Chapterw1w—
wBusinesswCombinations:wAmerica'swMostwPopularwBusinesswActivity
,wBringingwanwEndwtowthewControversy
MULTIPLEwCHOICE
1. Anweconomicwadvantagewofwawbusinesswcombinationwincludes
a. Utilizingwduplicativewassets.
b. Creatingwseparatewmanagementwteams.
c. Coordinatedwmarketingwcampaigns.
d. Horizontallywcombiningwlevelswwithinwthewmarketingwchain.
ANS:w C DIF:w E OBJ:w 1
2. Awtaxwadvantagewofwbusinesswcombinationwcanwoccurwwhenwthewexistingwowne
rwofwawcompanywsellswoutwandwreceives:
a. cashwtowdeferwthewtaxablewgainwaswaw"tax-freewreorganization."
b. stockwtowdeferwthewtaxablewgainwaswaw"tax-freewreorganization."
c. cashwtowcreatewawtaxablewgain.
d. stockwtowcreatewawtaxablewgain.
ANS:w B DIF:w E OBJ:w 1
3. Awcontrollingwinterestwinwawcompanywimplieswthatwthewparentwcompany
a. ownswallwofwthewsubsidiary'swstock.
b. haswinfluencewoverwawmajoritywofwthewsubsidiary'swassets.
c. haswpaidwcashwforwawmajoritywofwthewsubsidiary'swstock.
d. haswtransferredwcommonwstockwforwawmajoritywofwthewsubsidiary'swouts
tandingwbondswandwdebentures.
ANS:w B DIF:w M OBJ:w 2
4. Whichwofwthewfollowingwiswawpotentialwabusewthatwmaywarisewwhenwawbusin
esswcombinationwiswaccountedwforwaswawpoolingwofwinterests?
a. Assetswofwthewbuyerwmaywbewovervaluedwwhenwthewpricewpaidwbywthewinves
torwiswallocatedwamongwspecificwassets.
b. Earningswofwthewpooledwentitywmaywbewincreasedwbecausewofwthewcomb
inationwonlywandwnotwaswawresultwofwefficientwoperations.
c. Liabilitieswmaywbewundervaluedwwhenwthewpricewpaidwbywthewinvestorwiswal
locatedwtowspecificwliabilities.
d. Anwunduewamountwofwcostwmaywbewassignedwtowgoodwill,wthuswpoten
tiallywallowingwanwunderstatementwofwpooledwearnings.
ANS:w B DIF:w M OBJ:w 3,wAppendixwA
, Chapterw1
5. CompanywBwacquiredwthewassetsw(netwofwliabilities)wofwCompanywSwinwexchangew
forwcash.wThewacquisitionwpricewexceedswthewfairwvaluewofwthewnetwassetswacq
uired.wHowwshouldwCompanywBwdeterminewthewamountswtowbewreportedwforwthewpla
ntwandwequipment,wandwforwlong-termwdebtwofwthewacquiredwCompanywS?
wPlantwandwEquipment wLong-TermwDebt
a. Fairwvalue S'swcarryingwamount
b. Fairwvalue Fairwvalue
c. S'swcarryingwamount Fairwvalue
d. S'swcarryingwamount S'swcarryingwamount
ANS:w B DIF:w E OBJ:w 4
6. PublicswCompanywacquiredwthewnetwassetswofwCitizenwCompanywduringw20X5.wThewp
urchasewpricewwasw$800,000.wOnwthewdatewofwthewtransaction,wCitizenwhadwnowlo
ng-
termwinvestmentswinwmarketablewequitywsecuritieswandw$400,000winwliabilitie
s.wThewfairwvaluewofwCitizenwassetswonwthewacquisitionwdatewwaswaswfollows:
Currentwassets.................................w$w 800,000
Noncurrentwassets. .............................. w 600,000
$1,400,000
==========
HowwshouldwPublicswaccountwforwthew$200,000wdifferencewbetweenwthewfairwvaluewo
fwthewnetwassetswacquired,w$1,000,000,wandwthewcost,w$800,000?
a. Retainedwearningswshouldwbewreducedwbyw$200,000.
b. Currentwassetswshouldwbewrecordedwatw$685,000wandwnoncurrentwass
etswrecordedwatw$515,000.
c. Thewnoncurrentwassetswshouldwbewrecordedwatw$400,000.
d. Awdeferredwcreditwofw$200,000wshouldwbewsetwupwandwsubsequentlywamor
tizedwtowfuturewnetwincomewoverwawperiodwnotwtowexceedw40wyears.
