Chapter 1 Business Combinations

Question 1

What are the economic motivations

underlying business combinations?

Answer 1

lower cost, lower risk, fewer delays, less takeovers, intangible assets, tax advantages, personal reasons

Question 2

What are the alternative forms of

business combinations from a legal perspective?

Answer 2

mergers and consolidations

Question 3

What are the three types of business combinations?

Answer 3

horizontal & vertical integration, conglomeration

Question 4

What is horizontal integration?

Answer 4

same business lines and markets (starbucks > dunkin’ donuts)

Question 5

What is vertical integration?

Answer 5

operation in different, but successive stages of production or distribution, or both (gm > supplier)

Question 6

What is conglomeration?

Answer 6

unrelated, diverse products or services (at&t > subway)

Question 6

What is an example of an antitrust law prohibiting a business combination?

Answer 6

Federal Trade Commission (FTC) prohibited Staple’s acquisition of Office Depot

Question 7

What are some potential prohibitions/obstacles to business combinations?

Answer 7

antitrust laws and regulations

Question 9

why would a government body prohibit an acquisition?

Answer 9

restrains trade or impairs competition

Question 9

What is an example of a state’s statutory takeover regulation?

Answer 9

Antitrust exemptions laws that allow hospitals to pursue cooperative projects

Question 10

What are some examples of regulation prohibiting a business combination? (3)

Answer 10

Federal Reserve Board (FRB) - banks
Department of Transportation - airlines
Department of Energy - utilities

Question 12

What is a merger?

Answer 12

one corporation takes over another business entity and that other entity is dissolved

Question 12

How does a merger work?

Answer 12

Company A acquires the net assets OR stock of Company B for cash, assets, or debt/equity securities. Company B is dissolved. Company A survives with Company B’s assets and liabilities (A + B = A)

Question 13

What is a consolidation?

Answer 13

A new corporation is formed to take over two or more separate businesses and dissolves the previously separate entities

Question 14

How does a consolidation work?

Answer 14

Company C is formed and acquires the net assets OR stock of Companies A and B by issuing Company C stock. Companies A and B are dissolved. Company C survives with the assets and liabilities of both dissolved firms

Question 15

When is a parent-subsidiary relationship formed?

Answer 15

When 50%-99% of a firm is acquired OR the acquired firm is not dissolved.

Question 16

What else can consolidation refer to?

Answer 16

preparing consolidated financial statements for a parent and its subsidiaries

Question 17

Since the 1950s what two methods for business combinations were acceptable?

Answer 17

pooling-of-interest and purchase methods

Question 18

Why did the pooling-of-interest method go away?

Answer 18

Because it used historical book values to record combinations RATHER THAN recognizing fair values of net assets at the transaction date

Question 19

What method do business combinations after June 30, 2001 use?

Answer 19

Purchase method

Question 20

What method do business combinations after December 15, 2008 use?

Answer 20

Acquisition method

Question 22

Pop Corp. issued 100,000 shares of its $10 par
value common stock for Son Corp. Pop’s
stock is valued at $16 per share. What is the journal entry to record this transaction?

Answer 22

DR Investment of Pop. Corp. (+A) 1,600k
CR Common Stock, $10 par (+E) 1,000k
CR Additional Paid-in-Capital (+E) 600k

Question 23

Pop Corp. pays cash for $80,000 in finder’s and consulting fees and for $40,000 to register and issue its common stock. What is the journal entry to record this transaction?

Answer 23

DR Investment Expense (Ex, -E) 80k
CR Additional Paid-in-Capital (-E) 40k
CR Cash (A-) 120k

Son Corp. is assumed to have been dissolved. So, Pop Corp. allocates the investment’s cost to the fair value of the identifiable assets acquired and liabilities assumed. The excess cost is goodwill. (Total cost paid for Son is $1,600 – the debit to the investment account. This is the value spread to the assets and liabilities.)

Question 24

A business combination in which a new corporation is formed to take over the assets and operations of two or more separate business entities, with the previously separate entities being dissolved, is a/an:

a Consolidation
b Merger
c Pooling of interests
d Acquisitions

Answer 24

a Consolidation

Question 25

In a business combination, the direct costs of registering and issuing equity securities are:

a Added the parent/investor company’s investment account
b Charged against other paid-in capital of the combined entity
c Deducted from income in the period of combination
d None of the above

Answer 25

b Charged against other paid-in capital of the combined entity

Question 26

An excess of fair value of net assets acquired in a business combination over the price paid is:

a Reported as a gain from a bargain purchase
b Applied to a reduction of noncash assets before negative goodwill may be reported
c Applied to reduce noncurrent assets other than marketable securities to zero before negative goodwill may be reported
d Applied to reduce goodwill to zero before negative goodwill may be reported

Answer 26

a Reported as a gain from a bargain purchase

Question 27

Cork Corporation acquires Dart Corporation in a business combination. Which of the following would be excluded from the process of assigning fair values to assets and liabillities for purposes of recording the acquisition?

a Patents devloped by Dart because the costs were expensed under GAAP
b Dart’s mortgage payable because it is fully secured by land that has a market value far in excess of the mortgage
c An asset or liability amount for over- or underfunding of Dart’s defined-benefit pension plan
d None of the above

Answer 27

aaaaaa

Question 28

what is a bargain purchase?

Answer 28

acquire company for less than fair market value