Test Bank for Advanced Accounting 12/E Fischer

Test Bank for Advanced Accounting 12/E Fischer Multiple Choice 1. An economic advantage of a business combination includes: a. Utilizing duplicative assets. b. Creating separate management teams. c. Shared fixed costs. d. Horizontally combining levels within the marketing chain. ANSWER: c RATIONALE: Business combinations may viewed as a way to take advantage of economies of scale by utilizing common facilities and sharing fixed costs. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-1 2. One large bank’s acquisition of another bank would be an example of a: a. market extension merger. b. conglomerate merger. c. product extension merger. d. horizontal merger. ANSWER: d RATIONALE: A horizontal merger occurs when two companies offering similar products or services that are likely competitors in the same marketplace merge. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-1 3. A large nation-wide bank’s acquisition of a major investment advisory firm would be an example of a: a. market extension merger. b. conglomerate merger. c. product extension merger. d. horizontal merger. ANSWER: c RATIONALE: A product extension merger occurs when the acquiring company is expanding its product offerings in the market place in which it sells. DIFFICULTY: M LEARNING OBJECTIVES: OBJ: ADAC.FISC.1-1 4. A building materials company’s acquisition of a television station would be an example of a: a. market extension merger. b. conglomerate merger. c. product extension merger. d. horizontal merger. ANSWER: b RATIONALE: Because these firms are in unrelated lines of business, this would be a conglomerate merger. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-1 5. 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. ANSWER: b RATIONALE: If the owners of a business sell their interests for cash or accept debt instruments, they would have an immediate taxable gain. However, if they accept common stock of another corporation and the transaction is crafted as such, they may account for the transaction as a “tax-free reorganization.” If this is the case, no taxes are paid until they sell the shares received in the transaction. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-1 6. A controlling interest in a company implies that the parent company a. owns all of the subsidiary's stock. b. has acquired a majority of the subsidiary's common stock. 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. ANSWER: b RATIONALE: Typically, a controlling interest is over 50% of the company’s voting stock. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-2 7. Some advantages of obtaining control by acquiring a controlling interest in stock include all but: a. Negotiations are made directly with the acquiree’s management. b. The legal liability of each corporation is limited to its own assets. c. The cost may be lower since only a controlling interest in the assets, not the total assets, is acquired. d. Tax advantages may result from preservation of the legal entities. ANSWER: a RATIONALE: If a company was acquiring a controlling interest in stock, the negotiations would be with the target company’s stockholders. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-2 8. A(n) ________________ occurs when the management of the target company purchases a controlling interest in that company and the company incurs a significant amount of debt as a result. a. greenmail b. statutory merger c. poison pill d. leveraged buyout ANSWER: d RATIONALE: A leveraged buyout is defensive move against an unfriendly takeover where management of the target company purchases a controlling interest in the company. Usually, a significant amount of debt is incurred. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-2 9. Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and consummate the purchase are a. recorded as a deferred asset and amortized over a period not to exceed 15 years b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price c. expensed in the period of the purchase d. included as part of the price paid for the company purchased ANSWER: c RATIONALE: Direct costs of the acquisition, such as professional fees incurred to negotiate and consummate the purchase, are expensed in the period of purchase. Costs related to the issuance of securities related to the purchase may be deducted from the value assigned to paid-in capital in excess of par. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-3 10. Which of the following costs of a business combination can be deducted from the value assigned to paid-in capital in excess of par? a. Direct and indirect acquisition costs. b. Direct acquisition costs. c. Direct acquisition costs and stock issue costs if stock is issued as consideration. d. Stock issue costs if stock is issued as consideration. ANSWER: d RATIONALE: Stock issue costs can be deducted from the value assigned to paid-in capital in excess of par when stock is issued as consideration. All other direct and indirect acquisition costs are expensed. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-3 11. When determining the fair values of assets acquired in an acquisition, the highest level of measurement per GAAP is a. adjusted market value based on prices of similar assets. b. unadjusted market values in an actively traded market. c. based on discounted cash flows. d. the entity’s best estimate of an exit or sale value. ANSWER: b RATIONALE: FASB provides a hierarchy of values where the highest level measurement possible should be used. The levels are as follows: Level 1 - Unadjusted quoted market values in an actively traded market. Level 2 - Adjusted market value based on prices of similar assets or on observable other inputs such as interest rates. Level 3 - Fair value based on unobservable inputs such as the entity’s best estimate of an exit value. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-3 12. Larry’s Liquor acquired the net assets of Drake’s Drinks in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should Larry’s Liquor determine the amounts to be reported for the plant and equipment, and for long-term debt of the acquired Drake’s Drinks? Plant and Equipment Long-Term Debt a. Fair value Drake's carrying amount b. Fair value Fair value c. Drake's carrying amount Fair value d. Drake's carrying amount Drake's carrying amount ANSWER: b RATIONALE: All assets acquired and liabilities assumed in an acquisition should be recorded at fair value. