Accounting - chapter 3 theory
Assume that two companies wish to engage in a business combination involving a share exchange. Once the share exchange is consummated, each shareholder group will have an equal number of voting shares. Which of the following statements best describes the course of action that must be taken under these circumstances?
Other factors must be examined to determine which shareholder group is more dominant
Company A makes a hostile take-over bud for control of company B. In response, company B makes a counter-offer to purchase shares from company A's shareholders. Which of the following best describes company B's response
Pac-man defence
Under which of the following scenarios would the preparation of consolidated financial statements not be justified?
50% of B's assets have been placed under the custody of a trustee
IAS 27 outlines the requirements for identifying the company that is the acquirer in a business combination when its not clear who that is. Which is not a consideration in determining which company is the acquirer.
Any by laws or provisions of the incorporation acts of each company that details the manner in which a business combination will occur at law.
Which of the following statements regarding the polling of interests method is false?
it is currently the required method for accounting for business combinations in Canada when an acquirer cannot be identified
The new IASB standard issued with respect to the treatment of negative goodwill requires that:
it must be recognized in income immediately but not necessarily as an extraordinary item
Which of the following would not be considered a business combination?
neither the purchase of an old abandoned warehouse, nor the exchanging of shares between the subsidiaries of the same parents company qualify as business combinations
Company A has made an offer to purchase all of the outstanding shares of company B for $10 per share. In response to company A's offer, the shareholders of company B were given rights to purchase additional shares at $8 per share. Which of the following tactics was employed by company B to prevent company A from acquiring control of company B?
poison pill
Which of the following would not be included in the acquisition cost?
share issue costs
How is negative goodwill treated under the acquisition method?
the acquiring company will report a gain on acquisiton
During an acquisition, when should intangible assets not be recognized apart of goodwill?
the assets have been accounted for by the subsidiary but have no fair value on the date of acquisition
The carrying value of depreciable assets on a potential subsidiary's books is only of concern when:
the companies are contemplating using the pooling of interests method to account for the business combination
In a business combination involving companies, when can a company always be deemed the acquirer?
the company holds more than 50% of the voting shares of the combined entity
One common criticism of the purchase method is that:
the consolidated balance sheet contains both book values and fair market values
Goodwill can best be described as
the difference between the acquisition price and the fair value of the net assets acquired
The process of preparing consolidated financial statements involves the elimination of inter-company transactions between a parent company and its subsidiary. Where would these entries be recorded?
the entries are not recorded in the books of either company. The entries are only made on the working papers
Under the new entity method
the net assets of both companies are recorded at fair market value
Appendix A of IFRS 3 provides an extensive list of what must be disclosed for each business combination. Which of the following items not in included in that list
the net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination
Which of the following methods of accounting for business combinations is/are consistent with the historical cost principle?
the purchase method
Which of the following statement(s) pertaining to business combination is false?
they can never arise from the purchase of assets nor can they can include unincorporated entities
How should intangible assets which are readily identifiable but not accurately measures be accounted for?
they should be included in goodwill
A company owns 80% of the voting shares of B company, which in turn owns 70% of the shares of C company. There are no outstanding warrants or options which would enable holders of other instruments to acquire additional voting shares of any of these companies. in this scenario,
A has indirect control over C
A company wishes to acquire control of B company as cheaply as possible. For economic reasons, a consultant recommended that A inc. do this through a purchase of assets, rather than a purchase of shares. Which of the following statements regarding the above scenario is correct?
A only needs to acquire control of B's net assets
A inc is contemplating a business combination with B inc. However, A inc's management is uncertain as to whether it should purchase B's assets or majority of B's voting shares. The fair market values of B's assets for exceed their book values. A's management should be advised that in most cases:
A purchase of B's shares would be likely be the cheaper method of acquiring control. However, it would be less advantageous to the consolidated entity from a tax standpoint
Which of the following statements best describes the current treatment of negative goodwill in Canada and the US
A reduction of assets with any unallocated portion appearing on the income statement as an extraordinary item
Zen inc owns 35% of sun Inc.'s voting shares. Zen is by far the largest single shareholder of sun inc's shares, with the rest of sun's shares being very widely held by an individual investors. There was a very poor turnout at Sun point's recent annual meeting, enabling Zen Inc. to elect the majority of Sun's Board of Directors. Does Zen control Sun?
