Test bank advanced accounting
|! |! |!
Chapter |!1 |!— |!Business |!Combinations: |!America's |!Most |!Popular |!Business |!Activity,
|!Bringing |!an |!End |!to |!the |!Controversy
MULTIPLE |!CHOICE
1. An |!economic |!advantage |!of |!a |!business |!combination |!includes
a. Utilizing |!duplicative |!assets.
b. Creating |!separate |!management |!teams.
c. Coordinated |!marketing |!campaigns.
d. Horizontally |!combining |!levels |!within |!the |!marketing |!chain.
ANS: | ! C DIF: |!E OBJ: |!1
2. A |!tax |!advantage |!of |!business |!combination |!can |!occur |!when |!the |!existing |!owner |!of |!a
|!company |!sells |!out |!and |!receives:
a. cash |!to |!defer |!the |!taxable |!gain |!as |!a |!"tax-free |!reorganization."
b. stock |!to |!defer |!the |!taxable |!gain |!as |!a |!"tax-free |!reorganization."
c. cash |!to |!create |!a |!taxable |!gain.
d. stock |!to |!create |!a |!taxable |!gain.
ANS: | ! B DIF: |!E OBJ: |!1
3. A |!controlling |!interest |!in |!a |!company |!implies |!that |!the |!parent |!company
a. owns |!all |!of |!the |!subsidiary's |!stock.
b. has |!influence |!over |!a |!majority |!of |!the |!subsidiary's |!assets.
c. has |!paid |!cash |!for |!a |!majority |!of |!the |!subsidiary's |!stock.
d. has |!transferred |!common |!stock |!for |!a |!majority |!of |!the |!subsidiary's |!outstanding |!bonds
|!and |!debentures.
ANS: | ! B DIF: |!M OBJ: |!2
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 |!investor |!is
|!allocated |!among |!specific |!assets.
b. Earnings |!of |!the |!pooled |!entity |!may |!be |!increased |!because |!of |!the |!combination |!only
|!and |!not |!as |!a |!result |!of |!efficient |!operations.
c. Liabilities |!may |!be |!undervalued |!when |!the |!price |!paid |!by |!the |!investor |!is |!allocated |!to
|!specific |!liabilities.
d. An |!undue |!amount |!of |!cost |!may |!be |!assigned |!to |!goodwill, |!thus |!potentially
|!allowing |!an |!understatement |!of |!pooled |!earnings.
ANS: | ! B DIF: |!M OBJ: |!3, |!Appendix |!A
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Chapter |!1
5. Company |!B |!acquired |!the |!assets |!(net |!of |!liabilities) |!of |!Company |!S |!in |!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 |!acquired |!Company |!S?
| ! Plant |!and |!Equipment | ! Long-Term |!Debt
a. Fair |!value S's |!carrying |!amount
b. Fair |!value Fair |!value
c. S's |!carrying |!amount Fair |!value
d. S's |!carrying |!amount S's |!carrying |!amount
ANS: | ! B DIF: |!E OBJ: |!4
6. Publics |!Company |!acquired |!the |!net |!assets |!of |!Citizen |!Company |!during |!20X5. |!The |!purchase |!price
|!was |!$800,000. |!On |!the |!date |!of |!the |!transaction, |!Citizen |!had |!no |!long-term |!investments |!in
|!marketable |!equity |!securities |!and |!$400,000 |!in |!liabilities. |!The |!fair |!value |!of |!Citizen |!assets |!on
|!the |!acquisition |!date |!was |!as |!follows:
Current |!assets................................. |!$ | ! 800,000
Noncurrent |!assets. ............................................................................................... 600,000
$1,400,000
==========
How |!should |!Publics |!account |!for |!the |!$200,000 |!difference |!between |!the |!fair |!value |!of |!the |!net |!assets
|!acquired, |!$1,000,000, |!and |!the |!cost, |!$800,000?
a. Retained |!earnings |!should |!be |!reduced |!by |!$200,000.
b. Current |!assets |!should |!be |!recorded |!at |!$685,000 |!and |!noncurrent |!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 |!amortized |!to
|!future |!net |!income |!over |!a |!period |!not |!to |!exceed |!40 |!years.
ANS: | ! C DIF: |!M OBJ: |!4
7. ABC |!Co. |!is |!acquiring |!XYZ |!Inc. |!XYZ |!has |!the |!following |!Intangible |!assets: |!Patent |!on |!a |!product
|!that |!is |!deemed |!to |!have |!no |!useful |!life |!$10,000. |!Customer |!List |!with |!an |!observable |!fair |!value
|!of |!$50,000.
A |!5-year |!operating |!lease |!with |!favorable |!terms |!with |!a |!discounted |!present |!value |!of |!$8,000.
