Accounting for Mergers and Acquisitions
Pre-Test Questions
Course Introduction
Accounting for Mergers and Acquisitions explores the financial reporting and analytical issues arising from business combinations and corporate restructurings. The course covers key concepts such as purchase accounting, goodwill and intangible assets, methods for consolidating financial statements, and the treatment of non-controlling interests. Students will examine the relevant accounting standards, including IFRS and US GAAP, and learn to analyze the impact of mergers and acquisitions on financial statements. Case studies are incorporated to provide practical insights into due diligence, valuation, and post-merger integration challenges from an accounting perspective.
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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Q1) 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.
Q2) For which of the following types of organizations does the CPA Canada Handbook not provide specific accounting standards?
A) Publicly accountable enterprises.
B) Private enterprises.
C) Not-for-profit organizations.
D) Proprietorships.
Answer: D
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3
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 significant influence investment in Stamp Company using the cost method, 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: A
Q2) If the investor sells part of its stake in an associate, accounted for using the equity method, which of the following is used to calculate the gain or loss on the sale of these shares?
A) The average carrying amount of the investment
B) The FIFO method
C) The LIFO method
D) The specific identification method
Answer: A
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Page 4
Chapter 3: Business Combinations
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Q1) Which of the following regarding the preparation of Consolidated Financial Statement is correct?
A) Once the parent company prepares Consolidated Financial Statements, it no longer needs to prepare financial statements for its own activities.
B) Only the subsidiaries are required to prepare Financial Statements.
C) Consolidated Financial Statements are required by the Parent Company for reporting purposes only; each company must continue to prepare its own Financial Statements.
D) Consolidated Financial Statements are required only when both companies are publicly traded.
Answer: C
Q2) How should intangible assets which are readily identifiable but not accurately measured be accounted for?
A) They should be ignored since they can't be accurately measured.
B) They should be independently appraised and accounted for at their appraised value.
C) They should be included in Goodwill.
D) They should be accounted for at an amount deemed reasonable by management.
Answer: C
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Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Contingent consideration will be classified as a liability when:
A) it will be paid in the form of additional equity.
B) it will be paid in the form of cash or another asset.
C) the form of payment will be determined at a future date.
D) the acquirer decides the appropriate time to make a payment.
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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Page 6
Chapter 5: Consolidation Subsequent to Acquisition Date
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Q1) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on GNR's investment in NMX account under the cost method?
A) An increase of $24,000
B) An increase of $30,000
C) An increase of $40,000
D) No effect
Q2) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR Inc. uses the Equity Method, what effect would the above information have on GNR's investment in NMX account?
A) An increase of $10,000.
B) An increase of $30,000.
C) An increase of $40,000.
D) No effect.
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) If a parent company borrows money at an interest rate of six percent from its subsidiary, what effect (if any) will this have on the non-controlling interest?
A) This would have no effect on the non-controlling interest.
B) The subsidiary would book its pro-rata share of any interest revenue.
C) The non-controlling interest balance would be reduced by the amount of the loan.
D) The subsidiary would record any interest revenue as an extraordinary gain.
Q2) When are profits from intercompany land sales realized?
A) They are realized only when sold to outsiders.
B) They are realized once legal ownership of the land has been transferred.
C) They are realized when consideration has been received for the land.
D) They are realized when an agreement is signed with respect to ownership of the land.
Q3) 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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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 would be the pre-tax gain or loss to the combined entity on the intercompany sale of the bonds?
A) $20,000 loss
B) $10,000 loss
C) Nil
D) $10,000 gain
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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 is the carrying value of the trademark after the sale?
A) $12,600
B) $18,000
C) $20,000
D) $30,000
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.
Page 10
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Chapter 9: Other Consolidation Reporting Issues
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Q1) Under which accounting standards is the reporting of the liabilities of operating segments required?
A) It is required under US GAAP.
B) It is required under ASPE.
C) It is required under IFRS.
D) It is required under IFRS only when this information is reported to the organization's chief operating decision maker.
Q2) Which of the following is not a requirement for a business component to be considered an Operating Segment under current Canadian GAAP?
A) Discrete financial information must be available.
B) Operating results are regularly reviewed by the enterprise's Chief Operating Decision Maker to make decisions about resources to be allocated to the segment and assess its performance.
C) The reportable income or loss must be at least 10% of the combined profit or loss for the combined entity.
D) It engages in business activities from which it may earn revenues and incur expenses.
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Chapter 10: Foreign Currency Transactions
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Q1) On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
\[\begin{array} { | l | l | l }
\hline \text { Trarsaction date: July } 1,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.370 \\
\hline\text { Year end July } 31,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.345 \\
\hline \text { Setternent date: August } 31,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$
1.325 \\
\hline
\end{array}\] At what amount would CANCO record its inventory purchase from RNB on July 1, 2020?
A) CDN$15,900
B) CDN$16,440
C) CDN$16,140
D) US$12,000
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Page 12
Chapter 11: Translation and Consolidation of Foreign Operations
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Q1) What exposure exists when the present value of future cash flows change as a result of changes in exchange rates?
A) Translation (accounting) exposure
B) Transaction exposure
C) Economic exposure
D) Business risk exposure
Q2) A foreign subsidiary has earned income evenly over the year and it has paid its income taxes for the year in two instalments, half on June 30 and half on December 31. Assuming the foreign subsidiary's functional currency is the same as the parent's functional currency, what rate(s) should be used to translate the foreign subsidiary's income tax expense into Canadian dollars when preparing translated financial statements for the year ended December 31?
A) Half at the rate at June 30 and half at the rate at December 31.
B) All at the average rate for the year.
C) All at the closing rate for the year.
D) All at the opening rate for the year.
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Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) How would the not-for-profit organization report each controlled profit-oriented enterprise?
A) It is not required to report its interest in profit-oriented subsidiaries.
B) By disclosure in the notes to the financial statements of the not-for-profit organization.
C) By consolidating the controlled enterprise into its own financial statements or by using the equity method and disclosing additional financial information.
D) By using the cost method together with appropriate note disclosure.
Q2) A not-for-profit organization receives a restricted contribution of $20,000 to be used for a specific project. During the current year, $14,000 is spent toward the project with the balance to be spent next year. How much donation revenue should the not-for-profit organization recognize in the current year, if the organization uses the restricted fund method of reporting and did not have a fund for this project?
A) $6,000
B) $14,000
C) $20,000
D) $34,000
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