Ch 2 - Consolidation of Financial Information

Even though measurement of an intangible asset (e.g., unpatented technology or customer relationships) may lack precision, recognition of the identified intangible may result in greater

faithful representation.

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

Property, plant, and equipment

In financial reporting for a bargain purchase business combination

-a gain is reported on the acquiring firm's income statement. -the collective fair value of the identifiable net assets becomes the acquired firm's valuation basis.

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

-a liability for the fair value of the contingent consideration. -the fair value of the contingent consideration in the investment account as part of the overall consideration transferred.

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

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

diversification.

The goal of the FASB/IASB joint project on accounting for business combinations was to

to develop a standard that includes a common set of principles to produce decision-useful information and minimizing exceptions to those principles.

When an acquired firm is legally dissolved upon acquisition, the acquirer will record on its books all of the former firm's assets and liabilities at their former book values.

FALSE

The income approach is often best suited for estimating the fair values of intangible assets such as trademarks and patents.

TRUE

In a business combination, the acquiring firm increases its retained earning for the amount of the acquisition-date subsidiary retained earnings.

FALSE

Intangible assets

-Lack physial substance -are common in business combinations -are required to meet specific criteria to qualify for recognition in a business combination

The reported balances for a business combination are the same regardless of whether the acquired firm is dissolved or not.

TRUE

Contingent consideration is

a contractual provision to pay additional amounts to former owners of a business based upon achievements of future performance measures.

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

a current period expense.

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

a gain on bargain purchase.

Consolidation entry A for an acquisition-date worksheet is designed to adjust the subsidiary's assets and liabilities from _____ value to fair value.

book or carrying

Which of the following occurs ina business combination

-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. -A single financial reporting entity is created

Which of the following qualify as elements of consideration transferred and thus recorded in a business combination?

-Additional paid-in capital related to common stock issued by the acquirer. -Cash paid by the acquirer. -Common stock issued by the acquirer.

"Which of the following were cited as motivations for Amazon to acquire Whole Foods Market?"

-Amazon effectively expanded its distribution network to include hundreds of Whole Foods stores. -Amazon gained a competitive edge against other on-line grocery distributors.

Which of the following 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. -Any contingent performance liability that may have accompanied the combination.

"Which of the following represent reasons that Salesforce.com acquired MuleSoft?"

-MuleSoft's cloud platform will help to integrate and connect clients applications, data, and devices. -MuleSoft had capabilities to help clients incorporate legacy information technology with Salesforce.

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.

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.

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

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

To complete a consolidation acquisition-date worksheet,

-the "investment in subsidiary" account balance is eliminated entirely in consolidation. -all account balances, after adjusting for consolidation entries, are extended across to the Consolidated Total column.

When a bargain purchase occurs, the valuation basis for the acquired firm is the fair value of the assets received less liabilities assumed, not the consideration transferred.

TRUE

Which of the following 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.

The FASB and IASB both have published standards of accounting for business combinations. Which of the following describes the relation between the two sets of business combination accounting standards?

Differences exist across the two standards in accounting for a noncontrolling interest, two sets of standard are identical in most respects, the convergence of the two standards was designed to enhance cross-border comparability of consolidated financial statements.

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

each company maintains its separate legal existence.

Consolidated financial statements are typically prepared when one company has

A controlling financial interest over another company

The acquisiition method of accounting for business combinations embraces

A fair value measurement attribute for newly acquired businesses

What is a business combination?

A set of separate business organizations under thecontrol ofa single company

What are the financial reporting requirements when one business organization possesses control over another business organization?

A single set of consolidated financial statements is prepared for the separate business entities tied together through common control.

When a parent acquires a subsidiary and records a bargain purchase gain, the gain is reported as a deferred gain on the consolidated balance sheet.

FALSE

When one business entity has a controlling financial interest in another entity, why are consolidated financial statements prepared for external reporting?

It is presumed that consolidated financial statements are necessary for a fair presentation.

When an acquired firm continues its separate legal corporate existence, which of the following best describes the procedures to prepare consolidated financial statements?

Only the financial statement information of the acquired firm and the parent are used to prepare consolidated financial statements.

Which of the following is a worksheet effect of consolidation entry S?

Subsidiary stockholders' equity account balances are brought to zero in consolidation.

Why is the in-process research and development (IPR&D) of an acquired subsidiary recognized as an asset?

The IPR&D has an acquisition-date fair value.

Which of the followingterms is best described by the integration of successive stageof production anddistribution of products?

Vertical integration

Costs incurred to register and issue securities in connection with a business combination are recorded as

a reduction of additional paid-in capital.

The purpose of consolidation entry A is to

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

The large amount of ______________ recognized in the Salesforce.com acquisition of MuleSoft suggests substantial synergies are expected from the combination.

goodwill

Among the items recognized by Tesla from the Grohmann acquisition included ___________ assets such as developed technology, software, customer relations, and the Grohmann trade name.

intangible

Trademarks and trade names are examples of _________ -related intangible assets.

marketing

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 an acquired firm's legal status is dissolved in a business combination, the acquiring firm's entry to record the combination includes

the fair value of the consideration transferred. the individual fair values of the assets acquired and liabilities assumed.

Which of the following best describes a statutory consolidation?

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

The acquisition method requires the recognition and measurement of which of the following?

