Accounting for Mergers and Acquisitions
Final Exam Questions
Course Introduction
Accounting for Mergers and Acquisitions explores the financial reporting and analysis issues unique to business combinations, including mergers, acquisitions, and consolidations. The course examines relevant accounting standards such as IFRS 3 and ASC 805 covering topics like purchase price allocation, valuation of assets and liabilities, goodwill recognition and impairment, and non-controlling interests. Students will also learn about the preparation of consolidated financial statements, the impact of acquisition accounting on financial ratios and performance metrics, and the disclosure requirements for M&A transactions. Real-world examples and case studies illustrate the complexities of accounting for business combinations in both domestic and international contexts.
Recommended Textbook
Modern Advanced Accounting in Canada9th Edition by Darrell Herauf
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Page 2
Chapter 1: Conceptual and Case Analysis Frameworks for Financial Reporting
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Sample Questions
Q1) Which of the following would NOT be a reason to obtain a greater understanding of accounting practices in other nations?
A) Financial results are disclosed in different currencies.
B) One needs to be aware of differing disclosure requirements from nation to nation, as this impacts the preparation of financial statements.
C) Income-smoothing may have affected a foreign subsidiary's results; such smoothing practices are not permitted in North America.
D) Departures from the historical cost principle may be possible in other nations.
Answer: A
Q2) One of the underlying assumptions of the Historical Cost Principle is that a stable unit of measure (currency) should be used for Financial Reporting. Is this always the case?
Answer: The Historical Cost Principle is not very useful when inflation rates are high. As a result of the eroding purchase power associated with periods of high inflation, many countries have had to experiment with price-level adjustments. These adjustments often include asset revaluations to reflect their current values.
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Chapter 2: Investments in Equity Securities
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Q1) 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
Q2) What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28 Investments in Associates and Joint Ventures?
A) 20% or more.
B) Less than 20%.
C) Between 20% and 50%.
D) 25% or more.
Answer: C
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Page 4
Chapter 3: Business Combinations
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Q1) A Inc. purchased 100% of B Inc.'s voting shares for cash. The assets and liabilities reported in the consolidated balance sheet of A Inc. prepared on the date of acquisition will include which of the following?
A) The book value of A's assets and liabilities plus the book value of B's assets and liabilities
B) The fair market value of A's assets and liabilities plus the book value of B's assets and liabilities
C) The book value of A's assets and liabilities plus the fair market value of B's assets and liabilities
D) The fair market value of A's assets and liabilities plus the fair market value of B's assets and liabilities
Answer: C
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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Page 5
Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Any negative goodwill arising on the date of acquisition:
A) is prorated among the parent company's identifiable net assets.
B) is recognized as a gain on the date of acquisition.
C) should be amortized over a predetermined period.
D) is recognized as a gain on date of acquisition by both the parent and the non-controlling interest.
Q2) Under the parent company method, which of the following statements pertaining to consolidated financial statements is TRUE?
A) The consolidated balance sheet is prepared by adding the carrying amounts of both the parent and its subsidiary.
B) The consolidated balance sheet is prepared by adding the carrying amounts of both the parent and its subsidiary as well as the parent's share of any acquisition differentials.
C) The consolidated balance sheet is prepared by adding the fair market values of both the Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D) The consolidated balance sheet is prepared by adding together the fair market values of both the parent and its subsidiary.
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Chapter 5: Consolidation Subsequent to Acquisition Date
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Q1) Testing intangible assets with indefinite useful lives for impairment:
A) occurs every year.
B) occurs when only there has been an indication of an impairment in the value of the asset such as a reduction in cash flow generation, idle assets, etc.
C) never occurs because the asset has an indefinite useful life.
D) occurs whenever required by the company's auditors.
Q2) Which of the following statements best describes the accounting treatment of Intangible Assets with indefinite lives?
A) All intangible assets are written down when their carrying values exceed their fair market values.
B) With the exception of Goodwill, all intangible assets are written down when their carrying values exceed their fair market values.
C) All intangible assets are written down when their carrying values exceed their undiscounted future cash flows.
