Type:
Test Bank
Resource:
Advanced Accounting
Edition:
8th Edition
Author(s):
Debra C. Jeter Paul K. Chaney
Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Introduction to Business Combinations Chapter Number: 1
Question Type: Multiple Choice
1. A(n) ______ occurs when the operations of two or more companies are brought under common control. a) tender offer b) vertical combination c) operating synergy d) business combination Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe historical trends in types of business combinations. Section Reference: 1.1 2. The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows: a) to improve the relevance, comparability, and transparency of financial information related to business combinations. b) to eliminate the amortization of Goodwill. c) to facilitate the convergence project of the FASB and the International Accounting Standards Board. d) to improve the relevance, comparability, and transparency of financial information related to business combinations and to eliminate the amortization of Goodwill. Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.1
3. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n): a) agreeable combination. b) friendly combination. c) hostile combination. d) unfriendly combination. Answer: b
Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 4 Identify defensive tactics used to attempt to block business combinations. Section Reference: 1.2
4. The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called: a) poison pill. b) pac-man defense. c) greenmail. d) white knight. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 4 Identify defensive tactics used to attempt to block business combinations. Section Reference: 1.2 5. Which of the following is NOT the benefit of horizontal integration? a) expansion in size. b) reduction in competition. c) creating a monopoly in the market space. d) regulatory issues. Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 2 Identify the major reasons firms combine. Section Reference: 1.3 6. The third period of business combinations started after World War II and is called: a) horizontal integration. b) merger mania. c) operating integration. d) vertical integration. Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 1 Describe historical trends in types of business combinations. Section Reference: 1.4 7. During the period between 1880-1904, huge trusts were created. This period of time is referred to as
a) horizontal integration b) vertical integration c) merger mania d) the conglomerate era Answer: a Question Title: Test Bank (Multiple Choice) Question 7 Difficulty: Medium Learning Objective: 1 Describe historical trends in types of business combinations. Section Reference: 1.4 8. Which of the following situations best describes a business combination to be accounted for as a statutory merger? a) Both companies in a combination continue to operate as separate, but related, legal entities. b) Only one of the combining companies survives and the other loses its separate identity. c) Two companies combine to form a new third company, and the original two companies are dissolved. d) One company transfers assets to another company it has created. Answer: b Question Title: Test Bank (Multiple Choice) Question 8 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.5
9. A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition? a) cash b) issuing debt c) issuing stock d) all of these Answer: d Question Title: Test Bank (Multiple Choice) Question 9 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.5
10. When the stock acquisition occurs, the acquiring company: a) closes its book. b) transfers the underlying assets and liabilities onto its own books. c) debits an account “Investment in Subsidiary”. d) acquires the total assets.
Answer: c Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.5
11. The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the: a) bonus. b) goodwill. c) implied offering price. d) takeover premium. Answer: d Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.6
12. After the deal, the acquiring firm should do all of the following to create a culture of success except: a) minimize client retention. b) create interoffice functional teams early to address cultural integration. c) be realistic with timelines, due dates, budgets. d) make a detailed post-merger integration plan. Answer: a Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 3 Identify the factors that managers should consider in exercising due diligence in business combinations. Section Reference: 1.7 13. The difference between normal earnings and expected future earnings is: a) average earnings. b) excess earnings. c) ordinary earnings. d) target earnings. Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy
Learning Objective: 6 Indicate the factors used to determine the price and the method of payment for a business combination. Section Reference: 1.8 14. The first step in estimating goodwill in the excess earnings approach is to: a) determine normal earnings. b) identify a normal rate of return for similar firms. c) compute excess earnings. d) estimate expected future earnings.
Answer: b Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8
15. When the merger decreases the earning per share of the acquiring institution, the acquisition is called: a) accretive. b) dilutive. c) vertical. d) horizontal. Answer: b Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Easy Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8
16. __________ is defined as the number of shares of the acquiring company to be exchanged for each share of the acquired company. a) implied exchange ratio. b) turnover ratio. c) stock exchange ratio. d) target earnings. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 6 Indicate the factors used to determine the price and the method of payment for a business combination.
