ACCT 4370 Final Exam | Answered with complete solutions

ACCT 4370 Final Exam | Answered with complete solutions During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of intercompany sales that should be eliminated for 200X consolidated statements? $27,000 $24,000 $18,000 $12,000 Which one of the following will occur on consolidated financial statements if an intercompany inventory transaction is not eliminated? An understatement of sales. An overstatement of sales. An understatement of purchases. An overstatement of accounts receivable. During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of ending inventory that should be eliminated for consolidated statements? $3,000 $6,000 $9,000 $15,000 Which of the following can be overstated on consolidated financial statements if intercompany inventory balances on-hand at the end of a period are not eliminated? Consolidated Income Consolidated Loss Yes Yes Yes No No Yes No No Yes Yes Pine Company acquired goods for resale from its manufacturing subsidiary, Strawco, at Strawco's cost to manufacture of $12,000. Pine subsequently resold the goods to a nonaffiliate for $18,000. Which one of the following is the amount of the elimination that will be needed as a result of the intercompany inventory transaction? $-0- $6,000 $12,000 $18,000 Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000, and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income? $900,000 $940,000 $960,000 $1,000,000 In which of the following legal forms of business combination does at least one preexisting entity cease to exist? Merger Consolidation Acquisition Yes Yes Yes Yes Yes No Yes No No No No Yes Yes Yes No In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity? Merger Acquisition Consolidation Yes Yes Yes Yes Yes No Yes No Yes No Yes No Yes No Yes On December 1, 200X, Betaco agreed to be acquired 100% by Alphaco at a cost equal to Betaco's book value. The combination was initiated at that time, and the closing date for the acquisition was December 31, 200X. Both firms have December 31 fiscal year-ends. There were no other transactions between the firms during 200X or 200Y. Each firm had the following net incomes for the periods shown: Alphaco Betaco 1/1/0X-11/30/0X $20,000 $5,000 12/1/0X-12/31/0X 4,000 1,000 1/1/0Y-1/31/0Y 2,000 3,000 Which one of the following is the consolidated net income that Alphaco should recognize for 200X? $24,000 $25,000 $29,000 $30,000 In which of the legal forms of business combination does more than one entity survive? Merger Consolidation Acquisition Yes Yes Yes Yes Yes No Yes No No No No Yes No No Yes In which of the following legal forms of business combination are two or more entities combined into one new entity? Merger Consolidation Acquisition Yes Yes Yes Yes Yes No No Yes No No No Yes No Yes No Topco owns 60% of the voting common stock of Midco and 40% of the voting common stock of Botco. Topco wishes to gain control of Botco by having Midco buy shares of Botco's voting stock. Which one of the following minimum levels of ownership of Botco must Midco additionally need to obtain in order for Topco to have controlling interest of Botco's voting stock? 11% 17% 26% 50+% On December 1, 200X, Betaco agreed to be acquired 100% by Alphaco at a cost equal to Betaco's book value. The combination was initiated at that time, and the closing date for the acquisition was December 31, 200X. Both firms have December 31 fiscal year-ends. There were no other transactions between the firms during 200X or 200Y. Each firm had the following net incomes for the periods shown: Alphaco Betaco 1/1/0X-11/30/0X $20,000 $5,000 12/1/0X-12/31/0X 4,000 1,000 1/1/0Y-1/31/0Y 2,000 3,000 Which one of the following is the amount of consolidated net income that should be recognized for January 200Y? $2,000 $3,000 $5,000 $10,000 On October 1, 200X, Parco acquired 100% controlling interest of Setco in a legal acquisition. There were no other transactions between the entities during 200X. The two companies reported the following net incomes/(losses) for the periods shown: Parco Setco 1/1/0X - 9/30/0X $125,000 $40,000 10/1/0X - 12/31/0X 30,000 ($15,000) Which one of the following would be the amount of income recognized by Parco in its consolidated financial statements for the year ended December 31, 200X? $140,000 $155,000 $180,000 $210,000 Which one of the following would be subject to the acquisition accounting requirements of ASC 805, Business Combinations? Formation of a joint venture Acquisition of a manufacturing entity by a holding company Acquisition of a for-profit entity by a not-for-profit organization Combination of entities under common control If a business combination is effected through an exchange of equity interests, assuming all other factors are equal, which one of the following independent circumstances would not indicate the likely acquirer in a business combination? The combining entity whose owners have the larger portion of voting rights in the combined entity The combining entity whose owners have the ability to select or remove a voting majority of the governing body of the combined entity The combining entity whose debt-holders have the larger portion of the debt of the combined entity The combining entity whose former management dominates the combined entity The requirements of ASC 805, Business Combinations, apply to all of the following business combinations except for which one? Combination between financial institutions The acquisition of a foreign entity by a U.S. entity Combination between not-for-profit organizations The acquisition of a group of assets that constitutes a business At the closing date of a business combination, goodwill was recognized. During the subsequent measurement period, additional identifiable assets were properly recognized as part of the business combination. If no other changes occurred during the measurement period, which