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 13. Crystal Co. purchased all of the common stock of Sill Corp. on January 1 of the current year. Five years prior to the acquisition, Sill Corp. had issued 30-year bonds bearing an interest rate of 8%. At the time of the acquisition, the prevailing interest rate for similar bonds was 5%. These bonds should be included in the consolidated balance sheet at a. face value. b. at a value higher than Sill’s recorded value due to the change in interest rates. c. at a value lower than Sill’s recorded value due to the change in interest rates. d. at Sill’s recorded value. ANSWER: b RATIONALE: All assets acquired and liabilities assumed should be recorded at their fair values. A change in interest rates may result in a market value that is different than the recorded value of the bonds. Generally, when interest rates fall, prices on bonds with higher stated interest rates will increase as investors are generally willing to pay more for the higher rate of return. DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1-4 14. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was available related to Comb's balance sheet: Book Value Fair Value Current Assets $50,000 $ 50,000 Building 80,000 100,000 Equipment 40,000 50,000 Liabilities 30,000 30,000 What is the amount recorded by ACME for the Building? a. $110,000 b. $20,000 c. $80,000 d. $100,000 ANSWER: d RATIONALE: Identifiable assets and liabilities of the acquiree are recorded at fair value. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-4 15. 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 having a discounted present value of $8,000. Identifiable research and development costs 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 ANSWER: c RATIONALE: Amounts to be recorded Patent $ - Customer list 50,000 Favorable operating lease 8,000 Identifiable research and development costs 100,000 $158,000 Because the patent is on a product having no useful life, it has no value. It is appropriate to recognize the other intangibles in an acquisition. DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1-4 16. Which of the following would not be considered an identifiable intangible asset? a. Assembled workforce b. Customer lists c. Production backlog d. Internet domain name ANSWER: a RATIONALE: An assembled workforce is specifically stated by FASB as not qualifying as an identifiable intangible asset. Whatever value it has would be included in the value recorded for goodwill. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-4 17. A contingent liability of an acquiree a. refers to future consideration due that is part of the acquisition agreement. b. is recorded when it is probable that future events will confirm its existence. c. may be recorded beyond the measurement period under certain circumstances. d. should be recorded even if the amount cannot be reasonably estimated. ANSWER: b RATIONALE: Two criteria must be met for an estimate of a contingent liability to be recorded: 1) information available indicates a liability had been incurred at the acquisition date, and 2) the amount of the liability can be reasonably estimated. Examples of a contingent liability might include pending claims, unfavorable lawsuits or environmental liabilities. Contingent liabilities should not be confused with contingent consideration that is part of the acquisition agreement. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 18. Goodwill results when: a. a controlling interest is acquired. b. the price of the acquisition exceeds the sum of the fair values of the net identifiable assets acquired. c. the fair value of net assets acquired exceeds the acquisition price. d. the price of the acquisition exceeds the book value of an acquired company. ANSWER: b RATIONALE: If the acquisition price exceeds the sum of the fair value of the net identifiable assets acquired, the excess price is goodwill. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1-4 19. Cozzi Company is being purchased and has the following balance sheet as of the purchase date: Current assets $200,000 Liabilities $ 90,000 Fixed assets 180,000 Equity 290,000 Total $380,000 Total $380,000 The price paid for Cozzi's net assets 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. $150,000 c. $170,000 d. $190,000 ANSWER: d RATIONALE: Acquisition price $500,000 Fair value: Current assets $ 200,000 Fixed assets 220,000 Liabilities (110,000) 310,000 Goodwill $190,000 DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 20. Publics Company acquired the net assets of Citizen Company during 2016. 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, of which the fair value approximated book value. The fair value of Citizen’s 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 difference between the fair value of the net assets acquired and the acquisition price of $800,000? a. Retained earnings should be reduced by $200,000. b. A $600,000 gain on acquisition of business should be recognized. c. A $200,000 gain on acquisition of business should be recognized. 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. ANSWER: c RATIONALE: Fair value of total assets $1,400,000 Fair value of liabilities 400,000 Fair value of net assets 1,000,000 Acquisition price 800,000 Gain on acquisition of business $ 200,000 If the acquisition price exceeds the fair value of the identifiable net assets acquired, the price deficiency is a gain. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 21. