Consolidations and Mergers
Chapter Exam Questions
Course Introduction
This course explores the principles and practices of business combinations, with a primary focus on consolidations and mergers. Students will learn the regulatory frameworks, accounting standards, and financial reporting requirements associated with corporate restructurings. Key topics include purchase accounting, goodwill calculation, intercompany transactions, the preparation of consolidated financial statements, and the impact of mergers on stakeholders. Through case studies and practical examples, the course equips students with the analytical skills necessary to evaluate merger strategies and understand the implications for organizational performance and governance.
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) After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?
A) Cost of goods sold.
B) Property, plant, & equipment.
C) Patents.
D) Goodwill.
E) Bonds payable.
Answer: D
Q2) Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?
A) The investor and investee make reciprocal entries to defer and realize inventory profits.
B) The same adjustments are made for upstream and downstream transfers.
C) Different adjustments are made for upstream and downstream transfers.
D) No adjustments are necessary.
E) Adjustments will be made only when profits are known upon sale to outsiders. Answer: B
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Chapter 2: Consolidation of Financial Information
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Q1) How are direct combination costs accounted for in an acquisition transaction?
Answer: In an acquisition, direct combination costs are expensed in the period of the acquisition.
Q2) Which of the following statements is true?
A) The pooling of interests for business combinations is an alternative to the acquisition method.
B) The purchase method for business combinations is an alternative to the acquisition method.
C) Neither the purchase method nor the pooling of interests method is allowed for new business combinations.
D) Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations.
E) Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.
Answer: C
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2011: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share.
(2)) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be
A) $18,000.
B) $16,500.
C) $20,000.
D) $18,500.
E) $19,500.
Answer: E
Q2) What is the basic objective of all consolidations?
Answer: The basic objective of all consolidations is to combine asset, liability, revenue, expense, and stockholders' equity accounts in a manner consistent with the concepts of the acquisition method to reflect substance over form in financial reporting for consolidations. When a parent has control (substance) over a subsidiary and separate incorporation is maintained (form), the consolidated financial statements will reflect results as if the multiple entities were one entity.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading market for Beazley Corp. At the time of the acquisition, the book value of Beazley's net assets was $300,000.
Required:
What amount should have been assigned to the non-controlling interest immediately after the combination?
Q2) When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
A) Income from subsidiary is not recognized until there is an entire year of consolidated operations.
B) Income from subsidiary is recognized from date of acquisition to year-end.
C) Excess cost over acquisition value is recognized at the beginning of the fiscal year.
D) No goodwill can be recognized.
E) Income from subsidiary is recognized for the entire year.
Q3) 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?
Q4) Where should a non-controlling interest appear on a consolidated balance sheet?
Page 6
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) 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.
Q2) Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2011. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?
Q3) Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2011, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2011 was $119,000. Required: What was the non-controlling interest's share of Stroban Co.'s net income?
Page 7
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other Issues
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Q1) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price.
On January 1, 2010, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2012, for 95% of the face value. Both companies utilized the straight-line method of amortization.
What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2013?
Q2) Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?
A) Subsidiary net income is not affected by a gain on bond transaction.
B) Subsidiary net income is not affected by a loss on bond transaction.
C) Parent Company net income is not affected by a gain on bond transaction.
D) Parent Company net income is not affected by a loss on bond transaction.
E) Consolidated net income is not affected by a gain or loss on bond transaction.
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Page 8
Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?
A) $0.
B) $50,000.
C) $70,000.
D) $100,000.
E) $150,000.
Q2) What are the essential criteria for including a subsidiary within an affiliated group?
Q3) Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.
Q4) What configuration of corporate ownership is described as a father-son-grandson relationship?
Q5) What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.
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Chapter 8: Segment and Interim Reporting
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Q1) Which of the segments are separately reportable?
A) DVDs only.
B) DVDs and MP3s.
C) DVDs and VCRs.
D) VCRs and MP3s.
E) DVDs, VCRs, and MP3s.
Q2) According to U.S. GAAP, what general information about an operating segment needs to be disclosed?
Q3) Which of the following costs require similar treatment to Property Tax Expense in an interim financial report? 1) Annual major repairs.
2) Advertising expense.
3) Bonus expense, if estimable.
4) Quantity discounts based on annual sales.
A) 1 and 2
B) 1, 2, and 3
C) 1, 2, and 4
D) 2, 3, and 4
E) 1, 2, 3, and 4
Q4) What is the major objective of segment reporting?
Q5) What is meant by the term: disaggregated financial information?
Page 10
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2011. Pigskin received payment of 35,000 British pounds on May 8, 2011. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)
A) $10,500 loss
B) $10,500 gain
C) $1,750 loss
D) $3,850 loss
E) No gain or loss should be recognized.
Q2) A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?
A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange loss will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.
Q3) What is the major assumption underlying the one-transaction perspective?
Q4) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q5) What is meant by the spot rate?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) Under the temporal method, depreciation expense would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) 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.
