ACCT 410 Exam Study Guide: Advanced Accounting
How to Use This Guide: Use these questions to test your knowledge. Cover the answer
section and try to articulate the complete answer yourself before reviewing the provided
explanation.
Part 1: Business Combinations & Consolidation—Introduction
1. What is the primary goal of a business combination?
ANSWER ✓ The primary goal is to achieve various strategic synergies, such as
accelerating growth, acquiring technology, eliminating competition, achieving
economies of scale, or diversifying business risk. From an accounting perspective, it
involves reporting the combined entity as a single economic entity.
2. Under the acquisition method, how is the acquirer in a business combination
identified?
ANSWER ✓ The acquirer is the entity that obtains control over the other entity (the
acquiree). Control is generally presumed when one entity obtains more than 50% of the
voting rights of another entity. Other indicators include power to govern financial and
operating policies, ability to appoint key management, and being the significantly larger
entity.
3. At what value are the assets and liabilities of the acquired company recorded in
a business combination?
ANSWER ✓ The assets acquired and liabilities assumed are recognized at their
acquisition-date fair values. This is a core principle of the acquisition method, which
does not carry forward the acquiree's historical book values.
4. What is goodwill, and how is its initial value calculated?
ANSWER ✓ Goodwill is an intangible asset representing the future economic benefits
arising from other assets acquired in a business combination that are not individually
identified and separately recognized. It is calculated as the excess of the: Consideration
Transferred + Fair Value of any Noncontrolling Interest (NCI) + Fair Value of any
, Previously Held Equity Interest over the Net Fair Value of the Identifiable Assets
Acquired and Liabilities Assumed.
5. What is a bargain purchase, and how is it accounted for?
ANSWER ✓ A bargain purchase occurs when the net fair value of the identifiable assets
acquired and liabilities assumed exceeds the sum of the consideration transferred, the
NCI, and the fair value of any previously held equity interest. The excess (a "gain on
bargain purchase") is recognized in profit or loss on the acquisition date.
6. Define a Noncontrolling Interest (NCI).
ANSWER ✓ A noncontrolling interest is the portion of equity (net assets) in a subsidiary
not attributable, directly or indirectly, to the parent company. It represents the
ownership stake in a subsidiary held by outside, third-party shareholders.
7. How is the NCI valued at the acquisition date under the two permissible
methods?
ANSWER ✓ 1. Full Goodwill (Fair Value) Method: The NCI is valued at its fair value.
This method implicitly values the entire subsidiary, including the NCI's share of goodwill.
2. Partial Goodwill Method: The NCI is valued at its proportionate share of the
acquiree's identifiable net assets' fair value. This method does not attribute any goodwill
to the NCI.
8. What are acquisition-related costs (e.g., legal fees, finder's fees) accounted for?
ANSWER ✓ Acquisition-related costs are not included as part of the consideration
transferred for the acquiree. Instead, they are expensed in the period in which the costs
are incurred and the services are received.
9. What is the difference between a statutory merger and a statutory
consolidation?
ANSWER ✓ In a statutory merger, one company acquires another, and the acquiree
ceases to exist as a separate legal entity. In a statutory consolidation, both combining
companies dissolve, and a brand new corporate entity is formed to acquire the net
assets of both.
10. How are in-process Research and Development (IPR&D) assets acquired in a
business combination treated?
, ANSWER ✓ Acquired IPR&D is recognized as an intangible asset at its acquisition-date
fair value, even if it has no alternative future use. It is considered indefinite-lived until
the completion or abandonment of the associated research and development efforts.
Part 2: Consolidated Financial Statements—Date of Acquisition
11. What is the purpose of preparing consolidated financial statements?
ANSWER ✓ The purpose is to present the financial position, results of operations, and
cash flows of a parent company and its subsidiaries as if they were a single economic
entity. This eliminates the effects of all intercompany transactions and investments.
12. What is the basic journal entry on the worksheet to eliminate the parent's
investment account at the acquisition date?
ANSWER ✓ The entry eliminates the parent's "Investment in Subsidiary" account against
the subsidiary's stockholders' equity and recognizes the fair value adjustments (FVA),
NCI, and Goodwill.
Debit: Subsidiary's Equity Accounts (at book value), FVA (to adjust assets/liabilities to fair
value), and Goodwill (if any).
Credit: Investment in Subsidiary and Noncontrolling Interest.
13. In the consolidation entry, why are the subsidiary's equity accounts
eliminated?
ANSWER ✓ They are eliminated because, from the consolidated entity's perspective, the
equity of the subsidiary is not held by outside parties (except for the NCI). The parent's
investment account represents its claim on these net assets, and the two accounts are
reciprocal and must be offset.
14. How are the fair value adjustments (FVA) for depreciable assets handled in
subsequent periods?
ANSWER ✓ The FVA is allocated to the specific assets/liabilities. For depreciable assets,
the increased value is depreciated over the asset's remaining useful life. This extra
depreciation is recorded in the consolidated income statement in subsequent periods.
15. When preparing a consolidated balance sheet immediately after acquisition,
what balances are combined?
