ACC Ch 2

Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved. Salt had no liabilities. The fair values of Salt's assets were $3,750,000. Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000, respectively, and fair values of $180,000 and $730,000, respectively. At what value will the buildings be recorded by Pepper? A) $730,000 B) $520,000 C) $210,000 D) $0

A) $730,000

The unamortized excess account is A) a contra-equity account. B) used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values. C) used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved. D) the excess purchase cost that is attributable to goodwill.

C) used in allocating the amounts paid for each asset and liability that are above or below their book

Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value of identifiable net assets acquired exceeds the investment cost, which of the following statements is correct? A) A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price. B) The difference is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit. C) The difference is allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain. D) The difference is allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit.

A) A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.

Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A) A worksheet. B) Lisa's general journal. C) Victoria's general journal. D) Victoria's secret consolidation journal. E) The general journals of both companies.

A) A worksheet.

In a business combination, which of the following will occur? A) All identifiable assets and liabilities are recorded at fair value at the date of acquisition. B) All identifiable assets and liabilities are recorded at book value at the date of acquisition. C) Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of the net assets acquired. D) None of the above is correct.

A) All identifiable assets and liabilities are recorded at fair value at the date of acquisition.

In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers? A) All revenues, expenses, gains, losses, receivables, and payables B) All revenues, expenses, gains, and losses but not receivables and payables C) Receivables and payables but not revenues, expenses, gains, and losses D) Only sales revenue and cost of goods sold

A) All revenues, expenses, gains, losses, receivables, and payables

A statutory merger is a(n) A) Business combination in which only one of the two companies continues to exist as a legal corporation. B) Business combination in which both companies continue to exist. C) Acquisition of a competitor. D) Acquisition of a supplier or a customer. E) Legal proposal to acquire outstanding shares of the target's stock.

A) Business combination in which only one of the two companies continues to exist as a legal corporation.

Which of the following statements is true regarding the acquisition method of accounting for a business combination? A) Net assets of the acquired company are reported at their fair values. B) Net assets of the acquired company are reported at their book values. C) Any goodwill associated with the acquisition is reported as a development cost. D) The acquisition can only be effected by a mutual exchange of voting common stock. E) Indirect costs of the combination reduce additional paid-in capital.

A) Net assets of the acquired company are reported at their fair values.

In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment? A) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill. B) Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill. C) Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill. D) Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill.

A) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill.

Which of the following statements is true regarding a statutory consolidation? A) The original companies dissolve while remaining as separate divisions of a newly created company. B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D) The acquiring company acquires the stock of the acquired company as an investment. E) A statutory consolidation is no longer a legal option.

A) The original companies dissolve while remaining as separate divisions of a newly created company.

A business merger differs from a business consolidation because A) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entities and forms a new corporation. B) a consolidation dissolves all but one of the prior entities, but a merger dissolves all of the prior entities. C) a merger is created when two entities join, but a consolidation is created when more than two entities join. D) a consolidation is created when two entities join, but a merger is created when more than two entities join.

A) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entities and forms a new corporation.

5) Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch will treat the $50,000 as A) an expense for the current year. B) a prior period adjustment to retained earnings. C) additional cost to investment of Slope on the consolidated balance sheet. D) a reduction in additional paid-in capital.

A) an expense for the current year.

9) A newly acquired subsidiary had pre-existing goodwill on its books. The parent company's consolidated balance sheet will A) not show any value for the subsidiary's pre-existing goodwill. B) treat the goodwill similarly to other intangible assets of the acquired company. C) not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value. D) always show the pre-existing goodwill of the subsidiary at its book value.

A) not show any value for the subsidiary's pre-existing goodwill.

According to FASB Statement No. 141, liabilities assumed in an acquisition will be valued at the ________. A) reasonably estimated fair value B) historical book value C) current replacement cost D) present value using market interest rates

A) reasonably estimated fair value

According to FASB Statement 141R, which one of the following items may not be accounted for as an intangible asset apart from goodwill? A) A production backlog B) A valuable employee workforce C) Noncontractual customer relationships D) Employment contracts

B) A valuable employee workforce

From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements? A) In substance the companies are separate, but in form the companies are one entity. B) In substance the companies are one entity, but in form they are separate. C) In substance and form the companies are one entity. D) In substance and form the companies are separate entities.

