M&A Final Exam
Sun acquired 100% of the outstanding shares of Piston in a non taxable transaction. On that date, the book value of Piston's recognized assets and liabilities were equal to their fair values. However, Piston had an unrecognized patent with a zero tax basis, a remaining life of 10 years, and a fair value of $50,000. Piston reported after-tax net income of $25,000 and paid dividends of $10,000. Assuming a tax rate of 40%, the amount of equity income recorded by Sun was:
$22,000
Kane, Inc. acquired 100% of Towes Enterprises on January 5, 2014. During 2014, Kane sold Toews for $375,000 goods which had cost $255,000. Toews still owned 10% of the goods at the end of the year. In 2015, Kane sold goods with a cost of $480,000 to Toews for $600,000, and the buyer still owned 15% of the goods at year-end. For 2015, cost of goods sold was $3,240,000 for Kane and $720,000 for Toews. What was consolidated cost of goods sold for 2015?
$3,366,000
An acquiring company issues 600,000 shares of $2.50 par value common stock to acquire 100% of the voting common stock of an investee company in a transaction that qualifies as a business combination. The fair value of the acquiring company's common stock is $12.50 per share. Direct legal and consulting fees incurred pursuant to the combination are $175,000. Direct registration and issuance costs for the acquiring company's common stock are $60,000. The transaction did not result in goodwill recognition or bargain gain recognition. What is the total amount of net assets recognized as a result of this business combination?
$7,500,000
RaylordCo. Acquired 100% of Gand Inc. on January 5, 2013. During 2013, Raylord sold goods to Gand for $150,000 that cost Raymond $112,500. Gand still owned 40% of the goods at the end of the year. Cost of goods sold was $675,000 for Raylord and $400,000 for Gand. What was consolidated cost of good sold?
$940,000
On January 1, Wolf purchased 15% of Fieldman's common stock. On August 1, it purchased another 30% of Fieldman's common stock. During October, Fieldman's declared and paid a cash dividend on its common stock. How much income from Fieldman's should Wolf report on its income statement?
15% of Fieldman's income for January 1 to July 31, plus 45% of Fieldman's income for the remainder of the year
Which of the following statements best describes how goodwill is measured?
Acquisition price - fair value of net tangible assets - fair value of identifiable intangible assets = goodwill
If Cloggins Co. sold equipment with a six-year life at a gain of $12,000 to Prosey Enterprises, its subsidiary, in the consolidated statements, the gain will:
Be recognized over the six-year period
If a seller makes an inter-company sale of equipment at a gain, retained earnings is reduced in the consolidation entries. Why does the amount of the adjustment change from year to year?
Because a portion of the gain is realized each year
Why does the intercompany sale of a building require subsequent adjustment to depreciation expense?
Because immediately after the sale, the balance in accumulated depreciation on the buyer's books is zero
GAAP identifies three approaches to assigning values to assets acquired in a business combination. Which of the following is not a recognized valuation technique for allocating the acquisition price to specific assets?
Book value approach
Richard uses the equity method to account for its investment in Plains on January 1. On the date of acquisition, Plains' land and buildings were undervalued on its balance sheet. How do these excesses of fair values over book values affect Richard's equity income from Plains?
Building decrease, Land no effect
On December 31, 2016, Paxton Company issued 20,000 shares of its common stock with a fair value of $20 per share for all of the outstanding common shares of Sonoma Company. Stock issuance costs of $2,500 and direct costs of $5,000 were paid. What amount was debited to Equity Investment at date of acquisition?
400,000
On January 1, 2016, Company A acquired 100% of the voting common stock of Company B from Company B's shareholders. Prior to the transaction, Company A had 11,440 shares of voting common stock outstanding and Company B had 5,000 shares of voting common stock outstanding. Which of the following terms or conditions of the transaction is an indicator that COmpany B is the acquiring entity for accounting purposes?
Company A issued 14,560 new shares of Company A common stock to execute the transaction
If unrealized inter-company profits in ending inventory exceed unrealized inter-company profits in beginning inventory, what will be the effect of the consolidation entries to eliminate unrealized inter-company inventory profits?
Consolidated cost of goods sold will be increased
If the accountant fails to record on the consolidation worksheet the amortization related to an undervalued truck:
Consolidated net income will be overstated
If the accountant fails to record, on the consolidation worksheet, amortization related to an undervalued truck:
Consolidated net income will be overstated.