Section Reference: 1.8 17. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is: a) to provide information relevant to the controlling stockholders. b) to represent the view that the affiliated companies are a separate, identifiable economic entity. c) to emphasis control of the whole by a single management. d) to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses. Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
18. Which of the following statements is correct? a) total elimination is consistent with the parent company concept. b) partial elimination is consistent with the economic unit concept. c) past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies. d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Hard Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
19. Under the economic unit concept, noncontrolling interest in net assets is treated as: a) a liability. b) an asset. c) stockholders' equity. d) an expense. Answer: c Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
20. The parent company concept adjusts subsidiary net asset values for the: a) differences between cost and fair value. b) differences between cost and book value. c) total fair value implied by the price paid by the parent. d) total cost implied by the price paid by the parent. Answer: b Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Hard Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9 21. Which of the following statements is correct? a) The economic unit concept suggests partial elimination of unrealized intercompany profits. b) The parent company concept suggests partial elimination of unrealized intercompany profits. c) The economic unit concept suggests no elimination of unrealized intercompany profits. d) The parent company concept suggests total elimination of unrealized intercompany profits. Answer: b Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
22. When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n): a) prorated share of the combined income. b) addition to combined income to arrive at consolidated net income. c) expense deducted from combined income to arrive at consolidated net income. d) deduction from current assets in the balance sheet. Answer: c Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
23. When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the:
a) book values of subsidiary assets and liabilities. b) fair values of subsidiary assets and liabilities. c) general price level adjusted values of subsidiary assets and liabilities. d) fair values of parent company assets and liabilities. Answer: b Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
24. The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the: a) parent company concept. b) current practice concept. c) historical cost company concept. d) economic unit concept. Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
25. The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the: a) economic unit concept. b) parent company concept. c) current practice concept. d) historical cost company concept. Answer: a Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
26. The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the: a) economic unit concept. b) current practice concept. c) parent company concept. d) historical cost company concept. Answer: c Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9 27. Which of the following is not a component of other comprehensive income under GAAP? a) earnings. b) gains and losses that bypass earnings. c) impairment losses. d) accumulated other comprehensive income. Answer: d Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Easy Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.10 28. Many of FASB’s recent pronouncements indicate a shift away from historical cost accounting toward: a) an elevated status for the Statements of Financial Accounting Concepts. b) convergence of standards. c) fair value accounting. d) representationally faithful reporting. Answer: c Question Title: Test Bank (Multiple Choice) Question 28 Difficulty: Medium Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.10
29. The impairment standard as it relates to goodwill is an example of a: a) consumption of benefit approach. b) loss or lack of benefit approach. c) component of other comprehensive income.
d) direct matching of expenses to revenues. Answer: b Question Title: Test Bank (Multiple Choice) Question 29 Difficulty: Easy Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.11
Question Type: Essay
30. Estimating the value of goodwill to be included in an offering price can be done under several alternative methods. The excess earnings approach is frequently used. Identify the steps used in this approach to estimate goodwill. Answer: The excess earnings approach to estimating goodwill includes the following steps: (a) Identify a normal rate of return for firms similar to the company being targeted, (b) Apply the identified rate of return of the level of identifiable assets (or net assets) of the target to approximate what would be normal earnings in this industry, (c) Estimate the expected future earnings of the target, (d) Subtract the normal earnings from the expected target earnings to compute “excess earnings”, and (e) Assume an appropriate time period and a discount rate to compute the discounted value of the excess earnings − the estimated goodwill. Question Title: Test Bank (Essay) Question 30 Difficulty: Medium Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8
31. The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept. Briefly explain the differences between the concepts. Answer: Under the parent company concept, the consolidated financial statements reflect the stockholders’ interests in the parent, plus their undivided interests in the net assets of the parent's subsidiaries. The focus is on the interests of the parent's shareholders. Under the economic entity concept, control of the whole by a single management is emphasized. With this concept, consolidated financial statements are intended to provide information about a group of legal entities − a parent company and its subsidiaries − operating as a single unit. Question Title: Test Bank (Essay) Question 31 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
Question Type: Problem
32. Hopkins Company is considering the acquisition of Richfield, Inc. To assess the amount it might be willing to pay, Hopkins makes the following computations and assumptions. A. Richfield, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Richfield, Inc. B. Richfield, Inc.'s pretax incomes for the years 2020 through 2022 were $470,000, $570,000, and $370,000, respectively. Hopkins believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings: Depreciation on Buildings (each year) Depreciation on Equipment (each year) Extraordinary Loss (year 2022) Salary Expense (each year)
