Consolidations and Mergers Review Questions
Course Introduction
This course provides a comprehensive examination of business combinations, focusing on consolidations and mergers from both a theoretical and practical accounting perspective. Students will explore the underlying motivations for mergers and acquisitions, the accounting treatment for different forms of business combinations, and the preparation of consolidated financial statements. Topics include acquisition methods, goodwill, minority interests, intercompany transactions, and reporting requirements as per prevailing accounting standards. The course also addresses strategic implications, regulatory considerations, and the ethical aspects of consolidations, equipping students with the analytical skills necessary to evaluate and execute successful mergers and acquisitions.
Recommended Textbook
Advanced Accounting 12th Edition by Paul
M. Fischer
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Chapter 1: Business Combinations: New Rules for a
Long-Standing Business Practice
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Q1) A(n) ________________ occurs when the management of the target company purchases a controlling interest in that company and the company incurs a significant amount of debt as a result.
A)greenmail
B)statutory merger
C)poison pill
D)leveraged buyout
Answer: D
Q2) Orbit Inc.purchased Planet Co.on January 1, 2015.At that time an existing patent having a 5-year estimated life was assigned a provisional value of $10,000 and goodwill was assigned a value of $100,000.By the end of fiscal year 2015, better information was available that indicated the fair value of the patent was $20,000.How should intangible assets be reported at the beginning of fiscal year 2016??
A)?Goodwill $100,000 \(\quad \)Patent $10,000
B)?Goodwill $90,000 \(\quad \)\(\quad \)Patent $16,000
C)?Goodwill $84,000 \(\quad \)\(\quad \)Patent $16,000
D)?Goodwill $90,000 \(\quad \)\(\quad \)Patent $20,000
Answer: B
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Chapter 2: Consolidated Statements: Date of Acquisition
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Q1) Which of the following is not an advantage of the parent issuing shares of stock in exchange for the subsidiary common shares being acquired?
A)It is not necessary to determine the fair values of the subsidiary's net assets.
B)It may allow the subsidiary's shareholders to have a tax free exchange.
C)It avoids the depletion of cash.
D)If the parent is publicly held, the share price is readily determinable.
Answer: A
Q2) An investor records its share of its investee's income as a separate source of income because:
A)The investor has a controlling interest in its investee.
B)The investor has a passive interest in its investee.
C)The investor has an influential interest in its investee.
D)The investor has an active interest in its investee.
Answer: B
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Chapter 3: Consolidated Statements: Subsequent to Acquisition
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Q1) In a mid-year purchase when the subsidiary's books are not closed until the end of the year, the consolidated net income contains the parent's share of the
A)subsidiary's income earned for the entire year.
B)subsidiary's income earned from the beginning of the year to the date of acquisition.
C)subsidiary's income earned from the date of acquisition to the end of the year.
D)dividends received from the subsidiary during the period of ownership.
Answer: C
Q2) The method of accounting for subsidiaries that is required for influential investments is the
A)cost method.
B)simple equity method.
C)investment method.
D)sophisticated equity method.
Answer: D
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Chapter 4: Intercompany Transactions: Merchandise, Plant
Assets, and Notes
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Q1) Phelps Co.uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp.At the time of the acquisition, the fair values of the net asset required approximated their book values.Based upon the following information, what amount does Phelps Co.record as subsidiary income \(\begin{array}{lr}
\text { Phelps internally generated income: } & \$ 250,000 \\
\text { Shore internally generated income: } & \$ 50,000 \\
\text { Intercompany profit on Shore beginning inventory: } & \$ 10,000 \\
\text { Intercompany profit on Shore ending inventory: } & \$ 15,000 \end{array}\)
A)$50,000
B)$44,000
C)$40,000
D)$36,000
Q2) Which of the following should appear in consolidated financial statements?
A)All intercompany transactions properly recorded on each affiliate's books.
B)Transactions between the consolidated company and outside parties.
C)Transactions not accounted for by the simple equity method.
D)Lease transactions between a parent and subsidiary.
