Accounting for Mergers and Acquisitions Review
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Course Introduction
This course explores the accounting principles, practices, and regulations specific to mergers and acquisitions (M&A). Students will examine the processes of identifying, measuring, and reporting assets, liabilities, and equity in business combinations, with a focus on purchase price allocation, goodwill recognition and impairment, and the impact on consolidated financial statements. Through case studies and practical examples, learners will analyze various types of M&A transactions, understand relevant international and local accounting standards, and discuss the strategic financial reporting implications for organizations undergoing structural change.
Recommended Textbook
Advanced Accounting 11th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Q1) In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue.
3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.
A) Entries 1 and 2.
B) Entries 2 and 3.
C) Entry 1 only.
D) Entry 2 only.
E) Entry 3 only.
Answer: D
Q2) When should an investor not use the equity method for an investment of 21% in another corporation?
Answer: When the investor does not have significant influence with regard to the investee.
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Chapter 2: Consolidation of Financial Information
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Q1) An example of a difference in types of business combination is:
A) A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition.
B) A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition.
C) A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution.
D) A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution.
E) Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.
Answer: C
Q2) 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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4
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) Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.
Answer: The initial balance in the investment account would be the acquisition value implied by the fair value of consideration transferred. This would not include consideration paid for costs to effect the combination. After the acquisition, the balance in the account is increased by the parent's accrual of the subsidiary's income and decreased by the dividends paid by the subsidiary.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2010. During 2010, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2010. What is the effect of including Harbor in consolidated net income for 2010?
A) $350,000.
B) $308,000.
C) $500,000.
D) $440,000.
E) $290,000.
Q2) Where should a non-controlling interest appear on a consolidated balance sheet?
Q3) When a parent uses the initial value method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet?
A) Parent company net income equals consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equal consolidated dividends.
E) Goodwill needs to be recognized on the parent's books.
Q4) What is preacquisition income?
Page 6
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) Edgar Co. acquired 60% of Stendall Co. on January 1, 2011. During 2011, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2011. Consolidated cost of goods sold for 2011 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar?
A) Consolidated cost of goods sold would have remained $2,140,000.
B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary.
C) Consolidated cost of goods sold would have been less than $2,140,000 because of the non-controlling interest in the subsidiary.
D) Consolidated cost of goods sold would have been more than $2,140,000 because of the non-controlling interest in the subsidiary.
E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.
Q2) How is the gain on an intra-entity transfer of a depreciable asset realized?
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other Issues
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Q1) A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true?
A) Since the sale was made at the end of the year, the parent's investment account is not affected.
B) Since the shares were sold for more than book value, the parent's investment account must be increased.
C) Since the shares were sold for more than book value, the parent's investment account must be decreased.
D) Since the shares were sold for more than book value but the parent did not buy any of the shares, the parent's investment account is not affected.
E) None of the above.
Q2) Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2010 and 2011.
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carry-forward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong's identifiable net assets is $500,000 at date of acquisition. Strong's tax rate is 30% and Leader's tax rate is 40%. What is goodwill resulting from this business combination?
A) $40,000.
B) $88,000.
C) $104,000.
D) $152,000.
E) $248,000.
Q2) What configuration of corporate ownership is described as a father-son-grandson relationship?
Q3) What are the benefits or advantages of filing a consolidated income tax return?
Q4) 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?
Q5) What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.
Page 9
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Chapter 8: Segment and Interim Reporting
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Q1) Which of the following is not a required disclosure in an interim financial report?
A) Net income.
B) Earnings per share.
C) Gross profit.
D) Significant changes in estimates or provisions for income taxes.
E) Disposal of a segment, net of income taxes.
Q2) What is the major objective of segment reporting?
Q3) What related items need to be disclosed in regard to total segment assets?
Q4) 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.
Q5) On February 23, 2011, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2011.
Prepare the journal entry for the payment of property taxes on February 23, 2011.
Q6) What is meant by the term: disaggregated financial information?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?
Q2) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?
Q3) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?
Q4) Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2010, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2011, the U.S. dollar equivalent was $144,000. In Mills' 2011 consolidated income statement, how much should have been reported as a foreign exchange gain?
A) $0.
B) $36,000.
C) $48,000.
D) $10,000.
E) $12,000.
Q5) What is the major assumption underlying the one-transaction perspective?
Q6) What is meant by the spot rate?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) What is the justification for the remeasurement of foreign currency transactions?
Q2) A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2008. (A.) How would depreciation expense on the equipment be translated for 2011? (B.) How would depreciation expense on the equipment be remeasured for 2011?
Q3) Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required?
Q4) Under the temporal method, retained earnings would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q5) Under the temporal method, common stock would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
12
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) The IASB and FASB are working on several joint projects. What is the purpose of the Financial Statement Presentation Project?
A) to provide guidance on the application of the acquisition method.
B) to enhance the usefulness of information in assessing the financial performance of the reporting enterprise.
C) to develop a common comprehensive standard on revenue recognition.
D) to develop a common conceptual framework that both boards can use as a basis for future standard-setting.
E) to agree upon financial statement titles that will have no differentiation after translation to various languages.
Q2) What accounting topics were covered under the FASB short-term convergence project?
Q3) Why does each country have its own unique set of financial reporting practices?
Q4) What were the major objectives of the Treaty of Rome?
Q5) What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?
Q6) What are the six key FASB initiatives to further convergence?
Q7) What are the two major types of legal systems used around the world?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) Which of the following is not a security as defined by the SEC?
A) Accounts receivable.
B) Notes receivable.
C) Treasury stock.
D) Debenture.
E) Investment contract.
