Chapter 2

Which of the following represent reasons why Tesla acquired Grohmann Engineering?

- Expected reductions in capital expenditures required for vehicle produced - An expectation that the acquisition will increase the speed and quality of production. - Expected integration of Grohmann's technology into Tesla's automotive business.

The acquisition method requires the recognition and measurement of which of the following?

- The acquiree's identified assets and liabilities assumed by the acquirer. - Goodwill or a gain from bargain purchase. - Any existing noncontrolling interest.

Intangible assets

- are required to meet specific criteria to qualify for recognition in a business combination. - lack physical substance. - are common in business combinations.

Goodwill recognized in a business combination

- is an asset that represents future economic benefits - may embody synergies the acquirer expects to achieve from the combination. - may capture value derived from other intangible assets not otherwise eligible for recognition.

Preexisting goodwill on a newly acquired subsidiary's books is

- not considered an identifiable asset by the parent. - essentially ignored in the allocation of the consideration transferred to the subsidiary's assets and liabilities.

In a business combination when each combining firm remains a legally incorporated separate entity

- the parent company employs consolidated worksheet entries to help prepare a set of consolidated financial statements. - the acquiring firm does not physically record the acquired firm's separate assets and liabilities.

Which of the following best describes control through majority voting stock ownership?

By exercising majority voting power, one firm can dictate the operating and financing activities of another firm.

What is the primary vehicle that business firms employ to exercise control over other business entities?

Control through majority voting stock ownership.

What is the measurement attribute employed in determining the consideration transferred in a business combination?

Fair value.

A business combination occurs and the acquired firm is legally dissolved. If the consideration transferred by the acquiring firm equals the collective fair value of the acquired firm's net identifiable asset, then

Neither goodwill nor a bargain purchase gain is recorded.

Why are consolidated financial statements prepared when a business combination of two or more companies creates a single economic entity?

There is a presumption that consolidated financial statements are more meaningful than separate financial statements.

True or false: Majority stock ownership does not always indicates an exclusive ability for one entity to exercise control over another.

True

Attorney fees paid for service provided related to a business combination are accounted for as

a current period expense.

Costs incurred to register and issue securities in connection with a business combination are recorded as

a reduction of additional paid-in capital.

The large amount of _____ recognized in the Salesforce.com acquisition of MuleSoft suggests substantial synergies are expected from the combination.

goodwill

When the consideration transferred in a 100% acquisition exceeds the total net fair value of the identifiable net assets received, the excess is recognized as

goodwill as an unidentifiable asset.

Consolidation entry S is a worksheet entry that

has no effect on the individual financial records of neither the parent nor the subsidiary.

Which of the following is an attribute of a statutory merger?

One company directly acquires another company's assets and assumes its liabilities.

Why is the in-process research and development (IPR&D) of an acquired subsidiary recognized as an asset?

The IPR&D has an acquisition-date fair value.

When an acquired firm's legal status is dissolved in a business combination, the acquiring firm's entry to record the combination includes

- the individual fair values of the assets acquired and liabilities assumed. - the fair value of the consideration transferred.

A single entity can become more profitable than the separate parent and subsidiary had been in the past through which of the following?

- The ability to attract financing at lower interest rates from greater negotiating power. - Larger firms can become more efficient at delivering goods and services. - Diversification of business risk.

Which of the following describes a fair value exchange price in an orderly transaction between market participants?

- The price that would be paid for transferring a liability. - The price that would be received from selling an asset.

Before preparation of a consolidated worksheet, an acquisition-date fair value allocation schedule is typically prepared. What is the purpose of the acquisition-date fair value allocation schedule?

- The schedule allocates the consideration transferred among the individual assets acquired and liabilities assumed in the business combination. - The schedule provides supporting calculations that identify fair value adjustments required in consolidation. - The schedule computes the allocated value assigned to goodwill or a bargain purchase gain.

Why are consolidated financial statements prepared following a business combination?

- There is a presumption that consolidated statements are more meaningful than separate company financial statements. - When one business entity controls the others in a business combination, a single reporting entity exists. - It is presumed that consolidated statements are necessary for a fair presentation.

When may majority stock ownership fail to provide control over a business entity?

- When noncontrolling participation rights are powerful enough to prevent the majority owners from exercising control. - When the acquiring company has only an indirect ability to determine the direction of management and policies through its majority voting privileges.

Size and scale are important drivers of business competitiveness because

- if firms can become more efficient in delivering goods and services, they may gain a competitive advantage and become more profitable. - increases in scale can produce larger profits from enhanced sales volume despite smaller profit margins.

In-process research and development acquired in a business combination is

- recognized as an indefinite life intangible asset. - tested periodically for impairment. - recognized at its acquisition-date fair value.

When the collective fair value of the net identified assets acquired and liabilities assumed exceeds the consideration transferred,

- the fair value of the net identifiable assets becomes the valuation basis for the acquired firm. - the acquirer recognizes a gain on bargain purchase.

Even though measurement of an intangible asset (e.g., unpatented technology or customer relationships) may lack precision, recognition of the identified intangible may result in greater

faithful representation.

In its acquisition of Whole Foods Market, Amazon cited "expected improvements in technology performance and functionality" as a source of _____ recognized in the combination.

goodwill

Among the items recognized by Tesla from the Grohmann acquisition included _____ assets such as developed technology, software, customer relations, and the Grohmann trade name.

intangible

Which of the following were cited as motivations for Amazon to acquire Whole Foods Market?

- Amazon effectively expanded its distribution network to include hundreds of Whole Foods stores. - Amazon gained a competitive edge against other on-line grocery distributors.

Which of the following are included in the first two columns of the consolidated worksheet as of the acquisition date?

