Advanced Accounting, 12e (Beams et al.)
Chapter 1 Business Combinations
1.1 Multiple Choice Questions
1) Which of the following is not a reason for a company to expand through a combination, rather
than by building new facilities?
A) A combination might provide cost advantages.
B) A combination might provide fewer operating delays.
C) A combination might provide easier access to intangible assets.
D) A combination might provide an opportunity to invest in a company without having to take
responsibility for its financial results.
Answer: D
Objective: LO1
Difficulty: Easy
2) A business merger differs from a business consolidation because
A) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior
entities and forms a new corporation.
B) a consolidation dissolves all but one of the prior entities, but a merger dissolves all of the prior
entities.
C) a merger is created when two entities join, but a consolidation is created when more than two
entities join.
D) a consolidation is created when two entities join, but a merger is created when more than two
entities join.
Answer: A
Objective: LO2
,Difficulty: Easy
3) Following the accounting concept of a business combination, a business combination occurs
when a company acquires an equity interest in another entity and has
A) at least 20% ownership in the entity.
B) more than 50% ownership in the entity.
C) 100% ownership in the entity.
D) control over the entity, irrespective of the percentage owned.
Answer: D
Objective: LO2
Difficulty: Easy
4) Historically, much of the controversy concerning accounting requirements for business
combinations involved the ________ method.
A) purchase
B) pooling of interests
C) equity
D) acquisition
Answer: B
Objective: LO2
Difficulty: Easy
5) Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch
will treat the $50,000 as
A) an expense for the current year.
B) a prior period adjustment to retained earnings.
C) additional cost to investment of Slope on the consolidated balance sheet.
D) a reduction in additional paid-in capital.
,Answer: A
Objective: LO3, 4
Difficulty: Moderate
6) Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire
shares of Seurat Company in an all-stock transaction. Picasso paid the investment bankers
$35,000 and will treat the investment banker fee as
A) an expense for the current year.
B) a prior period adjustment to Retained Earnings.
C) additional goodwill on the consolidated balance sheet.
D) a reduction to additional paid-in capital.
Answer: D
Objective: LO3
Difficulty: Moderate
7) Durer Inc. acquired Sea Corporation in a business combination and Sea Corp went out of
existence. Sea Corp developed a patent listed as an asset on Sea Corp's books at the patent office
filing cost. In recording the combination,
A) fair value is not assigned to the patent because the research and development costs have been
expensed by Sea Corp.
B) Sea Corp's prior expenses to develop the patent are recorded as an asset by Durer at purchase.
C) the patent is recorded as an asset at fair market value.
D) the patent's market value increases goodwill.
Answer: C
Objective: LO4
Difficulty: Moderate
8) In a business combination, which of the following will occur?
, A) All identifiable assets and liabilities are recorded at fair value at the date of acquisition.
B) All identifiable assets and liabilities are recorded at book value at the date of acquisition.
C) Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of the
net assets acquired.
D) None of the above is correct.
Answer: A
Objective: LO3
Difficulty: Moderate
Chapter 1 Business Combinations
1.1 Multiple Choice Questions
1) Which of the following is not a reason for a company to expand through a combination, rather
than by building new facilities?
A) A combination might provide cost advantages.
B) A combination might provide fewer operating delays.
C) A combination might provide easier access to intangible assets.
D) A combination might provide an opportunity to invest in a company without having to take
responsibility for its financial results.
Answer: D
Objective: LO1
Difficulty: Easy
2) A business merger differs from a business consolidation because
A) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior
entities and forms a new corporation.
B) a consolidation dissolves all but one of the prior entities, but a merger dissolves all of the prior
entities.
C) a merger is created when two entities join, but a consolidation is created when more than two
entities join.
D) a consolidation is created when two entities join, but a merger is created when more than two
entities join.
Answer: A
Objective: LO2
,Difficulty: Easy
3) Following the accounting concept of a business combination, a business combination occurs
when a company acquires an equity interest in another entity and has
A) at least 20% ownership in the entity.
B) more than 50% ownership in the entity.
C) 100% ownership in the entity.
D) control over the entity, irrespective of the percentage owned.
Answer: D
Objective: LO2
Difficulty: Easy
4) Historically, much of the controversy concerning accounting requirements for business
combinations involved the ________ method.
A) purchase
B) pooling of interests
C) equity
D) acquisition
Answer: B
Objective: LO2
Difficulty: Easy
5) Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch
will treat the $50,000 as
A) an expense for the current year.
B) a prior period adjustment to retained earnings.
C) additional cost to investment of Slope on the consolidated balance sheet.
D) a reduction in additional paid-in capital.
,Answer: A
Objective: LO3, 4
Difficulty: Moderate
6) Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire
shares of Seurat Company in an all-stock transaction. Picasso paid the investment bankers
$35,000 and will treat the investment banker fee as
A) an expense for the current year.
B) a prior period adjustment to Retained Earnings.
C) additional goodwill on the consolidated balance sheet.
D) a reduction to additional paid-in capital.
Answer: D
Objective: LO3
Difficulty: Moderate
7) Durer Inc. acquired Sea Corporation in a business combination and Sea Corp went out of
existence. Sea Corp developed a patent listed as an asset on Sea Corp's books at the patent office
filing cost. In recording the combination,
A) fair value is not assigned to the patent because the research and development costs have been
expensed by Sea Corp.
B) Sea Corp's prior expenses to develop the patent are recorded as an asset by Durer at purchase.
C) the patent is recorded as an asset at fair market value.
D) the patent's market value increases goodwill.
Answer: C
Objective: LO4
Difficulty: Moderate
8) In a business combination, which of the following will occur?
, A) All identifiable assets and liabilities are recorded at fair value at the date of acquisition.
B) All identifiable assets and liabilities are recorded at book value at the date of acquisition.
C) Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of the
net assets acquired.
D) None of the above is correct.
Answer: A
Objective: LO3
Difficulty: Moderate
