Chapter 2

Income Approach

Techniques include present value, option-pricing models, and "the multiperiod excess earnings method, which is used to measure the fair value of certain intangible assets."

Cost Approach

Valuation technique "based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost).

Recognition Principle

"As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree" (FASB ASC 805-20-25-1)

Measurement Principle

"The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values" (FASB ASC 805-20-30-1)

Maxwell acquires 100 percent of the outstanding voting shares of Daisy Company on January 1, 2016. To obtain these shares, Maxwell pays $200,000 cash and issues 6,000 shares of $5 par value common stock on this date. Maxwell's stock had a fair value of $20 per share. Maxwell also pays an additional $4,000 in stock issuance costs. At date of acquisition, the book values and fair values of Daisy's net assets amounted to $230,000 and $265,000, respectively. What amount was reported for goodwill as a result of this acquisition? Select one: A. $55,000 B. $90,000 C. $-0- D. $51,000

A. $55,000

Which of the following statements best describes the relationship between a parent and its consolidated subsidiary? Select one: A. In legal form they are separate, but in economic substance they are one. B. In legal form and economic substance they are one. C. In legal form they are one, but in economic substance they are separate. D. In legal form and economic substance they are separate.

A. In legal form they are separate, but in economic substance they are one.

Which of the following statements is incorrect regarding the recognition of intangible assets in a business combination? Select one: A. The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet. B. Intangibles that can be separated from the business and sold, rented or licensed are recognized separately from goodwill. C. Separately recognized intangibles are identified as either limited life or indefinite life intangibles. D. Intangible assets arising from contractual or legal rights are recognized separately from goodwill.

A. The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet.

Fey Corporation issues 40,000 shares of its common stock for all of the outstanding shares of Werthman, Inc. Fey's shares have a par value of $5 and a market value of $24 per share. What is the increase in consolidated additional paid-in capital resulting from the combination? Select one: A. $-0- B. $760,000 C. $960,000 D. $560,000

B. $760,000

When an investor is deemed to have "control" over an investee, GAAP requires presentation of consolidated financial statements. Which of the following would not be considered an indicator of control? Select one: A. Instead of owning stock, a company licenses technology to another company in an agreement allowing the licensor to appoint a majority of the licensee's board of directors. B. The investor owns 40% of the investee's stock and the rest is owned by the investee's founder. C. The investor owns 40% of the investee's stock and the rest is owned by a large number of small investors. D. The investor has majority interest in the investee.

B. The investor owns 40% of the investee's stock and the rest is owned by the investee's founder.

On January 1, 2017, Aiello Company purchased 100% of the common stock Uline Industries for $450,000. On that date, Uline had common stock of $90,000 and retained earnings of $280,000. Equipment and land were each undervalued by $25,000 on Uline's books. There was a $10,000 overvaluation of Bonds Payable, as well a $20,000 undervaluation of inventory. What is the amount of goodwill recorded in connection with this combination? Select one: A. $80,000 B. $25,000 C. $-0- D. $20,000

C. $-0-

Ryan Company had common stock of $140,000 and retained earnings of $287,000. Logan, Inc. had common stock of $280,000 and retained earnings of $375,000. On January 1, 2017, Logan issued 42,000 shares of common stock with a $1 par value and a $13 fair value for all of Ryan Company's outstanding common stock. Immediately after the combination, what were the consolidated net assets? Select one: A. $ 973,000 B. $ 655,000 C. $1,201,000 D. $1,082,000

C. $1,201,000

Which of the following statements best describes how goodwill is measured? Select one: A. Acquisition price - fair value of net tangible assets = goodwill B. Acquisition price - goodwill = fair value of net tangible assets C. Acquisition price - fair value of net tangible assets - fair value of identifiable intangible assets = goodwill D. Acquisition price - book value of net assets = goodwill

C. Acquisition price - fair value of net tangible assets - fair value of identifiable intangible assets = goodwill

Acquisition-related costs incurred by the investor for services provided by outside accountants, as well as the investor's employees, are Select one: A. capitalized, subject to impairment testing, but not amortization. B. capitalized, subject to both amortization and impairment testing. C. expensed immediately. D. expensed if indirect, but capitalized if direct.

C. expensed immediately.

Which of the following statements is true regarding the acquisition method of accounting for a business combination? Select one: A. Assets of the acquired company are recorded at fair value, but only if the acquisition cost equals or exceeds fair value of the subsidiary's net assets. B. Consulting costs related to the combination reduce additional paid-in capital. C. Assets of the acquired company are recorded at book values. D. Assets of the acquired company are recorded at fair values regardless of the acquisition cost.

D. Assets of the acquired company are recorded at fair values regardless of the acquisition cost

AAP (Acquisition Accounting Premium)

Fair value of subsidiary account = Subsidiary BV of account + AAP of account.

Market Approach

Includes the use of market multiples (and ranges of multiples) derived from a set of comparables.

Fair Value Hierarchy

Level 1: Quoted prices in active markets Level 2: Inputs other than quoted prices are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs

Valuation Techniques

Market Approach, Income Approach, Cost Approach.