Accounting for Mergers and Acquisitions
Midterm Exam
Course Introduction
Accounting for Mergers and Acquisitions explores the principles, standards, and methodologies used to account for business combinations, consolidations, and restructurings. This course examines the financial reporting requirements under relevant accounting standards such as IFRS and US GAAP, focusing on purchase price allocation, goodwill recognition and impairment, and the elimination of intercompany transactions. Through case studies and practical examples, students will gain an understanding of the complexities involved in merger and acquisition transactions, including tax considerations and regulatory compliance, equipping them to analyze, record, and report on these transformative business activities with accuracy and strategic insight.
Recommended Textbook
Advanced Accounting 12th Edition by Hoyle
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19 Chapters
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Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Wathan Inc. sold $180,000 in inventory to Miller Co. during 2012, for $270,000. Miller resold $108,000 of this merchandise in 2012 with the remainder to be disposed of during 2013.
Required:
Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Wathan should have recorded at the end of 2012 to defer the unrealized intra-entity inventory profit.
Answer: 11ea8e0c_b195_8827_b636_e55a1965785c_TB2311_00_TB2311_00
Q2) What is the primary objective of the fair value method of accounting for an investment?
Answer: The investor possesses only a small percentage of an investee and cannot expect to have a significant impact on the operations or decision-making of the investee. Since the shares are bought in anticipation of cash dividends or appreciation of stock market values, dividends received are accounted for as income and the investment is reflected at each balance sheet date at its fair value which is generally the market value at that date.
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Page 3
Chapter 2: Consolidation of Financial Information
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Q1) For acquisition accounting, why are assets and liabilities of the subsidiary consolidated at fair value?
Answer: The acquisition transaction is assumed to occur through an orderly transaction between market participants at the measurement date of the acquisition. Thus identified assets and liabilities acquired have been assigned fair value for the transfer to the acquirer and this is a relevant and faithful representation for consolidation.
Q2) How is contingent consideration accounted for in an acquisition business combination transaction?
Answer: The fair value approach of the acquisition method views contingent payments as part of the consideration transferred. Under this view, contingencies have a value to those who receive the consideration and represent measurable obligations of the acquirer. The amount of the contingent consideration is measured as the expected present value of a potential payment and increases the investment value recorded.
Q3) What is the difference in consolidated results between a business combination whereby the acquired company is dissolved, and a business combination whereby separate incorporation is maintained?
Answer: There is no difference in consolidated results.
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) 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.
Q2) Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?
Answer: The loan represents an intra-entity payable for Hans and receivable for Dutch, and each receivable and payable would be eliminated in preparing a consolidated balance sheet.
Q3) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?
Answer: The initial value method is the easiest to use.
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Page 5
Chapter 4: Consolidated Financial Statements and Outside Ownership
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Sample Questions
Q1) On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. Prepare a proper presentation of consolidated net income for 2015.
Q2) How is a non-controlling interest in the net income of an entity reported in the income statement?
Q3) Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' revenues for 2015 totaled $200,000.
Required: What amount of Scarvens' revenues would be included in the consolidated revenues under the acquisition method of accounting for business combinations?
Q4) Where may a non-controlling interest be presented in a consolidated balance sheet?
Page 6
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Chapter 5: Consolidated Financial Statements Intra-Entity
Asset Transactions
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Sample Questions
Q1) On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. Compute Collins' share of Smeder's net income for 2012.
A) $12,400.
B) $14,400.
C) $11,200.
D) $12,800.
E) $18,000.
Q2) Why do intra-entity transfers between the component companies of a business combination occur so frequently?
Q3) What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?
Q4) When is the gain on an intra-entity transfer of land realized?
Page 7
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Chapter 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows,
and Other Issues
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Sample Questions
Q1) Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2011, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $400,000. On January 1, 2013, Ernest acquired 30 percent of these same bonds on the open market at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2014 beginning Retained Earnings as a result of this bond acquisition?
A) $114,000.
B) $122,000.
C) $136,000.
D) $144,000.
E) $152,000.
Q2) A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?
A) The investment in subsidiary will decrease.
B) Additional paid-in capital will decrease.
C) Retained earnings will increase.
D) The investment in subsidiary will increase.
