Accounting for Mergers and Acquisitions
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Course Introduction
This course explores the complex financial reporting and accounting issues associated with mergers, acquisitions, and related business combinations. Students will examine the application of accounting standards to the consolidation of financial statements, the valuation and allocation of purchase price, goodwill recognition and impairment, and the treatment of noncontrolling interests. The course also covers regulatory considerations, disclosure requirements, and the effects of mergers and acquisitions on financial ratios and performance metrics. Real-world case studies and practical examples are used to highlight the challenges and best practices in accounting for business combinations.
Recommended Textbook
Advanced Accounting 11th Edition by
Joe Ben Hoyle
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19 Chapters
1785 Verified Questions
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. The balance in the investment account at December 31, 2012, is
A) $370,000.
B) $355,000.
C) $305,000.
D) $400,000.
E) $105,000.
Answer: A
Q2) How would a change be made from the fair value method to the equity method of accounting for investments?
Answer: According to GAAP, the investment account and retained earnings of the investor should be adjusted to retrospectively restate results of operations of prior periods.
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Chapter 2: Consolidation of Financial Information
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Q1) How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?
Answer: In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews.
Q2) Which of the following statements is true regarding the acquisition method of accounting for a business combination?
A) Net assets of the acquired company are reported at their fair values.
B) Net assets of the acquired company are reported at their book values.
C) Any goodwill associated with the acquisition is reported as a development cost.
D) The acquisition can only be effected by a mutual exchange of voting common stock.
E) Indirect costs of the combination reduce additional paid-in capital.
Answer: A
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) Why is push-down accounting a popular internal reporting technique?
Answer: Push-down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If acquisition value allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.
Q2) Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?
A) the amount of consolidated net income.
B) total assets on the consolidated balance sheet.
C) total liabilities on the consolidated balance sheet.
D) the balance in the investment account on the parent's books.
E) the amount of consolidated cost of goods sold.
Answer: D
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Jax Company uses the acquisition method for accounting for its investment in Saxton Company. Jax sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?
A) The difference between selling price and acquisition value is recorded as a realized gain or loss.
B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss.
C) The difference between selling price and carrying value is recorded as a realized gain or loss.
D) The difference between selling price and carrying value is recorded as an unrealized gain or loss.
E) The difference between selling price and carrying value is recorded as an adjustment to retained earnings.
Q2) Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?
Q3) Where should a non-controlling interest appear on a consolidated balance sheet?
Q4) What is preacquisition income?
Page 6
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?
A) Proportionately over a designated period of years.
B) When Wood Co. sells the land to a third party.
C) No gain can be recognized.
D) As Wood uses the land.
E) When Wood Co. begins using the land productively.
Q2) X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2011, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling interest in Kent's net income?
A) $90,000.
B) $85,200.
C) $54,000.
D) $94,800.
E) $86,640.
Q3) When is the gain on an intra-entity transfer of land realized?
Page 7
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other
Issues
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Q1) How do intra-entity sales of inventory affect the preparation of a consolidated statement of cash flows?
A) They must be added in calculating cash flows from investing activities.
B) They must be deducted in calculating cash flows from investing activities.
C) They must be added in calculating cash flows from operating activities.
D) Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required.
E) They must be deducted in calculating cash flows from operating activities.
Q2) If a subsidiary issues a stock dividend, which of the following statements is true?
A) Investment in subsidiary on the parent's books will increase.
B) Investment in subsidiary on the parent's books will decrease.
C) Additional paid-in capital on the parent's books will increase.
D) Additional paid-in capital on the parent's books will decrease.
E) No adjustment is necessary.
Q3) Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. When Buckette prepared consolidated financial statements, it should include
A) Shuvelle but not Tayle.
B) Tayle but not Shuvelle.
C) either Shuvelle or Tayle.
D) Shuvelle and Tayle.
E) neither Shuvelle nor Tayle.
Q2) Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?
A) $0.
B) $1,100.
C) $1,800.
D) $6,000.
E) $9,000.
Q3) What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation?
Page 9
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Chapter 8: Segment and Interim Reporting
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Q1) Which of the following statements is false concerning the number of operating segments that should be disclosed?
A) At least 75 percent of total company sales made to outsiders should be presented.
B) Even though an operating segment has been reportable in the past and is of continuing significance, it must meet at least one of the three reporting tests to report separately in the current year.
C) If the 75 percent rule is not met by the results of applying all three reporting tests, additional segments must be disclosed separately despite their failure to satisfy even one of the three quantitative thresholds.
D) If an operating segment qualifies for disclosure in the current year, prior period segment data presented for comparative purposes must be restated to reflect the newly reportable segment as a separate segment.
E) The practical limit to the number of operating segments is 10.
Q2) According to U.S. GAAP, how should common costs be allocated to individual segments to determine segment profit or loss?
Q3) What is meant by the term: disaggregated financial information?
Q4) What is the major objective of segment reporting?
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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 purchases goods denominated in a foreign currency and the foreign currency depreciates?
Q2) What factors create a foreign exchange gain?
Q3) 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.
Q4) How does a foreign currency forward contract differ from a foreign currency option?
Q5) What is meant by the spot rate?
Q6) Where can you find exchange rates between the U.S. dollar and most foreign currencies?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) Under the current rate method, depreciation expense would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements?
A) Net income/loss in the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Other comprehensive income.
E) Retained earnings.
