Section 3B - Biz Combo

Question 1

How should the acquirer recognize a bargain purchase in a business acquisition?

As a gain in earnings at the acquisition date

As negative goodwill in the statement of financial position

As a deferred gain that is amortized into earnings over the estimated future periods benefited

As goodwill in the statement of financial position

Answer 1

As a gain in earnings at the acquisition date

In a business acquisition, the acquiring corporation must recognize the assets and liabilities acquired at fair value. If the net assets acquired exceed the purchase price—a bargain purchase—the excess must be recognized as a gain in earnings at the date of the acquisition.

Question 2

If the values assigned to the identifiable net assets exceed the cost of the acquired company, such “excess” must be recognized as a ___in earnings of the acquisition date.

Thus, the fair values of the “eligible” assets would be recognized on the __date.

Answer 2

gain

acquisition

Question 3

Brower Corporation acquired all of the outstanding stock of Jordon Corporation. The purchase price of the acquisition was $1,960,000. The book value of Jordon’s net assets was $2,172,000. Jordon had assets whose fair values were greater than their carrying value by $58,000. How much gain is implied in Brower’s acquisition of Jordon?

$58,000

$270,000

$212,000

$200,000

Answer 3

$270,000

If the values assigned to the identifiable net assets exceed the cost of the acquired company, this would be considered a bargain purchase option and the “excess” must be recognized as a gain in earnings of the acquisition date.

Brower will record a gain of $270,000, computed as follows: Purchase price less book value of purchased share of net assets ($1,960,000 – $2,172,000 = ($212,000)). Because the book value of the net assets is greater than the purchase price, there is no goodwill implied in the acquisition and thus Brower will recognize a gain. The gain is the difference between the book value of the net assets plus any undervalued assets ($212,000 + $58,000 = $270,000).

Question 4

Which of the following expenses related to the business combination should be included, in total, in the determination of net income of the combined corporation for the period in which the expenses are incurred?

Fees of finders and consultants: No; Issuance fees for equity securities issues: No

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: Yes

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No

Fees of finders and consultants: No; Issuance fees for equity securities issues: Yes

Answer 4

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No

Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:

Out-of-pocket costs such as fees of finders and consultants are expensed.

Issuance costs such as SEC filing fees are charged to the paid-in-capital account.

Question 5

Under the acquisition method, a business combination is deemed to be the acquisition of one entity by another.

Accordingly, the accounting for the combination follows the ___cost principle related to acquisitions. The accounting basis is the ___of the consideration given or the __value of the consideration (net assets) received, whichever is more___

The ___is the entity that obtains control of one or more businesses in the business combination.

The acquisition date is the date that the acquirer achieves ___.

Answer 5

historical

FV, fair, clearly determinable.

acquirer

control

Question 6

In-process __and __results are classified as intangible assets with indefinite lives until the research and development phase is complete or the project is abandoned.

Answer 6

research and development

Question 7

Grand Corporation acquired all of the outstanding stock of Modest Corporation on February 23, 20X3. The purchase price of the acquisition was $3,680,000. The book value of Modest’s net assets was $3,345,000. In preparing the acquisition, Grand determined that Modest had assets whose book values were $218,000 less than their fair values. How much goodwill will Grand Corporation record as a result of this acquisition?

$101,000

$335,000

$117,000

$218,000

Answer 7

$117,000

Grand will record goodwill of $117,000 computed as follows: Purchase price less book value of net assets ($3,680,000 – $3,345,000 = $335,000). Purchase price in excess of net assets less undervalued assets equals goodwill ($335,000 – $218,000 = $117,000).

Question 8

If the fair value of the consideration plus the fair value of a noncontrolling interest in the acquiree exceeds the fair value of the identifiable net assets acquired, this “excess” should be recognized as ___

Answer 8

goodwill

Question 9

If Company C is established for the merging of Company A and Company B, the business combination is classified as:

statutory merger.

statutory consolidation.

an acquisition of stock.

an acquisition of assets.

Answer 9

statutory consolidation.

The acquisition of stock classification refers to the acquisition of capital stock by the acquiring entity, which becomes the parent company. No third entity is established. The acquisition of assets classification refers to the transfer of assets from the acquired entity to the acquiring entity.

No third entity is established. The statutory merger classification refers to the merging of the two entities into one. No third entity is established.

The statutory consolidation classification refers to the merging of two enterprises into a newly established enterprise.

Question 10

A Statutory ____is of the form “A + B = A” in which one enterprise (A) acquires another enterprise (B) with the latter (B) ceasing to exist after the combination.

A statutory ___is of the form “A + B = C” in which a new enterprise (C) is created to acquire the net assets of other enterprises (A and B). Enterprises A and B cease to exist after the combination.

An acquisition is of the form “A + B = A + B” in which one enterprise (A) acquires a majority share of the stock of another enterprise (B), but both entities continue their legal existence

The statutory merger and statutory consolidation forms of business combinations may be categorized as___. In both forms, the acquired enterprise ceases to exist as a legal entity; thus, it is ___into the surviving enterprise.