Q2) What is a private placement of securities?
Q3) What is the primary focus of the Sarbanes-Oxley Act of 2002?
Q4) Why is the SEC's Rule 14c-3 important to the accounting profession?
Q5) Which one of the following regulates the subsequent trading of securities through brokers and exchanges?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Investment Advisers Act of 1940.
E) The Sarbanes-Oxley Act of 2002.
Q6) When is the SEC's Registration Form S-4 used?
Q8) Describe the two parts of the SEC registration statement. Page 14
Q7) What is included in Part II of a securities registration statement?
Q9) When must Form 8-K be filed with the SEC?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) On a statement of financial affairs, a company's assets should be valued at A) historical cost.
B) net realizable value, if lower than historical cost.
C) replacement cost.
D) net realizable value, if higher than historical cost.
E) net realizable value, whether higher or lower than historical cost.
Q2) What term is used for a bankruptcy forced upon a debtor by its creditors?
Q3) What information is conveyed by the Statement of Realization and Liquidation?
A) Account balances reported by the company at the date of the filing of the bankruptcy petition.
B) Cash receipts generated by the sale of the debtor's property.
C) Write up of assets.
D) Recognition of recorded liabilities.
E) Assets and liabilities but not stockholders' equity.
Q4) On a statement of financial affairs, a company's liabilities should be valued at
A) the present value of future cash flows.
B) net realizable value.
C) the amount required for settlement.
D) replacement cost.
E) the amount expected to be paid if the company could honor its debts.
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Chapter 14: Partnerships: Formation and Operation
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Q1) James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000 respectively. Because of a cash shortage James invests an additional $12,000 on June 1<sup>st</sup>. Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner?
Q2) When the hybrid method is used to record the withdrawal of a partner, the partnership
A) revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner.
B) revalues liabilities but not assets, and no goodwill is recorded.
C) can recognize goodwill but does not revalue assets and liabilities.
D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to the withdrawing partner.
E) revalues assets and liabilities but does not record goodwill.
Q3) Determine the balance in both capital accounts at the end of 2011 to the nearest dollar.
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) What is the preferred method of resolving a partner's deficit balance, according to the Uniform Partnership Act?
A) Partners never have a deficit balance.
B) The other partners must contribute personal assets to cover the deficit balance.
C) The partnership must sell assets in order to cover the deficit balance.
D) The partner with a deficit balance must contribute personal assets to cover the deficit balance.
E) The partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities.
Q2) Why is a Schedule of Liquidation prepared?
Q3) What is the role of the accountant during the liquidation process?
Q4) What is a safe cash payment?
Q5) For a partnership, how should liquidation gains and losses be accounted for?
Q6) What events or circumstances might force the termination of a partnership and liquidation of its assets?
Q7) 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?
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Chapter 16: Accounting for State and Local Governments
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Q1) Which group of financial statements is prepared using the "modified accrual accounting" approach?
A) GAAP-Based Financial Statements.
B) Fund Financial Statements.
C) Cost-Based Financial Statements.
D) Government-Wide Financial Statements.
E) General Purpose Financial Statements.
Q2) The reporting of the fund balance of governmental funds will result in a maximum of ___________ categories:
A) One
B) Two
C) Three
D) Four
E) Five
Q3) Which of the following is a fiduciary fund?
A) Pension trust fund.
B) Debt service fund.
C) Permanent fund.
D) Enterprise fund.
E) Capital projects fund.
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Chapter 17: Accounting for State and Local Governments
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Q1) Which of the following is not a criterion of a capital lease?
A) The lease transfers ownership of the property to the lessee by the end of the lease term.
B) The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, net of lessor's investment tax credit.
C) The lease contains an option to purchase the leased property at a bargain price.
D) The lease contains an option to renew.
E) The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
Q2) What are the three broad sections of a state or local government's CAFR?
Q3) Which statement is false regarding the government-wide Statement of Net Assets?
A) the purpose of the Statement of Net Assets is to report the economic resources of the government as a whole.
B) assets are reported excluding capital assets.
C) capital assets are reported net of depreciation.
D) investments are reported at fair value rather than historical cost.
E) Business-type activities include Enterprise Funds.
Q4) What is meant by the term fiscally independent?
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) Which one of the following financial statements is notrequired by GAAP regarding a voluntary health and welfare organization?
A) Statement of Financial Position.
B) Statement of Functional Expense.
C) Statement of Activities and Changes in Net Assets.
D) Statement of Cash Flows.
E) Statement of Operations.
Q2) For the month of December 2011, 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.
Q3) What two classifications are used for the expenses incurred by voluntary health and welfare organizations?
Q4) What is the main source of financial support for most voluntary health and welfare organizations?
Q5) What are the objectives of accounting for a not-for-profit organization?
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Chapter 19: Accounting for Estates and Trusts
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Q1) Which of the following is normally viewed as an adjustment to the principal of an estate?
A) Ordinary repair expenses.
B) Insurance expenses.
C) Utility expenses.
D) Major repairs to rental property.
E) Property taxes.
Q2) The provisions of a will currently undergoing probate are: "One thousand shares of Wal-Mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-Mart stock and $25,000 cash in the savings account. What would the son have received from the settlement of the estate?
A) 1,000 shares of Wal-Mart stock and $15,000 cash
B) 1,000 shares of Wal-Mart stock and $0 cash
C) 1,000 shares of Wal-Mart stock and $10,000 cash
D) 1,200 shares of Wal-Mart stock and $5,000 cash
E) 1,400 shares of Wal-Mart stock and $5,000 cash
Q3) What is meant by "an individual dies intestate"?
Q4) What is meant by estate accounting?
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