Identifiable |!R |!& |!D |!of |!$100,000.
ABC |!will |!record |!how |!much |!for |!acquired |!Intangible |!Assets |!from |!the |!Purchase |!of |!XYZ |!Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS: | ! B DIF: |!D OBJ: |!4
1-2
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Chapter |!1
8. Vibe |!Company |!purchased |!the |!net |!assets |!of |!Atlantic |!Company |!in |!a |!business |!combination
|!accounted |!for |!as |!a |!purchase. |!As |!a |!result, |!goodwill |!was |!recorded. |!For |!tax |!purposes, |!this
|!combination |!was |!considered |!to |!be |!a
tax-free |!merger. |!Included |!in |!the |!assets |!is |!a |!building |!with |!an |!appraised |!value |!of |!$210,000 |!on
|!the |!date |!of |!the |!business |!combination. |!This |!asset |!had |!a |!net |!book |!value |!of |!$70,000, |!based |!on
|!the |!use |!of |!accelerated |!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 |!building |!on |!its |!books |!after |!the
|!purchase?
a. $120,000
b. $134,400
c. $140,000
d. $210,000
ANS: | ! D DIF: |!M OBJ: |!4
9. Goodwill |!represents |!the |!excess |!cost |!of |!an |!acquisition |!over |!the
a. sum |!of |!the |!fair |!values |!assigned |!to |!intangible |!assets |!less |!liabilities |!assumed.
b. sum |!of |!the |!fair |!values |!assigned |!to |!tangible |!and |!intangible |!assets |!acquired |!less |!liabilities
|!assumed.
c. sum |!of |!the |!fair |!values |!assigned |!to |!intangibles |!acquired |!less |!liabilities |!assumed.
d. book |!value |!of |!an |!acquired |!company.
ANS: | ! B DIF: |!M OBJ: |!5
10. When |!purchasing |!a |!company |!occurs, |!FASB |!recommends |!disclosing |!all |!of |!the |!following |!EXCEPT:
a. goodwill |!related |!to |!each |!reporting |!segment.
b. contingent |!payment |!agreements, |!options, |!or |!commitments |!included |!in |!the |!purchase
|!agreement, |!including |!accounting |!methods |!to |!be |!followed.
c. results |!of |!operations |!for |!the |!current |!period |!if |!both |!companies |!had |!remained |!separate.
d. amount |!of |!in-process |!R&D |!purchased |!and |!written-off |!during |!the |!period.
ANS: | ! C DIF: |!M OBJ: |!5
1-3
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Chapter |!1
11. Cozzi |!Company |!is |!being |!purchased |!and |!has |!the |!following |!balance |!sheet |!as |!of |!the |!purchase
|!date:
Current |!assets.......... | ! $200,000 |L
! iabilities.... | ! $ |!90,000 |!Fixed
|!assets............ | ! | ! 180,000 Equity. ................................. |!290,000
Total................. | ! $380,000 Total. .............................. $380,000
======== ========
The |!price |!paid |!for |!Cozzi's |!net |!assets |!(the |!purchaser |!assumes |!the |!liabilities) |!is |!$500,000. |!The |!fixed
|!assets |!have |!a |!fair |!value |!of
$220,000, |!and |!the |!liabilities |!have |!a |!fair |!value |!of |!$110,000. |!The |!amount |!of |!goodwill |!to |!be
|!recorded |!in |!the |!purchase |!is |! .
a. $0
b. $50,000
c. $70,000
d. $90,000
ANS: | ! C DIF: |!M OBJ: |!6
12. Separately |!identified |!intangible |!assets |!are |!accounted |!for |!by |!amortizing:
a. exclusively |!by |!using |!impairment |!testing.
b. based |!upon |!a |!pattern |!that |!reflects |!the |!benefits |!conveyed |!by |!the |!asset.
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: |!E OBJ: |!6
13. Acme |!Co. |!is |!preparing |!a |!pro-forma |!set |!of |!financial |!statements |!after |!an |!acquisition |!of |!Coyote
|!Co. |!The |!purchase |!price |!is |!less |!than |!the |!fair |!value |!of |!the |!assets |!acquired. |!However, |!the
|!purchase |!price |!is |!greater |!than |!net |!book |!value |!of |!the |!acquired |!company.
a. Acme's |!goodwill |!will |!decrease |!over |!time.
b. Acme's |!amortization |!of |!intangible |!assets |!will |!increase |!over |!time.
c. Depreciation |!expense |!will |!be |!greater |!than |!Coyote |!Company's |!expense.
d. Coyote's |!loss |!on |!the |!sale |!of |!the |!assets |!will |!create |!a |!net |!loss |!carryforward.
ANS: | ! C DIF: |!D OBJ: |!6
1-4
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|! |! |!