Answer 10

merger

consolidation

acquistion

fusions, fused

Question 11

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be:

capitalized as part of goodwill and tested annually for impairment.

allocated on a pro rata basis to the nonmonetary assets acquired.

capitalized as an other asset and amortized over five years.

expensed as incurred in the current period.

Answer 11

expensed as incurred in the current period.

The acquisition method is required to account for the acquisition of another company. The acquisition method requires that acquisition-related costs be expensed as incurred. The costs to acquire stock or bonds must be included in the cost of the stock or bonds.

Question 12

• Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination.
• The market value of Sayon’s common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000.
• Registration and issuance costs for the common stock are $35,000.

What should be recorded in Sayon’s additional paid-in capital account for this business combination?

$1,365,000

$1,400,000

$1,545,000

$1,255,000

Answer 12

$1,365,000

Question 13

Company J acquired all of the outstanding common stock of Company K in exchange for cash. The acqui­sition price exceeds the fair value of net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K?

Plant and equipment, fair value; Long-term debt, K’s carrying amount

Plant and equipment, K’s carrying amount; Long-term debt, K’s carrying amount

Plant and equipment, K’s carrying amount; Long-term debt, fair value

Plant and equipment, fair value; Long-term debt, fair value

Answer 13

Plant and equipment, fair value; Long-term debt, fair value

This must be accounted for under the acquisition method. Assets and liabilities are recorded at fair value. Any excess of acquisition price over fair value is recorded as goodwill.

Question 14

When a private company is required to recognize or otherwise consider the fair value of intangible assets, the private company may make an accounting policy to apply the accounting alternative. This election may be applied for any one of the following transactions:

a. Applying the ____method
b. Assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity in net assets of an investee when applying the ___method
c. Adopting ___reporting

Answer 14

acquisition

equity

fresh-start

Question 15

An acquirer shall not recognize separately from goodwill the following intangible assets:

a. ___-related intangible assets unless they are capable of being ___or licensed independently
b. ____agreements

Answer 15

customer related, sold

noncompetition

Question 16

In its financial statements, Pare, Inc., uses the cost method of accounting for its 15% ownership of Sabe Co. On December 31, 20X1, Pare has a receivable from Sabe. How should the receivable be reported in Pare’s December 31, 20X1, balance sheet?

The total receivable should be offset against Sabe’s payable to Pare, without separate disclosure.

Eighty-five percent (85%) of the receivable should be reported separately, with the balance offset against Sabe’s payable to Pare.

The total receivable should be included as part of the investment in Sabe, without separate disclosure.

The total receivable should be reported separately.

Answer 16

The total receivable should be reported separately.

The total receivable should be reported separately. The equity method would be used at the 20% ownership level but would not change the requirement to report the receivable separately. At the 50%-plus level of ownership, consolidation would require elimination of the receivable as an intercompany item.

Question 17

Unconsolidated subsidiaries should be accounted for by the parent at ___value or under the ___method, whichever is appropriate.

The ___method should be used if the parent (investor) has the ability to significantly ___the operating and financial policies of the unconsolidated subsidiary (investee); otherwise, the fair value method should be used.

Answer 17

FV / Equity

equity, influence

Question 18

On December 31, year 1, Andover Co. acquired Barrelman, Inc. Before the acquisition, a product lawsuit seeking $10 million in damages was filed against Barrelman. As of the acquisition date, Andover believed that it was probable that a liability existed and that the fair value of the liability was $5 million. What amount should Andover record as a liability as of December 31, year 1?

$10,000,000

$0

$5,000,000

$7,500,000

Answer 18

$5,000,000

Proper accounting for loss contingencies requires an assessment of the probability that a future event or events will confirm a loss or asset impairment or the incurrence of a liability as of the date of the financial statements.

Three ranges of probability exist: (1) probable: The future event or events are likely to occur and the amount is reasonably estimable; (2) reasonably possible: The chance of the future event or events occurring is more than remote but less than likely; and (3) remote:

The chance of the future event or events occurring is slight. Since the event is probable and the amount is reasonably estimable, Barrelman should record a $5,000,000 liability.

Question 19

Proper accounting for loss contingencies requires an assessment of the probability that a future event or events will confirm a loss or asset impairment or the incurrence of a liability as of the date of the financial statements. Three ranges of probability exist:

1. __: The future event or events are likely to occur.
2. ____: The chance of the future event or events occurring is more than remote but less than likely.
3. ___: The chance of the future event or events occurring is slight.

Answer 19

probable

reasonably probable

remote

Question 20

In a business combination with goodwill recorded, how should any subsequent impairment of the goodwill be recognized on the income statement or statement of retained earnings?

As a component of other comprehensive income

As a restatement of beginning retained earnings

As a loss from continuing operations

As a change in accounting principle

Answer 20

As a loss from continuing operations

The impairment loss should be recognized in income from continuing operations just as amortization expense would have been recognized in arriving at income from continuing operations. (FASB ASC 350-20-45-1)

Question 21

Reporting Goodwill Impairment Loss

The aggregate amount of goodwill impairment losses must be reported as a separate line item in the income statement ___the subtotal income from continuing operations unless a goodwill impairment loss is associated with a ____.