B) In substance the companies are one entity, but in form they are separate.

In reference to international accounting for goodwill, U.S. companies have complained that past U.S. accounting rules for goodwill placed them at a disadvantage in competing against foreign companies for merger partners. Why? A) Previous rules required immediate write off of goodwill which resulted in a one-time expense that was not required under international rules. B) Previous rules required amortization of goodwill which resulted in an ongoing expense that was not required under international rules. C) Previous rules did not permit the recording of goodwill, thus resulting in a lower asset base than international counterparts would recognize. D) All of the above are correct.

B) Previous rules required amortization of goodwill which resulted in an ongoing expense that was not required under international rules.

Which of the following statements is true regarding the acquisition method of accounting for a business combination? A) The combination must involve the exchange of equity securities only. B) The transaction establishes an acquisition fair value basis for the company being acquired. C) The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company. D) The transaction may be considered to be the uniting of the ownership interests of the companies involved. E) The acquired subsidiary must be smaller in size than the acquiring parent.

B) The transaction establishes an acquisition fair value basis for the company being acquired.

Panini Corporation owns 85% of the outstanding voting stock of Strathmore Company and Malone Corporation owns the remaining 15% of Strathmore's voting stock. On the consolidated financial statements of Panini Corporation and Strathmore, Malone is A) an affiliate. B) a noncontrolling interest. C) an equity investee. D) a related party.

B) a noncontrolling interest.

Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for A) investments in unconsolidated subsidiaries. B) investments in consolidated subsidiaries. C) capital stock. D) ending retained earnings.

B) investments in consolidated subsidiaries.

With respect to goodwill, an impairment A) will be amortized over the remaining useful life. B) is a two-step process which first compares book value to fair value at the business reporting unit level. C) is a one-step process considering the entire firm. D) occurs when asset values are adjusted to fair value in a purchase.

B) is a two-step process which first compares book value to fair value

Historically, much of the controversy concerning accounting requirements for business combinations involved the ________ method. A) purchase B) pooling of interests C) equity D) acquisition

B) pooling of interests

In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true? A) Negative goodwill is recorded. B) A deferred credit is recorded. C) A gain on bargain purchase is recorded. D) Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit. E) Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as gain.

C) A gain on bargain purchase is recorded.

Which of the following examples accurately describes a difference in the types of business combinations? A) A statutory merger can only be effected through an asset acquisition while a statutory consolidation can only be effected through a capital stock acquisition. B) A statutory merger can only be effected through a capital stock acquisition while a statutory consolidation can only be effected through an asset acquisition. C) A statutory merger requires the dissolution of the acquired company while a statutory consolidation requires dissolution of the companies involved in the combination following the transfer of assets or stock to a newly formed entity. D) A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E) Both a statutory merger and a statutory consolidation can only be effected through an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

C) A statutory merger requires the dissolution of the acquired company while a statutory consolidation requires dissolution of the companies involved in the combination following the transfer of assets or stock to a newly formed entity.

At the date of an acquisition which is not a bargain purchase, the acquisition method A) Consolidates the subsidiary's assets at fair value and the liabilities at book value. B) Consolidates all subsidiary assets and liabilities at book value. C) Consolidates all subsidiary assets and liabilities at fair value. D) Consolidates current assets and liabilities at book value, and long-term assets and liabilities at fair value. E) Consolidates the subsidiary's assets at book value and the liabilities at fair value.

C) Consolidates all subsidiary assets and liabilities at fair value.

In a business combination where a subsidiary retains its incorporation and which is accounted for under the acquisition method, how should stock issuance costs and direct combination costs be treated? A) Stock issuance costs and direct combination costs are expensed as incurred. B) Direct combination costs are ignored, and the stock issuance costs result in a reduction to additional paid-in capital. C) Direct combination costs are expensed as incurred and stock issuance costs result in a reduction to additional paid-in capital. D) Both are treated as part of the acquisition consideration transferred. E) Both reduce additional paid-in capital.