380,000 30,000 130,000 170,000
C. The normal rate of return on net assets for the industry is 15%.
Required: A. Assume that Hopkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill. B. Assume that Hopkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill. Answer: A. Normal earnings for similar firms = ($6,000,000 - $3,700,000) × 15% = $345,000 Expected earnings of target: Pretax income of Richfield, Inc., 2020 Subtract: Additional depreciation on buildings ($380,000 × .25) Target's adjusted earnings, 2020
$470,000 (95,000) 375,000
Pretax income of Richfield, Inc., 2021 Subtract: Additional depreciation on buildings Target's adjusted earnings, 2021
$570,000 (95,000)
Pretax income of Richfield, Inc., 2022 Add: Extraordinary loss Subtract: Additional depreciation on buildings Target's adjusted earnings, 2022
$370,000 130,000 (95,000)
475,000
405,000
Target's three year total adjusted earnings Target's three year average adjusted earnings
1,255,000 418,333
Excess earnings of target = $418,333 – $345,000 = $73,333 per year
Present value of excess earnings (perpetuity) at 20%:
$73,333 20% = $366,665 (Estimated Goodwill)
Implied offering price = Fair value of assets - Fair value of liabilities + Estimated goodwill Implied offering price = $6,000,000 - $3,700,000 + $366,665 = 2,666,665.
B.
Excess earnings of target (same as in A): $73,333
Present value of excess earnings (ordinary annuity) for five years at 15%; $73,333 × 3.35216 = $245,824 Implied offering price = $6,000,000 - $3,700,000 + $245,824 = $2,545,824. Note: The salary expense and depreciation on equipment are expected to continue at the same rate, and thus do not necessitate adjustments. Question Title: Test Bank (Problem) Question 1-1 Difficulty: Hard Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8
33. Eden Company is trying to decide whether to acquire Bloomington Inc. The following balance sheet for Bloomington Inc. provides information about book values. Estimated market values are also listed, based upon Eden Company's appraisals.
Current Assets Property, Plant & Equipment (net) Total Assets Total Liabilities Common Stock, $10 par value Retained Earnings Total Liabilities and Equities
Bloomington Inc. Book Values $ 450,000 1,140,000 $1,590,000
Bloomington Inc. Market Values $ 450,000 1,300,000 $1,750,000
$700,000 280,000 610,000 $1,590,000
$700,000
Eden Company expects that Bloomington will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm." Required: A. Compute an estimation of goodwill based on the information above that Eden might be willing to pay (include in its purchase price), under each of the following additional assumptions: (1) Eden is willing to pay for excess earnings for an expected life of 4 years (undiscounted).