Q3) Under the current rate method, how would cost of goods sold be translated?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) In the United States, foreign companies filing annual reports with the SEC that are not prepared in accordance with U.S. GAAP must:
A) present financial statements that comply with international GAAP.
B) conform with U.S. GAAP or present a reconciliation to U.S. GAAP.
C) have a demonstrated need for capital to be used for operations in the U.S.
D) use the U.S. dollar as their reporting currency.
E) use IFRS, or use foreign GAAP and provide a reconciliation to U.S. GAAP.
Q2) In countries where there is less pressure for public accountability and information disclosure:
A) information needs can be satisfied by requesting information from internal company sources.
B) public offerings of stock shares are the primary source of financing for companies.
C) accounting information is prepared to meet the needs of taxing authorities.
D) accounting standards emphasize accounting for high inflation situations.
E) the accounting focus is on recent market economy reforms.
Q3) Which two EU directives have helped harmonize accounting standards?
Q4) What is the IOSCO?
Q5) What are the four different ways IFRS can be used by a country?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) What is a private placement of securities?
Q2) Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include:
A) three balance sheets, three income statements, and three statements of cash flows.
B) three balance sheets, two income statements, and two statements of cash flows.
C) one balance sheet, one income statement, and one statement of cash flows.
D) two balance sheets, three income statements, and three statements of cash flows.
E) two balance sheets, two income statements, and two statements of cash flows.
Q3) What is blue sky legislation?
Q4) Which of the following securities offerings is not exempt from registration prior to their sale?
A) offerings of more than $5 million.
B) securities issued by governments.
C) securities issued by banks.
D) securities issued by savings and loan associations.
E) offerings of no more than $1 million made to any number of investors within a 12-month period.
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) Which of the following is not a responsibility of the bankruptcy trustee?
A) Recover all property belonging to the insolvent company.
B) Liquidate common stock of the company.
C) Preserve the estate from any further deterioration.
D) Make distributions to the proper claimants.
E) Void preferences made by the debtor within 90 days prior to the filing of the bankruptcy petition if the company was already insolvent.
Q2) Who must accept and confirm the Reorganization plan?
Q3) Where should a company undergoing reorganization report the gains and losses resulting from the reorganization?
A) on the statement of retained earnings.
B) on the income statement, combined with the gains and losses from operations.
C) on the statement of stockholders' equity.
D) on the income statement, separate from other gains and losses.
E) on the statement of cash flows.
Q4) What is the meaning of the phrase debtor in possession?
Q5) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q6) What information is included on the statement of realization and liquidation?
Q7) To what does the term Chapter 11 bankruptcy refer?
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Chapter 14: Partnerships: Formation and Operation
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Sample Questions
Q1) Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Dana?
A) $20,000.
B) $60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners.
40% of Goodwill = $60,000
)40 G = $60,000
G = $150,000 and Dana receives 40% = $60,000. Dana's balance = $60,000 + $60,000 = $120,000.
Q2) Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash.
Required:
Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss directly to the partners.
Q2) What is the purpose of a predistribution plan?
Q3) 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?
Q4) The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?
Q5) For a partnership, how should liquidation gains and losses be accounted for?
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Chapter 16: Accounting for State and Local Governments
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Q1) A new truck was ordered for the sanitation department at a cost of $122,200 on September 3, 2011.
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.
Q2) When a city collects fees from citizens who use the public swimming pool, the money should be recorded in
A) the General Fund.
B) an Enterprise Fund.
C) a Capital Projects Fund.
D) an Agency Fund.
E) an Internal Service Fund.
Q3) In governmental accounting, what term is used for a decrease in financial resources?
Q4) What are the two proprietary fund types?
Q5) What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?
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Chapter 17: Accounting for State and Local Governments
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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 Town of Wakefield opened a solid waste landfill in 2010 that was at 20% capacity on December 31, 2010 and at 50% capacity on December 31, 2011. The city initially anticipated closure costs of $2.3 million but in 2011 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed.
What is the journal entry that should be recorded on December 31, 2011 for Government-wide Financial Statements?
Q3) What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?
Q4) What are the three broad sections of a state or local government's CAFR?
Q5) What is meant by the term legally independent?
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) 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. Prepare the necessary journal entry to record the revenue and receivables.
Q2) In accruing patient charges for the current month, which one of the following accounts should a hospital credit?
A) Accounts Payable.
B) Deferred Revenue.
C) Unearned Revenue.
D) Patient Service Revenues.
E) Accounts Receivable.
Q3) Which of the following is not a question individuals ask of not-for-profit organizations in considering whether to make a contribution?
A) Will donated funds be used effectively by the organization to accomplish its purpose?
B) Will the donated funds be wasted?
C) How much should this organization receive?
D) Is this organization profitable?
E) Is contributing to this charity a wise allocation of resources?
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Chapter 19: Accounting for Estates and Trusts
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Q1) 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 is the remaining principal to be divided equally between the son and the daughter?
A) $10,000 cash
B) $15,000 cash
C) 400 shares of Wal-Mart stock and $10,000 cash
D) 400 shares of Wal-Mart stock and $15,000 cash
E) 1,000 shares of Wal-Mart stock and $5,000 cash
Q2) The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds
$50,000, Rental Property
$100,000, and Personal Property
$80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000.
Prepare the journal entry to record the payment of the estate's liabilities for debts incurred prior to the decedent's death.
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