Answer 21

before , discontinued operation

Question 22

A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be:

included in the acquisition cost to be allocated to identifiable assets according to their fair values.

deducted directly from the retained earnings of the combined corporation.

capitalized as a deferred charge and amortized.

deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

Answer 22

deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

Question 23

Acquisition-related costs are costs the acquirer incurs to effect a business combination.

Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.

The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.”

Answer 23

yea

Question 24

A combination is accounted for as an acquisition. Which of the following would be considered part of the acquisition cost of an acquired entity in a business combination?

1. Costs incurred by the acquiring entity that are directly related to the acquisition
2. Costs incurred by the acquired entity that are directly related to the acquisition
3. Indirect acquisition costs incurred by the acquiring entity

I and III only

I only

I and II only

None of these items would be part of the acquisition cost.

Answer 24

None of these items would be part of the acquisition cost.

FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense. All of these costs are acquisition-related costs and should be expensed in the period incurred.

he question is asking which, if any, of those costs should be added to the cost of the acquisition, not which ones are acquisition-related costs.

Question 25

Charles Corporation acquires all of the outstanding stock of Harry Corporation. After the acquisition, the stock of Harry Corporation is retired and the Harry Corporation ceases to exist. This is an example of a:

statutory merger.

statutory consolidation.

goodwill acquisition.

None of the answer choices are correct.

Answer 25

statutory merger.

A statutory merger occurs when one entity acquires another entity and the second entity ceases to exist. The acquiring entity remains in existence and continues the operations of the combined businesses.

Question 26

• Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities.
• The fair value of the in-process research and development activities was $400,000.

Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?

$400,000

$50,000

$0

$350,000

Answer 26

$400,000

In-process research and development results are classified as intangible assets with indefinite lives until the research and development phase is complete or the project is abandoned.

.These assets are originally recorded at fair value (i.e., $400,000) and will be subject to impairment tests.

Question 27

West, Inc., acquired 60% of East Co.’s outstanding common stock. West paid $800,000 to acquire the stock. West plans to relocate East’s company headquarters, which is expected to cost between $100,000 and $300,000. The present value of the probability-adjusted relocation cost is $240,000. What is West’s acquisition cost?

$1,040,000

$1,100,000

$900,000

$800,000

Answer 27

$800,000

The acquisition of the stock would be reported at cost—the amount paid for the stock. Future relocation costs would not be included in the current cost of the stock. Costs expected to be incurred are not liabilities and should not be included in the acquisition cost.

Question 28

A company incurred the following costs to complete a business combination in the current year:

1. Issuing debt securities $30,000
2. Registering debt securities 25,000
3. Legal fees 10,000
4. Due diligence costs 1,000

What amount should be reported as current-year expenses, not subject to amortization?

$36,000

$1,000

$11,000

$66,000

Answer 28

$11,000

• A business combination occurs when two or more business enterprises are brought under common control and into one accounting entity (e.g., mergers, consolidations, or acquisitions).
• Acquisition costs and restructuring costs must be recognized separately from the acquisition itself in the acquirer’s post-combination financial statements in accordance with GAAP—usually expensed.
• The legal fees and due diligence costs that total $11,000 are considered acquisition costs and should be expensed in the current year. Debt issuance and debt registration costs are part of the consideration given, and recorded in conjunction with the debt itself.

Question 29

Rollins Corporation acquired 75% of the outstanding stock of Schauer Corporation. The purchase price of the acquisition was $3,960,000. The book value of Schauer’s net assets was $4,640,000. Schauer had assets whose fair values were greater than their carrying value by the following amounts: Land $120,000, Buildings $280,000. How much goodwill is implied in Rollins’ acquisition of Schauer?

$180,000

$480,000

$300,000

$80,000

Answer 29

$180,000

ollins will record goodwill of $180,000, computed as follows:

• Purchase price less book value of purchased share of net assets ($3,960,000 – ($4,640,000 × 0.75) = 480,000).
• Purchase price in excess of net assets equals $480,000.
• The amount of the undervalued assets purchased in the acquisition must be computed before determining goodwill: ($120,000 + $280,000) × 0.75 = $300,000.
• Goodwill equals the purchase price in excess of net assets less the purchased portion of undervalued assets: $480,000 – $300,000 = $180,000.

Question 30

A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration: $1,000,000 after year 1, $1,000,000 after year 2, and $500,000 after year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent-based consideration portion is $2,100,000. What is the total consideration transferred for this business combination?

$15,100,000

$13,000,000

$15,500,000

$5,100,000

Answer 30

$15,100,000

A contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to the former owners of an acquired entity only if certain specified future events occur or conditions are met.

The amount of contingent consideration paid is recorded at its fair value. Total consideration would be $15,100,000 ($3,000,000 cash + $10,000,000 in stock + $2,100,000 contingent-based consideration).