Recognizing/Measuring Assets, Liabilities & Noncontrolling Interest

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco's plants and relocate its employees. Which one of the following is the amount of liability that Lazer should recognize in recording the business combination? A. $- 0 - (no liability) B. $150,000 C. $170,000 D. $200,000

B. $150,000 Lazer will recognize $150,000 in liabilities, the fair value of the amount acquired from Tipco. The $20,000 legal and accounting fees will be expensed as cost of carrying out the combination. The expected cost of closing one of Tipco's plants and relocating its employees will not be recognized until there is an actual liability.

Which of the following contingencies that exist on the acquisition date should be recognized by the acquirer in a business combination? I. A contractual contingency to provide warranty services to prior customers of the acquiree. II. An outstanding lawsuit against the acquiree for which an expert legal authority believes there is a 20% probability that the suit will be successful. A. Neither I nor II. B. I only. C. II only. D. Both I and II.

B. I only. Item I would be recognized; Item II would not be recognized. Contractual contingencies (contingencies related to existing contracts) are recognized by the acquirer and measured at fair value. Noncontractual contingencies (contingencies that do not result from an existing contract), including lawsuits, are recognized only if it is more likely than not that the contingency will give rise to a liability (or an asset). A probability of 20% that the suit will be lost is not more likely than not, and the lawsuit would not be recognized.

On May 1, 2008, Hico, Inc. acquired 20% of the voting securities of Lowco, Inc. for $400,000 cash. The investment did not give Hico significant influence over Lowco and was classified as an available-for-sale investment. On July 1, 2009, Hico acquired the remaining 80% of Lowco's voting securities for $1,800,000 cash. At that time, Hico's original 20% investment in Lowco had a carrying value and a fair value of $450,000. Which one of the following is the amount of gain that Hico should recognize in July, 2009 net income as a result of the effect of the business combination on Hico's original investment in Lowco? A. $- 0 - (no gain) B. $40,000 C. $50,000 D. $400,000

C. $50,000 Because the original investment was treated as available-for-sale, between May 1, 2008, and July 1, 2009, it would have been adjusted to fair value ($450,000) and the increase recognized in other comprehensive income (not in net income). The cumulative entries would have been DR: Investment $50,000 and CR: Unrecognized Gain/Other Comprehensive Income $50,000. In connection with the combination, the $50,000 unrecognized gain in Accumulated Other Comprehensive Income would be reclassified and recognized as a gain in net income of the period. The $450,000 carrying amount/fair value of the original investment would be included as part of the total consideration used in acquiring Lowco.

Which one of the following items acquired in a business combination is least likely to require that the acquirer reconsider the acquiree's classification? A. An investment classified as held-to-maturity by the acquiree. B. An investment classified as held-for-trading by the acquiree. C. A lease classified as a sales-type capital lease by the acquiree. D. A derivative instrument used for speculative purposes by the acquiree.

C. A lease classified as a sales-type capital lease by the acquiree. In a business combination, an acquirer that obtains a lease contract should continue to classify the contract as established at the inception of the contract. The classification of a lease contract is established at the inception of the lease and would not change as a result of a transfer of ownership in a business combination.

Zooco, Inc. acquired 40% of the voting stock of Stubco, Inc. on September 1, 2008, and accounted for the investment using the equity method of accounting. On May 1, 2009, Zooco acquired an additional 20% of Stubco's voting stock to achieve a business combination. Which one of the following is the value Zooco should use to measure its original 40% investment in Stubco when recording the combination? A. Original cost, September 1, 2008. B. Carrying value, May 1, 2009. C. Fair value, May 1, 2009. D. 40% of Stubco's book value, May 1, 2009.

C. Fair value, May 1, 2009. When a business combination is accomplished in stages (or steps), the fair value of the investment on the date of the combination is used to value the business combination. In this case, that would be the fair value on May 1, 2009. Any difference between the carrying value and the fair value on the acquisition date would be recognized as a gain or loss for the period.

Which one of the following payments by an acquirer in a business combination is most likely to be a part of the cost in recording a business combination transaction? A. Payment by the acquirer to settle a trade payable due to the acquired entity. B. Payment by the acquirer to the acquiree's management personnel to remain with the firm for one year following the business combination. C. Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree. D. Payment by the acquirer to reimburse the acquiree for cost it incurred in carrying out the business combination.

C. Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree. Payment for a valid patent, even though not previously recognized by the acquiree, most likely would be a part of the business combination transaction. Since costs of developing a patentable item are expensed when incurred, the acquiree may not have recognized any asset associated with the patent, but the acquirer should record the patent acquired in a business combination at fair value.

The noncontrolling interest in an acquiree should be based on the separately determined fair value of that interest. True False

True

There are some minor exceptions to the use of fair value to measure items acquired or assumed in a business combination. True False

True

Use of the acquisition method to account for a business combination requires the acquirer to identify assets acquired, liabilities assumed, and noncontrolling interest in the acquired business. True False

True

Which of the following kinds of intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity? Future benefits that Future benefits derive from legal rights that can be separately sold Yes Yes Yes No No Yes No No

Yes Yes Intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity if they either have future benefits that arise from contractual or legal rights (e.g., trademarks, copyrights, franchise agreements, etc.) or are capable of being separately sold, transferred, licensed, rented, or exchanged (e.g., customer lists, databases, etc.).

Generally, which of the following items acquired in a business combination should be measured at fair value? Identifiable Liabilities Assumed Assets Acquired Noncontrolling Interest Yes Yes No Yes No No Yes No Yes Yes Yes Yes

Yes Yes Yes Generally, identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree are measured at fair value. A few exceptions exist for selected assets and liabilities.

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco's plants and relocate its employees. Which one of the following is the total amount of consideration that Lazer paid for Tipco in the business combination? A. $250,000 B. $270,000 C. $300,000 D. $320,000

A. $250,000 The total consideration paid by Lazer to acquire Tipco is $250,000, the cash paid. The other cost of carrying out the business combination ($20,000) and the expected cost of closing one of Tipco's plants and relocating its employees ($50,000) would not be part of the cost of the acquisition. The $20,000 legal and accounting fees will be expensed as cost of carrying out the combination. The expected cost of closing one of Tipco's plants and relocating its employees will not be recognized until there is an actual liability.

Which of the following statements, if any, concerning a noncontrolling interest in an acquiree is/are correct? I. The value assigned to a noncontrolling interest in an acquiree should be based on the proportional share of that interest in the net assets of the acquiree. II. The fair value per share of the noncontrolling interest in an acquiree must be the same as the fair value per share of the controlling (acquirer) interest. A. Both I and II. B. I only. C. II only. D. Neither I nor II.

D. Neither I nor II. Neither Statement I nor Statement II is correct. The value assigned to a noncontrolling interest in an acquiree would not be based simply on the proportional share of that interest in the net assets of the acquiree (Statement I), but rather on the separately determined fair value of the noncontrolling interest. The fair value per share of the noncontrolling interest in an acquiree does not have to be the same as the fair value per share of the controlling interest (Statement II), because there is likely to be a premium in value associated with having control of an entity that the noncontrolling interest would not enjoy.

An investment classified as held-to-maturity by an acquiree must retain that classification when it is recognized by the acquirer in a business combination. True False

Fales

Benefits expected to arise following a business combination that can be estimated at the acquisition date should be recognized as assets in recording the combination. True False

False

Goodwill existing on the books of the acquired entity will be recognized as an asset by the acquirer. True False

False

Long-term assets acquired in a business combination, which the acquirer classifies as held-for-sale at the acquisition date, should be measured at fair value. True False

False

Rights granted by an acquirer to an acquiree prior to a business combination, which the acquirer reacquires as part of a business combination, should be written-off in connection with the acquisition transaction. True False

False

The noncontrolling interest in an acquiree should be measured as the minority interest in the fair value of the acquiree's identifiable assets and liabilities as determined by the acquirer at the acquisition date. True False

False

An indemnification provision in a business combination agreement limits the acquirer's liability associated with specific assets or liabilities. True False

True

Existing GAAP accounting requirements apply to an acquiree's interperiod income tax items and employee benefit arrangements which are acquired in a business combination. True False

True

In a business combination achieved in stages, ownership interest in the acquiree, obtained by the acquirer prior to achieving control, must be remeasured to fair value at the acquisition date. True False

True

In a business combination achieved in stages, the acquirer may recognize a gain or loss on investment revaluation at the acquisition date. True False

True

In a business combination, an acquirer may recognize identifiable assets not previously recognized by an acquired firm. True False

True

Items acquired or assumed in a business combination generally should be measured at fair value using the requirements of ASC 820, "Fair Value Measurement." True False

True

The fair value per share of the noncontrolling interest in an acquiree may be different than the fair value per share of the acquirer in that acquiree. True False

True