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:
TEST BANK FOR 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.
ADVANCED
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.
ACCOUNTING 11TH 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
EDITION BY FISCHER
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 b. $134,400
6. Publics Company acquired the net assets of Citizen Company during 20X5. c. $140,000
The purchase price was $800,000. On the date of the transaction, d. $210,000
Citizen had no long-term investments in marketable equity securities ANS: D DIF: M OBJ: 4
and $400,000 in liabilities. The fair value of Citizen assets on the 9. Goodwill represents the excess cost of an acquisition over the
acquisition date was as follows: a. sum of the fair values assigned to intangible assets less
Current assets................................. $ 800,000 liabilities assumed.
Noncurrent assets.............................. 600,000 b. sum of the fair values assigned to tangible and intangible assets
$1,400,000 acquired less liabilities assumed.
========== c. sum of the fair values assigned to intangibles acquired less
How should Publics account for the $200,000 difference between the fair liabilities assumed.
value of the net assets acquired, $1,000,000, and the cost, $800,000? d. book value of an acquired company.
a. Retained earnings should be reduced by $200,000. ANS: B DIF: M OBJ: 5
b. Current assets should be recorded at $685,000 and noncurrent 10. When purchasing a company occurs, FASB recommends disclosing all of the
assets recorded at $515,000. following EXCEPT:
c. The noncurrent assets should be recorded at $400,000. a. goodwill related to each reporting segment.
d. A deferred credit of $200,000 should be set up and subsequently b. contingent payment agreements, options, or commitments included in
amortized to future net income over a period not to exceed 40 the purchase agreement, including accounting methods to be
years. followed.
ANS: C DIF: M OBJ: 4 c. results of operations for the current period if both companies had
7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible assets: remained separate.
Patent on a product that is deemed to have no useful life $10,000. d. amount of in-process R&D purchased and written-off during the
Customer List with an observable fair value of $50,000. period.
A 5-year operating lease with favorable terms with a discounted ANS: C DIF: M OBJ: 5
present value of $8,000. Chapter 1
Identifiable R & D of $100,000. 1-4
ABC will record how much for acquired Intangible Assets from the 11. Cozzi Company is being purchased and has the following balance sheet as
Purchase of XYZ Inc? of the purchase date:
a. $168,000 Current assets.......... $200,000 Liabilities.... $ 90,000
b. $58,000 Fixed assets............ 180,000 Equity......... 290,000
c. $158,000 Total................. $380,000 Total........ $380,000
d. $150,000 ======== ========
ANS: B DIF: D OBJ: 4 The price paid for Cozzi's net assets (the purchaser assumes the
Chapter 1 liabilities) is $500,000. The fixed assets have a fair value of
1-3 $220,000, and the liabilities have a fair value of $110,000. The amount
8. Vibe Company purchased the net assets of Atlantic Company in a business of goodwill to be recorded in the purchase is __________.
combination accounted for as a purchase. As a result, goodwill was a. $0
recorded. For tax purposes, this combination was considered to be a b. $50,000
tax-free merger. Included in the assets is a building with an appraised c. $70,000
value of $210,000 on the date of the business combination. This asset d. $90,000
had a net book value of $70,000, based on the use of accelerated ANS: C DIF: M OBJ: 6
depreciation for accounting purposes. The building had an adjusted tax 12. Separately identified intangible assets are accounted for by
basis to Atlantic (and to Vibe as a result of the merger) of $120,000. amortizing:
Assuming a 36% income tax rate, at what amount should Vibe record this a. exclusively by using impairment testing.
building on its books after the purchase? b. based upon a pattern that reflects the benefits conveyed by the
a. $120,000 asset.
,c. over the useful economic life less residual value using only the Building 130,000
straight-line method. Equipment 75,000
d. amortizing over a period not to exceed a maximum of 40 years. What is the 20X5 depreciation expense Balter will record related to
ANS: B DIF: E OBJ: 6 purchasing Jersey Company?
