Advance Accounting Ch1 - 3

Goodwill recognized in a business combination must be allocated among a firm's identified reporting units. If the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true? a) No goodwill impairment loss is recognized unless the implied value for goodwill exceeds its carrying amount. b) A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value. c) A goodwill impairment loss is recognized for the excess of a reporting unit's carrying amount over its fair value, not to exceed the carrying amount of goodwill. d) The reporting unit reduces the values assigned to its long-term assets (including any unrecognized intangibles) to reflect its fair value.

B

An acquired firm's financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary? a) The parent tests the preexisting goodwill for impairment before recording the goodwill as part of the acquisition. b) The parent includes the preexisting goodwill as an identified intangible asset acquired. c) The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed. d) Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value.

C

Hawkins Company has owned 10 percent of Larker, Inc., for the past several years. This ownership did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an additional 30 percent of Larker and now will use the equity method. How will the investor report change? a) A cumulative effect of an accounting change is shown in the current income statement. b) A retrospective adjustment is made to restate all prior years presented using the equity method. c)No change is recorded; the equity method is used from the date of the new acquisition. d) Hawkins will report the change as a component of accumulated other comprehensive income.

C

When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition? a) The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met. b) The fair value of the contingent consideration is expensed immediately at acquisition date. c) The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized. d) The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.

C

What is a statutory merger? a) A merger approved by the Securities and Exchange Commission. b) An acquisition involving the purchase of both stock and assets. c) A takeover completed within one year of the initial tender offer. d) A business combination in which only one company continues to exist as a legal entity.

D

When an equity method investment account is reduced to a zero balance a) The investor should establish a negative investment account balance for any future losses reported by the investee. b) The investor should discontinue using the equity method until the investee begins paying dividends. C) Future losses are reported as unusual items in the investor's income statement. d) The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses.

D

When an investor uses the equity method to account for investments in common stock, the investor's share of cash dividends from the investee should be recorded as a) A deduction from the investor's share of the investee's profits. b) Dividend income. c) A deduction from the stockholders' equity account, Dividends to Stockholders. d) A deduction from the investment account.

D

Which of the following does not represent a primary motivation for business combinations? a) Combinations are often a vehicle to accelerate growth and competitiveness. b) Cost savings can be achieved through elimination of duplicate facilities and staff. c) Synergies may be available through quick entry for new and existing products into markets. d) Larger firms are less likely to fail.

D

According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be a) Capitalized as part of the overall fair value acquired in the merger. b) Recorded as an expense in the period the merger takes place.Page 76 c) Included in recognized goodwill. d) Written off over a five-year maximum useful life.

B

FASB ASC 805, "Business Combinations," provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be: a) Recognized as an ordinary gain from a bargain purchase. b) Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years. c) Treated as goodwill and tested for impairment on an annual basis. d) Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific non-current assets of the acquired firm.

A

When does gain recognition accompany a business combination? a) When a bargain purchase occurs. b) In a combination created in the middle of a fiscal year. c) In an acquisition when the value of all assets and liabilities cannot be determined. d) When the amount of a bargain purchase exceeds the value of the applicable noncurrent assets (other than certain exceptions) held by the acquired company.

A

When should a consolidated entity recognize a goodwill impairment loss? a) If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts. b) Whenever the entity's fair value declines significantly. c) If the fair value of a reporting unit with goodwill fall below its carrying amount. d) Annually on a systematic and rational basis.

A

Which of the following is the best theoretical justification for consolidated financial statements? a) In form the companies are one entity; in substance they are separate. b) In form the companies are separate; in substance they are one entity. c) In form and substance the companies are one entity. d) In form and substance the companies are separate. (AICPA)

b