-The acquiree's identified assets and liabilities assumed by the acquirer. -Goodwill or a gain from bargain purchase. -Any existing noncontrolling interest.

Which of the following may be included in the calculation of the consideration transferred for a newly acquired firm?

-The equity interests issued by the acquirer in the combination. -Sum of the acquisition-date fair values of the assets transferred by the acquirer. -The liabilities incurred by the acquirer to former owners of the acquiree.

Which of the following describes a fair value exchange price in an orderly transaction between market participants?

-The price that would be paid for transferring a liability. -The price that would be received from selling an asset.

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.

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

-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 parent records a bargain purchase gain on its books.

In a business combination when each combining firm maintains its separate incorporation

-the acquiring firm utilizes an investment account to record the acquisition. -consolidation worksheets are employed to generate financial reports for the combined economic entity. -each company maintains independent record keeping.

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

Actively-traded securities

Which of the following best describes control through a majority voting stock acquisition?

Although one company controls another, no dissolution occurs and each company remains a separately incorporated entity.

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.

Which of the following best describes a situation where one company acquires the net assets of another firm and the acquired firm then is dissolved as a separate legal entity?

Statutory merger.

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.

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.

The second column of figures on the consolidated worksheet includes the subsidiary's assets and liabilities at their _____ value.

Book or carrying

Which of the following best describes control through majority voting stock ownership?

By exercising majority voting power, one firm can dictate the operating and financing activities of another firm.

How does one firm usually exercise control over another firm?

By ownership of a majority voting stock interest

Which of the following 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.

According to the acquisition method, the acquiring firm records all assets acquired and liabilities assumed in a merger transaction at their individual acquisition date fair values.

TRUE

In its acquisition of Whole Foods Market, Amazon cited "expected improvements in technology performance and functionality" as a source of _____________ recognized in the combination.

Goodwill

Which of the following best describes a statutory merger?

One company acquires the net assets of another company and the acquired company then is dissolved as a separate legal entity.

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

The collective fair value of the net identifiable assets acquired.

The measurement attribute used by an acquirer to recognize an acquired firm's assets and liabilities is _______ ________.

fair value

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

Ownership of a majority voting interest is the only way to ensure a controlling financial interest

FALSE

Pre-existing goodwill, when present on an acquired firm's separate balance sheet, is considered an identifiable intangible asset

FALSE

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

Fair value

Which of the subsidiary's account balances are frequently eliminated through consolidation entry S?

Retained earnings, Common stock, Additional paid-in capital

The task of managing a diverse group of companies in distinct industries may fail if

The integration ofthe acquired firms into the controlling firm is not managed carefully

What accounting procedures are appropriate when an acquired firm is dissolved immediately following a business combination?

The surviving company records the dissolved company's assets and liabilities on its financial records.

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

Control through majority voting stock ownership.

The acquisition-date fair value allocation schedule helps to prepare the worksheet entries to adjust the subsidiary's assets from book value to ______ value.

fair

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.

Which of the following is a characteristic of the accounting procedure for a statutory merger or a statutory consolidation?

-Because the acquired firm's accounts are combined on the surviving company's records, no further consolidation procedures are needed. -On the combination date, the surviving company records on its books the assets and liabilities from each of the dissolving companies. -Once the dissolved companies' account balances are transferred to the surviving company's records, the records of the dissolved companies are closed.

"Which of the following represent reasons why Tesla acquired Grohmann Engineering?"

-Expected integration of Grohmann's technology into Tesla's automotive business. An expectation that the acquisition will increase the speed and quality of production. -Expected reductions in capital expenditures required for vehicle produced.

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 goods and services, they may gain a competitive advantage and become more profitable

Select from below the attributes of a business combination accomplished through acquisition of variable interests in another entity.

-Majority voting stock ownership is not a necessary condition for control over a variable interest entity. -The variable interest entity remains in existence as a separate legal entity--often a trust or partnership. -Current GAAP requires the consolidation of financial statement for a primary beneficiary and its variable interest entities.

Which of the following intangibles are often recognized in a business combination?

-Parent -customer relations -franchise agreements

Which of the following are typical costs that accompany a business combination?

-Professional service fees for attorneys and accountants. -Costs incurred to register and issue securities. -Secretarial and management time allocated to acquisition activity.

Which of the following are considered potential advantages to growth through a business combination?

-Quick entry for new and existing products into domestic and foreign markets. -Economies of scale allowing greater efficiency and negotiating power. -Cost savings through elimination of duplicate facilities and staff.

When each company in a business combination maintains its separate legal existence, which of the following occurs?

-The financial accounts of newly acquired subsidiary are unaffected. -The acquiring company establishes a single investment account in its financial records. -Each company continues to maintain an independent accounting system.

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. -It is presumed that consolidated statements are necessary for a fair presentation. -There is a presumption that consolidated statements are more meaningful than separate company financial statements.

In a business combination, when the collective fair values 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.

Which of the following 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.

In a business combination when each combining firm remains a legally incorporated separate entity

-the parent company employs consolidated worksheet entries to help prepare a set of consolidated financial statements. -the acquiring firm does not physically record the acquired firm's separate assets and liabilities.

The recording of goodwill in a business combination may recognize that

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

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.

Why are consolidated financial statements prepared when a business combination of two or more companies creates a single economic entity?

there is apresumption that consolidated financial statements are more meaningful than separate financial statements