C) Direct combination costs are expensed as incurred and stock issuance costs result in a reduction to additional paid-in capital.

In reference to the FASB disclosure requirements about a business combination in the period in which the combination occurs, which of the following is correct? A) Firms are not required to disclose the name of the acquired company. B) Firms are not required to disclose the business purpose for a combination. C) Firms are required to disclose the nature, terms and fair value of consideration transferred in a business combination. D) All of the above are correct.

C) Firms are required to disclose the nature, terms and fair value of consideration transferred in a business combination.

According to GAAP, which of the following is true with respect to the pooling of interest method of accounting for business combinations? A) It was the only method used prior to 2002. B) It must be used for all new acquisitions. C) GAAP allowed its use prior to 2002. D) It, or the acquisition method, may be used at the acquirer's discretion. E) GAAP requires it to be used instead of the acquisition method for business combinations for which $50 billion or more in consideration is transferred.

C) GAAP allowed its use prior to 2002.

Which of the following methods does the FASB consider the best indicator of fair values in the evaluation of goodwill impairment? A) Senior executive's estimates B) Financial analyst forecasts C) Market value D) The present value of future cash flows discounted at the firm's cost of capital

C) Market value

Which of the following statements is true? A) The pooling of interests for business combinations is an alternative to the acquisition method. B) The purchase method for business combinations is an alternative to the acquisition method. C) Neither the purchase method nor the pooling of interests method is allowed for new business combinations. D) Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations. E) Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.

C) Neither the purchase method nor the pooling of interests method is allowed for new business combinations.

Pregler Inc. has 70% ownership of Sach Company, but should exclude Sach from its consolidated financial statements if A) Sach is in a regulated industry. B) Pregler uses the equity method for Sach. C) Sach is in legal reorganization. D) Sach is in a foreign country and records its books in a foreign currency.

C) Sach is in legal reorganization.

Which of the following statements is true regarding a statutory merger? A) The original companies dissolve while remaining as separate divisions of a newly created company. B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D) The acquiring company acquires the stock of the acquired company as an investment. E) A statutory merger is no longer a legal option.

C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.

With respect to recognizing and measuring the fair value of a business combination in accordance with the acquisition method of accounting, which of the following should the acquirer consider when determining fair value? A) Only assets received by the acquirer. B) Only consideration transferred by the acquirer. C) The consideration transferred by the acquirer plus the fair value of assets received less liabilities assumed. D) The par value of stock transferred by the acquirer, and the book value of identifiable assets transferred by the entity acquired. E) The book value of identifiable assets transferred to the acquirer as part of the business combination less any liabilities assumed.

C) The consideration transferred by the acquirer plus the fair value of assets received less liabilities assumed.

Durer Inc. acquired Sea Corporation in a business combination and Sea Corp went out of existence. Sea Corp developed a patent listed as an asset on Sea Corp's books at the patent office filing cost. In recording the combination, A) fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp. B) Sea Corp's prior expenses to develop the patent are recorded as an asset by Durer at purchase. C) the patent is recorded as an asset at fair market value. D) the patent's market value increases goodwill.

C) the patent is recorded as an asset at fair market value.

Which of the following is not a reason for a company to expand through a combination, rather than by building new facilities? A) A combination might provide cost advantages. B) A combination might provide fewer operating delays. C) A combination might provide easier access to intangible assets. D) A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.

D) A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.

When considering an acquisition, which of the following is NOT a method by which one company may gain control of another company? A) Purchase of the majority of outstanding voting stock of the acquired company. B) Purchase of all assets and liabilities of another company. C) Purchase the assets, but not necessarily the liabilities, of another company previously in bankruptcy. D) All of the above methods result in a company gaining control over another company.

D) All of the above methods result in a company gaining control over another company.

10. Acquired in-process research and development is considered as A) A definite-lived asset subject to amortization. B) A definite-lived asset subject to testing for impairment. C) An indefinite-lived asset subject to amortization. D) An indefinite-lived asset subject to testing for impairment. E) A research and development expense at the date of acquisition.