- An investment account in the parent's financial statement column. - Any contingent performance liability that may have accompanied the combination.

Which of the following qualify as elements of consideration transferred and thus recorded in a business combination?

- Common stock issued by the acquirer. - Additional paid-in capital related to common stock issued by the acquirer. -Cash paid by the acquirer.

Which of the following are considered potential advantages to growth through a business combination?

- Cost savings through elimination of duplicate facilities and staff. - Economies of scale allowing greater efficiency and negotiating power. - Quick entry for new and existing products into domestic and foreign markets.

Which of the following are typical costs that accompany a business combination?

- Costs incurred to register and issue securities. - Secretarial and management time allocated to acquisition activity. - Professional service fees for attorneys and accountants.

The FASB and IASB both have published standards of accounting for business combinations. Which of the following describes the relation between the two sets of business combination accounting standards?

- Differences exist across the two standards in accounting for a noncontrolling interest. - The two sets of standard are identical in most respects. - The convergence of the two standards was designed to enhance cross-border comparability of consolidated financial statements.

Which of the following represent reasons that Salesforce.com acquired MuleSoft?

- MuleSoft's cloud platform will help to integrate and connect clients applications, data, and devices. - MuleSoft had capabilities to help clients incorporate legacy information technology with Salesforce.

Which of the following is a characteristic of the accounting procedure for a statutory merger or a statutory consolidation?

- On the combination date, the surviving company records on its books the assets and liabilities from each of the dissolving companies. - Once the dissolved companies' account balances are transferred to the surviving company's records, the records of the dissolved companies are closed. - Because the acquired firm's accounts are combined on the surviving company's records, no further consolidation procedures are needed.

Which of the following are criteria that are essential to recognizing an intangible asset acquired in a business combination?

- The intangible asset arises from a contractual or other legal right. - The intangible asset is capable of being sold or otherwise separated from the acquired enterprise.

Which of the following may be included in the calculation of the consideration transferred for a newly acquired firm?

- The liabilities incurred by the acquirer to former owners of the acquiree. - Sum of the acquisition-date fair values of the assets transferred by the acquirer. - The equity interests issued by the acquirer in the combination.

In a business combination when each combining firm maintains its separate incorporation

- consolidation worksheets are employed to generate financial reports for the combined economic entity. - each company maintains independent record keeping. - the acquiring firm utilizes an investment account to record the acquisition.

When a business combination is accompanied by contingent consideration to be paid by the parent upon completion of specified performance metrics, the journal entry to record the combination includes

- the fair value of the contingent consideration in the investment account as part of the overall consideration transferred. - a liability for the fair value of the contingent consideration.

The recording of goodwill in a business combination may recognize that

- the quality of the acquired firm's personnel may provide additional profitability. - the assets of the combining firms may act in concert to produce an expectation of enhanced profitability. - the acquiring firm has transferred consideration in excess of the acquired net identifiable assets.

Which of the following best describes the accounting procedure for a statutory merger or statutory consolidation?

The surviving company records the assets acquired and liabilities assumed in the merger on its financial records.

What accounting procedures are appropriate when an acquired firm is dissolved immediately following a business combination?

The surviving company records the dissolved company's assets and liabilities on its financial records.

True or false: Acquisition-date fair values are used to measure assets acquired and liabilities assumed across all business combinations.

True

Which of the following terms is best described by the integration of successive stages of production and distribution of products?

Vertical integration.

Contingent consideration is

a contractual provision to pay additional amounts to former owners of a business based upon achievements of future performance measures.

Consolidated financial statements are typically prepared when one company has

a controlling financial interest over another company.

The second column of figures on the consolidated worksheet includes the subsidiary's assets and liabilities at their _____ values.

book

The acquisition-date fair value allocation schedule helps to prepare the worksheet entries to adjust the subsidiary's assets from book value to _____ value.

fair

The measurement attribute used by an acquirer to recognize an acquired firm's assets and liabilities is _____ _____.

fair value

For a 100% business acquisition where dissolution of the acquired firm does not occur, the parent company records on its books

the fair value of the acquired firm in an investment account.

Consolidation entry S brings subsidiary stockholders' equity account balances to zero because

they represent ownership interests held by the parent and thus are not outstanding equity.

The goal of the FASB/IASB joint project on accounting for business combinations was to

to develop a standard that includes a common set of principles to produce decision-useful information and minimizing exceptions to those principles.

Consolidated financial statements typically represent which of the following?

A number of separate business companies tied together through common control.

How does the acquisition method treat contingent consideration when present in a business combination

As a negotiated component of the fair value of the consideration transferred.

True or false: In a business combination, the acquiring firm increases its retained earning for the amount of the acquisition-date subsidiary retained earnings.

False

True or false: Pre-existing goodwill, when present on an acquired firm's separate balance sheet, is considered an identifiable intangible asset

False

True or false: When an acquired firm is legally dissolved upon acquisition, the acquirer will record on its books all of the former firm's assets and liabilities at their former book values.

False

When one business entity has a controlling financial interest in another entity, why are consolidated financial statements prepared for external reporting?

It is presumed that consolidated financial statements are necessary for a fair presentation.

Which of the following best describes a statutory merger?

One company acquires the net assets of another company and the acquired company then is dissolved as a separate legal entity.

Which of the following best describes a situation where one company acquires the net assets of another firm and the acquired firm then is dissolved as a separate legal entity?

Statutory merger.

What is the accounting treatment of the acquired subsidiary's equity accounts in a business combination?

Subsidiary equity accounts are excluded from the accounting for the business combination.

Which of the following is a worksheet effect of consolidation entry S?

Subsidiary stockholders' equity account balances are brought to zero in consolidation.