13. Acme Co. is preparing a pro-forma set of financial statements after an a. $8,000
acquisition of Coyote Co. The purchase price is less than the fair b. $15,000
value of the assets acquired. However, the purchase price is greater c. $28,000
than net book value of the acquired company. d. $30,000
a. Acme's goodwill will decrease over time. ANS: C DIF: M OBJ: 6
b. Acme's amortization of intangible assets will increase over time. Chapter 1
c. Depreciation expense will be greater than Coyote Company's 1-6
expense. 16. In performing the 20X7 impairment test for goodwill, the company had
d. Coyote's loss on the sale of the assets will create a net loss the following 20X6 and 20X7 information is available.
carryforward. 20X6 20X7
ANS: C DIF: D OBJ: 6 Implied fair value of reporting unit $350,000 $400,000
Chapter 1 Net book value of reporting unit (including goodwill) $380,000 $360,000
1-5 Based upon this information what are the 20X6 and 20X7 adjustment to
14. While performing a goodwill impairment test, the company had the goodwill, if any?
following information: a. 20X6 $0
Estimated implied fair value of reporting unit 20X7 $40,000 decrease
(without goodwill) $420,000 b. 20X6 $30,000 increase
Existing net book value of reporting unit 20X7 $40,000 decrease
(without goodwill) $380,000 c. 20X6 $30,000 decrease
Book value of goodwill $60,000 20X7 $40,000 decrease
Based upon this information the proper conclusion is: d. 20X6 $30,000 decrease
a. The existing net book value plus goodwill is in excess of the 20X7 $0
implied fair value, therefore, no adjustment is required. ANS: D DIF: D OBJ: 7
b. The existing net book value plus goodwill is less than the implied 17. Couples Corporation purchases Players Corporation. The fair value of
fair value plus goodwill, therefore, no adjustment is required. the net assets of Players is $750,000 and the fair value of priority
c. The existing net book value plus goodwill is in excess of the accounts (including a deduction for depreciation) is $600,000. Which of
implied fair value, therefore, goodwill needs to be decreased. the following purchase prices would require using allocation
d. The existing net book value is less than the estimated implied procedures?
fair value; therefore, goodwill needs to be decreased. a. $500,000
ANS: C DIF: D OBJ: 6 b. $600,000
15. Balter Inc. acquired Jersey Company on January 1, 20X5. When the c. $700,000
purchase occurred Jersey Company had the following information related d. $800,000
to fixed assets: ANS: B DIF: D OBJ: 7
Land $ 80,000 18. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of
Building 200,000 the acquisition the following information was available related to
Accumulated Depreciation (100,000) Comb's balance sheet:
Equipment 100,000 Book Value Fair Value
Accumulated Depreciation (50,000) Current Assets $50,000 $ 50,000
The building has a 10-year remaining useful life and the equipment has Building 80,000 100,000
a 5-year remaining useful life. The fair value of the assets on that Equipment 40,000 50,000
date were: Liabilities 30,000 30,000
Land $100,000 What is the amount recorded by ACME for the Building?
, a. $40,000 calculation of goodwill?
b. $60,000 a. sales for the period
c. $80,000 b. income tax expense
d. $100,000 c. extraordinary items
ANS: B DIF: D OBJ: 7 d. cost of goods sold
19. Which of the following business combination expenses would NOT qualify ANS: C DIF: M OBJ: 10, Appendix A
as a direct acquisition expense for a purchase? Chapter 1
a. Fees for purchase audit 1-8
b. Outside legal fees PROBLEM
c. Stock issuance fees 1. Internet Corporation is considering the acquisition of Homepage
d. All are direct acquisition expenses. Corporation and has obtained the following audited condensed balance
Chapter 1 sheet:
1-7 Homepage Corporation
ANS: C DIF: E OBJ: 8 Balance Sheet
20. Polk issues common stock to acquire all the assets of the Sam Company December 31, 20X5
on January 1, 20X5. There is a contingent share agreement, which states Assets Liabilities and Equity
that if the income of the Sam Division exceeds a certain level during Current assets.... $ 40,000 Current Liabilities.......... $ 60,000
20X5 and 20X6, additional shares will be issued on January 1, 20X7. The Land.............. 20,000 Capital Stock (50,000 shares,
impact of issuing the additional shares is to Buildings (net)... 80,000 $1 par value)................ 50,000
a. increase the price assigned to fixed assets. Equipment (net)... 60,000 Other Paid-in Capital........ 20,000