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was available related to Comb's balance sheet: Book Value Fair Value Current Assets $50,000 $ 50,000 Building 80,000 100,000 Equipment 40,000 50,000 Liabilities 30,000 30,000 What is the amount of goodwill or gain related to the acquisition? a. Goodwill of $70,000 b. Goodwill of $30,000 c. A gain of $30,000 d. A gain of $70,000 ANSWER: d RATIONALE: Acquisition price $110,000 Fair value of net assets acquired: Current assets $ 50,000 Building 110,000 Equipment 50,000 Liabilities (30,000) 180,000 Gain on acquisition of business $( 70,000) DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 22. Jones Company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively. Jackson also had unrecorded copyrights valued at $150,000 and its direct costs related to the acquisition were $50,000. What was the amount of the goodwill related to the acquisition? a. $600,000 b. $650,000 c. $550,000 d. $700,000 ANSWER: a RATIONALE: Acquisition price $2,000,000 Fair value: Assets $1,500,000 Copyrights 150,000 Liabilities (250,000) 1,400,000 Goodwill $ 600,000 Direct costs related to the acquisition are expensed in the period the acquisition is made. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 23. Jones company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively. Jackson also had in-process research and development projects valued at $150,000 and its pension plan’s projected benefit obligation exceeded the plan assets by $50,000. What was the amount of the goodwill related to the acquisition? a. $750,000 b. $50,000 c. $250,000 d. $650,000 ANSWER: d RATIONALE: Acquisition price $2,000,000 Fair value: Assets $1,500,000 Research and development 150,000 Excess pension liability (50,000) Liabilities (250,000) 1,350,000 Goodwill $ 650,000 DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1-4 24. Orbit Inc. purchased Planet Co. on January 1, 2016. At that time an existing patent having a 5-year life was not recorded as a separately identified intangible asset. At the end of fiscal year 2015, it is determined the patent is valued at $20,000, and goodwill has a book value of $100,000. How should intangible assets be reported at the beginning of fiscal year 2016? a. Goodwill $100,000 Patent $0 b. Goodwill $100,000 Patent $20,000 c. Goodwill $80,000 Patent $20,000 d. Goodwill $80,000 Patent $16,000 ANSWER: a RATIONALE: In no case may the measurement period exceed a year; therefore, goodwill will remain at its $100,000 book value, and the patent will not be recorded. DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1-4 25. Orbit Inc. purchased Planet Co. on January 1, 2015. At that time an existing patent having a 5-year estimated life was assigned a provisional value of $10,000 and goodwill was assigned a value of $100,000. By the end of fiscal year 2015, better information was available that indicated the fair value of the patent was $20,000. How should intangible assets be reported at the beginning of fiscal year 2016? a. Goodwill $100,000 Patent $10,000 b. Goodwill $90,000 Patent $16,000 c. Goodwill $84,000 Patent $16,000 d. Goodwill $90,000 Patent $20,000 ANSWER: b RATIONALE: Patent: New estimate $ 20,000 Provisional value 10,000 Adjustment needed $ 10,000 Provisional goodwill 100,000 Adjusted goodwill $ 90,000 Amortization of the patent in 2016 based on the new estimate should be $20,000 / 5 = $4,000, so the book value of the patent at December 31, 2016 would be $16,000 ($20,000 - $4,000) DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1-4 26. Balter Inc. acquired Jersey Company on January 1, 2016. When the purchase occurred Jersey Company had the following information related to fixed assets: Land $ 80,000 Building 200,000 Accumulated Depreciation (100,000) Equipment 100,000 Accumulated Depreciation (50,000) 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: Land $100,000 Building 130,000 Equipment 75,000 What is the 2016 depreciation expense Balter will record related to purchasing Jersey Company? a. $8,000 b. $15,000 c. $28,000 d. $30,000 ANSWER: c RATIONALE: Building Fair value - $130,000 / 10 years $13,000 Equipment Fair value - $ 75,000 / 5 years 15,000 $28,000 DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 27. Polk issues common stock to acquire all the assets of the Sam Company on January 1, 2016. There is a contingent share agreement, which states that if the income of the Sam Division exceeds a certain level during 2016 and 2017, additional shares will be issued on January 1, 2018. The impact of issuing the additional shares is to a. increase the price assigned to fixed assets. b. have no effect on asset values, but to reassign the amounts assigned to equity accounts. c. reduce retained earnings. d. record additional goodwill. ANSWER: b RATIONALE: An agreement to issue added stock upon the occurrence of a future event is considered to be a change in the estimate of the value of shares issued. The only entry made is at the date of the added stock issue to reassign the original consideration assigned to the stock to a greater number of shares. This typically results in an entry to increase the Common Stock account and decrease Paid-in Capital in Excess of Par. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 28. Jones Company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively. If Jackson meets specified sales targets, Jones is required to pay an additional $200,000 in cash per the acquisition agreement. Jones estimates the probability of this to be 50%. The direct costs related to the acquisition were $50,000. What was the amount of the goodwill related to the acquisition? a. $900,000 b. $950,000 c. $850,000 d. $750,000 ANSWER: c RATIONALE: Acquisition price: Cash at closing $2,000,000 Contingent consideration 100,000 2,100,000 Fair value: Assets $1,500,000 Liabilities (250,000) 1,250,000 Goodwill $ 850,000 Direct costs related to the acquisition are expensed in the period the acquisition is made. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4 29. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was available related to Comb's balance sheet: Book Value Fair Value Current Assets $50,000 $ 50,000 Building 80,000 100,000 Equipment 40,000 50,000 Liabilities 30,000 30,000 What is the amount of gain or loss on disposal of business should Comb Corp. recognize? a. Gain of $60,000 b. Gain of $60,000 c. Loss of $30,000 d. Loss of $60,000 ANSWER: c RATIONALE: Acquisition price $110,000 Book values of net assets acquired: Current assets $ 50,000 Building 80,000 Equipment 40,000 Liabilities (30,000) 140,000 Loss on sale of business $( 30,000) DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1-4