LS Ch.2

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

fair value

What is the primary measurement attribute employed in accounting for an acquired company in a newly formed business combination?

fair value

Even though measurement of an intangible asset may lack precision, recognition of the identified intangible may result in greater

faithful representation

Wotf is typically employed to consolidate the financial reports of separately incorporated firms that are part of a business combination?

financial statement information of each firm in the business combination is used to prepare consolidated financial statements

In its acquisition of WhatsApp, Facebook cited "expected synergies in future growth" as a source of ____________ as an asset recognized in 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

The acquisition method requires the recognition and measurement of wotf?

goodwill or a gain from bargain purchase; any existing non controlling interest; the acquiree's identified assets and liabilities assumed by the acquirer

Consolidation entry S is a worksheet entry that

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

Size and scale are important drivers of business competitiveness because

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

WOTF best describes a statutory merger?

one company acquired the net assets of another company the acquired company then is dissolved as a separate legal entity

Wotf intangibles are often recognized in a business combination?

patents; franchise agreements; customer relationships

For what types of assets is the cost approach often used to estimate fair values?

property, plant, and equipment

Wotf are legacy methods of accounting for business combinations?

purchase method; pooling interests method

WOTF describes a fair value exchange price in an orderly transaction between market participants?

the price that would be received from selling an asset; the price that would be paid for transferring a liability

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

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

a current period expense

The acquisition method of accounting for business combinations embraces

a fair value measurement attribute for newly acquired businesses

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

a gain on bargain purchase

What is a business combination?

a set of separate business organizations under the control of a single company

Wotf occurs in a business combination?

a single financial reporting entity is created; a single set of financial statements subsequently is prepared for all the firms under common control; one company gains control over the assets and operations of another company

Wotf represent reasons why AT&T acquired DirecTV?

acquiring DirecTV provides AT&T access to customers in the Latin American market; the acquisition allows AT&T to expand its offerings to consumers

market estimates of fair value are most often appropriate for which categories of assets acquired in a business combination?

actively-traded securities

The purpose of consolidation entry A is to

adjust the subsidiary asset and liability accounts to their acquisition-date fair value

To complete a consolidation acquisition-date worksheet

all account balances, after adjusting for consolidation entries, are extended across to the consolidated total column; the "investment in subsidiary" account balance is eliminated entirely in consolidation

WOTF 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 and any contingent performance liability that may have accompanied the combination

Why do some criticize the recognition of bargain purchase gains in business combinations?

an unrealized gain is recognized despite the lack of any selling activity by the acquirer

Consolidated worksheet entries provide adjustments and eliminations that

appear solely on worksheets in order to derive consolidated financial statements

Intangible assets

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

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

When a company acquires a majority, but less than 100% of the voting stock of another company,

each company maintains its separate legal existence

How does one firm usually exercise control over another firm?

by ownership of a majority voting stock interest

Preexisting goodwill on a newly acquired subsidiary's books is

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

WOTF qualify as elements of consideration transferred and thus recorded in a business combination?

common stock issued by the acquirer; cash paid by the acquirer; additional paid-in capital related to common stock issued by the acquirer

When a new entity is created to receive all the assets and liabilities (or capital stock) of two previous firms, this combination is referred to as a statutory

consolidation

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

Wotf best describes control through ownership rights to variable interests in another firm?

control is exercised through contractual arrangements that entitle a primary beneficiary of another firm to residual profit rights

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

control through majority voting stock ownership

WOTF 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

When a company acquires another company in a fundamentally different industry, this strategy is known as

diversification

When a company acquires more than 50% of the voting stock of another firm, and the acquired firm continues its separate legal existence, the acquirer records the stock acquisition in an ___________ account.

investment

Goodwill recognized in a business combination

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

When a company acquires all of the assets and liabilities of another firm and the acquired firm is dissolved as separate entity, this combination is referred to as a statutory ___________.

merger

In financial reporting for a bargain purchase business combination

no goodwill is reported as a result of the business combination; the collective fair value of the identifiable net assets becomes the acquired firm's valuation basis; a gain is reported on the acquiring firm's income statement

WOTF are considered potential advantages to growth through a business combination?

quick entry for new and existing products into domestic and foreign markets; cost savings through elimination of duplicate facilities and staff; economies of scale allowing greater efficiency and negotiating power

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

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

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

In consolidation entry S, the "S" refers to

subsidiary stockholders; equity

When a business combination results in a bargain purchase gain, wotf best describes the valuation basis of the acquired firm?

the collective fair value of the net identifiable assets acquired

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

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

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

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 and the fair value of the consideration transferred

WOTF 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

WOTF 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; the equity interests issued by the acquirer in the combination; sum of the acquisition-date fair values of the assets transferred by the acquirer

When the fair value of a 100% acquired subsidiary's net identifiable assets exceeds the consideration transferred,

the parent records a bargain purchase gain on its books; a bargain purchase gain is reported in the consolidated income statement in the period of the acquisition; the identifiable assets of the acquired subsidiary are reported in the acquisition-date consolidated balance sheet at fair value

The recording of goodwill in a business combination may recognize that

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

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 computes the allocated value assigned to goodwill or a bargain purchase gain; 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 FASB and IASB both have published standards of accounting for business combinations. Wotf describes the relation between the two sets of business combination accounting standards?

the two sets of standard are identical in most respects; differences exist across the two standards in accounting for a non controlling interest; the convergence of the two standards was designed to enhance cross-border comparability of consolidated financial statements

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

WOTF best describes a statutory consolidation?

two or more companies transfer their assets (and liabilities) or capital stock to a newly formed entity

WOTF is an attribute of a statutory consolidation?

two or more existing companies are united under the ownership of a newly created company

When a company establishes contractual control (absent voting stock control) over another company, control is considered to be established through ownership of _________ interests.

variable

Wotf best describes the integration of successive stages of production and distribution of product?

vertical integration

Why are consolidated financial statements prepared following a business combination?

when one business entity controls the others in a business combination, a single reporting entity exists; there is a presumption that consolidated statements are more meaningful than separate company financial statements; 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 the acquiring company has only an indirect ability to determine the direction of management and policies through its majority voting privileges; non controlling participation rights are powerful enough to prevent the majority owners from exercising control