ANS:w C DIF:w M OBJ:w 4
7. ABCwCo.wiswacquiringwXYZwInc.wXYZwhaswthewfollowingwIntangiblewassets:wPaten
twonwawproductwthatwiswdeemedwtowhavewnowusefulwlifew$10,000.wCustomerwListw
withwanwobservablewfairwvaluewofw$50,000.
Aw5-
yearwoperatingwleasewwithwfavorablewtermswwithwawdiscountedwpresentwval
uewofw$8,000.
IdentifiablewRw&wDwofw$100,000.
ABCwwillwrecordwhowwmuchwforwacquiredwIntangiblewAssetswfromwthewPurchasewof
wXYZwInc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS:w B DIF:w D OBJ:w 4
1-2
, Chapterw1
8. VibewCompanywpurchasedwthewnetwassetswofwAtlanticwCompanywinwawbusinesswcombi
nationwaccountedwforwaswawpurchase.wAswawresult,wgoodwillwwaswrecorded.wForwt
axwpurposes,wthiswcombinationwwaswconsideredwtowbewawtax-
freewmerger.wIncludedwinwthewassetswiswawbuildingwwithwanwappraisedwvaluewofw$
210,000wonwthewdatewofwthewbusinesswcombination.wThiswassetwhadwawnetwbookwval
uewofw$70,000,wbasedwonwthewusewofwacceleratedwdepreciationwforwaccountingwpu
rposes.wThewbuildingwhadwanwadjustedwtaxwbasiswtowAtlanticw(andwtowVibewaswawr
esultwofwthewmerger)wofw$120,000.wAssumingwaw36%wincomewtaxwrate,watwwhatwamou
ntwshouldwVibewrecordwthiswbuildingwonwitswbookswafterwthewpurchase?
a. $120,000
b. $134,400
c. $140,000
d. $210,000
ANS:w D DIF:w M OBJ:w 4
9. Goodwillwrepresentswthewexcesswcostwofwanwacquisitionwoverwthe
a. sumwofwthewfairwvalueswassignedwtowintangiblewassetswlesswliab
ilitieswassumed.
b. sumwofwthewfairwvalueswassignedwtowtangiblewandwintangiblewassetswacqu
iredwlesswliabilitieswassumed.
c. sumwofwthewfairwvalueswassignedwtowintangibleswacquiredwlesswliab
ilitieswassumed.
d. bookwvaluewofwanwacquiredwcompany.
ANS:w B DIF:w M OBJ:w 5
10. Whenwpurchasingwawcompanywoccurs,wFASBwrecommendswdisclosingwallwofwthewfoll
owingwEXCEPT:
a. goodwillwrelatedwtoweachwreportingwsegment.
b. contingentwpaymentwagreements,woptions,worwcommitmentswincludedwinwthe
wpurchasewagreement,wincludingwaccountingwmethodswtowbewfollowed.
c. resultswofwoperationswforwthewcurrentwperiodwifwbothwcompanieswhadwrema
inedwseparate.
d. amountwofwin-processwR&Dwpurchasedwandwwritten-
offwduringwthewperiod.