one of the following would be the effect, if any, of the additional assets recognized on the amount of goodwill recognized in the combination? No change in the amount of goodwill recognized An increase in the amount of goodwill recognized A decrease in the amount of goodwill recognized An increase or decrease in the amount of goodwill recognized, depending on the underlying reason(s) for the goodwill Which of the following statements concerning the acquisition date of a business combination is/are correct? I. The acquisition date may be before the closing date. II. The acquisition date may be on the closing date. III. The acquisition date may be after the closing date. I and II only. II only. II and III only. I, II, and III. When using the acquisition method of accounting for a business combination, which of the following statements concerning the measurement period is/are correct? I. It provides time for the acquiring entity to identify assets acquired and liabilities assumed that existed as of the acquisition date. II. It provides time for the acquiring entity to determine the fair value of assets acquired and liabilities assumed that existed as of the acquisition date. III. It should not exceed one year from the acquisition date. I and II only. I and III only. II and III, only. I, II, and III. Zipco, Inc. acquired 100% of the voting stock of Narco, Inc. with an acquisition date of March 31, 2009. During the following three months, Zipco learned the following: I. A major credit customer of Narco had declared bankruptcy on March 1, 2009, but the adverse effect on Narco's accounts receivable had not been recognized in the amount of accounts receivable recognized in the acquisition date amounts. II. Narco had a lawsuit against it that existed at the acquisition date of the combination but was not recognized on Narco's books or in the liabilities recognized at the acquisition date. Analysis determined that it was more likely than not that the party that brought the lawsuit would win a material judgment against Narco/Zipco. Which of these items of new information, if any, should be recognized in accounting for the business combination? Neither I nor II. I only. II only. Both I and II. Which of the following are requirements of using the acquisition method of accounting for a business combination? I. Determining the acquiring entity. II. Determining the acquisition date of the business combination. III. Determining the cost of the acquisition. I only. I and II only. I and III only. I, II, and III. Which one of the following correctly describes the maximum length of the measurement period for a business combination? The acquisition date of the business combination The end of the annual fiscal period in which the combination occurs One year from the acquisition date of the combination Indefinite, until all information about accounts and amounts is known Company Z is formed to consolidate three preexisting entities: Companies W, X, and Y. Company Z pays cash to acquire the net assets of Company W and issues debt to acquire the net assets of Company X. Company Z acquires all of the stock of Company Y in the market for cash. Which one of the companies is most likely the acquirer in the business combination? Company W Company X Company Y Company Z Which of the following statements, if any, concerning the accounting for business combinations is/are correct? I. All business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805, Business Combinations. II. The acquisition accounting requirements of ASC 805, Business Combinations, are identical to those of IFRS #3, Business Combinations. Neither I nor II. I only. II only. Both I and II. In which one of the following cases is Company A most likely to be the acquirer of Company B in a business combination? Company A owns 80% of Company B's long-term debt. Company A owns 40% of Company B's voting stock and 40% of Company C's voting stock, which owns 20% of Company B's voting stock. Company A owns 35% of Company B's voting stock and 60% of Company C's voting stock, which owns 20% of Company B's voting stock. Company A owns 40% of Company B's outstanding bonds and 20% of Company B's voting stock. When a new entity is formed to effect a business combination, which of the following statements, if any, is/are correct? I. A legal consolidation has occurred. II. The new entity is always the acquirer in the business combination. Neither I nor II. I only. II only. Both I and II. Which of the following is/are acceptable methods to account for a business combination? Purchase Method Acquisition Method Pooling of Interests Method Yes Yes Yes Yes Yes No Yes No No No Yes No No Yes No The acquisition date of a business combination is generally which one of the following? The effective date The closing date The settlement date The recording date A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration: $1,000,000 after Year 1, $1,000,000 after Year 2, and $500,000 after year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent -based consideration portion is $2,100,000. What is the total consideration transferred for this business combination? $15,500,000 $15,100,000 $13,000,000 $5,100,000 An obligation of an acquirer to pay contingent consideration to the former owners of an acquired entity in a business combination can be recognized as which of the following? A Liability An Equity Item Yes Yes Yes No No Yes No No Yes Yes Changes in the fair value of contingent consideration transferred in a business combination resulting from occurrences after the acquisition date should be recognized as a gain or loss in the current income when the contingent consideration is classified as An Asset or a Liability An Equity Item Yes Yes Yes No No Yes No No Yes No Which of the following statements concerning the acquisition of a business is/are correct? I. Most consideration transferred to effect a business