(2) Eden is willing to pay for excess earnings for an expected life of 4 years, which should be capitalized at the industry normal rate of return. (3) Excess earnings are expected to last indefinitely, but Eden demands a higher rate of return of 20% because of the risk involved. B. Determine the amount of goodwill to be recorded on the books if Eden pays $1,300,000 cash and assumes Bloomington's liabilities. Answer: A. Normal earnings for similar firms (based on tangible assets only) = $1,750,000 × 14% = $245,000 Excess earnings = $290,000 - 245,000 = $45,000 (1)
Goodwill based on four years excess earnings undiscounted. Goodwill = ($45,000)(4 years) = $180,000
(2)
Goodwill based on four years discounted excess earnings Goodwill = ($45,000)(2.91371) = $131,117 (present value of an annuity factor for n=4, I=14% is 2.91371)
(3)
Goodwill based on a perpetuity Goodwill = ($45,000)/.20 = $225,000
B.
Goodwill = Cost less fair value of net assets Goodwill = ($1,300,000 - ($1,750,000 - $700,000)) = $250,000
Question Title: Test Bank (Problem) Question 1-2 Difficulty: Hard Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8
34. Park Company acquired an 80% interest in the common stock of Southdale Company for $1,540,000 on July 1, 2022. Southdale Company's stockholders' equity on that date consisted of: Common stock Other contributed capital Retained earnings
$800,000 400,000 330,000
Required: Compute the total noncontrolling interest to be reported in the consolidated balance sheet assuming the: (1) parent company concept. (2) economic unit concept. Answer: 1. Total book value of Southdale's net assets ($800,000 + $400,000 + $330,000) Noncontrolling interest % Noncontrolling interest in net assets
$1,530,000 × .2 $306,000
2. Total fair value of Southdale's net assets ($1,540,000/.8) Noncontrolling interest % Noncontrolling interest in net assets
$1,925,000 × .2 $385,000
Question Title: Test Bank (Problem) Question 1-3 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
35. The following balances were taken from the records of S Company: Common stock (1/1/20 and 12/31/20) Retained earnings 1/1/20 Net income for 2023 Dividends declared in 2023 Retained earnings, 12/31/20 Total stockholders' equity on 12/31/20
$720,000 $160,000 180,000 (40,000) 300,000 $1,020,000
P Company purchased 75% of S Company's common stock on January 1, 2021 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2023 of ten years. Required: A. 1. 2.
Compute the difference between cost/(implied) and book value applying: Parent company theory. Economic unit theory.
B. 1. 2.
Assuming the economic unit theory: Compute noncontrolling interest in consolidated income for 2023. Compute noncontrolling interest in net assets on December 31, 2023.
Answer: A1. Cost of investment Equity acquired .75($720,000 + $160,000) Difference (parent company theory) 2. Implied value of S Company ($900,000/.75) Book value of S Company ($720,000 + $160,000) Difference (economic unit theory) B1. Noncontrolling interest in consolidated income:
$900,000 660,000 $240,000 $1,200,000 880,000 $320,000
.25[$180,000 - ($320,000/10)]
$37,000
2. Noncontrolling interest in net assets: .25[$1,020,000 + (9/10 × $320,000)]
$327,000
Question Title: Test Bank (Problem) Question 1-4 Difficulty: Hard Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9
Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Accounting for Business Combinations Chapter Number: 2
Question Type: Multiple Choice
1. SFAS 141R requires that all business combinations be accounted for by using: a) the pooling of interests method. b) the acquisition method. c) either the acquisition or the pooling of interests methods. d) neither the acquisition nor the pooling of interests methods. Answer: b Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe the major changes in the accounting for business combinations since 2001, and the reasons for those changes. Section Reference: 2.1
2. The fair value of assets and liabilities of the acquired entity is to be reflected in the financial statements of the combined entity. When the acquisition takes place over a period of time rather than all at once, at what time is the fair value of the assets and liabilities of the acquired entity determined under SFAS 141R? a) the date the interest in the acquiree was acquired. b) the date the acquirer obtains control of the acquiree c) the date of acquisition of the largest portion of the interest in the acquiree. d) the date of the financial statements. Answer: b Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Describe the major changes in the accounting for business combinations since 2001, and the reasons for those changes. Section Reference: 2.1