Company A, a manufacturing conglomerate, owns 85% of the voting interests of Company B, a financial services company. Company B owns 65% of the voting interests of Company C, an automobile leasing company. In Company A's consolidated F/S, should consolidation accounting or equity method accounting be used for Company B and Company C?
Consolidation used for both Company B and Company C
All of the following are necessary to distinguish a business combination from a simple asset acquisition except:
Correct answer: The entity has begun to generate revenues. Other options: The entity has initiated planned activities, the entity has human and material resources, as well as intellectual property, the entity will be able to obtain access to customers.
Sun Co. is a wholly owned subsidiary of Star CFO. Both companies have separate general ledgers, and prepare separate F/S. Sun requires stand-alone F/S. Which of the following statements is correct?
Correct: Consolidated F/S SHould only be prepared by Star and not by Sun. Incorrect: Consolidated F/S should be prepared for both Star and Sun, After consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting, after consolidation, the accounts of both Star and Sun should be combined together into one general-ledger accounting system for future ease in reporting.
Under the equity method, dividends declared by a subsidiary are accounted for by the parent as:
Decrease in equity investment
In the years subsequent to acquisition of a subsidiary, the equity investment accounted for under the equity method includes the following components except:
Dividends paid by the investor. It does include investee's reported income, amortization, and dividends paid by the investee.
Which of the following is the correct entry on a parent's books to recognize amortization of a previously unrecorded patent acquired in a business combination?
Dr. Equity Income, Cr. Equity Investment
Investor owns 40% of investee and applies the equity method. In 2016, investor sells merchandise costing $210,000 to investee for $280,000. Investee's ending inventory includes $60,000 purchased from investor. Which of the following is the correct equity method entry to defer the unrealized gross profit?
Dr. Equity income 6,000 Cr. Equity investment 6,000
Identify the provision that is not typically contained in a partnership agreement
Each partner is only able for his or her proportionate share of the partnership liabilities based on their relative share of total partnership capital
Which of the following accounting treatments is used when an investor can exercise significant influence over the decisions of the investee?
Equity method
Goodwill is required to be tested for impairment
Every year
Acquisition-related costs incurred by the investor for services provided by outside accountants, as well as the investor's employees, are:
Expended immediately
Acquisition agreements sometimes include a provision requiring an increase in the cash price contingent upon investee's profits exceeding a specified level within a certain time period. Regarding the contingent consideration, acquisition accounting requires at acquisition date:
Recognition of a liability at its fair value, resulting in an increase in goodwill
How do stock issuance costs affect the investor's balance sheet?
Reduce additional paid-in-capital
How do direct costs of the combination affect the investor's balance sheet?
Reduce retained earnings
Allocation of goodwill impairment losses to the parent and the noncontrolling interests should be based on:
Relative interests of parent and noncontrolling interests in the carrying value of goodwill
During 2015, Major Company sold merchandise to its 100%-owned subsidiary, Minor Company. During that year, all of the merchandise was resold to outside customers. If no consolidation entries are made, which of the following will be incorrect in consolidated statements?
Sales, cost of goods sold
Bosch Co. received a cash dividend from a common stock investment. Should Bosch report an increase in the investment account if its accounts for the investment under the fair value method or the equity method?
Fair value method, NO; Equity method, NO
Bosch Co. received a cash dividend from a common stock investment. Should Bosch report a decrease in the investment account if it accounts for the investment under the fair value method or the equity method?
Fair value method, NO; Equity method, YES
Assume an investor company purchased a controlling financial interest in 100% of the outstanding voting common stock of an investee. Which of the following statements is false about the investor's pre-consolidation bookkeeping and/or the post-consolidation financial reporting in the investor's published F/S?
False: The investor company can make an irrevocable election to report the equity investment at fair value, even if the investor has control over the investee. True: if the investor applies equity method, the balance of the pre-consolidation investment in investee account will equal 100% of the investee's SE, adjusted for 100% of the unamortized differences between the investee's net assets fair values and book values, in its pre-consolidation accounting records, the investor can use any investment-accounting method it chooses, in its published F/S the investor must consolidate the investee
How much inter-company inventory profit should be eliminated from ending inventory in the consolidation process?
Gross profit on goods remaining in buyer's inventory at year-end
Company A purchased from Company B a set of net assets. Which of the following conditions is not necessary for the transaction to qualify as a business combination?
Has proven base of customers that has a history of purchasing the outputs
Often, the investor or investee will adopt a restructuring plan to achieve certain synergies from the acquisition. Certain restructuring costs are required for implementation of such a plan. Which of the following statements correctly describes the GAAP treatment of such costs?