Chapter |!1 |!— |!Business |!Combinations: |!America's |!Most |!Popular |!Business |!Activity,
|!Bringing |!an |!End |!to |!the |!Controversy
MULTIPLE |!CHOICE
1. An |!economic |!advantage |!of |!a |!business |!combination |!includes
a. Utilizing |!duplicative |!assets.
b. Creating |!separate |!management |!teams.
c. Coordinated |!marketing |!campaigns.
d. Horizontally |!combining |!levels |!within |!the |!marketing |!chain.
ANS: | ! C DIF: |!E OBJ: |!1
2. A |!tax |!advantage |!of |!business |!combination |!can |!occur |!when |!the |!existing |!owner |!of |!a
|!company |!sells |!out |!and |!receives:
a. cash |!to |!defer |!the |!taxable |!gain |!as |!a |!"tax-free |!reorganization."
b. stock |!to |!defer |!the |!taxable |!gain |!as |!a |!"tax-free |!reorganization."
c. cash |!to |!create |!a |!taxable |!gain.
d. stock |!to |!create |!a |!taxable |!gain.
ANS: | ! B DIF: |!E OBJ: |!1
3. A |!controlling |!interest |!in |!a |!company |!implies |!that |!the |!parent |!company
a. owns |!all |!of |!the |!subsidiary's |!stock.
b. has |!influence |!over |!a |!majority |!of |!the |!subsidiary's |!assets.
c. has |!paid |!cash |!for |!a |!majority |!of |!the |!subsidiary's |!stock.
d. has |!transferred |!common |!stock |!for |!a |!majority |!of |!the |!subsidiary's |!outstanding |!bonds
|!and |!debentures.
ANS: | ! B DIF: |!M OBJ: |!2
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 |!investor |!is
|!allocated |!among |!specific |!assets.
b. Earnings |!of |!the |!pooled |!entity |!may |!be |!increased |!because |!of |!the |!combination |!only
|!and |!not |!as |!a |!result |!of |!efficient |!operations.
c. Liabilities |!may |!be |!undervalued |!when |!the |!price |!paid |!by |!the |!investor |!is |!allocated |!to
|!specific |!liabilities.
d. An |!undue |!amount |!of |!cost |!may |!be |!assigned |!to |!goodwill, |!thus |!potentially
|!allowing |!an |!understatement |!of |!pooled |!earnings.
ANS: | ! B DIF: |!M OBJ: |!3, |!Appendix |!A
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Chapter |!1
5. Company |!B |!acquired |!the |!assets |!(net |!of |!liabilities) |!of |!Company |!S |!in |!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 |!acquired |!Company |!S?
| ! Plant |!and |!Equipment | ! Long-Term |!Debt
a. Fair |!value S's |!carrying |!amount
b. Fair |!value Fair |!value
c. S's |!carrying |!amount Fair |!value
d. S's |!carrying |!amount S's |!carrying |!amount
ANS: | ! B DIF: |!E OBJ: |!4
6. Publics |!Company |!acquired |!the |!net |!assets |!of |!Citizen |!Company |!during |!20X5. |!The |!purchase |!price
|!was |!$800,000. |!On |!the |!date |!of |!the |!transaction, |!Citizen |!had |!no |!long-term |!investments |!in
|!marketable |!equity |!securities |!and |!$400,000 |!in |!liabilities. |!The |!fair |!value |!of |!Citizen |!assets |!on
|!the |!acquisition |!date |!was |!as |!follows:
Current |!assets................................. |!$ | ! 800,000
Noncurrent |!assets. ............................................................................................... 600,000
$1,400,000
==========
How |!should |!Publics |!account |!for |!the |!$200,000 |!difference |!between |!the |!fair |!value |!of |!the |!net |!assets
|!acquired, |!$1,000,000, |!and |!the |!cost, |!$800,000?
a. Retained |!earnings |!should |!be |!reduced |!by |!$200,000.
b. Current |!assets |!should |!be |!recorded |!at |!$685,000 |!and |!noncurrent |!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 |!amortized |!to
|!future |!net |!income |!over |!a |!period |!not |!to |!exceed |!40 |!years.
ANS: | ! C DIF: |!M OBJ: |!4
7. ABC |!Co. |!is |!acquiring |!XYZ |!Inc. |!XYZ |!has |!the |!following |!Intangible |!assets: |!Patent |!on |!a |!product
|!that |!is |!deemed |!to |!have |!no |!useful |!life |!$10,000. |!Customer |!List |!with |!an |!observable |!fair |!value
|!of |!$50,000.
A |!5-year |!operating |!lease |!with |!favorable |!terms |!with |!a |!discounted |!present |!value |!of |!$8,000.