ANS:w C DIF:w M OBJ:w 5
1-3
, Chapterw1
11. CozziwCompanywiswbeingwpurchasedwandwhaswthewfollowingwbalancewsheetwaswofwth
ewpurchasewdate:
Currentwassets.......... $200,000 Liabilities.... $w90,000
Fixedwassets............ w180,000 Equity......... w290,000
Total................. $380,000 Total........ $380,000
======== ========
ThewpricewpaidwforwCozzi'swnetwassetsw(thewpurchaserwassumeswthewliabilities)wi
sw$500,000.wThewfixedwassetswhavewawfairwvaluewof
$220,000,wandwthewliabilitieswhavewawfairwvaluewofw$110,000.wThewamountwofwgo
odwillwtowbewrecordedwinwthewpurchasewisw .
a. $0
b. $50,000
c. $70,000
d. $90,000
ANS:w C DIF:w M OBJ:w 6
12. Separatelywidentifiedwintangiblewassetswarewaccountedwforwbywamo
rtizing:
a. exclusivelywbywusingwimpairmentwtesting.
b. basedwuponwawpatternwthatwreflectswthewbenefitswconveyedwbywthewasse
t.
c. overwthewusefulweconomicwlifewlesswresidualwvaluewusingwonlywthewstra
ight-linewmethod.
d. amortizingwoverwawperiodwnotwtowexceedwawmaximumwofw40wyears.
ANS:w B DIF:w E OBJ:w 6
13. AcmewCo.wiswpreparingwawpro-
formawsetwofwfinancialwstatementswafterwanwacquisitionwofwCoyotewCo.wThewpur
chasewpricewiswlesswthanwthewfairwvaluewofwthewassetswacquired.wHowever,wthew
purchasewpricewiswgreaterwthanwnetwbookwvaluewofwthewacquiredwcompany.
a. Acme'swgoodwillwwillwdecreasewoverwtime.
b. Acme'swamortizationwofwintangiblewassetswwillwincreasewoverwtime.
c. DepreciationwexpensewwillwbewgreaterwthanwCoyotewCompany'swexp
ense.
d. Coyote'swlosswonwthewsalewofwthewassetswwillwcreatewawnetwlosswcarry
forward.
ANS:w C DIF:w D OBJ:w 6
1-4
wBusinesswCombinations:wAmerica'swMostwPopularwBusinesswActivity
,wBringingwanwEndwtowthewControversy
MULTIPLEwCHOICE
1. Anweconomicwadvantagewofwawbusinesswcombinationwincludes
a. Utilizingwduplicativewassets.
b. Creatingwseparatewmanagementwteams.
c. Coordinatedwmarketingwcampaigns.
d. Horizontallywcombiningwlevelswwithinwthewmarketingwchain.
ANS:w C DIF:w E OBJ:w 1
2. Awtaxwadvantagewofwbusinesswcombinationwcanwoccurwwhenwthewexistingwowne
rwofwawcompanywsellswoutwandwreceives:
a. cashwtowdeferwthewtaxablewgainwaswaw"tax-freewreorganization."
b. stockwtowdeferwthewtaxablewgainwaswaw"tax-freewreorganization."
c. cashwtowcreatewawtaxablewgain.
d. stockwtowcreatewawtaxablewgain.
ANS:w B DIF:w E OBJ:w 1
3. Awcontrollingwinterestwinwawcompanywimplieswthatwthewparentwcompany
a. ownswallwofwthewsubsidiary'swstock.
b. haswinfluencewoverwawmajoritywofwthewsubsidiary'swassets.
c. haswpaidwcashwforwawmajoritywofwthewsubsidiary'swstock.
d. haswtransferredwcommonwstockwforwawmajoritywofwthewsubsidiary'swouts
tandingwbondswandwdebentures.
ANS:w B DIF:w M OBJ:w 2
4. Whichwofwthewfollowingwiswawpotentialwabusewthatwmaywarisewwhenwawbusin
esswcombinationwiswaccountedwforwaswawpoolingwofwinterests?
a. Assetswofwthewbuyerwmaywbewovervaluedwwhenwthewpricewpaidwbywthewinves
torwiswallocatedwamongwspecificwassets.
b. Earningswofwthewpooledwentitywmaywbewincreasedwbecausewofwthewcomb
inationwonlywandwnotwaswawresultwofwefficientwoperations.
c. Liabilitieswmaywbewundervaluedwwhenwthewpricewpaidwbywthewinvestorwiswal
locatedwtowspecificwliabilities.
d. Anwunduewamountwofwcostwmaywbewassignedwtowgoodwill,wthuswpoten
tiallywallowingwanwunderstatementwofwpooledwearnings.