Page 6
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Chapter 5: Intercompany Transactions: Bonds and Leases
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Q1) When a parent buys subsidiary bonds:
A)The bonds become new investments/assets from a consolidated viewpoint and no elimination is necessary.
B)The bonds become new investments/assets but the parent company may not retire subsidiary bonds by lending money.
C)Intercompany interest expense/revenue and accrued interest receivable/payable are not eliminated as the new investments to the parent company and the new debt to the subsidiary company needs to be separately shown when consolidation occurs.
D)The bonds are retired when consolidation occurs by elimination and in periods after the purchase need to be eliminated and retained earnings adjustment for any retirement gain or loss that has not been amortized.
Q2) On an income distribution schedule, any gain or loss resulting from intercompany bonds is charged to
A)the issuer of the bonds.
B)the purchaser of the bonds.
C)allocation between the issuer and the purchaser.
D)none of the above
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Chapter 6: Cash Flow, Eps, and Taxation
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Q1) Company P purchased an 75% interest in Company S on January 1, 2016, for $675,000.On the purchase date, Company S stockholders' equity was $800,000.Any excess of cost over book value was attributed to a patent with a 10-year life.In 2016, Company P reported internally generated income before taxes of $80,000.Company S reported internally generated income before taxes of $40,000.The firms file separate tax returns at a 30% tax rate.Assume an 80% exclusion rate on intercompany income.The nondeductible portion of excess amortization is
A)$0 (The amortization is fully deductible)
B)$9,750
C)$2,500
D)$4,500
Q2) When an affiliated group elects to be taxed as a single entity, taxable income is calculated based on
A)consolidated income as determined on the consolidated worksheet.
B)each firms separate income.
C)each firms separate income with adjustments for intercompany transactions.
D)none of the above.
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Chapter 7: Special Issues in Accounting for an Investment
in a Subsidiary
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Q1) When preparing a consolidated balance sheet worksheet when the investment account is maintained under the simple equity method:
A)the parent's share of subsidiary income should be eliminated against retained earnings.
B)the parent's share of the subsidiary's equity accounts may be eliminated directly against the investment account.
C)any intercompany sales must be eliminated against cost of goods sold.
D)the investment account should be converted to the cost method as of the end of the year.
Q2) A new subsidiary is being formed.The parent company purchased 70% of the shares for $20 per share.The remaining shares were sold to a variety of outside interests for an average of $22 per share.The consolidated statements will show A)a gain.
B)a loss.
C)only cash and related equity.
D)goodwill.
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Chapter 8: Subsidiary Equity Transactions, Indirect
Subsidiary Ownership, and Subsidiary Ownership of Parent Shares
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Q1) When a parent purchases a portion of the newly issued stock of its subsidiary in a private offering and the ownership interest decreases,
A)any difference between the change in equity and the price paid is the excess of cost or book value attributable to the new block.
B)any difference between the change in equity and the price paid is viewed as a gain or loss on the sale of an interest.
C)any difference between the change in equity and the price paid is viewed as a change in paid-in capital or retained earnings.
D)there will be no adjustment.
Q2) Company P had 300,000 shares of common stock outstanding.It owned 80% of the outstanding common stock of S.S owned 20,000 shares of P common stock.In the consolidated balance sheet, Company P's outstanding common stock may be shown as A)285,000 shares.
B)300,000 shares.
C)300,000 shares, less 20,000 shares of treasury stock.
D)300,000 shares, footnoted to indicate that S holds 20,000 shares.
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Chapter 9: The International Accounting Environment
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Q1) Forward Contracts:
Calculate the gain or loss to the holder and to the writer of the forward contract who agrees to buy foreign currencies at a specific price.Assume that on May 1, the writer of the forward contract agrees to sell 3,000,000 foreign currencies at a specific price of $0.22 per foreign currency (FC) with delivery in 30 days (May 31).Assume the spot rate at the end of the forward period is $0.20.
What is the entry to the holder on May 1.
Explain how the value of the forward contract changes over time.
Q2) Explain the goal of harmonization of accounting standards.Why is this so important to multinational companies?
Q3) The process of expressing a subsidiary's financial statement amounts denominated in a foreign currency into amounts measured in the reporting currency of its parent company is referred to as:
A)redenomination of financial statements.
