Chaptern1n—
nBusinessnCombinations:nAmerica'snMostnPopularn
BusinessnActivity,nBri
ngingnannEndntonthenControversy
MULTIPLEnCHOICE
1. Anneconomicnadvantagenofnanbusinessncombinationnincludes
a. Utilizingnduplicativenassets.
b. Creatingnseparatenmanagementnteams.
c. Coordinatednmarketingncampaigns.
d. Horizontallyncombiningnlevelsnwithinnthenmarketingnchain.
ANS:n C DIF:n E OBJ:n 1
2. Antaxnadvantagenofnbusinessncombinationncannoccurnwhennthenexistingnowner
nofnancompanynsellsnoutnandnreceives:
a. cashntondefernthentaxablengainnasnan"tax-freenreorganization."
b. stockntondefernthentaxablengainnasnan"tax-freenreorganization."
c. cashntoncreatenantaxablengain.
d. stockntoncreatenantaxablengain.
ANS:n B DIF:n E OBJ:n 1
3. Ancontrollingninterestninnancompanynimpliesnthatnthenparentncompany
a. ownsnallnofnthensubsidiary'snstock.
b. hasninfluencenovernanmajoritynofnthensubsidiary'snassets.
c. hasnpaidncashnfornanmajoritynofnthensubsidiary'snstock.
d. hasntransferredncommonnstocknfornanmajoritynofnthensubsidiary'snouts
tandingnbondsnandndebentures.
ANS:n B DIF:n M OBJ:n 2
4. Whichnofnthenfollowingnisnanpotentialnabusenthatnmaynarisenwhennanbusine
ssncombinationnisnaccountednfornasnanpoolingnofninterests?
a. Assetsnofnthenbuyernmaynbenovervaluednwhennthenpricenpaidnbyntheninvest
ornisnallocatednamongnspecificnassets.
b. Earningsnofnthenpoolednentitynmaynbenincreasednbecausenofnthencombi
nationnonlynandnnotnasnanresultnofnefficientnoperations.
c. Liabilitiesnmaynbenundervaluednwhennthenpricenpaidnbyntheninvestornisnal
locatedntonspecificnliabilities.
d. Annunduenamountnofncostnmaynbenassignedntongoodwill,nthusnpoten
tiallynallowingnannunderstatementnofnpoolednearnings.
ANS:n B DIF:n M OBJ:n 3,nAppendixnA
, Chaptern1
5. CompanynBnacquirednthenassetsn(netnofnliabilities)nofnCompanynSninnexchangen
forncash.nThenacquisitionnpricenexceedsnthenfairnvaluenofnthennetnassetsnacqu
ired.nHownshouldnCompanynBndeterminenthenamountsntonbenreportednfornthenplan
tnandnequipment,nandnfornlong-termndebtnofnthenacquirednCompanynS?
PlantnandnEquipment
n Long-TermnDebt
a. Fairnvalue S'sncarryingnamount
b. Fairnvalue Fairnvalue
c. S'sncarryingnamount Fairnvalue
d. S'sncarryingnamount S'sncarryingnamount
ANS:n B DIF:n E OBJ:n 4
6. PublicsnCompanynacquirednthennetnassetsnofnCitizennCompanynduringn20X5.nThenp
urchasenpricenwasn$800,000.nOnnthendatenofnthentransaction,nCitizennhadnnonlo
ng-
termninvestmentsninnmarketablenequitynsecuritiesnandn$400,000ninnliabilitie
s.nThenfairnvaluenofnCitizennassetsnonnthenacquisitionndatenwasnasnfollows:
Currentnassets.................................n$n 800,000
Noncurrentnassets. .............................. 600,000
$1,400,000
==========
HownshouldnPublicsnaccountnfornthen$200,000ndifferencenbetweennthenfairnvalueno
fnthennetnassetsnacquired,n$1,000,000,nandnthencost,n$800,000?
a. Retainednearningsnshouldnbenreducednbyn$200,000.
b. Currentnassetsnshouldnbenrecordednatn$685,000nandnnoncurrentnasse
tsnrecordednatn$515,000.
c. Thennoncurrentnassetsnshouldnbenrecordednatn$400,000.
d. Andeferredncreditnofn$200,000nshouldnbensetnupnandnsubsequentlynamort
izedntonfuturennetnincomenovernanperiodnnotntonexceedn40nyears.
ANS:n C DIF:n M OBJ:n 4
7. ABCnCo.nisnacquiringnXYZnInc.nXYZnhasnthenfollowingnIntangiblenassets:nPaten
tnonnanproductnthatnisndeemedntonhavennonusefulnlifen$10,000.nCustomernListn
withnannobservablenfairnvaluenofn$50,000.
An5-
yearnoperatingnleasenwithnfavorablentermsnwithnandiscountednpresentnval
uenofn$8,000.
