Introduction to Business Combinations

Question 1

How are transactions costs recorded?

Answer 1

They are expensed, NOT capitalized.

Question 2

True or False: When the acquisition method of accounting is used, if a business combination occurs during a fiscal year, the acquirer’s operating results for the entire fiscal year enters into the determination of consolidated net income for that year

Answer 2

True

Question 3

True or False: When an investor acquires control of an investee, a business combination has occurred.

Answer 3

True

Question 4

True or False: A business combination can be accomplished by one entity making an investment in the debt securities of another entity

Answer 4

False

Question 5

True or False: If all else is equal, a business combination in the form of a legal merger will result in greater net income for the year of the combination than if the combination had been a legal acquisition

Answer 5

False

Question 6

True or False: At the date of a business combination accounted for as an acquisition, the income of the combined entities will be the same as the income of the acquirer

Answer 6

True

Question 7

True or False: Only the acquisition method can be used currently to record a business combination

Answer 7

True

Question 8

True or False: A new business combination currently may be accounted for as either a purchase or pooling of interests

Answer 8

False

Question 9

True or False: The legal form of a business combination will influence the correct accounting for the combination

Answer 9

True

Question 10

True or False: One entity can gain control of another entity through direct and/or indirect ownership of that entity

Answer 10

True

Question 11

In which of the legal forms of business combination does more than one entity survive?

1. Merger
2. Consolidation
3. Acquisition

Answer 11

Only in a legal acquisition does more than one entity survive. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities.

Question 12

In which of the following legal forms of business combination are two or more entities combined into one new entity?

1. Merger
2. Consolidation
3. Acquisition

Answer 12

Consolidation. Only a legal consolidation results from the combination of two or more existing entities into one new entity

Question 13

In which of the following legal forms of business combination does at least one preexisting entity cease to exist?

1. Merger
2. Consolidation
3. Acquisition

Answer 13

Merger and Consolidation

In a merger and a consolidation, at least one preexisting entity ceases to exist, but in an acquisition, no entity ceases to exist.

Question 14

If, as a result of gaining control of another entity, the acquiring entity recognizes an investment in the acquired entity on its books, which of the following legal forms of business combination could have occurred?

1. Merger
2. Consolidation
3. Acquisition

Answer 14

Acquisition

In an acquisition, the acquiring entity recognizes (debits) on its books as an investment in the acquired entity, but in a merger and in a consolidation, the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity, not an investment in the acquired entity.

Question 15

In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity?

1. Merger
2. Consolidation
3. Acquisition

Answer 15

Merger and Consolidation

Question 16

Which of the following situations would require the use of the acquisition method in a business combination?
A. The acquisition of a group of assets.
B. The formation of a joint venture.
C. The purchase of more than 50% of a business.
D. All of the above would require the use of the acquisition method.

Answer 16

The purchase of more than 50% of a business

*Acquisition method was previously called purchasing method