Controversy test
bank
Business
Activity,
Bringing an
End to the
, Chapter 1
Chapter 1 — Business Combinations: America's Most Popular 5. Company B acquired the assets (net of liabilities) of Company S in
Business Activity, Bringing an End to the Controversy exchange for cash. The acquisition price exceeds the fair value of the
net assets acquired. How should Company B determine the amounts to be
reported for the plant and equipment, and for long-term debt of the
MULTIPLE CHOICE acquired Company S?
1. An economic advantage of a business combination includes Plant and Equipment Long-Term Debt
a. Utilizing duplicative assets. a. Fair value S's carrying amount
b. Creating separate management teams. b. Fair value Fair value
c. Coordinated marketing campaigns. c. S's carrying amount Fair value
d. Horizontally combining levels within the marketing chain. d. S's carrying amount S's carrying amount
ANS: C DIF: E OBJ: 1 ANS: B DIF: E OBJ: 4
2. A tax advantage of business combination can occur when the existing 6. Publics Company acquired the net assets of Citizen Company during 20X5.
owner of a company sells out and receives: The purchase price was $800,000. On the date of the transaction,
a. cash to defer the taxable gain as a "tax-free reorganization." Citizen had no long-term investments in marketable equity securities
b. stock to defer the taxable gain as a "tax-free reorganization." and $400,000 in liabilities. The fair value of Citizen assets on the
c. cash to create a taxable gain. acquisition date was as follows:
d. stock to create a taxable gain.
Current assets................................. $ 800,000
Noncurrent assets.............................. 600,000
ANS: B DIF: E OBJ: 1 $1,400,000
==========
3. A controlling interest in a company implies that the parent company
a. owns all of the subsidiary's stock. How should Publics account for the $200,000 difference between the fair
b. has influence over a majority of the subsidiary's assets. value of the net assets acquired, $1,000,000, and the cost, $800,000?
c. has paid cash for a majority of the subsidiary's stock. a. Retained earnings should be reduced by $200,000.
d. has transferred common stock for a majority of the subsidiary's b. Current assets should be recorded at $685,000 and noncurrent
outstanding bonds and debentures. assets recorded at $515,000.
c. The noncurrent assets should be recorded at $400,000.
d. A deferred credit of $200,000 should be set up and subsequently
ANS: B DIF: M OBJ: 2 amortized to future net income over a period not to exceed 40
years.
4. Which of the following is a potential abuse that may arise when a
business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by the ANS: C DIF: M OBJ: 4
investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of the 7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible assets:
combination only and not as a result of efficient operations. Patent on a product that is deemed to have no useful life $10,000.
c. Liabilities may be undervalued when the price paid by the investor Customer List with an observable fair value of $50,000.
is allocated to specific liabilities. A 5-year operating lease with favorable terms with a discounted
d. An undue amount of cost may be assigned to goodwill, thus present value of $8,000.
potentially allowing an understatement of pooled earnings. Identifiable R & D of $100,000.
ABC will record how much for acquired Intangible Assets from the
ANS: B DIF: M OBJ: 3, Appendix A Purchase of XYZ Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS: B DIF: D OBJ: 4
1-2
, Chapter 1 Chapter 1
8. Vibe Company purchased the net assets of Atlantic Company in a business 11. Cozzi Company is being purchased and has the following balance sheet as
combination accounted for as a purchase. As a result, goodwill was of the purchase date:
recorded. For tax purposes, this combination was considered to be a
tax-free merger. Included in the assets is a building with an appraised Current assets.......... $200,000 Liabilities.... $ 90,000
value of $210,000 on the date of the business combination. This asset Fixed assets............ 180,000 Equity......... 290,000
had a net book value of $70,000, based on the use of accelerated Total................. $380,000 Total........ $380,000
depreciation for accounting purposes. The building had an adjusted tax ======== ========
basis to Atlantic (and to Vibe as a result of the merger) of $120,000.
Assuming a 36% income tax rate, at what amount should Vibe record this The price paid for Cozzi's net assets (the purchaser assumes the
building on its books after the purchase? liabilities) is $500,000. The fixed assets have a fair value of
a. $120,000 $220,000, and the liabilities have a fair value of $110,000. The amount
b. $134,400 of goodwill to be recorded in the purchase is __________.
c. $140,000 a. $0
d. $210,000 b. $50,000
c. $70,000
d. $90,000
ANS: D DIF: M OBJ: 4
9. Goodwill represents the excess cost of an acquisition over the ANS: C DIF: M OBJ: 6
a. sum of the fair values assigned to intangible assets less
liabilities assumed. 12. Separately identified intangible assets are accounted for by
b. sum of the fair values assigned to tangible and intangible assets amortizing:
acquired less liabilities assumed. a. exclusively by using impairment testing.
c. sum of the fair values assigned to intangibles acquired less b. based upon a pattern that reflects the benefits conveyed by the
liabilities assumed. asset.
d. book value of an acquired company. c. over the useful economic life less residual value using only the
straight-line method.
d. amortizing over a period not to exceed a maximum of 40 years.
