Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
1) Assuming no impairment in value prior to transfer, assets transferred by a parent company to
another entity it has created should be recorded by the newly created entity at the assets':
A) cost to the parent company.
B) book value on the parent company's books at the date of transfer.
C) fair value at the date of transfer.
D) fair value of consideration exchanged by the newly created entity.
Answer: B
Difficulty: 1 Easy
Topic: Internal Expansion: Creating a Business Entity; Valuation of Business Entities
Learning Objective: 01-01 Understand and explain the reasons for and different methods of
business expansion, the types of organizational structures, and the types of acquisitions.; 01-03
Make calculations and prepare journal entries for the creation of a business entity.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
2) Given the increased development of complex business structures, which of the following
regulators is responsible for the continued usefulness of accounting reports?
A) Securities and Exchange Commission (SEC)
B) Public Company Accounting Oversight Board (PCAOB)
C) Financial Accounting Standards Board (FASB)
D) All of the other answers are correct
Answer: D
Difficulty: 1 Easy
Topic: An Introduction to Complex Business Structures
Learning Objective: 01-01 Understand and explain the reasons for and different methods of
business expansion, the types of organizational structures, and the types of acquisitions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
3) A business combination in which the acquired company's assets and liabilities are combined
with those of the acquiring company into a single entity is defined as:
A) Stock acquisition
,B) Leveraged buyout
C) Statutory Merger
D) Reverse statutory rollup
,Answer: C
Difficulty: 1 Easy
Topic: Organizational Structure and Financial Reporting
Learning Objective: 01-04 Understand and explain the differences between different forms of
business combinations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
4) In which of the following situations do accounting standards not require that the financial
statements of the parent and subsidiary be consolidated?
A) A corporation creates a new 100 percent owned subsidiary
B) A corporation purchases 90 percent of the voting stock of another company
C) A corporation has both control and majority ownership of an unincorporated company
D) A corporation owns less-than a controlling interest in an unincorporated company
Answer: D
Difficulty: 1 Easy
Topic: Organizational Structure and Financial Reporting
Learning Objective: 01-01 Understand and explain the reasons for and different methods of
business expansion, the types of organizational structures, and the types of acquisitions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
During its inception, Devon Company purchased land for $100,000 and a building for $180,000.
After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary,
Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses
straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An
appraisal revealed that the building has a fair value of $200,000.
5) Based on the information provided, at the time of the transfer, Regan Company should record:
A) Building at $180,000 and no accumulated depreciation.
B) Building at $162,000 and no accumulated depreciation.
C) Building at $200,000 and accumulated depreciation of $24,000.
D) Building at $180,000 and accumulated depreciation of $18,000.
Answer: D
Difficulty: 2 Medium
Topic: Valuation of Business Entities; Accounting for Internal Expansion: Creating Business
Entities
Learning Objective: 01-04 Understand and explain the differences between different forms of
business combinations.; 01-03 Make calculations and prepare journal entries for the creation of a
business entity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
, 6) Based on the information provided, what amount would be reported by Devon Company as
investment in Regan Company common stock?
A) $312,000
B) $180,000
C) $330,000
D) $150,000
Answer: A
Difficulty: 2 Medium
Topic: Accounting for Internal Expansion: Creating Business Entities; The Development of
Accounting for Business Combinations
Learning Objective: 01-03 Make calculations and prepare journal entries for the creation of a
business entity.; 01-02 Understand the development of standards related to acquisition accounting
over time.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
7) Based on the preceding information, Regan Company will report
A) additional paid-in capital of $0.
B) additional paid-in capital of $150,000.
C) additional paid-in capital of $162,000.
D) additional paid-in capital of $180,000.
Answer: C
Difficulty: 2 Medium
Topic: Accounting for Internal Expansion: Creating Business Entities
Learning Objective: 01-03 Make calculations and prepare journal entries for the creation of a
business entity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
At its inception, Peacock Company purchased land for $50,000 and a building for $220,000. After
exactly 4 years, it transferred these assets and cash of $75,000 to a newly created subsidiary,
Selvick Company, in exchange for 25,000 shares of Selvick's $5 par value stock. Peacock uses
straight-line depreciation. When purchased, the building had a useful life of 20 years with no
expected salvage value. An appraisal at the time of the transfer revealed that the building has a fair
value of $250,000.
8) Based on the information provided, at the time of the transfer, Selvick Company should record
A) the building at $220,000 and accumulated depreciation of $44,000.
B) the building at $220,000 with no accumulated depreciation.
C) the building at $176,000 with no accumulated depreciation.
D) the building at $250,000 with no accumulated depreciation.
