Chapter 1 — Business Combinations: America's Most Popular
Business Activity, Bringing an End to the Controversy
MULTIPLE CHOICE
1. An economic advantage of a business combination includes
a. Utilizing duplicative assets.
b. Creating separate management teams.
c. Coordinated marketing campaigns.
d. Horizontally combining levels within the marketing chain.
ANS: C DIF: E OBJ: 1
2. A tax advantage of business combination can occur when the
existing owner of a company sells out and receives:
a. cash to defer the taxable gain as a "tax-free
reorganization."
b. stock to defer the taxable gain as a "tax-free
reorganization."
c. cash to create a taxable gain.
d. stock to create a taxable gain.
ANS: B DIF: E OBJ: 1
3. A controlling interest in a company implies that the parent
company
a. owns all of the subsidiary's stock.
b. has influence over a majority of the subsidiary's assets.
, c. has paid cash for a majority of the subsidiary's stock.
d. has transferred common stock for a majority of the
subsidiary's outstanding bonds and debentures.
ANS: B DIF: M OBJ: 2
4. Which of the following is a potential abuse that may arise when a
business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by
the investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of
the combination only and not as a result of efficient
operations.
c. Liabilities may be undervalued when the price paid by the
investor is allocated to specific liabilities.
d. An undue amount of cost may be assigned to goodwill, thus
potentially allowing an understatement of pooled earnings.
ANS: B DIF: M OBJ: 3, Appendix A
,5. Company B acquired the assets (net of liabilities) of Company S
in exchange for cash. The acquisition price exceeds the fair
value of the net assets acquired. How should Company B determine
the amounts to be reported for the plant and equipment, and for
long-term debt of the acquired Company S?
Plant and Equipment Long-Term Debt
a. Fair value S's carrying amount
b. Fair value Fair value
c. S's carrying amount Fair value
d. S's carrying amount S's carrying amount
ANS: B DIF: E OBJ: 4
1. Publics Company acquired the net assets of Citizen Company during
20X5. The purchase price was $800,000. On the date of the
transaction, Citizen had no long-term investments in marketable
equity securities and $400,000 in liabilities. The fair value of
Citizen assets on the acquisition date was as follows:
Current assets................................. $ 800,000
Noncurrent assets.............................. 600,000
$1,400,000
==========
How should Publics account for the $200,000 difference between
the fair value of the net assets acquired, $1,000,000, and the
cost, $800,000?
a. Retained earnings should be reduced by $200,000.
b. Current assets should be recorded at $685,000 and noncurrent
assets recorded at $515,000.
, c. The noncurrent assets should be recorded at $400,000.
d. A deferred credit of $200,000 should be set up and
subsequently amortized to future net income over a period
not to exceed 40 years.
ANS: C DIF: M OBJ: 4
7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible
assets:
Patent on a product that is deemed to have no useful life
$10,000.
Customer List with an observable fair value of $50,000.
A 5-year operating lease with favorable terms with a discounted
present value of $8,000.
Identifiable R & D of $100,000.
ABC will record how much for acquired Intangible Assets from the
Purchase of XYZ Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS: B DIF: D OBJ: 4
Business Activity, Bringing an End to the Controversy
MULTIPLE CHOICE
1. An economic advantage of a business combination includes
a. Utilizing duplicative assets.
b. Creating separate management teams.
c. Coordinated marketing campaigns.
d. Horizontally combining levels within the marketing chain.
ANS: C DIF: E OBJ: 1
2. A tax advantage of business combination can occur when the
existing owner of a company sells out and receives:
a. cash to defer the taxable gain as a "tax-free
reorganization."
b. stock to defer the taxable gain as a "tax-free
reorganization."
c. cash to create a taxable gain.
d. stock to create a taxable gain.
ANS: B DIF: E OBJ: 1
3. A controlling interest in a company implies that the parent
company
a. owns all of the subsidiary's stock.
b. has influence over a majority of the subsidiary's assets.
, c. has paid cash for a majority of the subsidiary's stock.
d. has transferred common stock for a majority of the
subsidiary's outstanding bonds and debentures.
ANS: B DIF: M OBJ: 2
4. Which of the following is a potential abuse that may arise when a
business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by
the investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of
the combination only and not as a result of efficient
operations.
c. Liabilities may be undervalued when the price paid by the
investor is allocated to specific liabilities.
d. An undue amount of cost may be assigned to goodwill, thus
potentially allowing an understatement of pooled earnings.
ANS: B DIF: M OBJ: 3, Appendix A
,5. Company B acquired the assets (net of liabilities) of Company S
in exchange for cash. The acquisition price exceeds the fair
value of the net assets acquired. How should Company B determine
the amounts to be reported for the plant and equipment, and for
long-term debt of the acquired Company S?
Plant and Equipment Long-Term Debt
a. Fair value S's carrying amount
b. Fair value Fair value
c. S's carrying amount Fair value
d. S's carrying amount S's carrying amount
ANS: B DIF: E OBJ: 4
1. Publics Company acquired the net assets of Citizen Company during
20X5. The purchase price was $800,000. On the date of the
transaction, Citizen had no long-term investments in marketable
equity securities and $400,000 in liabilities. The fair value of
Citizen assets on the acquisition date was as follows:
Current assets................................. $ 800,000
Noncurrent assets.............................. 600,000
$1,400,000
==========
How should Publics account for the $200,000 difference between
the fair value of the net assets acquired, $1,000,000, and the
cost, $800,000?
a. Retained earnings should be reduced by $200,000.
b. Current assets should be recorded at $685,000 and noncurrent
assets recorded at $515,000.
, c. The noncurrent assets should be recorded at $400,000.
d. A deferred credit of $200,000 should be set up and
subsequently amortized to future net income over a period
not to exceed 40 years.
ANS: C DIF: M OBJ: 4
7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible
assets:
Patent on a product that is deemed to have no useful life
$10,000.
Customer List with an observable fair value of $50,000.
A 5-year operating lease with favorable terms with a discounted
present value of $8,000.
Identifiable R & D of $100,000.
ABC will record how much for acquired Intangible Assets from the
Purchase of XYZ Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS: B DIF: D OBJ: 4