No, Zen does not control sun because it cannot exercise control over sun without the cooperation of Sun's other sharehodlers
123456 Inc. is contemplating a business combination with 7654321 Inc. One company is incorporated under federal law and the other under provincial law. Is a statutory amalgamation permissible under these circumstances?
No, a statutory amalgamation would not be possible, since one company is incorporated under federal law and the other under provincial law
Which of the following statements about the pooling of interests method is incorrect?
Cash flows will always be significantly higher under the pooling of interests method than under the purchase method
Which of the following statements is correct? (since 2002...)
Since 2002, the only acceptable method of accounting for business combinations is the purchase method
Parent company acquires sub company's common shares for cash. On the date of acquisition, sub had goodwill of $100,000 on it's books. Which of the following statements regarding sub's goodwill on the date of acquisition is correct?
Sub's goodwill is not considered an identifiable asset and should therefore be excluded from parent company's acquisition differential calculation
How should the acquisition cost of a business combination be allocated prior to preparing consolidated financial statements?
The acquisition cost should be allocated to the acquirer's interest in the fair values of the acquired company's identifiable assets and liabilities
A inc. purchased 100% of B inc's voting shares for cash on January 1st. The assets and liabilities reported consolidated balance sheet of A Inc. prepared not eh date of acquisition will include
The book value of A's assets and liabilities plus the fair market value of B's assets and liabilities.
DEF inc. is contemplating a business combination involving GHI Inc. DEF can either purchase the assets and liabilities of GHI inc, or it can engage in a pooling of interests with GHI inc. Assuming the the fair values of GHI's identifiable assets are equal to their book values, which method would show a higher net income for the consolidated entity. (assume that the pooling of interests method is allowable)
The purchase method and the pooling of interests method would show the same income
Which of the following statements is correct?
Under the purchase method, the company's net assets are recorded at the price paid for these assets on the date of acquisition
Which of the following is closest to IAS 27 definition of control?
control is the power of one company to govern the financial and operating policies of an entity so as to obtain the benefits of its activities
Which of the following must be possible in order for a business combination to exist?
control of a subsidiary's net assets
Which of the following acquires assets and liabilities are not valued at the date of acquisition?
deferred tax assets and liabilities
Which of the following pertaining to consolidated financial statements is correct?
When one company has control over another, consolidated financial statements must be prepared for the combined entity
XYZ inc owns 55% of DEF's 10,000 outstanding voting shares. Another company, GHI inc, owns 40%, with he remaining shares being held by many individual investors. GHI inc, also owns 25,000,000 worth of DEF's inc's $1,000 par value bonds, each of which is convertible to one voting share of DEF inc. Which of the following statements regarding the control of DEF inc is correct.
XYZ inc does not have control over DEF inc, as it cannot exercise control over DEF's strategic operating, investing and financing activities without the cooperation of GHI inc.
One company is considering entering into a business combination with another. The potential acquirer wishes to acquire the subsidiary's assets and liabilities but wishes to prepare consolidated financial statements using the fair market values of its own assets and liabilities as well of those of its potential subsidiary. Can this be accomplished?
Yes, this would be possible, but only if the new entity method is used
A Inc. purchases 100% of the voting shares of B inc. on July 1, 2008. On the are, A inc would be required to prepare which of the following statements?
a consolidated balance balance
The net income generated by the net assets of the acquired company is adjusted for:
both b and c
Company Y purchases a controlling interest in Company Z on January 1, 2002. Which of the following would appear as the shareholder equity amount on Company Y's consolidated balance sheet on the date of acquisition?
company Y's shareholder equity
In order for one company to establish control over another
consideration of some kind must be given. However, the consideration given is irrelevant to the substance of the relationship between the two companies
Which of the following regarding the preparation of consolidated financial statements are/is correct?
consolidated financial statements are required by the parent company for reporting purposes only; each company must continue to prepare its own financial statements