b. have no effect on asset values, but to reassign the amounts Retained Earnings............. 70,000
assigned to equity accounts. $200,000 $200,000
c. reduce retained earnings. ======== ========
d. record additional goodwill. Internet also acquired the following fair values for Homepage's assets
ANS: D DIF: D OBJ: 8 and liabilities:
21. In a purchase, the direct acquisition, indirect acquisition and Current assets......................................... $ 55,000
security issuance costs are accounted for as follows: Land................................................... 60,000
Direct Acquisition Indirect Acquisition Security Issuance Buildings (net)........................................ 90,000
a. Added to price paid Added to price paid Added to price paid Equipment (net)........................................ 75,000
b. Added to price paid Expensed Deducted from value Current Liabilities.................................... (60,000)
of security issued $220,000
c. Expensed Expensed Deducted from value ========
of security issued Internet and Homepage agree on a price of $280,000 for Homepage's net
d. Expensed Expensed Expensed assets. Prepare the necessary journal entry to record the purchase
ANS: B DIF: E OBJ: 9 given the following scenarios:
22. Orbit Inc. purchased Planet Co. in 20X3. At that time an existing a. Internet pays cash for Homepage Corporation and incurs $5,000
patent was not recorded as a separately identified intangible asset. At of direct acquisition costs.
the end of fiscal year 20X5, the patent is valued at $15,000, and b. Internet issues its $5 par value stock as consideration. The
goodwill has a book value of $100,000. How should intangible assets be fair value of the stock at the acquisition date is $50 per
reported at the beginning of fiscal year 20X6? share. Additionally, Internet incurs $5,000 of security
a. Goodwill $100,000 Patent $0 issuance costs.
b. Goodwill $115,000 Patent $0 Chapter 1
c. Goodwill $100,000 Patent $15,000 1-9
d. Goodwill $85,000 Patent $15,000 ANS:
ANS: D DIF: M OBJ: 9 a. Current assets.......................... $55,000
23. Which of the following income factors should not be factored into a Land.................................... 60,000
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:
TEST BANK FOR 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.
ADVANCED
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.
ACCOUNTING 11TH 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
EDITION BY FISCHER
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 b. $134,400
6. Publics Company acquired the net assets of Citizen Company during 20X5. c. $140,000
The purchase price was $800,000. On the date of the transaction, d. $210,000
Citizen had no long-term investments in marketable equity securities ANS: D DIF: M OBJ: 4
and $400,000 in liabilities. The fair value of Citizen assets on the 9. Goodwill represents the excess cost of an acquisition over the
acquisition date was as follows: a. sum of the fair values assigned to intangible assets less
Current assets................................. $ 800,000 liabilities assumed.
Noncurrent assets.............................. 600,000 b. sum of the fair values assigned to tangible and intangible assets
$1,400,000 acquired less liabilities assumed.
========== c. sum of the fair values assigned to intangibles acquired less
How should Publics account for the $200,000 difference between the fair liabilities assumed.
value of the net assets acquired, $1,000,000, and the cost, $800,000? d. book value of an acquired company.
a. Retained earnings should be reduced by $200,000. ANS: B DIF: M OBJ: 5
b. Current assets should be recorded at $685,000 and noncurrent 10. When purchasing a company occurs, FASB recommends disclosing all of the
assets recorded at $515,000. following EXCEPT:
c. The noncurrent assets should be recorded at $400,000. a. goodwill related to each reporting segment.
d. A deferred credit of $200,000 should be set up and subsequently b. contingent payment agreements, options, or commitments included in
amortized to future net income over a period not to exceed 40 the purchase agreement, including accounting methods to be
years. followed.
ANS: C DIF: M OBJ: 4 c. results of operations for the current period if both companies had
7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible assets: remained separate.
Patent on a product that is deemed to have no useful life $10,000. d. amount of in-process R&D purchased and written-off during the
Customer List with an observable fair value of $50,000. period.