ANS: B DIF: M OBJ: 5
10. When purchasing a company occurs, FASB recommends disclosing all of the ANS: B DIF: E OBJ: 6
following EXCEPT:
a. goodwill related to each reporting segment. 13. Acme Co. is preparing a pro-forma set of financial statements after an
b. contingent payment agreements, options, or commitments included in acquisition of Coyote Co. The purchase price is less than the fair
the purchase agreement, including accounting methods to be value of the assets acquired. However, the purchase price is greater
followed. than net book value of the acquired company.
c. results of operations for the current period if both companies had a. Acme's goodwill will decrease over time.
remained separate. b. Acme's amortization of intangible assets will increase over time.
d. amount of in-process R&D purchased and written-off during the c. Depreciation expense will be greater than Coyote Company's
period. expense.
d. Coyote's loss on the sale of the assets will create a net loss
carryforward.
ANS: C DIF: M OBJ: 5
ANS: C DIF: D OBJ: 6
1-3 1-4
, Chapter 1 Chapter 1
14. While performing a goodwill impairment test, the company had the 16. In performing the 20X7 impairment test for goodwill, the company had
following information: the following 20X6 and 20X7 information is available.
Estimated implied fair value of reporting unit
(without goodwill) $420,000 20X6 20X7
Existing net book value of reporting unit Implied fair value of reporting unit $350,000 $400,000
(without goodwill) $380,000 Net book value of reporting unit (including goodwill) $380,000 $360,000
Book value of goodwill $60,000
Based upon this information what are the 20X6 and 20X7 adjustment to
Based upon this information the proper conclusion is: goodwill, if any?
a. The existing net book value plus goodwill is in excess of the a. 20X6 $0
implied fair value, therefore, no adjustment is required. 20X7 $40,000 decrease
b. The existing net book value plus goodwill is less than the implied b. 20X6 $30,000 increase
fair value plus goodwill, therefore, no adjustment is required. 20X7 $40,000 decrease
c. The existing net book value plus goodwill is in excess of the c. 20X6 $30,000 decrease
implied fair value, therefore, goodwill needs to be decreased. 20X7 $40,000 decrease
d. The existing net book value is less than the estimated implied d. 20X6 $30,000 decrease
fair value; therefore, goodwill needs to be decreased. 20X7 $0
ANS: C DIF: D OBJ: 6 ANS: D DIF: D OBJ: 7
15. Balter Inc. acquired Jersey Company on January 1, 20X5. When the 17. Couples Corporation purchases Players Corporation. The fair value of
purchase occurred Jersey Company had the following information related the net assets of Players is $750,000 and the fair value of priority
to fixed assets: accounts (including a deduction for depreciation) is $600,000. Which of
Land $ 80,000 the following purchase prices would require using allocation
Building 200,000 procedures?
Accumulated Depreciation (100,000) a. $500,000
Equipment 100,000 b. $600,000
Accumulated Depreciation (50,000) c. $700,000
d. $800,000
The building has a 10-year remaining useful life and the equipment has
a 5-year remaining useful life. The fair value of the assets on that
date were: ANS: B DIF: D OBJ: 7
Land $100,000
Building 130,000 18. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of
Equipment 75,000 the acquisition the following information was available related to
Comb's balance sheet:
What is the 20X5 depreciation expense Balter will record related to Book Value Fair Value
purchasing Jersey Company? Current Assets $50,000 $ 50,000
a. $8,000 Building 80,000 100,000
b. $15,000 Equipment 40,000 50,000
c. $28,000 Liabilities 30,000 30,000
d. $30,000
What is the amount recorded by ACME for the Building?
a. $40,000
ANS: C DIF: M OBJ: 6 b. $60,000
c. $80,000
d. $100,000
ANS: B DIF: D OBJ: 7
19. Which of the following business combination expenses would NOT qualify
as a direct acquisition expense for a purchase?
a. Fees for purchase audit
b. Outside legal fees
c. Stock issuance fees
d. All are direct acquisition expenses.