IdentifiablenRn&nDnofn$100,000.
ABCnwillnrecordnhownmuchnfornacquirednIntangiblenAssetsnfromnthenPurchasenofn
XYZnInc?
a.n$168,000
b.n$58,000
c.n$158,000
d.n$150,000
ANS:n B DIF:n D OBJ:n 4
1-2
, Chaptern1
8. VibenCompanynpurchasednthennetnassetsnofnAtlanticnCompanyninnanbusinessncombi
nationnaccountednfornasnanpurchase.nAsnanresult,ngoodwillnwasnrecorded.nFornt
axnpurposes,nthisncombinationnwasnconsideredntonbenantax-
freenmerger.nIncludedninnthenassetsnisnanbuildingnwithnannappraisednvaluenofn$
210,000nonnthendatenofnthenbusinessncombination.nThisnassetnhadnannetnbooknva
luenofn$70,000,nbasednonnthenusenofnacceleratedndepreciationnfornaccountingn
purposes.nThenbuildingnhadnannadjustedntaxnbasisntonAtlanticn(andntonVibenasna
nresultnofnthenmerger)nofn$120,000.nAssumingnan36%nincomentaxnrate,natnwhatnam
ountnshouldnVibenrecordnthisnbuildingnonnitsnbooksnafternthenpurchase?
a.n$120,000
b.n$134,400
c.n$140,000
d.n$210,000
ANS:n D DIF:n M OBJ:n 4
9. Goodwillnrepresentsnthenexcessncostnofnannacquisitionnovernthe
a. sumnofnthenfairnvaluesnassignedntonintangiblenassetsnlessnliab
ilitiesnassumed.
b. sumnofnthenfairnvaluesnassignedntontangiblenandnintangiblenassetsnacqui
rednlessnliabilitiesnassumed.
c. sumnofnthenfairnvaluesnassignedntonintangiblesnacquirednlessnliab
ilitiesnassumed.
d. booknvaluenofnannacquiredncompany.
ANS:n B DIF:n M OBJ:n 5
10. Whennpurchasingnancompanynoccurs,nFASBnrecommendsndisclosingnallnofnthenfollo
wingnEXCEPT:
a. goodwillnrelatedntoneachnreportingnsegment.
b. contingentnpaymentnagreements,noptions,norncommitmentsnincludedninnthen
purchasenagreement,nincludingnaccountingnmethodsntonbenfollowed.
c. resultsnofnoperationsnfornthencurrentnperiodnifnbothncompaniesnhadnremai
nednseparate.
d. amountnofnin-processnR&Dnpurchasednandnwritten-
offnduringnthenperiod.
ANS:n C DIF:n M OBJ:n 5
1-3
, Chaptern1
11. CozzinCompanynisnbeingnpurchasednandnhasnthenfollowingnbalancensheetnasnofnthe
npurchasendate:
Currentnassets. ........... $200,000 Liabilities.... $n90,000
Fixednassets. ............. 180,000 Equity......... n290,000
Total. ................. $380,000 Total........ $380,000
======== ========
ThenpricenpaidnfornCozzi'snnetnassetsn(thenpurchasernassumesnthenliabilities)ni
sn$500,000.nThenfixednassetsnhavenanfairnvaluenof
$220,000,nandnthenliabilitiesnhavenanfairnvaluenofn$110,000.nThenamountnofngoo
dwillntonbenrecordedninnthenpurchasenis .
a. $0
b.n$50,000
c.n$70,000
d.n$90,000
ANS:n C DIF:n M OBJ:n 6
12. Separatelynidentifiednintangiblenassetsnarenaccountednfornbynamo
rtizing:
a. exclusivelynbynusingnimpairmentntesting.
b. basednuponnanpatternnthatnreflectsnthenbenefitsnconveyednbynthenasset
.
c. overnthenusefulneconomicnlifenlessnresidualnvaluenusingnonlynthenstrai
ght-linenmethod.
d. amortizingnovernanperiodnnotntonexceednanmaximumnofn40nyears.
ANS:n B DIF:n E OBJ:n 6
13. AcmenCo.nisnpreparingnanpro-
formansetnofnfinancialnstatementsnafternannacquisitionnofnCoyotenCo.nThenpur
chasenpricenisnlessnthannthenfairnvaluenofnthenassetsnacquired.nHowever,nthe
npurchasenpricenisngreaternthannnetnbooknvaluenofnthenacquiredncompany.
a. Acme'sngoodwillnwillndecreasenoverntime.
b. Acme'snamortizationnofnintangiblenassetsnwillnincreasenoverntime.
c. DepreciationnexpensenwillnbengreaternthannCoyotenCompany'snexp
ense.
d. Coyote'snlossnonnthensalenofnthenassetsnwillncreatenannetnlossncarryf
orward.