A 5-year operating lease with favorable terms with a discounted ANS: C DIF: M OBJ: 5
present value of $8,000. Chapter 1
Identifiable R & D of $100,000. 1-4
ABC will record how much for acquired Intangible Assets from the 11. Cozzi Company is being purchased and has the following balance sheet as
Purchase of XYZ Inc? of the purchase date:
a. $168,000 Current assets.......... $200,000 Liabilities.... $ 90,000
b. $58,000 Fixed assets............ 180,000 Equity......... 290,000
c. $158,000 Total................. $380,000 Total........ $380,000
d. $150,000 ======== ========
ANS: B DIF: D OBJ: 4 The price paid for Cozzi's net assets (the purchaser assumes the
Chapter 1 liabilities) is $500,000. The fixed assets have a fair value of
1-3 $220,000, and the liabilities have a fair value of $110,000. The amount
8. Vibe Company purchased the net assets of Atlantic Company in a business of goodwill to be recorded in the purchase is __________.
combination accounted for as a purchase. As a result, goodwill was a. $0
recorded. For tax purposes, this combination was considered to be a b. $50,000
tax-free merger. Included in the assets is a building with an appraised c. $70,000
value of $210,000 on the date of the business combination. This asset d. $90,000
had a net book value of $70,000, based on the use of accelerated ANS: C DIF: M OBJ: 6
depreciation for accounting purposes. The building had an adjusted tax 12. Separately identified intangible assets are accounted for by
basis to Atlantic (and to Vibe as a result of the merger) of $120,000. amortizing:
Assuming a 36% income tax rate, at what amount should Vibe record this a. exclusively by using impairment testing.
building on its books after the purchase? b. based upon a pattern that reflects the benefits conveyed by the
a. $120,000 asset.
,c. over the useful economic life less residual value using only the Building 130,000
straight-line method. Equipment 75,000
d. amortizing over a period not to exceed a maximum of 40 years. What is the 20X5 depreciation expense Balter will record related to
ANS: B DIF: E OBJ: 6 purchasing Jersey Company?
13. Acme Co. is preparing a pro-forma set of financial statements after an a. $8,000
acquisition of Coyote Co. The purchase price is less than the fair b. $15,000
value of the assets acquired. However, the purchase price is greater c. $28,000
than net book value of the acquired company. d. $30,000
a. Acme's goodwill will decrease over time. ANS: C DIF: M OBJ: 6
b. Acme's amortization of intangible assets will increase over time. Chapter 1
c. Depreciation expense will be greater than Coyote Company's 1-6
expense. 16. In performing the 20X7 impairment test for goodwill, the company had
d. Coyote's loss on the sale of the assets will create a net loss the following 20X6 and 20X7 information is available.
carryforward. 20X6 20X7
ANS: C DIF: D OBJ: 6 Implied fair value of reporting unit $350,000 $400,000
Chapter 1 Net book value of reporting unit (including goodwill) $380,000 $360,000
1-5 Based upon this information what are the 20X6 and 20X7 adjustment to
14. While performing a goodwill impairment test, the company had the goodwill, if any?
following information: a. 20X6 $0
Estimated implied fair value of reporting unit 20X7 $40,000 decrease
(without goodwill) $420,000 b. 20X6 $30,000 increase
Existing net book value of reporting unit 20X7 $40,000 decrease
(without goodwill) $380,000 c. 20X6 $30,000 decrease
Book value of goodwill $60,000 20X7 $40,000 decrease
Based upon this information the proper conclusion is: d. 20X6 $30,000 decrease
a. The existing net book value plus goodwill is in excess of the 20X7 $0
implied fair value, therefore, no adjustment is required. ANS: D DIF: D OBJ: 7
b. The existing net book value plus goodwill is less than the implied 17. Couples Corporation purchases Players Corporation. The fair value of
fair value plus goodwill, therefore, no adjustment is required. the net assets of Players is $750,000 and the fair value of priority
c. The existing net book value plus goodwill is in excess of the accounts (including a deduction for depreciation) is $600,000. Which of
implied fair value, therefore, goodwill needs to be decreased. the following purchase prices would require using allocation
d. The existing net book value is less than the estimated implied procedures?