Identifiable |!R |!& |!D |!of |!$100,000.
ABC |!will |!record |!how |!much |!for |!acquired |!Intangible |!Assets |!from |!the |!Purchase |!of |!XYZ |!Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS: | ! B DIF: |!D OBJ: |!4
1-2
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Chapter |!1
8. Vibe |!Company |!purchased |!the |!net |!assets |!of |!Atlantic |!Company |!in |!a |!business |!combination
|!accounted |!for |!as |!a |!purchase. |!As |!a |!result, |!goodwill |!was |!recorded. |!For |!tax |!purposes, |!this
|!combination |!was |!considered |!to |!be |!a
tax-free |!merger. |!Included |!in |!the |!assets |!is |!a |!building |!with |!an |!appraised |!value |!of |!$210,000 |!on
|!the |!date |!of |!the |!business |!combination. |!This |!asset |!had |!a |!net |!book |!value |!of |!$70,000, |!based |!on
|!the |!use |!of |!accelerated |!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 |!building |!on |!its |!books |!after |!the
|!purchase?
a. $120,000
b. $134,400
c. $140,000
d. $210,000
ANS: | ! D DIF: |!M OBJ: |!4
9. Goodwill |!represents |!the |!excess |!cost |!of |!an |!acquisition |!over |!the
a. sum |!of |!the |!fair |!values |!assigned |!to |!intangible |!assets |!less |!liabilities |!assumed.
b. sum |!of |!the |!fair |!values |!assigned |!to |!tangible |!and |!intangible |!assets |!acquired |!less |!liabilities
|!assumed.
c. sum |!of |!the |!fair |!values |!assigned |!to |!intangibles |!acquired |!less |!liabilities |!assumed.
d. book |!value |!of |!an |!acquired |!company.
ANS: | ! B DIF: |!M OBJ: |!5
10. When |!purchasing |!a |!company |!occurs, |!FASB |!recommends |!disclosing |!all |!of |!the |!following |!EXCEPT:
a. goodwill |!related |!to |!each |!reporting |!segment.
b. contingent |!payment |!agreements, |!options, |!or |!commitments |!included |!in |!the |!purchase
|!agreement, |!including |!accounting |!methods |!to |!be |!followed.
c. results |!of |!operations |!for |!the |!current |!period |!if |!both |!companies |!had |!remained |!separate.
d. amount |!of |!in-process |!R&D |!purchased |!and |!written-off |!during |!the |!period.
ANS: | ! C DIF: |!M OBJ: |!5
1-3
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Chapter |!1
11. Cozzi |!Company |!is |!being |!purchased |!and |!has |!the |!following |!balance |!sheet |!as |!of |!the |!purchase
|!date:
Current |!assets.......... | ! $200,000 |L
! iabilities.... | ! $ |!90,000 |!Fixed
|!assets............ | ! | ! 180,000 Equity. ................................. |!290,000
Total................. | ! $380,000 Total. .............................. $380,000
======== ========
The |!price |!paid |!for |!Cozzi's |!net |!assets |!(the |!purchaser |!assumes |!the |!liabilities) |!is |!$500,000. |!The |!fixed
|!assets |!have |!a |!fair |!value |!of
$220,000, |!and |!the |!liabilities |!have |!a |!fair |!value |!of |!$110,000. |!The |!amount |!of |!goodwill |!to |!be
|!recorded |!in |!the |!purchase |!is |! .
a. $0
b. $50,000
c. $70,000
d. $90,000
ANS: | ! C DIF: |!M OBJ: |!6
12. Separately |!identified |!intangible |!assets |!are |!accounted |!for |!by |!amortizing:
a. exclusively |!by |!using |!impairment |!testing.
b. based |!upon |!a |!pattern |!that |!reflects |!the |!benefits |!conveyed |!by |!the |!asset.
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: |!E OBJ: |!6
13. Acme |!Co. |!is |!preparing |!a |!pro-forma |!set |!of |!financial |!statements |!after |!an |!acquisition |!of |!Coyote
|!Co. |!The |!purchase |!price |!is |!less |!than |!the |!fair |!value |!of |!the |!assets |!acquired. |!However, |!the
|!purchase |!price |!is |!greater |!than |!net |!book |!value |!of |!the |!acquired |!company.
a. Acme's |!goodwill |!will |!decrease |!over |!time.
b. Acme's |!amortization |!of |!intangible |!assets |!will |!increase |!over |!time.
c. Depreciation |!expense |!will |!be |!greater |!than |!Coyote |!Company's |!expense.
d. Coyote's |!loss |!on |!the |!sale |!of |!the |!assets |!will |!create |!a |!net |!loss |!carryforward.
ANS: | ! C DIF: |!D OBJ: |!6
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