1
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
existingowner 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'soutstanding bonds and debentures.
ANS: B DIF: M OBJ: 2
4. Which of the following is a potential abuse that may arise when
abusiness combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by
theinvestor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of
thecombination only and not as a result of efficient operations.
c. Liabilities may be undervalued when the price paid by the
investoris allocated to specific liabilities.
[Date] 1
,2
d. An undue amount of cost may be assigned to goodwill,
thuspotentially allowing an understatement of pooled
earnings. ANS: B DIF: M OBJ: 3, Appendix A
Chapter 1
1-2
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
[Date] 2
,3
ANS: B DIF: E OBJ: 4
6. 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
noncurrentassets 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
subsequentlyamortized 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
[Date] 3
, 4
c. $158,000
d. $150,000
ANS: B DIF: D OBJ: 4
Chapter 1
1-3
8. Vibe Company purchased the net assets of Atlantic Company in a
businesscombination accounted for as a purchase. As a result, goodwill was
recorded. For tax purposes, this combination was considered to be a
tax-free merger. Included in the assets is a building with an appraised
value of $210,000 on the date of the business combination. This asset
had a net book value of $70,000, based on the use of accelerated
depreciation for accounting purposes. The building had an adjusted tax
basis to Atlantic (and to Vibe as a result of the merger) of $120,000.
Assuming a 36% income tax rate, at what amount should Vibe record this
building on its books after the purchase?
a. $120,000
[Date] 4
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
existingowner 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'soutstanding bonds and debentures.
ANS: B DIF: M OBJ: 2
4. Which of the following is a potential abuse that may arise when
abusiness combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by
theinvestor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of
thecombination only and not as a result of efficient operations.
c. Liabilities may be undervalued when the price paid by the
investoris allocated to specific liabilities.
[Date] 1
,2
d. An undue amount of cost may be assigned to goodwill,
thuspotentially allowing an understatement of pooled
earnings. ANS: B DIF: M OBJ: 3, Appendix A
Chapter 1
1-2
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
[Date] 2
,3
ANS: B DIF: E OBJ: 4
6. 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
noncurrentassets 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
subsequentlyamortized 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
[Date] 3
, 4
c. $158,000
d. $150,000
ANS: B DIF: D OBJ: 4
Chapter 1
1-3
8. Vibe Company purchased the net assets of Atlantic Company in a
businesscombination accounted for as a purchase. As a result, goodwill was
recorded. For tax purposes, this combination was considered to be a
tax-free merger. Included in the assets is a building with an appraised
value of $210,000 on the date of the business combination. This asset
had a net book value of $70,000, based on the use of accelerated
depreciation for accounting purposes. The building had an adjusted tax
basis to Atlantic (and to Vibe as a result of the merger) of $120,000.
Assuming a 36% income tax rate, at what amount should Vibe record this
building on its books after the purchase?
a. $120,000
[Date] 4