fair value; therefore, goodwill needs to be decreased. a. $500,000
ANS: C DIF: D OBJ: 6 b. $600,000
15. Balter Inc. acquired Jersey Company on January 1, 20X5. When the c. $700,000
purchase occurred Jersey Company had the following information related d. $800,000
to fixed assets: ANS: B DIF: D OBJ: 7
Land $ 80,000 18. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of
Building 200,000 the acquisition the following information was available related to
Accumulated Depreciation (100,000) Comb's balance sheet:
Equipment 100,000 Book Value Fair Value
Accumulated Depreciation (50,000) Current Assets $50,000 $ 50,000
The building has a 10-year remaining useful life and the equipment has Building 80,000 100,000
a 5-year remaining useful life. The fair value of the assets on that Equipment 40,000 50,000
date were: Liabilities 30,000 30,000
Land $100,000 What is the amount recorded by ACME for the Building?
, a. $40,000 calculation of goodwill?
b. $60,000 a. sales for the period
c. $80,000 b. income tax expense
d. $100,000 c. extraordinary items
ANS: B DIF: D OBJ: 7 d. cost of goods sold
19. Which of the following business combination expenses would NOT qualify ANS: C DIF: M OBJ: 10, Appendix A
as a direct acquisition expense for a purchase? Chapter 1
a. Fees for purchase audit 1-8
b. Outside legal fees PROBLEM
c. Stock issuance fees 1. Internet Corporation is considering the acquisition of Homepage
d. All are direct acquisition expenses. Corporation and has obtained the following audited condensed balance
Chapter 1 sheet:
1-7 Homepage Corporation
ANS: C DIF: E OBJ: 8 Balance Sheet
20. Polk issues common stock to acquire all the assets of the Sam Company December 31, 20X5
on January 1, 20X5. There is a contingent share agreement, which states Assets Liabilities and Equity
that if the income of the Sam Division exceeds a certain level during Current assets.... $ 40,000 Current Liabilities.......... $ 60,000
20X5 and 20X6, additional shares will be issued on January 1, 20X7. The Land.............. 20,000 Capital Stock (50,000 shares,
impact of issuing the additional shares is to Buildings (net)... 80,000 $1 par value)................ 50,000
a. increase the price assigned to fixed assets. Equipment (net)... 60,000 Other Paid-in Capital........ 20,000
b. have no effect on asset values, but to reassign the amounts Retained Earnings............. 70,000
assigned to equity accounts. $200,000 $200,000
c. reduce retained earnings. ======== ========
d. record additional goodwill. Internet also acquired the following fair values for Homepage's assets
ANS: D DIF: D OBJ: 8 and liabilities:
21. In a purchase, the direct acquisition, indirect acquisition and Current assets......................................... $ 55,000
security issuance costs are accounted for as follows: Land................................................... 60,000
Direct Acquisition Indirect Acquisition Security Issuance Buildings (net)........................................ 90,000
a. Added to price paid Added to price paid Added to price paid Equipment (net)........................................ 75,000
b. Added to price paid Expensed Deducted from value Current Liabilities.................................... (60,000)
of security issued $220,000
c. Expensed Expensed Deducted from value ========
of security issued Internet and Homepage agree on a price of $280,000 for Homepage's net
d. Expensed Expensed Expensed assets. Prepare the necessary journal entry to record the purchase
ANS: B DIF: E OBJ: 9 given the following scenarios:
22. Orbit Inc. purchased Planet Co. in 20X3. At that time an existing a. Internet pays cash for Homepage Corporation and incurs $5,000
patent was not recorded as a separately identified intangible asset. At of direct acquisition costs.
the end of fiscal year 20X5, the patent is valued at $15,000, and b. Internet issues its $5 par value stock as consideration. The
goodwill has a book value of $100,000. How should intangible assets be fair value of the stock at the acquisition date is $50 per
reported at the beginning of fiscal year 20X6? share. Additionally, Internet incurs $5,000 of security
a. Goodwill $100,000 Patent $0 issuance costs.
b. Goodwill $115,000 Patent $0 Chapter 1
c. Goodwill $100,000 Patent $15,000 1-9
d. Goodwill $85,000 Patent $15,000 ANS:
ANS: D DIF: M OBJ: 9 a. Current assets.......................... $55,000
23. Which of the following income factors should not be factored into a Land.................................... 60,000
