,Chapter 01—Business Combinations: New Rules for a Long-Standing Business Practice
advanced accounting 12th edition paul m fischer william jtaylor ritah cheng test
bank
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
,Chapter 01—Business Combinations: New Rules for a Long-Standing Business Practice
merger.
DIFFICULTY: M
Cengage Learning Testing, Powered by Cognero Page 2
, Chapter 01—Business Combinations: New Rules for a Long-Standing Business Practice
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
advanced accounting 12th edition paul m fischer william jtaylor ritah cheng test
bank
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
,Chapter 01—Business Combinations: New Rules for a Long-Standing Business Practice
merger.
DIFFICULTY: M
Cengage Learning Testing, Powered by Cognero Page 2
, Chapter 01—Business Combinations: New Rules for a Long-Standing Business Practice
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