B)foreign currency translation.
C)currency consolidation.
D)foreign currency transaction.
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Chapter 10: Foreign Currency Transactions
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Q1) Wolters Corporation is a U.S.corporation that purchased 50,000 chocolate bars from a foreign manufacturer on 6/1/24 for 80,000 foreign currency units, to be paid on 9/1/24.On 6/1/24 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on 9/1/24.Wolters has a July 31 year end.
?
Exchange rates are as follows: ?
The option strike price was $0.645.
\[\begin{array} { l c c }
\text { Date } & \text { Spot Rate } & \text { Option Price } \\
\hline 6 / 1 / 24 & \$ 0.64 & \$ 800 \\
7 / 31 / 24 & \$ 0.66 & \$ 1,500 \\
9 / 1 / 24 & \$ 0.69 & \$ 3,600
\end{array}\] ?
Required: ?
Make the necessary journal entries for Wolters for the period June 1 through September 1, 2024.
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Chapter 11: Translation of Foreign Financial Statements
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Q1) Assuming that the functional currency of a foreign subsidiary is the local currency, which of the following accounts would be translated at the current rate?
A)Additional Paid-in Capital
B)Retained Earnings
C)Allowance for Doubtful Accounts
D)Cost of Goods Sold
Q2) Assuming that a foreign entity is deemed to be operating in an environment dominated by the local currency, the entity's capital stock is translated using A)the current rate.
B)a simple average rate.
C)a weighted average rate.
D)a historical rate.
Q3) List the two primary objectives of translating foreign financial statements according to the FASB #52, which emphasizes the concept of the functional currency.?
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Chapter 12: Interim Reporting and Disclosures About
Segments of an Enterprise
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Q1) Which of the following statements is not true concerning the determination of the effective tax rate to be used for interim reporting?
A)Tax rate changes should not be accounted for retroactively.
B)The effective tax rate for the entire year should be estimated.
C)The effective tax rate should reflect anticipated tax credits.
D)The estimated tax rate should reflect extraordinary items.
Q2) Which of the following best describes the treatment given a change in accounting principles made during the second quarter?
A)The cumulative effect should be recognized in the quarter in which the decision to change is made.
B)Regardless of the quarter of change, the recognition is deferred until year end.
C)All prior interim periods are retrospectively restated.
D)Interim periods prior to the period of change are not restated.
Q3) With regard to major customers, which of the following items is not true?
A)If it qualifies, the federal government is considered a single major customer.
B)The total amount of the sales to each major customer must be disclosed.
C)The names of the major customers must be disclosed.
D)The identity of the segments making the sales must be disclosed.
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Chapter 13: Partnerships: Characteristics, Formation, and
Accounting for Activities
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Q1) Record the entry for the partnership of E & R assuming a net loss of $15,000.The agreement calls for profit and loss to be distributed equally.
Q2) The allocation of pro ts or losses may be based on salaries, interest on invested Capital, a pro t/loss percentage and:
A)Assets
B)Bonus
C)Contributed Capital
D)Liabilities
E)None of the above
Q3) Which of the following statements is most likely false?
A)A partners dissociation may result in dissolution
B)A partner becoming a debtor in bankruptcy
C)A partners dissociation may be involuntary
D)None of the above
Q4) An LLC is a hybrid type of organization that has advantages of
A)Proprietor and partner
B)Partner and corporation
C)Proprietor and corporation
D)S corporation and C corporation
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Chapter 14: Partnerships: Ownership Changes and Liquidations
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Q1) The RUPA establishes rules governing the priority in which partnership assets are distributed to creditors and partners.Subject to any agreement to the contrary what would the first step be in partner's liquidation?
