Consolidated Stmts. Ch. 2

Statutory merger

A business combination in which only one company continues to exist as a legal entity.

d. Recorded as an expense in the period the merger takes place.

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. Included in recognized goodwill. c. Written off over a five-year maximum useful life. d. Recorded as an expense in the period the merger takes place.

d. The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed.

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. Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value. d. The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed.

Goodwill

Cost of the investment less the fair value of the subsidiary's net assets and previously unrecorded intangible assets at acquisition date.

Recognize these costs as an intangible asset and test for impairment

Using the acquisition method, a company acquires all of the shares of stock of another company. In-process research and development is present and estimated to have a $300,000 fair value. How would you account for these costs? a. Always expense these costs at the acquisition date b. Expense these costs unless such costs represent assets with alternative future use c. Recognize these costs as an intangible asset and amortize the cost over a reasonable life d. Recognize these costs as an intangible asset and test for impairment e. These costs have no impact on the purchase.

b. When a bargain purchase occurs.

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

b. 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.

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 fair value of the contingent consideration is expensed immediately at acquisition date. b. 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. c. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met. d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.

c. larger firms being less likely to fail

Which of the following does not represent a primary motivation for business combinations? a. quick entry for new and existing products into markets b. combinations as a vehicle for achieving rapid growth and competitiveness c. larger firms being less likely to fail d. cost savings through elimination of duplicate facilities and staff

d. In form the companies are one entity; in substance they are separate.

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

Purchase Method

Records a business combination at the cost to the new owners. Includes direct combination costs as part of the investment

d. Recognized as an ordinary gain from a bargain purchase.

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. Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific noncurrent assets of the acquired firm. 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. Recognized as an ordinary gain from a bargain purchase.

d. Variable Interest Entities.

In 2004, GAAP expanded the definition of 'control' and addressed the definition and consolidation requirements for a. Less than 50% owned subsidiaries. b. Foreign Subsidiaries. c. Permanently Impaired Subsidiaries. d. Variable Interest Entities. e. Entities financed with subordinated debt.

c. book value plus any excess of purchase price over book value of the acquired assets and liabilities.

In preparing the consolidation worksheet for a business combination accounted for as a purchase using the purchase method, which one of the following is the appropriate basis for valuing fixed assets of a wholly-owned subsidiary? a. fair value of the assets only. b. book value as shown on the books of the subsidiary. c. book value plus any excess of purchase price over book value of the acquired assets and liabilities. d. historical cost as shown on the books of the subsidiary. e. current carrying value.