ANS:n C DIF:n D OBJ:n 6
1-4
nBusinessnCombinations:nAmerica'snMostnPopularn
BusinessnActivity,nBri
ngingnannEndntonthenControversy
MULTIPLEnCHOICE
1. Anneconomicnadvantagenofnanbusinessncombinationnincludes
a. Utilizingnduplicativenassets.
b. Creatingnseparatenmanagementnteams.
c. Coordinatednmarketingncampaigns.
d. Horizontallyncombiningnlevelsnwithinnthenmarketingnchain.
ANS:n C DIF:n E OBJ:n 1
2. Antaxnadvantagenofnbusinessncombinationncannoccurnwhennthenexistingnowner
nofnancompanynsellsnoutnandnreceives:
a. cashntondefernthentaxablengainnasnan"tax-freenreorganization."
b. stockntondefernthentaxablengainnasnan"tax-freenreorganization."
c. cashntoncreatenantaxablengain.
d. stockntoncreatenantaxablengain.
ANS:n B DIF:n E OBJ:n 1
3. Ancontrollingninterestninnancompanynimpliesnthatnthenparentncompany
a. ownsnallnofnthensubsidiary'snstock.
b. hasninfluencenovernanmajoritynofnthensubsidiary'snassets.
c. hasnpaidncashnfornanmajoritynofnthensubsidiary'snstock.
d. hasntransferredncommonnstocknfornanmajoritynofnthensubsidiary'snouts
tandingnbondsnandndebentures.
ANS:n B DIF:n M OBJ:n 2
4. Whichnofnthenfollowingnisnanpotentialnabusenthatnmaynarisenwhennanbusine
ssncombinationnisnaccountednfornasnanpoolingnofninterests?
a. Assetsnofnthenbuyernmaynbenovervaluednwhennthenpricenpaidnbyntheninvest
ornisnallocatednamongnspecificnassets.
b. Earningsnofnthenpoolednentitynmaynbenincreasednbecausenofnthencombi
nationnonlynandnnotnasnanresultnofnefficientnoperations.
c. Liabilitiesnmaynbenundervaluednwhennthenpricenpaidnbyntheninvestornisnal
locatedntonspecificnliabilities.
d. Annunduenamountnofncostnmaynbenassignedntongoodwill,nthusnpoten
tiallynallowingnannunderstatementnofnpoolednearnings.
ANS:n B DIF:n M OBJ:n 3,nAppendixnA
, Chaptern1
5. CompanynBnacquirednthenassetsn(netnofnliabilities)nofnCompanynSninnexchangen
forncash.nThenacquisitionnpricenexceedsnthenfairnvaluenofnthennetnassetsnacqu
ired.nHownshouldnCompanynBndeterminenthenamountsntonbenreportednfornthenplan
tnandnequipment,nandnfornlong-termndebtnofnthenacquirednCompanynS?
PlantnandnEquipment
n Long-TermnDebt
a. Fairnvalue S'sncarryingnamount
b. Fairnvalue Fairnvalue
c. S'sncarryingnamount Fairnvalue
d. S'sncarryingnamount S'sncarryingnamount
ANS:n B DIF:n E OBJ:n 4
6. PublicsnCompanynacquirednthennetnassetsnofnCitizennCompanynduringn20X5.nThenp
urchasenpricenwasn$800,000.nOnnthendatenofnthentransaction,nCitizennhadnnonlo
ng-
termninvestmentsninnmarketablenequitynsecuritiesnandn$400,000ninnliabilitie
s.nThenfairnvaluenofnCitizennassetsnonnthenacquisitionndatenwasnasnfollows:
Currentnassets.................................n$n 800,000
Noncurrentnassets. .............................. 600,000
$1,400,000
==========
HownshouldnPublicsnaccountnfornthen$200,000ndifferencenbetweennthenfairnvalueno
fnthennetnassetsnacquired,n$1,000,000,nandnthencost,n$800,000?
a. Retainednearningsnshouldnbenreducednbyn$200,000.
b. Currentnassetsnshouldnbenrecordednatn$685,000nandnnoncurrentnasse
tsnrecordednatn$515,000.
c. Thennoncurrentnassetsnshouldnbenrecordednatn$400,000.
d. Andeferredncreditnofn$200,000nshouldnbensetnupnandnsubsequentlynamort
izedntonfuturennetnincomenovernanperiodnnotntonexceedn40nyears.
ANS:n C DIF:n M OBJ:n 4
7. ABCnCo.nisnacquiringnXYZnInc.nXYZnhasnthenfollowingnIntangiblenassets:nPaten
tnonnanproductnthatnisndeemedntonhavennonusefulnlifen$10,000.nCustomernListn
withnannobservablenfairnvaluenofn$50,000.
An5-
yearnoperatingnleasenwithnfavorablentermsnwithnandiscountednpresentnval
uenofn$8,000.