If a restructuring plan is not already in place at the date of acquisition, the liability and related expense must be recognized after the acquisition date.
Often, the investor or investee will adopt a restructuring plan to achieve certain synergies from the acquisition. Certain restructuring costs are required for implementation of such a plan. Which of the following statements correctly describes the GAAP treatment of such costs?
If a restructuring plan is not already in place, the liability and related expense must be recognized subsequent to the acquisition.
Assume an investor company purchased 20% of the outstanding voting common stock of an investee. Which of the following statements is false about the financial reporting of the investment in the investor's published F/S?
If the investor company has no influence over the investee, changes in the market value of the investment in the investee are only recognized in other comprehensive income.
The main difference between a "basket purchase" and a net asset acquisition is that:
In a net asset acquisition, all assets are valued at full fair value regardless of purchase price; while in a "basket purchase" the purchase price is allocated to the various assets.
Which of the following statements best describes the relationship between a parent and its consolidated subsidiary?
In legal form they are separate, but in economic substance they are one.
Transaction costs in a basket purchase transaction are
Included in the amount allocated to the net assets
In a business combination, the fair values of the acquiree's in-process tangible research and development projects are:
Included in the annual goodwill impairment tests
In-process intangible research and development costs incurred in a business combination are
Included in the annual goodwill impairment tests
When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
Income from subsidiary is recognized from date of acquisition to year-end.
One of the effects of eliminating intercompany profit from ending inventory is to
Increase cost of goods sold
One of the effects of eliminating intercompany profit from ending inventory is to:
Increase cost of goods sold
An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the equity investment account of the investor is:
Increased by its share of the earnings of the investee and is decreased by its share of the investee's losses.
Grand Corporation uses the equity method of accounting for its investment in a 30%-owned investee that earned $48,000 and paid $12,000 in dividends. As a result, Grand Corporation made the following entries: Dr. Equity Investment 14,400, Cr. Equity Income 14,400. Dr. Cash 3,600, Cr. Dividend Revenue 3,600. What effect will these entries have on Grand Corporation's balance sheet?
Investment overstated, retained earnings overstated.
Consolidated net income always equal the combined revenues of the parent and subsidiary minus the combined expenses of the two companies:
Minus net debits in the income statement consolidation entries
How do the investee's revenues and expenses during the year affect the consolidated totals?
No effect
If an investor sells merchandise to an investee and the investee resells all of the items to outside parties in the same period, what equity method entry is required?
No equity method entry is required since the gross profit is realized
In the case of an equity method investment for which there is a change in market value:
No gains are recognized in income until the investment is sold
Which of the following statements is not correct regarding the recognition of intangible assets in a business combination?
Not correct: The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet. Correct: Intangible assets arising from contractual or legal rights are recognized separately from goodwill, intangibles that can be separated from the business and sold, rented or licensed are recognized separately from goodwill, separately recognized intangibles are identified says either limited life or indefinite life intangibles.
In the case of an inter-company sale of land, a consolidation entry is prepared in the period or periods:
Of both the sale of the land and the following periods
If foster company acquires all of the common stock of bava, inc. Where will the entries necessary to arrive at consolidated balances appear?
On a worksheet only.
Which of the following statements is false regarding the formation of a partnership?
Partners may only contribute cash to the partnership which, then, purchases all of its assets
The consolidated statement of cash flows is:
Prepared from the consolidated comparative balance sheets and income statement.
A bargain purchase occurs when:
The purchase price of a subsidiary is less than the fair value of the investee's identified net assets.
An investor who owns 30% of the common stock of an investee is most likely to exercise significant influence requiring use of the equity method when:
The second largest investor owns only 1% of the investee's outstanding stock
Whether inter-company inventory sales are upstream or downstream has no effect on consolidation procedures when:
The subsidiary is 100% owned
What an inter-company gain on sale of land is finally realized by sale of the land to an outsider, the consolidated gain on sale will equal
The sum of the recorded gain on sale to the outsider and the deferred gain
If the fair value of a reporting unit with goodwill falls below its book value, which of the following statements is true?
There is a potential impairment loss for the amount that the book value of the goodwill exceeds its implied fair value.
In a business combination, which of the following is true about intangible assets that are recognized separate fro goodwill?
They are generally measured at fair value at the date of acquisition.
WHich of the following is true regarding planned restructuring costs at the acquisition date of a business?
They are recorded only if they are a pre-existing liability of the investee.