ANS:w B DIF:w M OBJ:w 3,wAppendixwA
, Chapterw1
5. CompanywBwacquiredwthewassetsw(netwofwliabilities)wofwCompanywSwinwexchangew
forwcash.wThewacquisitionwpricewexceedswthewfairwvaluewofwthewnetwassetswacq
uired.wHowwshouldwCompanywBwdeterminewthewamountswtowbewreportedwforwthewpla
ntwandwequipment,wandwforwlong-termwdebtwofwthewacquiredwCompanywS?
wPlantwandwEquipment wLong-TermwDebt
a. Fairwvalue S'swcarryingwamount
b. Fairwvalue Fairwvalue
c. S'swcarryingwamount Fairwvalue
d. S'swcarryingwamount S'swcarryingwamount
ANS:w B DIF:w E OBJ:w 4
6. PublicswCompanywacquiredwthewnetwassetswofwCitizenwCompanywduringw20X5.wThewp
urchasewpricewwasw$800,000.wOnwthewdatewofwthewtransaction,wCitizenwhadwnowlo
ng-
termwinvestmentswinwmarketablewequitywsecuritieswandw$400,000winwliabilitie
s.wThewfairwvaluewofwCitizenwassetswonwthewacquisitionwdatewwaswaswfollows:
Currentwassets.................................w$w 800,000
Noncurrentwassets. .............................. w 600,000
$1,400,000
==========
HowwshouldwPublicswaccountwforwthew$200,000wdifferencewbetweenwthewfairwvaluewo
fwthewnetwassetswacquired,w$1,000,000,wandwthewcost,w$800,000?
a. Retainedwearningswshouldwbewreducedwbyw$200,000.
b. Currentwassetswshouldwbewrecordedwatw$685,000wandwnoncurrentwass
etswrecordedwatw$515,000.
c. Thewnoncurrentwassetswshouldwbewrecordedwatw$400,000.
d. Awdeferredwcreditwofw$200,000wshouldwbewsetwupwandwsubsequentlywamor
tizedwtowfuturewnetwincomewoverwawperiodwnotwtowexceedw40wyears.
ANS:w C DIF:w M OBJ:w 4
7. ABCwCo.wiswacquiringwXYZwInc.wXYZwhaswthewfollowingwIntangiblewassets:wPaten
twonwawproductwthatwiswdeemedwtowhavewnowusefulwlifew$10,000.wCustomerwListw
withwanwobservablewfairwvaluewofw$50,000.
Aw5-
yearwoperatingwleasewwithwfavorablewtermswwithwawdiscountedwpresentwval
uewofw$8,000.
IdentifiablewRw&wDwofw$100,000.
ABCwwillwrecordwhowwmuchwforwacquiredwIntangiblewAssetswfromwthewPurchasewof
wXYZwInc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000
ANS:w B DIF:w D OBJ:w 4
1-2
, Chapterw1
8. VibewCompanywpurchasedwthewnetwassetswofwAtlanticwCompanywinwawbusinesswcombi
nationwaccountedwforwaswawpurchase.wAswawresult,wgoodwillwwaswrecorded.wForwt
axwpurposes,wthiswcombinationwwaswconsideredwtowbewawtax-
freewmerger.wIncludedwinwthewassetswiswawbuildingwwithwanwappraisedwvaluewofw$
210,000wonwthewdatewofwthewbusinesswcombination.wThiswassetwhadwawnetwbookwval
uewofw$70,000,wbasedwonwthewusewofwacceleratedwdepreciationwforwaccountingwpu
rposes.wThewbuildingwhadwanwadjustedwtaxwbasiswtowAtlanticw(andwtowVibewaswawr
esultwofwthewmerger)wofw$120,000.wAssumingwaw36%wincomewtaxwrate,watwwhatwamou
ntwshouldwVibewrecordwthiswbuildingwonwitswbookswafterwthewpurchase?