D) The recoverable amount is determined and compared to the carrying amount. If the recoverable amount is greater than the carrying amount than no impairment exists; otherwise, there is an impairment and the asset is written down to its recoverable amount.
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7
Chapter 6: Intercompany Inventory and Land Profits
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Q1) X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What is the after-tax dollar value of X's realized profits during the year on its sales to Y?
A) $2,000
B) $1,000
C) $600
D) $400
Q2) Which of the following methods does NOT call for the elimination of ALL intercompany profits?
A) Identifiable net asset method
B) Fair value enterprise method
C) Proportionate consolidation method
D) Partial goodwill method
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Page 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 of interest expense, excluding amortization of the bond discount, (if any) would have to be eliminated in 2020 as a result of the intercompany sale of the bonds?
A) None
B) $12,000
C) $12,200
D) $14,400
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Page 9
Chapter 8: Consolidated Cash Flows and Changes in Ownership
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Q1) ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750. ABC Inc. uses the equity method to account for its investment in 123 Inc.
What percentage of its Investment in 123 was sold by ABC?
A) 14%
B) 50%
C) 56%
D) 20%
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) On December 31, 2020, XYZ Inc. has an account payable of $2,000 for operating expenses incurred during the year. These expenses are only tax deductible when paid. XYZ normally pays for its operating expenses one month after they are incurred. Assuming a 20% tax rate, these expenses shall result in:
A) a deferred tax liability of $2,000.
B) a deferred tax liability of $400.
C) a deferred tax asset of $400.
D) a deferred tax asset of $2,000.
Q2) SNZ Inc. purchased machinery and equipment in the amount of $30,000 on January 1, 2019. SNZ plans to depreciate the asset straight-line over 20 years with no salvage value. For tax purposes these assets are to be depreciated using a capital cost allowance rate of 20%. The half-year rule applies. SNZ pays tax at a rate of 25%. What is the amount of the temporary difference between straight line depreciation and capital cost allowance on December 31, 2020?
A) $1,500
B) $1,800
C) $3,600
D) $5,400
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Chapter 10: Foreign Currency Transactions
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Q1) Prairie Dog Inc. borrowed US$10,000,000 on January 1, 2017 at an annual rate of 8%. The loan is due December 31, 2020 and interest is payable annually each December 31. The exchange rates on selected dates throughout the life of the loan are shown below: \(\begin{array}{|l|l|}
\hline \text { January } 1,2017 & \text { CDN } \$ 1.4415 \\
\hline \text { December } 31,2017 & \text { CDN } \$ 1.4325 \\
\hline \text { December } 31,2018 & \text { CDN } \$ 1.4575 \\
\hline \text { December } 31,2019 & \text { CDN } \$ 1.4435 \\
\hline \text { December } 31,2020 & \text { CDN } \$ 1.4525 \\ \hline
\end{array}\) Assume that the average annual exchange rate was equal to the December 31<sup>st</sup> spot rates.
Prepare the journal entries for 2017.
Q2) 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.
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Page 12
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, depreciation and amortization must be translated using closing rates.
B) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization are translated using average rates.
C) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization must be translated using historical rates.
D) If the functional currency of the foreign operation is the same as the parent's functional currency, depreciation and amortization must be translated using closing 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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Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) Which of the following statements is correct?
A) Endowments are donations that are received with the provision that it will be invested and only the investment income may be spent by the organization.
B) Endowments are unrestricted donations which can be used for any purposes that are consistent with the goals and objectives of the not-for-profit organization.
C) Endowments are provided as donations which only allow a not-for-profit organization to invest in other not-for-profit organizations only.
D) Endowments may be restricted and unrestricted funds which must be used in accordance with the wishes of the contributor and only available during the life of the donor.
Q2) If a not-for-profit organization uses the restricted fund method of reporting and has an endowment fund, how should an endowment contribution be reported?
A) As revenue in the general fund.
B) As revenue in the endowment fund.
C) As a direct increase in net assets in the general fund.
D) As a direct increase in net assets in the endowment fund.
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Page 14