A)Liabilities paid
B)Assets discharged
C)Capital reevaluated
D)Expense paid
Q2) The book-value approach of the bonus method does not directly recognize increases in asset values suggested by the consideration that the incoming partner pays.However, the method does indirectly recognize:
A)Increase by adjusting capital balances
B)Increase by adjusting the operating cash account
C)Increase by reevaluation of partners assets
D)Increase in partners distribution
Q3) In liquidation of a partnership profit and loss become part of:
A)Partners Drawing
B)Cash
C)Partners' capital
D)Partners personal wealth not related to partnership
Page 16
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Chapter 15: Government and Not for Profit Accounting
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Q1) Corrections of previous years errors are made directly through which account:
A)Deferred Asset
B)Deferred Liability
C)Fund Balance- Unassigned
D)General Liability
Q2) Which fund is likely restricted to expenditure for specific operational purposes:
A)Fiduciary Fund
B)Capital Fund
C)Debt Fund
D)Speical revenue Fund
Q3) Fiduciary funds account for resources for which the government unit:
A)Reports under specific guidelines
B)Reports as strictly useful cash
C)Acts as a trustee
D)Acts as a holding account
Q4) Identify the three fund types used in government accounting and their relevance:
Q5) Describe the three types of general ledger accounts and types of journal entries found in a government entity.
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Chapter 16: Governmental Accounting: Other
Governmental Funds, Proprietary Funds, and Fiduciary Funds
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Q1) Which of the following is not a classification of net assets of proprietary funds?
A)Unrestricted
B)Restricted
C)Assigned
D)Invested in capital assets, net of related debt
Q2) Capital improvements which are financed by special assessment debt for which the government is obligated in some manner would be recorded in the General Fixed Assets Account Group as a(n)
A)debit to Expenditures.
B)debit to Assets for the portion owned by the government.
C)investment in General Fixed Assets--Capital Project Funds.
D)Bonds Payable.
Q3) A government may use agency funds to account for all but the following:
A)taxes that are collected that are restricted for a special purpose
B)employee withholdings
C)taxes collected on behalf of other governmental units
D)capital projects undertaken by a government for which special assessment bonds were issued, but for which it has no responsibility in the case of nonpayment
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Chapter 17: Financial Reporting Issues
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Q1) Major funds are described as
A)the general fund and enterprise funds
B)at least 5% of all government and enterprise funds combined
C)those in which assets, liabilities, revenues, or expenditures are at least 10% of all funds in that type.
D)all of the above
Q2) Reciprocal interfund activities include interfund services between government and proprietary funds.
A)True
B)False
Q3) Which of the following could be considered a component unit of a primary government unit?
A)water utility enterprise
B)chamber of commerce
C)pension plan
D)affiliated booster club
Q4) The statement of net assets also includes general long-term liabilities accounted for at face value.
A)True
B)False
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Chapter 18: Accounting for Private Not-For-Profit Organizations
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Q1) A not-for-profit organization issues a Statement of Financial Position.
A)True
B)False
Q2) How do you differentiate between a voluntary health and welfare organization and another not-for-profit organization?
Q3) Public support for a voluntary health and welfare organization includes:
A)news articles about the organization.
B)banners and promotional materials.
C)legacies and bequests.
D)celebrity endorsements.
Q4) Which of the following is not a required characteristic of a private not-for-profit organization per the definition given by the AICPA?
A)no owners or shareholders
B)an operating purpose other than making a profit
C)an organization dedicated to service of the public good
D)Significant contributions from providers who do not expect reciprocal goods or services in return
Q5) What are the two major categories of resources obtained by voluntary health and welfare organizations, and how do they differ?
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Chapter 19: Accounting for Not-For-Profit Colleges and Universities and Health Care Organizations
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Q1) The financial statements required for public healthcare organizations are the statement of revenues, expenses, and changes in net assets, the statement of net assets and the statement of cash flows.
A)True
B)False
Q2) What is the basis of accounting used in accounting for not-for-profit health care organizations?
A)fund accounting
B)accrual basis
C)modified accrual basis
D)cash basis
Q3) Income earned on restricted endowment resources should
A)remain in the endowment fund.
B)be transferred and recorded directly in the unrestricted fund.
C)be recorded in the endowment fund with a liability established for future transfer to an unrestricted fund.
D)transferred immediately and recorded directly to the fund the donor designate to receive the income/benefit.
Q4) Are not-for-profit universities required to use fund accounting?