What is a purpose of the consolidation entry regarding the inter-company sale of land?
To make consolidated net income the same as it would have been had the sale not occurred
Stock issuance costs are:
Treated as a reduction in additional paid-in capital.
In comparing the equity method to consolidation, which of the following statements is true:
True: consolidated after-tax profit margin is less than the investor's after-tax profit margin. False: consolidated liabilities are less than the investor's liabilities, consolidated after-tax profit margin is greater than the investor's after-tax profit margin, consolidated after-tax profit margin is equal to the investor's after-tax profit margin.
Intercompany gains on sale of land are deferred
Until the land is sold
Which of the following does not indicate an investor company's ability to significantly influence an investee?
The investor owns 30% while another investor owns 70%.
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?
The investor owns 40% of the investee's stock and the rest is owned by the investee's founder.
Roxanne, Inc. sells a machine to GraniteCompany, its subsidiary at a $10,000 gain. The machine was classified as property, plant and equipment on Roxanne's books and also will be classified as such on Granite's books. The consolidation entry to eliminate the intercompany transaction at year end will not include:
A credit to gain on sale of equipment
The consolidation entry to realize a loss from an inter-company sale of a building would include:
A debit to depreciation expense
In the case of an intercompany sale of land, which of the following is not a true statement
A gain or loss should not be recorded on the seller's books
Which of the following is a limitation of consolidated financial statements?
All of the following are true: the investor and investee may be in different industries, making comparisons difficult, consolidated statements can mask the results of poorly performing subsidiaries, segment disclosures are often too summarized for effective analysis
Which of the following are typical characteristics of special entities?
All of the following: it is legally distinct from the sponsoring company and may be bankruptcy remote, it is only allowed to engage in a highly restricted set of activities, when used in a securitization, cash flows from the assets held by the SPE are used by the SPE to repay the securities holders
Which of the following is a limitation of consolidated financial statements?
All of the following: the investor and investee may be in different industries, making comparisons difficult, consolidated statements can mask the results of poorly performing subsidiaries, segment disclosures are often too summarized for effective analysis
Accounting standards require that a portion of the cost of an acquired company be allocated to investee liabilities. However, often in the case of pre-existing contingent liabilities, the amounts may be unknown at the acquisition date. What are the general financial reporting requirements for the consolidated statements at date of acquisition?
All the following statements are true: if the fair value of a pre-existing contingent liability is unknown, the liability should not be recognized, a contingent liability would not be recognized unless the loss was "probable", contingencies meeting the "possible" threshold would be disclosed, not accrued
When preparing a consolidated balance sheet, the noncontrolling interest amount must be presented:
As a part of stockholders' equity.
If a parent uses the equity method in years subsequent to the acquisition year, the amount debited to retained earnings in the consolidation entries is the subsidiary's retained earnings balance
At the beginning of the current year
If a parent uses the equity method in years subsequent to the acquisition year, the amount debited to retained earnings in the consolidation entries is the subsidiary's retained earnings balance:
At the beginning of the current year
When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "sigificant influence" over the investee
If impaired goodwill subsequently regains its value
The loss recovery cannot be recognized
If impaired goodwill subsequently regains its value:
The loss recovery cannot be recognized
If impaired goodwill subsequently regains its value:
The loss recovery cannot be recognized.
The net cash paid for an acquisition is classified on the statement of cash flows as:
Supplementary information.
Which of the following statements is incorrect regarding the recognition of intangible assets in a business combination?
The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet.
Which of the following statements is not true when the parent uses a method other than the equity method?
The consolidated statements will be different
All of the following are necessary to distinguish a business combination from a simple asset acquisition except:
The entity has begun to generate revenues.
If a 30% acquisition is made at book value, what will be the relationship between the equity investment account and the investee's stockholders' equity?
The equity investment account balance wil equal 30% of investee's stockholders' equity throughout the life of the investment
If a 30% acquisition is made at a price above book value due to an undervalued patent, what will the relationship between the equity investment account and the investee's stockholders' equity?
The equity investment account balance will equal 30% of investee's stockholders' equity at date of acquisition, plus the unamortized cost of the patent.
Under what circumstances might consolidation of a majority owned investee not be appropriate?
The investee is in bankruptcy.
Under the equity ethos, when the equity investment balance is reduced to zero as investee incurs losses:
The investment remains at zero until profits have eliminated the unrealized loss
When the equity investment balance is reduced to zero as investee incurs losses:
The investment remains at zero until profits have eliminated the unrealized loss