to report the additional investment.
D)Frey should ignore any changes in the fair values of Sabo's net assets between January 1, 20X4, and January 1, 20X8.
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11
Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) When a subsidiary issues shares, ________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces the NCI
D)this may increase the NCI
Q2) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
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12
Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) A few years ago, Locke Ltd. purchased a machine from its wholly owned subsidiary, Dubois Ltd., for $90,000. Locke has just sold the machine to an unrelated party for a $15,000 gain. At the time of the sale, there was still an unrealized gain of $50,000 from the purchase from Dubois. With this sale of the asset to the unrelated party, what is the amount of gain that should be recognized on Locke's consolidated financial statements?
A)$15,000
B)$50,000
C)$55,000
D)$65,000
Q2) A parent company uses the equity method to record its investment in its subsidiary.
To check the balance of the consolidated retained earnings, what amount should be added to the parent company's separate-entity retained earnings?
A)Balance of the equity in the earnings of the subsidiary account
B)Net income from the subsidiary company's separate-entity statement of income
C)Balance of the investment account
D)Increase in the balance of the investment account
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Restricted shares may have a cocktail provision. When might a coattail provision take effect?
A)When a company increases its dividends
B)When a buyer tries to acquire control of a company
C)When a company reacquires some of its shares
D)When a company issues preferred shares
Q2) A parent company owns a subsidiary's preferred and common shares. How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q3) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Basaraba Ltd. Owns 80% of the outstanding common shares of Gill Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. Under the agency approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?
A)The gain would be assigned to Basaraba.
B)The gain would be assigned to Gill.
C)The gain is assigned partially to Basaraba and partially to Gill.
D)The gain is eliminated on consolidation.
Q2) For gains on intercompany bond holdings, which method of allocating the gain emphasizes substance over form?
A)Allocating the gain to the parent company as the parent company has ultimate control
B)Allocating the gain to the bond purchasing company as the bonds will be retired under consolidation
C)Allocating the gain to the bond issuing company under the agency approach
D)Allocating the gain between the issuing and purchasing companies under the par-value approach
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Chapter 7: Segment and Interim Reporting
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Questions
Q1) Yang Ltd. will issue interim financial statements for its second quarter. Which statement(s)must report details of the second quarter as well as for the year to date?
A)Statement of comprehensive income only
B)Statement of changes in equity only
C)Statement of comprehensive income and statement of changes in equity only
D)Statement of comprehensive income, statement of changes in equity, and statement of cash flows only
Q2) Rules for interim reporting require that comparative information be presented. What comparative information should the current statement of financial position include?
A)The same quarter, last year
B)The immediate preceding quarter
C)The year end, last year
D)As budgeted for the period
Q3) Under the profit test only, which segments are reportable?
A)Segment A only
B)Segment C only
C)Segments A and C only
D)Segments C and D only
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) What exchange rate is usually used to report non-monetary assets on the statement of financial position?
A)Historical rate
B)Spot rate
C)Closing rate
D)Fair value
Q2) Assume that the transaction qualifies as a cash-flow hedge. What is the net exchange gain (loss)that McBride should recognize in the period from May 1 to July 31, 20X2?
A)$(2,200)
B)$(1,800)
C)$ 0
D)$400
Q3) Required:
The company uses the gross method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.
Q4) Compare and contrast accounting for foreign currency transactions and hedge accounting under IFRS and ASPE.
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Chapter 9: Reporting Foreign Operations
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Q1) Required:
Assume that WBC's functional currency is the euro. Calculate the translated Canadian dollar balances for the following accounts for December 31, 20X7.
a. Equipment
b. Accumulated depreciation-equipment
c. Depreciation expense
d. Goodwill
Q2) For publicly accountable companies, with foreign operations in countries with a hyper-inflationary economy, what should be done prior to translation?
A)The subsidiary's financial statements must be adjusted for changes in the price levels of the subsidiary's country.
B)The subsidiary's financial statements must be adjusted for changes in the price level of the parent's country.
C)The subsidiary's financial statements must be adjusted by the average inflation rate of the subsidiary and the parent companies' countries.
D)No adjustment is required unless the changes in price levels of the subsidiary country exceed 1000%.
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18
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) During the year, a not-for-profit art gallery acquired a number of pieces for its collection. Which of the following choices for reporting the acquisitions is not in accordance with the CICA Handbook?
A)Capitalize, but do not depreciate
B)Capitalize and depreciate
C)Immediate write-off
D)Note disclosure only
Q2) For the 20X6 fiscal year, KU Care, a not-for-profit organization, received $300,000 in unrestricted donations and $175,000 in donations designated specifically for cancer research. $200,000 of the unrestricted donations and $100,000 of the restricted donations were expended in 20X6 for current operations and cancer research, respectively. KU did not set up a separate fund for the restricted donation. Under the deferral method, how much of the donations should be reported as revenue in the statement of operations for the 20X6 fiscal year?
A)$300,000
B)$375,000
C)$400,000
D)$475,000
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Chapter 10: Appendix A: Fund Accounting
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Q1) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
Q2) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd. What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
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Page 20
Chapter 11: Public Sector Financial Reporting
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Q1) Which of the following are qualitative characteristics of good financial reports for governments?
A)Comparability among years, consistency among governments, completeness, and timeliness
B)Comparability among governments, consistency between years, completeness, and timeliness
C)Comparability with business, consistency between years, completeness, and timeliness
D)Full disclosure, transparency, accuracy, and audit
Q2) Who is the largest issuer of debt?
A)Banks
B)Government
C)Publicly accountable enterprises
D)Private enterprises
Q3) Research surveys have suggested that there are several qualitative characteristics that are desirable in published financial reports of governmental units. Explain why comparability is so important to users and what this means for users.
Q4) Clearly distinguish between a government business organization and a non-business government organization.
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