IdentifiablenRn&nDnofn$100,000.
ABCnwillnrecordnhownmuchnfornacquirednIntangiblenAssetsnfromnthenPurchasenofn
XYZnInc?
a.n$168,000
b.n$58,000
c.n$158,000
d.n$150,000
ANS:n B DIF:n D OBJ:n 4
1-2
, Chaptern1
8. VibenCompanynpurchasednthennetnassetsnofnAtlanticnCompanyninnanbusinessncombi
nationnaccountednfornasnanpurchase.nAsnanresult,ngoodwillnwasnrecorded.nFornt
axnpurposes,nthisncombinationnwasnconsideredntonbenantax-
freenmerger.nIncludedninnthenassetsnisnanbuildingnwithnannappraisednvaluenofn$
210,000nonnthendatenofnthenbusinessncombination.nThisnassetnhadnannetnbooknva
luenofn$70,000,nbasednonnthenusenofnacceleratedndepreciationnfornaccountingn
purposes.nThenbuildingnhadnannadjustedntaxnbasisntonAtlanticn(andntonVibenasna
nresultnofnthenmerger)nofn$120,000.nAssumingnan36%nincomentaxnrate,natnwhatnam
ountnshouldnVibenrecordnthisnbuildingnonnitsnbooksnafternthenpurchase?
a.n$120,000
b.n$134,400
c.n$140,000
d.n$210,000
ANS:n D DIF:n M OBJ:n 4
9. Goodwillnrepresentsnthenexcessncostnofnannacquisitionnovernthe
a. sumnofnthenfairnvaluesnassignedntonintangiblenassetsnlessnliab
ilitiesnassumed.
b. sumnofnthenfairnvaluesnassignedntontangiblenandnintangiblenassetsnacqui
rednlessnliabilitiesnassumed.
c. sumnofnthenfairnvaluesnassignedntonintangiblesnacquirednlessnliab
ilitiesnassumed.
d. booknvaluenofnannacquiredncompany.
ANS:n B DIF:n M OBJ:n 5
10. Whennpurchasingnancompanynoccurs,nFASBnrecommendsndisclosingnallnofnthenfollo
wingnEXCEPT:
a. goodwillnrelatedntoneachnreportingnsegment.
b. contingentnpaymentnagreements,noptions,norncommitmentsnincludedninnthen
purchasenagreement,nincludingnaccountingnmethodsntonbenfollowed.
c. resultsnofnoperationsnfornthencurrentnperiodnifnbothncompaniesnhadnremai
nednseparate.
d. amountnofnin-processnR&Dnpurchasednandnwritten-
offnduringnthenperiod.
ANS:n C DIF:n M OBJ:n 5
1-3
, Chaptern1
11. CozzinCompanynisnbeingnpurchasednandnhasnthenfollowingnbalancensheetnasnofnthe
npurchasendate:
Currentnassets. ........... $200,000 Liabilities.... $n90,000
Fixednassets. ............. 180,000 Equity......... n290,000
Total. ................. $380,000 Total........ $380,000
======== ========
ThenpricenpaidnfornCozzi'snnetnassetsn(thenpurchasernassumesnthenliabilities)ni
sn$500,000.nThenfixednassetsnhavenanfairnvaluenof
$220,000,nandnthenliabilitiesnhavenanfairnvaluenofn$110,000.nThenamountnofngoo
dwillntonbenrecordedninnthenpurchasenis .
a. $0
b.n$50,000
c.n$70,000
d.n$90,000
ANS:n C DIF:n M OBJ:n 6
12. Separatelynidentifiednintangiblenassetsnarenaccountednfornbynamo
rtizing:
a. exclusivelynbynusingnimpairmentntesting.
b. basednuponnanpatternnthatnreflectsnthenbenefitsnconveyednbynthenasset
.
c. overnthenusefulneconomicnlifenlessnresidualnvaluenusingnonlynthenstrai
ght-linenmethod.
d. amortizingnovernanperiodnnotntonexceednanmaximumnofn40nyears.
ANS:n B DIF:n E OBJ:n 6
13. AcmenCo.nisnpreparingnanpro-
formansetnofnfinancialnstatementsnafternannacquisitionnofnCoyotenCo.nThenpur
chasenpricenisnlessnthannthenfairnvaluenofnthenassetsnacquired.nHowever,nthe
npurchasenpricenisngreaternthannnetnbooknvaluenofnthenacquiredncompany.
a. Acme'sngoodwillnwillndecreasenoverntime.
b. Acme'snamortizationnofnintangiblenassetsnwillnincreasenoverntime.
c. DepreciationnexpensenwillnbengreaternthannCoyotenCompany'snexp
ense.
d. Coyote'snlossnonnthensalenofnthenassetsnwillncreatenannetnlossncarryf
orward.
ANS:n C DIF:n D OBJ:n 6
1-4