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Chapter 20: Estates and Trusts: Their Nature and the
Accountants Role
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Q1) The primary purpose of an estate's charge and discharge statement is to detail
A)cash flow as to principal and as to income.
B)income and expenses of the estate.
C)transactions affecting principal and income.
D)the profit or loss during the period of stewardship.
Q2) The gross estate reflects the original purchase value of all property in which the decedent had an interest at the date of death, regardless of the nature of the property or to whom it passes.
A)True
B)False
Q3) Adequate estate planning is critical for an individual or family with a sizable net worth.List the goals of estate planning for large, more complex estates.
Q4) Property that is titled as "joint tenants" allows for:
A)the property to pass outside of the probate process to a surviving joint owner.
B)tenants to remain in a leased property if the lessor dies.
C)the decedent's interest in the property to avoid inclusion in his or her estate for estate tax purposes.
D)a distribution to the joint survivor that is recognized as taxable income.
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Chapter 21: Debt Restructuring, Corporate Reorganizations, and Liquidations
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Q1) Which of the following is not true of a company operating as a "debtor-in-possession' after a chapter 11 reorganization plan is approved by the bankruptcy court?
A)Provisions are binding on all creditors and security holders, whether or not they accepted the plan.
B)Property is vested in the debtor company is free of all claims, except as stipulated under the plan.
C)If the reorganization is not accomplishing its objective, a request for modification or conversion to a chapter 7 liquidation may be submitted to the court.
D)If the plan contained the provision to pay accounts payable at $.50 on $1.00, and the company's cash flow is better than expected, the amount paid could be increased.
Q2) In a quasi-reorganization, a debit balance in Retained Earnings (a deficit) is eliminated by
A)reducing paid-in capital or reorganization capital.
B)reducing future depreciation charges.
C)issuing more capital stock.
D)writing down assets to lower, but fair, values.
Q3) Describe the duties of the trustee in a Chapter 7 liquidation.
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Chapter 22: Derivatives and Related Accounting Issues
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Q1) On August 1, an oil producer decided to hedge the fair value of its inventory by acquiring a futures contract to sell 100,000 barrels of oil on November 1 for $85.00 each.Price data follow: ?
\[\begin{array} { l r r } & \text { Spot Frice } & \text { Futures Price } \\
\text { August 1 } & \$ 84.00 & \$ 85.00 \\
\text { September 1 } & 82.80 & 83.50 \\
\text { October 1 } & 82.20 & 82.40 \\
\text { November 1 } & 81.00 & 81.00
\end{array}\] What was the fair value of the contract on October 1?
A)-$280,000
B)-$110,000
C)-$260,000
D)-$20,000
Q2) Which of the following is true about options?
A)Generally, higher volatility of the underlying increases the value of the option.
B)The value of an option is realized only through its being exercised.
C)An American option is exercisable at its maturity date.
D)An option premium is refundable if the option becomes unfavorable.
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Chapter 23: Equity Method for Unconsolidated Investments
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Q1) All but the following are required disclosures for equity method investors:
A)Percentage of ownership in the investment.
B)Underlying book value of the investment.
C)The market value of the investment, if available.
D)All of these items are required disclosures.
Q2) If the market value of an equity method investment falls below its book value, it is written down if the decline is considered permanent with no subsequent increase in value other than regular equity method adjustments.
A)True
B)False
Q3) Under the fair value option, the investor's share of dividends received from the investee and fair value adjustments are recorded as APIC.
A)True
B)False
Q4) The underlying book value of an investment is not a required disclosure for equity method investors.
A)True
B)False
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Chapter 24: Variable Interest Entities
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Q1) The primary bene ciary has control of the variable interest entity (VIE) based on its power to control the activities of the VIE and the obligation to absorb losses and receive bene ts from the VIE.
A)True
B)False
Q2) The entity having control of a VIE is referred to as the parent company.
A)True
B)False
Q3) The consolidation process for VIE's includes the elimination of all inter-entity transactions as would be the case for control based on stock ownership
A)True
B)False
Q4) The primary beneficiary does not consolidate its interest in a VIE into their consolidated financial statements.
A)True
B)False
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