Advanced Accounting, 10E
Beams, Clement, Anthony, Lowensohn
Email: richard@qwconsultancy.com
Chapter 1 Test Bank
BUSINESS COMBINATIONS Multiple Choice Questions LO1 1.
Which of the following is a reason why a company would expand through a combination, rather than by building new facilities? a. A combination might provide cost advantages. b. A combination might provide fewer operating delays. c. A combination might provide easier access to intangible assets. d. All of the above are possible reasons that a company might choose a combination.
Solution: d LO2 2.
A business combination in which a new corporation is created and two or more existing corporations are combined into the newly created corporation is called a a. merger. b. purchase transaction. c. pooling-of-interests. d. consolidation.
Solution: d LO2 3.
A business combination occurs when a company acquires an equity interest in another entity and has a. at least 20% ownership in the entity. b. more than 50% ownership in the entity. c. 100% ownership in the entity. d. control over the entity, irrespective of the percentage owned.
Solution: d
.
1-1
LO2 4.
FASB favors consolidation of two entities when a. one acquires less than 20% equity ownership of the other. b. one company’s ownership interest in another gives it control of the acquired company, even if the acquiring company does not have a majority ownership in the acquired. Typically, this is in the 20%-50% interest range. c. one acquires two thirds equity ownership in the other. d. each entity holds stock in the other, regardless of percentage of ownership.
Solution: b LO3 LO4 5.
Michangelo Co. paid $100,000 in fees to its accountants and lawyers in acquiring Florence Company. Michangelo will treat the $100,000 as a. an expense for the current year. b. a prior period adjustment to retained earnings. c. additional cost to investment of Florence on the consolidated balance sheet. d. a reduction in paid-in capital.
Solution: a LO3 6.
Picasso Co. issued 10,000 shares of its $1 par common stock, valued at $400,000, to acquire shares of Bull Company in an all-stock transaction. Picasso paid the investment bankers $35,000. Picasso will treat the investment banker fee as: a. an expense for the current year. b. a prior period adjustment to Retained Earnings. c. additional goodwill on the consolidated balance sheet. d. a reduction in paid-in capital.
Solution: d
.
1-2
LO3 7.
Durer Inc acquired Sea Corporation in a business combination and Sea Corp went out of existence. Sea Corp developed a patent listed as an asset on Sea Corp’s books at the patent office filing cost. In recording the combination a. fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp. b. Sea Corp’s prior expenses to develop the patent are recorded as an asset by Durer at purchase. c. the patent is recorded as an asset at fair market value. d. the patent's market value increases goodwill.
Solution: c LO2 8.
In a merger, which of the following will occur? a. A merger occurs when one corporation takes over the operations of another business entity, and the acquired entity is dissolved. b. None of the business entities will be dissolved. c. The acquired assets will be recorded at book value by the acquiring entity. d. None of the above is correct.
Solution: a LO3 9.
According to FASB Statement 141, which one of the following items may not be accounted for as an intangible asset apart from goodwill? a. A production backlog. b. A talented employee workforce. c. Noncontractual customer relationships. d. Employment contracts.
Solution: b
.
1-3
LO4 10.
Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value exceeds the investment cost, which of the following statements is correct? a. A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price. b. the value is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit. c. it is allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain. d. It is allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit.
Solution: a LO4 11.
With respect to goodwill, an impairment a. will be amortized over the remaining useful life. b. is a two-step process which analyzes each business unit of the entity. c. is a one-step process considering the entire firm. d. occurs when asset values are adjusted to fair value in a purchase.
Solution: b Use the following information in answering questions 12 and 13. Manet Corporation exchanges 150,000 shares of newly issued $1 par value common stock with a fair market value of $25 per share for all of the outstanding $5 par value common stock of Gardner Inc and Gardner is then dissolved. Manet paid the following costs and expenses related to the business combination: Costs of special shareholders’ meeting to vote on the merger Registering and issuing securities Accounting and legal fees Salaries of Manet’s employees assigned to the implementation of the merger Cost of closing duplicate facilities . 1-4
$13,000 14,000 9,000 15,000 11,000