1-5 1-6
bank
Business
Activity,
Bringing an
End to the
, Chapter 1
Chapter 1 — Business Combinations: America's Most Popular 5. Company B acquired the assets (net of liabilities) of Company S in
Business Activity, Bringing an End to the Controversy exchange for cash. The acquisition price exceeds the fair value of the
net assets acquired. How should Company B determine the amounts to be
reported for the plant and equipment, and for long-term debt of the
MULTIPLE CHOICE acquired Company S?
1. An economic advantage of a business combination includes Plant and Equipment Long-Term Debt
a. Utilizing duplicative assets. a. Fair value S's carrying amount
b. Creating separate management teams. b. Fair value Fair value
c. Coordinated marketing campaigns. c. S's carrying amount Fair value
d. Horizontally combining levels within the marketing chain. d. S's carrying amount S's carrying amount
ANS: C DIF: E OBJ: 1 ANS: B DIF: E OBJ: 4
2. A tax advantage of business combination can occur when the existing 6. Publics Company acquired the net assets of Citizen Company during 20X5.
owner of a company sells out and receives: The purchase price was $800,000. On the date of the transaction,
a. cash to defer the taxable gain as a "tax-free reorganization." Citizen had no long-term investments in marketable equity securities
b. stock to defer the taxable gain as a "tax-free reorganization." and $400,000 in liabilities. The fair value of Citizen assets on the
c. cash to create a taxable gain. acquisition date was as follows:
d. stock to create a taxable gain.
Current assets................................. $ 800,000
Noncurrent assets.............................. 600,000
ANS: B DIF: E OBJ: 1 $1,400,000
==========
3. A controlling interest in a company implies that the parent company
a. owns all of the subsidiary's stock. How should Publics account for the $200,000 difference between the fair
b. has influence over a majority of the subsidiary's assets. value of the net assets acquired, $1,000,000, and the cost, $800,000?
c. has paid cash for a majority of the subsidiary's stock. a. Retained earnings should be reduced by $200,000.
d. has transferred common stock for a majority of the subsidiary's b. Current assets should be recorded at $685,000 and noncurrent
outstanding bonds and debentures. assets recorded at $515,000.
c. The noncurrent assets should be recorded at $400,000.
d. A deferred credit of $200,000 should be set up and subsequently
ANS: B DIF: M OBJ: 2 amortized to future net income over a period not to exceed 40
years.
4. Which of the following is a potential abuse that may arise when a
business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by the ANS: C DIF: M OBJ: 4
investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of the 7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible assets:
combination only and not as a result of efficient operations. Patent on a product that is deemed to have no useful life $10,000.
c. Liabilities may be undervalued when the price paid by the investor Customer List with an observable fair value of $50,000.
is allocated to specific liabilities. A 5-year operating lease with favorable terms with a discounted
d. An undue amount of cost may be assigned to goodwill, thus present value of $8,000.
potentially allowing an understatement of pooled earnings. Identifiable R & D of $100,000.
ABC will record how much for acquired Intangible Assets from the
ANS: B DIF: M OBJ: 3, Appendix A Purchase of XYZ Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS: B DIF: D OBJ: 4
1-2
, Chapter 1 Chapter 1
8. Vibe Company purchased the net assets of Atlantic Company in a business 11. Cozzi Company is being purchased and has the following balance sheet as
combination accounted for as a purchase. As a result, goodwill was of the purchase date:
recorded. For tax purposes, this combination was considered to be a
tax-free merger. Included in the assets is a building with an appraised Current assets.......... $200,000 Liabilities.... $ 90,000
value of $210,000 on the date of the business combination. This asset Fixed assets............ 180,000 Equity......... 290,000
had a net book value of $70,000, based on the use of accelerated Total................. $380,000 Total........ $380,000
depreciation for accounting purposes. The building had an adjusted tax ======== ========
basis to Atlantic (and to Vibe as a result of the merger) of $120,000.
Assuming a 36% income tax rate, at what amount should Vibe record this The price paid for Cozzi's net assets (the purchaser assumes the
building on its books after the purchase? liabilities) is $500,000. The fixed assets have a fair value of
a. $120,000 $220,000, and the liabilities have a fair value of $110,000. The amount
b. $134,400 of goodwill to be recorded in the purchase is __________.
c. $140,000 a. $0
d. $210,000 b. $50,000
c. $70,000
d. $90,000
ANS: D DIF: M OBJ: 4
9. Goodwill represents the excess cost of an acquisition over the ANS: C DIF: M OBJ: 6
a. sum of the fair values assigned to intangible assets less
liabilities assumed. 12. Separately identified intangible assets are accounted for by
b. sum of the fair values assigned to tangible and intangible assets amortizing:
acquired less liabilities assumed. a. exclusively by using impairment testing.
c. sum of the fair values assigned to intangibles acquired less b. based upon a pattern that reflects the benefits conveyed by the
liabilities assumed. asset.
d. book value of an acquired company. c. over the useful economic life less residual value using only the
straight-line method.
d. amortizing over a period not to exceed a maximum of 40 years.