E) No adjustment will be necessary.
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income tax return?
Q2) On January 1, 2013, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?
A) Included in current assets.
B) Included in noncurrent assets.
C) Consolidated stockholders' equity is reduced by $350,000.
D) Consolidated stockholders' equity is reduced by $300,000.
E) There is no effect on the consolidated balance sheet, because the effects have been eliminated.
Q3) X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?
Q4) What are the benefits or advantages of filing a consolidated income tax return?
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Chapter 8: Segment and Interim Reporting
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Q1) What information does U.S. GAAP require to be disclosed for a major customer?
A) The identity of the customer.
B) The operating segment reporting sales to the customer.
C) The geographic area of the customer.
D) The percentage of sales derived from the customer.
E) The length of time the customer has been a customer of the company.
Q2) According to U.S. GAAP, how should common costs be allocated to individual segments to determine segment profit or loss?
Q3) The following items are required to be disclosed for each operating segment except:
A) Factors used to allocate company-wide pension expense.
B) Revenues from transactions with other operating segments.
C) Interest revenue and interest expense.
D) Depreciation, depletion, and amortization expense.
E) Revenues from external customers.
Q4) Describe the test to determine whether a sufficient number of operating segments are disclosed.
Q5) According to U.S. GAAP, what revenues and expenses included in segment profit or loss need to be disclosed?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
A) Recognized foreign currency denominated assets and liabilities.
B) Unrecognized foreign currency firm commitments.
C) Forecasted foreign currency denominated transactions.
D) Net investment in foreign operations.
E) Deferred foreign currency gains and losses.
Q2) Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books?
A) $2,000.
B) $2,100.
C) $2,500.
D) $2,700.
E) $2,800.
Q3) What is the major assumption underlying the one-transaction perspective?
Page 11
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Chapter 10: Translation of Foreign Currency Financial Statements
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Sample Questions
Q1) Which accounts are translated using current exchange rates?
A) all revenues and expenses.
B) all assets and liabilities.
C) cash, receivables, and most liabilities.
D) all current assets and liabilities.
E) all noncurrent assets and liabilities.
Q2) Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
Q3) Under the current rate method, property, plant & equipment would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q4) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
Page 12
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years.
At what amount should the equipment be reported on the December 31, 2013 balance sheet under the IFRS revaluation model?
A) $190,000
B) $173,500
C) $165,000
D) $136,000
E) $110,000
Q2) What accounting topics were covered under the FASB short-term convergence project?
Q3) What is meant by harmonization of accounting standards?
Q4) What problems are caused by diverse accounting practices?
Q5) What are the four different ways IFRS can be used by a country?
Q6) Which two EU directives have helped harmonize accounting standards?
Q7) What is the IOSCO?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Sample Questions
Q1) What information is required in proxy statements?
(1) Five-year summary of operations.
(2) Five-year summary of industry segments.
(3) Listing of company directors and executive officers.
(4) Management discussion and analysis (MD&A).
A) 1, 2 and 3.
B) 2, 3 and 4.
C) 1, 3 and 4.
D) 1, 2 and 4.
E) 1, 2, 3, and 4.
Q2) Which one of the following is not a division of the SEC?
A) the Division of Corporation Finance.
B) the Division of Investment Management.
C) the Division of Compliance Information.
D) the Division of Enforcement.
E) the Division of Trading and Markets.
Q3) What information needs to be included in Form 10-Q?
Q4) What is the purpose of the SEC's Regulation S-K?
Q6) How are the operations of the SEC funded? Page 14
Q5) Why was the Public Utility Holding Company Act of 1935 created?
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Page 15
Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Sample Questions
Q1) What is the role of the trustee in the liquidation of a company?
Q2) What is the meaning of the phrase debtor in possession?
Q3) Assuming all of the following expenses have priority, in what order are they prioritized?
A) Administrative expenses, employee claims for wages, unpaid taxes, claims for the return of customer deposits.
B) Employee claims for wages, unpaid taxes, administrative expenses, claims for the return of customer deposits.
C) Unpaid taxes, administrative expenses, employee claims for wages, return of customer deposits.
D) Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes.
E) Unpaid taxes, return of customer deposits, employee claims for wages, administrative expenses.