Q3) A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
A) There is no translation adjustment.
B) There is a transaction loss.
C) There is a transaction gain.
D) There is a negative translation adjustment.
E) There is a positive translation adjustment.
Page 12
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) Which of the following are not authoritative pronouncements of International Financial Reporting Standards (IFRSs)? 1) International Financial Reporting Standards issued by the IASB
2) International Accounting Standards issued by the IASC and adopted by the IASB
3) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC)
4) U.S. Generally Accepted Accounting Principles
A) 4 only.
B) 3 and 4.
C) 1, 3, and 4.
D) 2, 3, and 4.
E) 1, 2, 3, and 4.
Q2) 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.
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) Which one of the following requires the registration of mutual funds that engage in investing and trading in securities?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Foreign Corrupt Practices Act of 1977.
E) The Sarbanes-Oxley Act of 2002.
Q2) What is included in Part II of a securities registration statement?
Q3) EDGAR stands for:
A) Electronic Debits, Gains, Assets and Revenues System.
B) Electronic Data Gathering, Analysis, and Retrieval System.
C) Explanatory Data Gathering, Analysis, and Retrieval System.
D) Explanatory Debits, Gains, Assets and Revenues System.
E) Electronic Data, Gross Analysis, and Revenues System.
Q4) Name the two broad categories of filings with the SEC.
Q5) What is a wrap-around filing?
Q6) What are the responsibilities of the SEC's Division of Corporation Finance?
Q8) What information is required in proxy statements? Page 14
Q7) What is included in Part I of a securities registration statement?
Q9) What information needs to be included in Form 10-Q?
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Page 15
Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) What is meant by a "fully secured liability"?
Q2) 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.
Q3) What is an order for relief?
Q4) What is the role of the trustee in the liquidation of a company?
Q5) To what does the term Chapter 7 bankruptcy refer?
Q6) How is the presentation of an income statement during a reorganization different from a normal income statement?
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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, 2010, 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 2010 and $180,000 in 2011. Each partner withdrew $1,000 for personal use every month during 2010 and 2011. What was Cleary's total share of net income for 2011?
A) $34,420.
B) $75,540.
C) $65,540.
D) $70,040.
E) $61,420.
Q2) Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?
Q3) By what methods can a person gain admittance to a partnership?
Q4) Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?
Q5) What events cause the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners.
Required: Who would have received the $10,400?
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) What accounting transactions are not recorded by an accountant during partnership liquidation?
A) The conversion of partnership assets into cash.
B) The allocation of gains and losses from sales of assets.
C) The payment of liabilities and expenses.
D) The initiation of legal action by creditors of the partnership.
E) Write-off of remaining unpaid debts.
Q4) For a partnership, how should liquidation gains and losses be accounted for?
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Page 18
Chapter 16: Accounting for State and Local Governments
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Q1) The school system had some booklets printed by a local print shop on September 22, 2011. 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.
Q2) 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.
Q3) Prepare the journal entry and identify the fund to record the purchase order of two trucks owned by Simple City for $100,000. Identify the fund in which the entry is recorded.
Q4) In governmental accounting, what term is used for a decrease in financial resources?
Q5) What is the purpose of fund financial statements?
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Chapter 17: Accounting for State and Local Governments
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Q1) GASB Codification Section 2200.106-107 makes which of the following statements regarding Management's Discussion and Analysis?
A) MD&A is required only for Proprietary Fund Financial Statements.
B) MD&A is required for all state and local government financial statements.
C) MD&A is only required for comprehensive annual financial reports.
D) MD&A for state and local government financial statements must include an analysis of potential, untapped revenue sources.
E) MD&A is an optional inclusion for state and local government financial statements.
Q2) What is meant by the term fiscally independent?
Q3) 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.
Q4) What information is required in the financial section of a state or local government's CAFR?
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Page 20
Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) For not-for-profit organizations, what is the difference in identification of "control" between a merger and an acquisition?
Q2) What are the objectives of accounting for a not-for-profit organization?
Q3) For a not-for-profit organization, when is recognition of contributions of artworks and historical treasures not required?
Q4) 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.
Q5) Give several examples of voluntary health and welfare organizations.
Q6) For a voluntary health and welfare organization, what are supporting services expenses?
Q7) A not-for-profit organization receives a computer as a donation (valued at $2,000). Prepare the journal entry for the transaction.
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Page 21
Chapter 19: Accounting for Estates and Trusts
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Q1) When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of:
A) Ademption.
B) Amendment.
C) Abatement.
D) Accretion.
E) Aggregation.
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 ordinary repairs to the rental property of $5,000.
Q3) What is meant by estate accounting?
Q4) In settling an estate, what is the meaning of the term legacy?
Q5) What is the difference between an executor and an administrator?
Q6) What is a remainderman of trust property?
Q7) What is meant by "an individual dies intestate"?
Page 22
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