Chapter 2

Question 1

Why do firms combine?

Answer 1

a. ) Vertical Integration
b. ) Cost Savings
c. ) Quick entry into new markets.
d. ) Economies of scale
e. ) More attractive financing opportunities
f. ) Diversification of business risk
g. ) Business Expansion
h. ) Increasingly competitive environment

Question 2

What action does the acquiring company take for a statutory merger through asset acquisition?

Answer 2

Acquires assets and often liabilities.

Question 3

What action does the acquired company take for a statutory merger through assert acquisition?

Answer 3

Dissolves and goes out of business.

Question 4

What action does the acquiring company take for a statutory merger through capital stock acquisition?

Answer 4

Acquires all stock and then transfers assets and liabilities to its own books.

Question 5

What action does the acquired company take for a statutory merger through capital stock acquisition?

Answer 5

Dissolves as a separate corporation, often remaining as a division of the acquiring company.

Question 6

What action does the acquiring company take for statutory consolidation through capital stock or asset acquisition?

Answer 6

Newly created to receive assets or capital stock of original companies.

Question 7

What action does the acquired company take for statutory consolidation through capital stock or asset acquisition?

Answer 7

Original companies may dissolve while remaining as separate divisions of newly created company.

Question 8

What action does the acquiring company take for acquisition of more than 50 percent of the voting stock.

Answer 8

Acquires stock that is recorded as an investment; controls decision making of acquired company.

Question 9

What action does the acquired company take for acquisition of more than 50 percent of the voting stock.

Answer 9

Remains in existence as legal corporation, although now a subsidiary of the acquiring company.

Question 10

What action does the acquiring company take for control through ownership of variable interests. Risks and rewards often flow to a sponsoring firm rather than the equity holder.

Answer 10

Establishes contractual control over a variable interest entity to engage in a specific activity.

Question 11

What action does the acquired company take for control through ownership of variable interests. Risks and rewards often flow to a sponsoring firm rather than the equity holder.

Answer 11

Remains in existence as a separate legal entity-often a trust or partnership.

Question 12

What constitutes a controlling financial interest?

Answer 12

a. ) Most often achieved through voting interest of stock.
b. ) FASB says “A reporting entity has the power to direct the activities of another entity when it has the current ability to direct the activities of the entity that significantly affect the entity’s returns.

Question 13

How is the consolidation process carried out?

Answer 13

a. ) If dissolution occurs, all account balances are consolidated in the financial records of the survivor as of the date of combination. The dissolved company’s records are closed out and the surviving company accounts are adjusted to include the balances from the dissolved company.
b. ) If separate incorporation continues, consolidation occurs outside the records of the companies at financial reporting intervals. Each company maintains its own records.

Question 14

Separately identified assets acquired and liabilities assumed

Answer 14

1. ) Market Approach- similar market trades.
2. ) Income Approach- discounted future cash flows
3. ) Cost Approach- current cost of replacement

Question 15

Goodwill or gain from a bargain purchase

Answer 15

1. ) If consideration exceeds net assets, goodwill is recorded.
2. ) If net assets exceed consideration, gain or bargain purchase is recorded.

Question 16

What are expensed in the period they are incurred?

Answer 16

• Accounting, Legal, investment banking, and appraisal fees.

- Indirect Costs

Question 17

Acquisition Method- Subsidiary is not dissolved

Answer 17

1. ) Step 1- Allocate purchase price as if the acquired company is dissolving at the acquisition date.
2. ) Step 2- List the financial information of parent and sub in the first 2 columns of worksheet.
3. ) Remove the Sub’s equity account balances.
4. ) Remover the investment in sub balance.
5. ) Allocate Sub’s fair values, including any excess of cost over book value to identifiable assets or goodwill.
6. ) Combine all account balances and extend into the consolidated total.
7. ) Subtract consolidated expenses from revenues to arrive at net income.

Question 18

Market Approach

Answer 18

The market approach estimates fair values using other market transactions involving similar assets or liabilities.

Question 19

Income Approach

Answer 19

The income approach relies on multi-period estimates of future cash flows projected to be generated by an asset.

Question 20

Cost Approach

Answer 20

The cost approach estimates fair values by reference to the current cost of replacing an asset with another of comparable economic utility.