D) An indefinite-lived asset subject to testing for impairment.

Using the acquisition method for a business combination, goodwill is generally calculated as the: A) Cost of the investment less the subsidiary's book value at the beginning of the year. B) Cost of the investment less the subsidiary's book value at the acquisition date. C) Cost of the investment less the subsidiary's fair value at the beginning of the year. D) Cost of the investment less the subsidiary's fair value at acquisition date. E) Zero, it is no longer allowed under federal law.

D) Cost of the investment less the subsidiary's fair value at acquisition date.

What method must be used if FASB Statement No. 94 prohibits full consolidation of a 70% owned subsidiary? A) The cost method B) The Liquidation value C) Market value D) Equity method

D) Equity method

Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire shares of Seurat Company in an all-stock transaction. Picasso paid the investment bankers $35,000 and will treat the investment banker fee as A) an expense for the current year. B) a prior period adjustment to Retained Earnings. C) additional goodwill on the consolidated balance sheet. D) a reduction to additional paid-in capital.

D) a reduction to additional paid-in capital.

Following the accounting concept of a business combination, a business combination occurs when a company acquires an equity interest in another entity and has A) at least 20% ownership in the entity. B) more than 50% ownership in the entity. C) 100% ownership in the entity. D) control over the entity, irrespective of the percentage owned.

D) control over the entity, irrespective of the percentage owned.

Push-down accounting A) requires a subsidiary to use the same accounting principles as its parent company. B) is required when the parent company uses the equity method to account for its investment in a subsidiary. C) is required when the parent company uses the cost method to account for its investment in a subsidiary. D) is the process of recording the effects of the purchase price assignment directly on the books of the subsidiary.

D) is the process of recording the effects of the purchase price assignment directly on the books of the subsidiary.

Under the current GAAP, Goodwill arising from a business combination is A) charged to Retained Earnings after the acquisition is completed. B) amortized over 40 years or its useful life, whichever is longer. C) amortized over 40 years or its useful life, whichever is shorter. D) never amortized.

D) never amortized.

What is the primary difference between: (i) accounting for a business combination when the subsidiary is dissolved; and (ii) accounting for a business combination when the subsidiary retains its incorporation? A) If the subsidiary is dissolved, it will not be operated as a separate division. B) If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. C) If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. D) If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. E) If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

E) If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

Which of the following is a not a reason for a business combination to take place? A) Cost savings through elimination of duplicate facilities. B) Quick entry for new and existing products into domestic and foreign markets. C) Diversification of business risk. D) Vertical integration. E) Increase in stock price of the acquired company.

E) Increase in stock price of the acquired company.

When a company acquires the majority, but less than 100% of the voting stock of another company a)each company maintains its legal existence b)dissolution of the acquired firm takes place c)a business combination has not taken place d)legal control is not possible

a)Each company maintains its legal existence

Consolidated financial statements typically represent which one of the following: a)the operations, financial position and cash flow of a single independent company b)a number of separate business companies tied together through common control c)any group of related companies

b)A number of separate business companies tied together through common control

Which of the following best describes a situation where one company acquires the net assets of the other firm and the acquired firm then is dissolved into a separate legal entity? a)subsidiary acquisition b)statutory Merger c)capital Interest combination d)consolidation

b)Statutory Merger

The purpose of the consolidation entry A is to a)record on the subsidiary's book the acquisition date fair values of its assets and liabilities b)allocated the acquisition price to the parent's and subsidiary's assets and liabilities c)adjust the subsidiary's assets and liabilities to their acquisition-date fair values

c)adjust the subsidiary's assets and liabilities to their acquisition-date fair values

Which of the following is the attribute to the statutory consolidation? a)all of the companies involved in the business combination retain their separate legal existence b)an acquiring company gains a controlling, but less than a 100%, interest in the acquiree's voting stock c)one company acquires another company that is subsequently dissolved by a surviving firm d)two or more existing companies are united under the ownership of a newly created company

d)Two or more existing companies are united under the ownership of a newly created company