ANS: B DIF: M OBJ: 5
10. When purchasing a company occurs, FASB recommends disclosing all of the ANS: B DIF: E OBJ: 6
following EXCEPT:
a. goodwill related to each reporting segment. 13. Acme Co. is preparing a pro-forma set of financial statements after an
b. contingent payment agreements, options, or commitments included in acquisition of Coyote Co. The purchase price is less than the fair
the purchase agreement, including accounting methods to be value of the assets acquired. However, the purchase price is greater
followed. than net book value of the acquired company.
c. results of operations for the current period if both companies had a. Acme's goodwill will decrease over time.
remained separate. b. Acme's amortization of intangible assets will increase over time.
d. amount of in-process R&D purchased and written-off during the c. Depreciation expense will be greater than Coyote Company's
period. expense.
d. Coyote's loss on the sale of the assets will create a net loss
carryforward.
ANS: C DIF: M OBJ: 5
ANS: C DIF: D OBJ: 6
1-3 1-4
, Chapter 1 Chapter 1
14. While performing a goodwill impairment test, the company had the 16. In performing the 20X7 impairment test for goodwill, the company had
following information: the following 20X6 and 20X7 information is available.
Estimated implied fair value of reporting unit
(without goodwill) $420,000 20X6 20X7
Existing net book value of reporting unit Implied fair value of reporting unit $350,000 $400,000
(without goodwill) $380,000 Net book value of reporting unit (including goodwill) $380,000 $360,000
Book value of goodwill $60,000
Based upon this information what are the 20X6 and 20X7 adjustment to
Based upon this information the proper conclusion is: goodwill, if any?
a. The existing net book value plus goodwill is in excess of the a. 20X6 $0
implied fair value, therefore, no adjustment is required. 20X7 $40,000 decrease
b. The existing net book value plus goodwill is less than the implied b. 20X6 $30,000 increase
fair value plus goodwill, therefore, no adjustment is required. 20X7 $40,000 decrease
c. The existing net book value plus goodwill is in excess of the c. 20X6 $30,000 decrease
implied fair value, therefore, goodwill needs to be decreased. 20X7 $40,000 decrease
d. The existing net book value is less than the estimated implied d. 20X6 $30,000 decrease
fair value; therefore, goodwill needs to be decreased. 20X7 $0
ANS: C DIF: D OBJ: 6 ANS: D DIF: D OBJ: 7
15. Balter Inc. acquired Jersey Company on January 1, 20X5. When the 17. Couples Corporation purchases Players Corporation. The fair value of
purchase occurred Jersey Company had the following information related the net assets of Players is $750,000 and the fair value of priority
to fixed assets: accounts (including a deduction for depreciation) is $600,000. Which of
Land $ 80,000 the following purchase prices would require using allocation
Building 200,000 procedures?
Accumulated Depreciation (100,000) a. $500,000
Equipment 100,000 b. $600,000
Accumulated Depreciation (50,000) c. $700,000
d. $800,000
The building has a 10-year remaining useful life and the equipment has
a 5-year remaining useful life. The fair value of the assets on that
date were: ANS: B DIF: D OBJ: 7
Land $100,000
Building 130,000 18. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of
Equipment 75,000 the acquisition the following information was available related to
Comb's balance sheet:
What is the 20X5 depreciation expense Balter will record related to Book Value Fair Value
purchasing Jersey Company? Current Assets $50,000 $ 50,000
a. $8,000 Building 80,000 100,000
b. $15,000 Equipment 40,000 50,000
c. $28,000 Liabilities 30,000 30,000
d. $30,000
What is the amount recorded by ACME for the Building?
a. $40,000
ANS: C DIF: M OBJ: 6 b. $60,000
c. $80,000
d. $100,000
ANS: B DIF: D OBJ: 7
19. Which of the following business combination expenses would NOT qualify
as a direct acquisition expense for a purchase?
a. Fees for purchase audit
b. Outside legal fees
c. Stock issuance fees
d. All are direct acquisition expenses.
1-5 1-6
