FAR Module 18

Question 0

What are the correct current terms that are used to describe the parties in a business combination

Answer 0

Acquiror

acquiree

Question 1

What are the outdated terms used to describe the parties in a business combination

Answer 1

Parent

subsidiary

Question 2

This is the party that is being acquired

Answer 2

Acquiree

Question 3

This is the party that obtains control of another party

Answer 3

Acquirer

Question 4

This is the date on which the acquirer obtains control of the acquiree

Answer 4

The acquisition date

Question 5

This is a transaction or event in which the acquirer obtains control of one or more businesses

Answer 5

A business combination

Question 6

When is a situation considered a business combination? (2)

Answer 6

1) When there is greater than 50% interest and
2) the interest control is permanent

you consolidate using fair value

Question 7

T/F

After a business combination there is only one set of books

Answer 7

FALSE

each party still keeps their own books, you just consolidate the two on a spreadsheet for the financial statements

Question 10

This term is defined as a controlling financial interest by ownership of a majority of the voting shares of stock. The general rule is that ownership either directly or indirectly by one company of more than 50% of the outstanding voting shares of another company constitutes control

Answer 10

Control

Question 11

When is the acquisition method used

Answer 11

If an acquisition qualifies as a business combination then the acquisition method is used

Question 12

What are the four steps in applying the acquisition method

Answer 12

1) Identify the acquirer
2) Determine the acquisition date
3) Recognize and measure identifiable assets acquired, liabilities assumed, and noncontrolling interest in the acquiree
4) Recognize and measure Goodwill or recognize a gain from a bargain purchase

Question 13

Why is it important to distinguish between the acquirer and the acquiree

Answer 13

Because only the acquiree’s assets are revalued to fair value at the acquisition date

Question 14

How do you calculate Goodwill or gain from a bargain purchase

Answer 14

Fair value of consideration transferred 
\+ FV of previously held equity interest in acquiree 
\+ FV of noncontrolling interest 
- FV of net identifiable assets 
= Goodwill or gain from Bargain purchase

Question 15

This is defined as an asset representing the future economic benefits that arise from other assets in a business combination that are not individually identified and separately recognized

Answer 15

Goodwill

Question 16

T/F

In certain instances control over an entity may be achieved through arrangements that do not involve ownership or voting interests

Answer 16

TRUE

Question 17

What are some ways in which control is achieved other than through ownership of voting interests

Answer 17

Contractual, ownership, or other interests that change with changes in an entities net asset value

Another example is when a primary beneficiary guarantees the losses of a variable interest entity, so they have a controlling interest

Question 18

What is the entry to record an investment in another business

Answer 18

Debit Investment in XXX
Credit Common Stock
Credit APIC

Question 19

What is the first worksheet elimination entry in an consolidation?

Answer 19

First eliminate the acquiree’s equity account, eliminate the investment account on the acquirers books, and establish the differential:

Debit capital stock 
Debit APIC 
Debit retained earnings 
Debit differential (PLUG)
Credit investment in stock

Question 20

What is the second worksheet elimination entry in a consolidation?

Answer 20

Eliminate the differential account and record asset write-ups to fair value, new identifiable intangible assets, and goodwill. Basically, debit and credit accounts that increased when converting from BV to FV. If it doesn’t balance, debit Goodwill.

Debit (all asset write-ups)
Debit (new assets)
Debit Goodwill (plug)
Credit Differential

Question 21

What is the original entry and elimination entry relating to inter-company sales of merchandise

Answer 21

Original for Purchaser:
Debit A/R
Credit Sales

Original for Seller:
Debit CoS
Credit A/P

Elimination Entries:
Debit A/P
Credit A/R

Debit Sales
Credit CoS

Question 22

What do you do to eliminate fixed asset transactions that are intercompany

Answer 22

Eliminate any gains or losses

bring back accumulated depreciation that you wrote off

Question 23

What do you do to eliminate any intercompany bond transactions

Answer 23

Eliminate gains and losses

Question 24

It is generally presumed that an entity is a variable interest entity subject to consolidation if it’s equity is classified how…

Answer 24

This used to be measured quantitatively as a percentage but is now measured qualitatively.

Question 25

T/F

under IFRS you can value the noncontrolling interest at either fair value (which includes Goodwill) or the proportionate share of the value of the identifiable net assets of the acquiree (which is exclusive of Goodwill)

Answer 25

TRUE

US GAAP requires it to be recorded at FV

Question 26

Under IFRS an acquirer may exclude an acquiree if what three conditions are met?

Answer 26

1) it is wholly or partially owned and its owners do not object to non-consolidation
2) it does not have any debt or equity instruments publicly traded
3) it’s parent prepares consolidated financial statements that comply with IFRS

Question 27

Why is the acquisition date important (2)

Answer 27

1) This is the date when the identifiable assets and the liabilities of the acquiree are measured at fair value
2) Also the acquirer recognizes net income of the acquiree only after the date of acquisition

Question 28

T/F

the acquisition date is when the consideration is transferred

Answer 28

FALSE

the acquisition date is when control has been acquired. This might fall on the same date as the transferring of consideration, but not necessarily all the time

Question 29

How should direct costs of an acquisition be treated

Answer 29

As an expense of the period in a business combination accounted for by the acquisition method in determining the combined corporations net income for the current period.

Question 30

How should general expenses related to an acquisition be treated in a business combination

Answer 30

They should be deducted as incurred in determining the combined corporations net income for the current period.

Question 31

When an acquirer-acquiree relationship exists consolidated financial statements are prepared in recognition of the accounting concept of

Answer 31

Economic entity

Question 32

T/F

in combined Financial statements, the statements include only the adjusted retained earnings of the acquirer. The acquiree’s retained earnings are not included

Answer 32

TRUE