Q4) What occurs in the accounting records for fresh start accounting when a bank agrees to accept less than the debtor's book value of a note payable?
Q5) What is an order for relief?
Q6) Who must accept and confirm the Reorganization plan?
Page 16
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Chapter 14: Partnerships: Formation and Operation
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Q1) Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013.
What was Cleary's capital account balance at the end of 2013?
A) $163,420.
B) $151,420.
C) $139,420.
D) $100,000.
E) $142,000.
Q2) The dissolution of a partnership occurs
A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.
Q3) What is the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) The schedule of liquidation
A provision for an equitable distribution of assets during liquidation.
Q2) Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit balance in their respective capital account. All assets from the partnership have been liquidated and all of the liabilities had been paid. How should any additional cash coming into the partnership be distributed to the partners?
Q3) The Arnold, Bates, Carlton, and Delbert partnership was liquidating. It had paid all its liabilities and had some assets yet to be sold. The partners had capital account balances of ($50,000), $90,000, $110,000, and $130,000. There was $40,000 cash available for distribution to the partners. What procedures would be followed to determine the amount of cash that could safely be distributed to each partner?
Q4) What should occur when a solvent partner has a deficit balance?
Q5) What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?
Q6) Why is a Schedule of Liquidation prepared?
Q7) For a partnership, how should liquidation gains and losses be accounted for?
Q8) What is the purpose of a predistribution plan?
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Chapter 16: Accounting for State and Local Governments
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Q1) On August 21, 2013, Fred City transferred $100,000 to the School System to cover repairs to a school building.
Required:
Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements.
Q2) The school system had some booklets printed by a local print shop on September 22, 2013. The school system was charged $1,560 for the printing, but the bill is not due until October.
Required:
(A.) Prepare the required journal entry in the General Fund for the Fund Financial Statements.
(B.) Prepare the required journal entry for the Government-Wide Financial Statements.
Q3) The Town of Anthrop receives a $10,000 grant to make the Town Hall handicapped-accessible.
Required:
Prepare the journal entry, and identify the fund in which it is recorded, to record the receipt of the grant.
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19
Chapter 17: Accounting for State and Local Governments
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Sample Questions
Q1) For fund financial statements, what account is credited when a piece of equipment is leased on a capital lease?
A) Equipment-Capital Lease.
B) Encumbrances-Long Term.
C) Encumbrances-Lease Obligations.
D) Capital Lease Obligation.
E) Other Financing Sources-Capital Lease.
Q2) The City of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city.
Required:
Prepare the journal entry/entries for the two transactions for the purposes of preparing the fund financial statements.
Q3) What information is required in the introductory section of a state or local government's CAFR?
Q4) What three criteria must be met to identify a governmental unit as a primary government?
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Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. The hospital estimated that contractual adjustments would reduce the amount collected from third-party payors to $1,710,000.
Required:
Prepare the necessary journal entry to record the contractual adjustments.
Q2) A not-for-profit organization (Charity A) raises money for other charitable organizations. Charity A receives $10,000 to distribute to Charity B.
Assume there are no donor rights to revoke or redirect the gift.
Q3) Reciprocal transfers where both parties give and receive something of value are A) contributed services.
B) unconditional promises to give.
C) endowment transactions.
D) exchange transactions.
E) required contributions.
Q4) What are third party payors? Why are their interests important in accounting for health care entities?
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Chapter 19: Accounting for Estates and Trusts
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Q1) What is the amount of the personal exemption on an estate income tax return?
A) $0.
B) $100.
C) $300.
D) $500.
E) $600.
Q2) What is the process of abatement?
A) an attempt to determine the deceased's intentions when the terms of the will are unclear.
B) a reduction of various bequests when the estate is not adequate to satisfy them completely.
C) selling of assets included in an estate to be able to pay creditors.
D) payment of the claims of creditors.
E) the establishment of how the creditors will be paid.
Q3) What is a remainderman of trust property?
Q4) How may real property be treated in identifying estate property subject to probate?
Q5) What is the difference between an executor and an administrator?
Q6) What are the three goals of probate laws?
Q7) What is meant by "an individual dies intestate"?
Page 22
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