combination should be measured at fair value. II. Contingent consideration should be included in the cost of an acquired business at fair value existing on the acquisition date. III. The cost of carrying out a business combination should be included in the cost of an acquired business. I only. I and II only. I and III only. I, II, and III. The terms of a business combination can provide that former shareholders of the acquired firm may receive additional compensation based on post-combination earnings or post-combination market share price. Would additional compensation based on such earnings or market price be considered an additional cost of the business combination? Based on Earnings Based on Share Price Yes Yes Yes No No Yes No No No No Which one of the following, incurred by an acquiring entity in carrying out a business combination, would not be included in the cost of an acquired entity? Cash paid as consideration in the combination Fair value of liabilities incurred in the combination Cost of legal fees to carry out the combination Fair value of contingent consideration at the acquisition date A business combination is accounted for using the acquisition method. Which of the following should be deducted in determining the combined corporation's net income for the current period? Direct Costs Of Acquisition General Expenses Related to Acquisition Yes Yes Yes No No Yes No No Yes Yes Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be Allocated on a pro rata basis to the nonmonetary assets acquired. Capitalized as part of goodwill and tested annually for impairment. Capitalized as an other asset and amortized over five years. Expensed as incurred in the current period. On December 31, Year 1, Andover Co. acquired Barrelman, Inc. Before the acquisition, a product lawsuit seeking $10 million in damages was filed against Barrelman. As of the acquisition date, Andover believed that it was probable that a liability existed and that the fair value of the liability was $5 million. What amount should Andover record as a liability as of December 31, Year 1? $0 $5,000,000 $7,500,000 $10,000,000 Which of the following kinds of intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity? Future benefits that derive from legal rights Future benefits that can be separately sold Yes Yes Yes No No Yes No No Yes Yes On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco's plants and relocate its employees. Which one of the following is the amount of liability that Lazer should recognize in recording the business combination? $- 0 - (no liability) $150,000 $170,000 $200,000 Which one of the following payments by an acquirer in a business combination is most likely to be a part of the cost in recording a business combination transaction? Payment by the acquirer to settle a trade payable due to the acquired entity Payment by the acquirer to the acquiree's management personnel to remain with the firm for one year following the business combination Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree Payment by the acquirer to reimburse the acquiree for cost it incurred in carrying out the business combination Which one of the following items acquired in a business combination is least likely to require that the acquirer reconsider the acquiree's classification? A debt investment classified as held-to-maturity by the acquiree A debt investment classified as held-for-trading by the acquiree A lease classified as a sales-type capital lease by the acquiree A derivative instrument used for speculative purposes by the acquiree Generally, which of the following items acquired in a business combination should be measured at fair value? Identifiable Assets Acquired Liabilities Assumed Noncontrolling Interest Yes Yes No Yes No No Yes No Yes Yes Yes Yes Yes Yes Yes Which of the following contingencies that exist on the acquisition date should be recognized by the acquirer in a business combination? I. A contractual contingency to provide warranty services to prior customers of the acquiree. II. An outstanding lawsuit against the acquiree for which an expert legal authority believes there is a 20% probability that the suit will be successful. Neither I nor II. I only. II only. Both I and II. Zooco, Inc. acquired 40% of the voting stock of Stubco, Inc. on September 1, 2008, and accounted for the investment using the equity method of accounting. On May 1, 2009, Zooco acquired an additional 20% of Stubco's voting stock to achieve a business combination. Which one of the following is the value Zooco should use to measure its original 40% investment in Stubco when recording the combination? Original cost, September 1, 2008 Carrying value, May 1, 2009 Fair value, May 1, 2009 40% of Stubco's book value, May 1, 2009 On May 1, 2017, Hico, Inc. acquired 20% of the voting securities of Lowco, Inc. for $400,000 cash. The investment did not give Hico significant influence over Lowco and was carried at fair value with unrealized gains and losses recorded in earnings. On July 1, 2018, Hico acquired the remaining 80% of Lowco's voting securities in a business combination for $1,800,000 cash. At that time, Hico's original 20% investment in Lowco had a fair value of $450,000. At what amount should Hico record as the total fair value of Lowco as a result of the business combination? $1,350,000 $1,800,000 $2,200,000 $2,250,000 Which of the following statements, if any, concerning a noncontrolling interest in an acquiree is/are correct? I. The value assigned to a noncontrolling interest in an acquiree should be based on the proportional share of that interest in the net assets of the acquiree. II. The fair value per share of the noncontrolling interest in an acquiree must be the same as the fair value per share of the controlling (acquirer) interest. Both I and II. I only. II only. Neither I nor II. Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?