a. $120,000
b. $134,400
c. $140,000
d. $210,000
ANS:w D DIF:w M OBJ:w 4
9. Goodwillwrepresentswthewexcesswcostwofwanwacquisitionwoverwthe
a. sumwofwthewfairwvalueswassignedwtowintangiblewassetswlesswliab
ilitieswassumed.
b. sumwofwthewfairwvalueswassignedwtowtangiblewandwintangiblewassetswacqu
iredwlesswliabilitieswassumed.
c. sumwofwthewfairwvalueswassignedwtowintangibleswacquiredwlesswliab
ilitieswassumed.
d. bookwvaluewofwanwacquiredwcompany.
ANS:w B DIF:w M OBJ:w 5
10. Whenwpurchasingwawcompanywoccurs,wFASBwrecommendswdisclosingwallwofwthewfoll
owingwEXCEPT:
a. goodwillwrelatedwtoweachwreportingwsegment.
b. contingentwpaymentwagreements,woptions,worwcommitmentswincludedwinwthe
wpurchasewagreement,wincludingwaccountingwmethodswtowbewfollowed.
c. resultswofwoperationswforwthewcurrentwperiodwifwbothwcompanieswhadwrema
inedwseparate.
d. amountwofwin-processwR&Dwpurchasedwandwwritten-
offwduringwthewperiod.
ANS:w C DIF:w M OBJ:w 5
1-3
, Chapterw1
11. CozziwCompanywiswbeingwpurchasedwandwhaswthewfollowingwbalancewsheetwaswofwth
ewpurchasewdate:
Currentwassets.......... $200,000 Liabilities.... $w90,000
Fixedwassets............ w180,000 Equity......... w290,000
Total................. $380,000 Total........ $380,000
======== ========
ThewpricewpaidwforwCozzi'swnetwassetsw(thewpurchaserwassumeswthewliabilities)wi
sw$500,000.wThewfixedwassetswhavewawfairwvaluewof
$220,000,wandwthewliabilitieswhavewawfairwvaluewofw$110,000.wThewamountwofwgo
odwillwtowbewrecordedwinwthewpurchasewisw .
a. $0
b. $50,000
c. $70,000
d. $90,000
ANS:w C DIF:w M OBJ:w 6
12. Separatelywidentifiedwintangiblewassetswarewaccountedwforwbywamo
rtizing:
a. exclusivelywbywusingwimpairmentwtesting.
b. basedwuponwawpatternwthatwreflectswthewbenefitswconveyedwbywthewasse
t.
c. overwthewusefulweconomicwlifewlesswresidualwvaluewusingwonlywthewstra
ight-linewmethod.
d. amortizingwoverwawperiodwnotwtowexceedwawmaximumwofw40wyears.
ANS:w B DIF:w E OBJ:w 6
13. AcmewCo.wiswpreparingwawpro-
formawsetwofwfinancialwstatementswafterwanwacquisitionwofwCoyotewCo.wThewpur
chasewpricewiswlesswthanwthewfairwvaluewofwthewassetswacquired.wHowever,wthew
purchasewpricewiswgreaterwthanwnetwbookwvaluewofwthewacquiredwcompany.
a. Acme'swgoodwillwwillwdecreasewoverwtime.
b. Acme'swamortizationwofwintangiblewassetswwillwincreasewoverwtime.
c. DepreciationwexpensewwillwbewgreaterwthanwCoyotewCompany'swexp
ense.
d. Coyote'swlosswonwthewsalewofwthewassetswwillwcreatewawnetwlosswcarry
forward.
ANS:w C DIF:w D OBJ:w 6
1-4
