Chapter 1

Question 1

consolidated financial statements

Answer 1

portray related companies as if they were a single company

Question 2

Enterprise Expansion why

Answer 2

it allows for economies of scale

Question 3

subsidiary

Answer 3

a company that a parent company controls most of the time through major ownership of stock

Question 4

parent

Answer 4

controls a sub

Question 5

pooling of interests

Answer 5

when wealthy individuals pool cash to purchase companies

Question 6

special purpose entity

Answer 6

a financing vehicle that is not a substantive operating entity

Question 7

Internal expansion

Answer 7

when assets in a company are sold to the separate entity and the other entity receives stock

Question 8

spin off(not on the test)

Answer 8

when the stock of a new company is distributed to the owners of the old company without having them forfeit their shares in the old company

Question 9

split off(not on test)

Answer 9

when the shares of the old company are exchanged to the shareholders for shares of the new company

Question 10

external expansion

Answer 10

business combination where an acquirer obtains control of one or more businesses

Question 11

control

Answer 11

the ability to direct policies and management

Question 12

merger

Answer 12

business combination in which the acquired company’s assets and liabilities are combined with those of the acquiring company making one entity

Question 13

controlling ownership

Answer 13

the acquired company remains as a separate entity, but the majority of its stock is with a controlling entity this is a parent sub relationship

Question 14

noncontrolling ownership

Answer 14

the purchase of a less than majority interest in another corporation does not usually result in a business combination or controlling situation

Question 15

other beneficial interest

Answer 15

one company has an interest in another company that helps it these must be consolidated

Question 16

pooling of interest method

Answer 16

outlawed by the FASB in 2007

Question 17

Internal expansion transfer of assets

Answer 17

are at book value unless the Fair value is less then the asset is written down by the original company then given to the new company at the lower value

Question 18

statutory merger

Answer 18

only one of the combining companies survives and the other is dissolved

Question 19

statutory consolidation

Answer 19

both companies are dissolved and the assets and liabilities are merged to make a new company

Question 20

stock acquisition

Answer 20

.when one company buys a majority of a company’s stock and gains control forming a parent sub relationship

Question 21

tender offer

Answer 21

when one company offers the shareholders of another company a price to buy their stock in a hostile takeover

Question 22

controlling %

Answer 22

over 50%

Question 23

value of assets in external expansion

Answer 23

they are appraised and valued at fair value

Question 24

acquisition method

Answer 24

the acquirer recognizes all assets acquired and liabilities assumed and measures them at their acquisition date fair values

Question 25

good will

Answer 25

an asset representing the value of future earnings there are three things that are valued

1. the FV of the consideration given by the acquirer
2. The FV of any interest in the acquiree already held by the acquirer if any
3. The FV of the noncontrolling interest in the acquiree

Question 26

differential

Answer 26

the difference between the fair value of the consideration exchanged and the book value of the net identifiable assets

Question 27

JE to record acquisition costs

Answer 27

Acquisition Exp

Cash

Question 28

JE for acquisition

Answer 28

Cash 
Inventory
buildings
goodwill 
     Current Liab
     C/S
     APIC

Question 29

JE for acquired company before distribution of stock

Answer 29

Investment in Company Stock
Current Liabilities
Accum Depr
   Cash
    Inventory
    buildings
    Gain on sale

Question 30

JE for the distribution of the acquirer stock on acquired company’s books

Answer 30

C/S
APIC
RE
Gain
   Investment in Acquirer Stock

Question 31

how often is goodwill tested for impairment

Answer 31

annually

Question 32

Goodwill once written down can

Answer 32

not be written up

Question 33

bargain purchase

Answer 33

when the purchase price is less than the fair value of an asset or company. if this occurs a gain is recorded

Question 34

JE for bargain purchase

Answer 34

Cash & Rec
Inventory
etc
    Cash 
    Curr Liab
    Gain

Question 35

Acquisition of Stock, the Investment Account is valued at

Answer 35

the fair value of consideration
ex:
FV of stock is 100
Inv in Company 100
   CS                          80
   APIC                       20

Question 36

Earning of an acquired company are included on the acquirers statement only

Answer 36

after the acquired date. income earned before the date is not included

Question 37

Uncertainty situations

Answer 37

measurement period, contingent consideration, acquiree contingencies

Question 38

measurement period

Answer 38

period of time where to account for uncertainty of fair values cannot exceed 1 year, but ends when the acquirer obtains the necessary information

Question 39

JE for measurement period adjustment

Answer 39

Land
Goodwill
Impairment Loss
Land

Question 40

Contingent Consideration

Answer 40

something that would change the fair value like an agreement on future profits

Question 41

acquiree contingencies

Answer 41

something that relates to the acquiree that could change the fair value of the company

Question 42

In process R&D

Answer 42

these should be recorded as assets and impaired annually

Question 43

Noncontrolling equity prior to business combination should be

Answer 43

revalued at the date of the business combination