How to Use This Guide: Use these questions to test your knowledge. Cover the answer
section and try to articulate the complete answer yourself before reviewing the provided
explanation.
Part 1: Business Combinations & Consolidation—Introduction
1. What is the primary goal of a business combination?
ANSWER ✓ The primary goal is to achieve various strategic synergies, such as
accelerating growth, acquiring technology, eliminating competition, achieving
economies of scale, or diversifying business risk. From an accounting perspective, it
involves reporting the combined entity as a single economic entity.
2. Under the acquisition method, how is the acquirer in a business combination
identified?
ANSWER ✓ The acquirer is the entity that obtains control over the other entity (the
acquiree). Control is generally presumed when one entity obtains more than 50% of the
voting rights of another entity. Other indicators include power to govern financial and
operating policies, ability to appoint key management, and being the significantly larger
entity.
3. At what value are the assets and liabilities of the acquired company recorded in
a business combination?
ANSWER ✓ The assets acquired and liabilities assumed are recognized at their
acquisition-date fair values. This is a core principle of the acquisition method, which
does not carry forward the acquiree's historical book values.
4. What is goodwill, and how is its initial value calculated?
ANSWER ✓ Goodwill is an intangible asset representing the future economic benefits
arising from other assets acquired in a business combination that are not individually
identified and separately recognized. It is calculated as the excess of the: Consideration
Transferred + Fair Value of any Noncontrolling Interest (NCI) + Fair Value of any
, Previously Held Equity Interest over the Net Fair Value of the Identifiable Assets
Acquired and Liabilities Assumed.
5. What is a bargain purchase, and how is it accounted for?
ANSWER ✓ A bargain purchase occurs when the net fair value of the identifiable assets
acquired and liabilities assumed exceeds the sum of the consideration transferred, the
NCI, and the fair value of any previously held equity interest. The excess (a "gain on
bargain purchase") is recognized in profit or loss on the acquisition date.
6. Define a Noncontrolling Interest (NCI).
ANSWER ✓ A noncontrolling interest is the portion of equity (net assets) in a subsidiary
not attributable, directly or indirectly, to the parent company. It represents the
ownership stake in a subsidiary held by outside, third-party shareholders.
7. How is the NCI valued at the acquisition date under the two permissible
methods?
ANSWER ✓ 1. Full Goodwill (Fair Value) Method: The NCI is valued at its fair value.
This method implicitly values the entire subsidiary, including the NCI's share of goodwill.
2. Partial Goodwill Method: The NCI is valued at its proportionate share of the
acquiree's identifiable net assets' fair value. This method does not attribute any goodwill
to the NCI.
8. What are acquisition-related costs (e.g., legal fees, finder's fees) accounted for?
ANSWER ✓ Acquisition-related costs are not included as part of the consideration
transferred for the acquiree. Instead, they are expensed in the period in which the costs
are incurred and the services are received.
9. What is the difference between a statutory merger and a statutory
consolidation?
ANSWER ✓ In a statutory merger, one company acquires another, and the acquiree
ceases to exist as a separate legal entity. In a statutory consolidation, both combining
companies dissolve, and a brand new corporate entity is formed to acquire the net
assets of both.
10. How are in-process Research and Development (IPR&D) assets acquired in a
business combination treated?
, ANSWER ✓ Acquired IPR&D is recognized as an intangible asset at its acquisition-date
fair value, even if it has no alternative future use. It is considered indefinite-lived until
the completion or abandonment of the associated research and development efforts.
Part 2: Consolidated Financial Statements—Date of Acquisition
11. What is the purpose of preparing consolidated financial statements?
ANSWER ✓ The purpose is to present the financial position, results of operations, and
cash flows of a parent company and its subsidiaries as if they were a single economic
entity. This eliminates the effects of all intercompany transactions and investments.
12. What is the basic journal entry on the worksheet to eliminate the parent's
investment account at the acquisition date?
ANSWER ✓ The entry eliminates the parent's "Investment in Subsidiary" account against
the subsidiary's stockholders' equity and recognizes the fair value adjustments (FVA),
NCI, and Goodwill.
Debit: Subsidiary's Equity Accounts (at book value), FVA (to adjust assets/liabilities to fair
value), and Goodwill (if any).
Credit: Investment in Subsidiary and Noncontrolling Interest.
13. In the consolidation entry, why are the subsidiary's equity accounts
eliminated?
ANSWER ✓ They are eliminated because, from the consolidated entity's perspective, the
equity of the subsidiary is not held by outside parties (except for the NCI). The parent's
investment account represents its claim on these net assets, and the two accounts are
reciprocal and must be offset.
14. How are the fair value adjustments (FVA) for depreciable assets handled in
subsequent periods?
ANSWER ✓ The FVA is allocated to the specific assets/liabilities. For depreciable assets,
the increased value is depreciated over the asset's remaining useful life. This extra
depreciation is recorded in the consolidated income statement in subsequent periods.
15. When preparing a consolidated balance sheet immediately after acquisition,
what balances are combined?
