[Topic 2] Chapter 1 Exam

Question 1

The only way to attain control over the net assets of another entity is to purchase the net assets.

Answer 1

FALSE

Question 2

Vertical integration is a type of combination that involves companies within the same industry that have previously been competitors.

Answer 2

FALSE

Question 3

Greenmail is a defensive tactic wherein substantial amount of outstanding common stock is acquired for treasury or retirement or substantial long-term debt in exchange for outstanding common stock is incurred.

Answer 3

FALSE.

Shark Repellent is the acquisition of substantial amount of outstanding common stock is acquired for treasury or retirement or substantial long-term debt in exchange for outstanding common stock is incurred.

Greenmail is the acquisition of common stock presently owned by the prospective acquirer company at a price substantially lower in excess of the prospective acquirer’s cost.

Question 4

The stock acquisition method used in accounting for business combination requires closing out of the books of the acquiree and transferring its assets and liabilities to the acquirer company.

Answer 4

FALSE.

The acquired company need not be dissolved.

Question 5

Changes of fair value of contingent consideration requires adjusting the original accounting of the acquisition which affects goodwill or bargain purchase gain/gain on acquisition.

Answer 5

TRUE

Question 6

PFRS 3 requires the acquirer to recognize a contingent liability assumed in a business combination when:

a. it is probable that there is an outflow of resources
b. possible obligations arise from past events
c. present obligations arise from past events
d. fair value can be measured reliably
e. All of the above
f. C and D only

Answer 6

C and D only.

c. present obligations arise from past events
d. fair value can be measured reliably

Question 7

If the share premium or additional paid-in capital from the related issuance is not enough to absorb the costs of issuing equity instruments, it shall be deducted from Retained Earnings.

Answer 7

TRUE

Question 8

Normally, 50% plus 1 positive vote is required by corporate by-laws to bind all stockholders in a friendly combination.

Answer 8

FALSE.

Normally, a two-thirds or three-fourths positive vote is required by corporate by-laws to bind all stockholders in a friendly combination.

Question 9

The firm in a merger transaction that the acquiring company is pursuing is a/the

a. holding company
b. target company
c. subsidiary
d. acquiring company

Answer 9

target company

Question 10

Acquisition-related expenses incurred by the acquirer shall be excluded from the measurement of the considerations paid and the cost of issuing equity instruments shall be included.

Answer 10

FALSE.

Acquisition-related expenses includes:
1. Cash
2. Non-monetary Assets
3. Equity Instruments
4. Liabilities Undertaken
5. Contingent Consideration
6. Share-based payment awards

Question 11

Future losses or other costs expected to be incurred by the acquirer as a result of the combination are liabilities and are therefore included in the calculation of the fair value of considerations paid.

Answer 11

FALSE.

Future losses are never capitalized.

Question 12

A business combination that occurs where only one of the original entities in existence after the combination is called a statutory consolidation.

Answer 12

FALSE.

If only one original entity survives after business combination, it is a STATUTORY MERGER.

If both entities are dissolved after combination to form a new entity, it is STATUTORY CONSOLIDATION

Question 13

Non-controlling interests is one of the areas that are covered in both full PFRS and PFRS
for SMEs.

Answer 13

FALSE

Question 14

The determination of the acquisition date depends on the date the acquirer receives physical possession of the assets acquired or actually pays out the consideration to the acquiree.

Answer 14

FALSE

Question 15

The acquiree entity is liquidated in a statutory merger.

Answer 15

TRUE

Question 16

Contingent consideration is an obligation of the acquirer to transfer additional assets or
equity interests to the former owners of an acquiree and the acquirer has the
right to the return of previously transferred consideration if specified conditions are met.

Answer 16

TRUE

Question 17

An offer by an acquirer to buy the stock of another company is commonly
called a ___________.

Answer 17

TENDER OFFER

Question 18

A method of combination where consolidated financial statements are prepared periodically.

Answer 18

STOCK ACQUISITION

Question 19

A combination involving companies in unrelated industries having no or little similarities for the purpose of entering into new markets or industries.

Answer 19

CONGLOMERATE COMBINATION

Question 20

A takeover defense in which the target firm finds an acquirer or encouraging a third company more to its liking/more acceptable than the initial hostile acquirer.

Answer 20

WHITE KNIGHT

Question 21

A merger transaction that the target firm’s management does not support, forcing the acquiring company to try to gain control of the firm by buying shares in the marketplace.

Answer 21

HOSTILE MERGER

Question 22

A method of combination where all of the assets and liabilities of the acquiree (acquired) are transferred to the books of the acquirer.

Answer 22

NET ASSET ACQUISITION

Question 23

A combination where a new corporation is formed.

Answer 23

STATUTORY CONSOLIDATION

Question 24

Occurs when one entity gains control over the net assets of another entity.

Answer 24

BUSINESS COMBINATION

Question 25

A defensive tactic that requires provisions in the employment contracts of key executives that provide them with sizable compensation if the firm is taken over.

Answer 25

GOLDEN PARACHUTES

Question 26

A combination where the acquiring (acquirer) company survives and the acquired (acquiree) company ceases to exist as a separate legal entity.

Answer 26

STATUTORY MERGER

Question 27

For assets that have been provisionally recorded as of the acquisition date, adjustments in value shall be done retrospectively during the measurement period, which is the earlier of one year from the acquisition date or the date when the acquirer receives needed information about facts and circumstances.

Answer 27

TRUE

Question 28

In the valuation of identifiable assets and liabilities, accounts receivable, notes receivable, and property, plant, and equipment shall be presented at gross or “deemed cost” with allowances or accumulated depreciation. Hence, a separate valuation account for these items is needed.

Answer 28

FALSE

Question 29

Within the bounds of PFRS 3 are stapling arrangements or dual listing stapling.

Answer 29

TRUE

Question 30

For a business combination to qualify as a statutory consolidation, a new corporation must be formed.

Answer 30

TRUE

Question 31

In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the acquiree does not change.

Answer 31

TRUE.

Acquiree receives acquirer’s stock, not vice versa.

Question 32

In the consummation of a combination, the two independent issues to be resolved should be: what is acquired and what is given up.

Answer 32

TRUE

Question 33

Hostile (unfriendly) takeovers involves various moves of resistance by the target company.

Answer 33

TRUE

Question 34

In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders become acquirer stockholders.

Answer 34

FALSE

Question 35

A stock acquisition is the only form of business combination that might require the preparation of consolidated financial statements.

Answer 35

TRUE

Question 36

Gain from a bargain purchase shall be attributable to both the acquirer and the acquiree.

Answer 36

FALSE

Question 37

Replacement of an acquiree’s share-based payment transactions with share-based transactions of the acquirer are obligations of the acquirer and shall be measured at cost.

Answer 37

FALSE.

The replacement of an acquiree’s share-based payment transactions with the share=based transactions of the acquirer are obligations of the acquirer and shall be measured using “market based measure.”

Question 38

Unrecognized assets and liabilities of the acquiree in its financial statements shall be
recognized by the acquirer at fair value as long as the item acquired or assumed must be part of the business acquired.

Answer 38

TRUE

Question 39

In an acquisition where the acquirer pays cash for the acquiree assets, the book value of the acquirer increases.

Answer 39

FALSE.

The payment of cash decreases the total amount of net assets.

Question 40

Potential contracts with new customers or contracts under negotiation but are yet uncommitted shall be recognized by the acquirer separately from goodwill.

Answer 40

FALSE