1) Assuming no impairment in value prior to transfer, assets transferred by a parent company to
another entity it has created should be recorded by the newly created entity at the assets':
A) cost to the parent company.
B) book value on the parent company's books at the date of transfer.
C) fair value at the date of transfer.
D) fair value of consideration exchanged by the newly created entity.
Answer: B
Difficulty: 1 Easy
Topic: Internal Expansion: Creating a Business Entity; Valuation of Business Entities
Learning Objective: 01-01 Understand and explain the reasons for and different methods of
business expansion, the types of organizational structures, and the types of acquisitions.; 01-03
Make calculations and prepare journal entries for the creation of a business entity.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
2) Given the increased development of complex business structures, which of the following
regulators is responsible for the continued usefulness of accounting reports?
A) Securities and Exchange Commission (SEC)
B) Public Company Accounting Oversight Board (PCAOB)
C) Financial Accounting Standards Board (FASB)
D) All of the other answers are correct
Answer: D
Difficulty: 1 Easy
Topic: An Introduction to Complex Business Structures
Learning Objective: 01-01 Understand and explain the reasons for and different methods of
business expansion, the types of organizational structures, and the types of acquisitions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
3) A business combination in which the acquired company's assets and liabilities are combined
with those of the acquiring company into a single entity is defined as:
A) Stock acquisition
,B) Leveraged buyout
C) Statutory Merger
D) Reverse statutory rollup
,Answer: C
Difficulty: 1 Easy
Topic: Organizational Structure and Financial Reporting
Learning Objective: 01-04 Understand and explain the differences between different forms of
business combinations.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
4) In which of the following situations do accounting standards not require that the financial
statements of the parent and subsidiary be consolidated?
A) A corporation creates a new 100 percent owned subsidiary
B) A corporation purchases 90 percent of the voting stock of another company
C) A corporation has both control and majority ownership of an unincorporated company
D) A corporation owns less-than a controlling interest in an unincorporated company
Answer: D
Difficulty: 1 Easy
Topic: Organizational Structure and Financial Reporting
Learning Objective: 01-01 Understand and explain the reasons for and different methods of
business expansion, the types of organizational structures, and the types of acquisitions.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
During its inception, Devon Company purchased land for $100,000 and a building for $180,000.
After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary,
Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses
straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An
appraisal revealed that the building has a fair value of $200,000.
5) Based on the information provided, at the time of the transfer, Regan Company should record:
A) Building at $180,000 and no accumulated depreciation.
B) Building at $162,000 and no accumulated depreciation.
C) Building at $200,000 and accumulated depreciation of $24,000.
D) Building at $180,000 and accumulated depreciation of $18,000.
Answer: D
Difficulty: 2 Medium
Topic: Valuation of Business Entities; Accounting for Internal Expansion: Creating Business
Entities
Learning Objective: 01-04 Understand and explain the differences between different forms of
business combinations.; 01-03 Make calculations and prepare journal entries for the creation of a
business entity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
, 6) Based on the information provided, what amount would be reported by Devon Company as
investment in Regan Company common stock?
A) $312,000
B) $180,000
C) $330,000
D) $150,000
Answer: A
Difficulty: 2 Medium
Topic: Accounting for Internal Expansion: Creating Business Entities; The Development of
Accounting for Business Combinations
Learning Objective: 01-03 Make calculations and prepare journal entries for the creation of a
business entity.; 01-02 Understand the development of standards related to acquisition accounting
over time.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
7) Based on the preceding information, Regan Company will report
A) additional paid-in capital of $0.
B) additional paid-in capital of $150,000.
C) additional paid-in capital of $162,000.
D) additional paid-in capital of $180,000.
Answer: C
Difficulty: 2 Medium
Topic: Accounting for Internal Expansion: Creating Business Entities
Learning Objective: 01-03 Make calculations and prepare journal entries for the creation of a
business entity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
At its inception, Peacock Company purchased land for $50,000 and a building for $220,000. After
exactly 4 years, it transferred these assets and cash of $75,000 to a newly created subsidiary,
Selvick Company, in exchange for 25,000 shares of Selvick's $5 par value stock. Peacock uses
straight-line depreciation. When purchased, the building had a useful life of 20 years with no
expected salvage value. An appraisal at the time of the transfer revealed that the building has a fair
value of $250,000.
8) Based on the information provided, at the time of the transfer, Selvick Company should record
A) the building at $220,000 and accumulated depreciation of $44,000.
B) the building at $220,000 with no accumulated depreciation.
C) the building at $176,000 with no accumulated depreciation.
D) the building at $250,000 with no accumulated depreciation.
