Business Combinations

Question 1

A business combination is a transaction or an event wherein an acquirer obtains control of a business. TF

Answer 1

True

Question 2

If A owns 40% of C + veto rights and B owns 60% of C who controls C?

Answer 2

Neither, the veto rights in essence make A and B equal partners.

Question 3

What is the quickest way to determine a company’s net book value?

Answer 3

Add just the equity accounts together.

Question 4

Costs incurred when recording an acquisition are capitalized. TF

Answer 4

False, expensed as incurred.

Question 5

“Pooling of interests” is not an acceptable form of business combination. TF

Answer 5

True

Question 6

What is it called when an acquired entity is “collapsed” into an existing entity?

Answer 6

A merger

Question 7

A consolidation is when a new entity consolidates the net assets of two or more entities to form a new entity. TF

Answer 7

True

Question 8

An acquisition results in one distinct entity. TF

Answer 8

False. The two entities remain separate unlike mergers and consolidations.

Question 9

The financials of merged, consolidated, and acquired companies stay separate until after the implementation date. TF

Answer 9

True

Question 10

The acquisition method of accounting applies to all business combinations post 2009. TF

Answer 10

True

Question 11

What is the “measurement period” and how long may it last?

Answer 11

The measurement period is the amount of time it takes a firm to value the acquired firms FV and determine goodwill. It may last a maximum of 1 year.

Question 12

The overriding premise in dealing with business combinations is that everything is valued via FMV at the acquisition date. TF

Answer 12

True

Question 13

Contingent liabilities are measured my the present value of future cash flows as of the aquistion date. TF

Answer 13

False, FMV

Question 14

A journal entry for an aqusition with a contingent liability would include a credit to contingent liability. TF

Answer 14

True. Dr. Invesment in company, cr. contingent liability, cr. cash

Question 15

If share based payments are required for employees of an acquired firm, and relates to pre combination services, that cost is part of the cost to aquire the firm. TF

Answer 15

True

Question 16

If share based payments are not required for employees of an acquired firm, and relates to post combination services, that cost is part of the cost to aquire the firm. TF

Answer 16

False, post combination expenses

Question 17

If share based payments are not required for employees of an acquired firm that cost is part of the cost to aquire the firm. TF

Answer 17

Falsle, post combination expenses

Question 18

Costs associated with a business combination are expensed as incurred. TF

Answer 18

True

Question 19

What are the five steps in a business combination?

Answer 19

1. Identify the aquirer
2. Determine the aquistion date and measurement period
3. Determine the cost of the aquistion
4. Recognize and measure the identifiable assets, liabilities, and non controlling interest involved
5. Recognize and measure Goodwill

Question 20

What is a VIE?

Answer 20

Variable Interest Entity.

Question 21

The primary beneficiary of the VIE must consolidate the business. TF

Answer 21

True

Question 22

SEC registration costs should be netted against APIC when determining the amount after a business combo. TF

Answer 22

True

Question 23

The excess of FV over cost is considered goodwill in a business combo. TF

Answer 23

False, its a gain from a bargain purchase

Question 24

Under the “___” equity method of accounting, the acquirers NI = Consolidated NI

Answer 24

Full

Question 25

The equity method is used for what % of ownership?

Answer 25

20% to 50%, >50% would require a consolidation

Question 26

Under the equity method, any excess paid over the ____ of the net assets, is considered ______.

Answer 26

FV, goodwill