TEST BANK FOR ADVANCED ACCOUNTING 11TH EDITION BY FISCHER

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 Chapter 1 1-2 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 Chapter 1 1-3 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