Chapter 1 Test Bank
BUSINESS COMBINATIONS
Multiple Choice Questions LO1
1.
Which Whic h of the the foll follo oin in! ! is a reas reason on h" h" a co#p co#pan an" " oul oul$ $ e%pa e%pan$ n$ throu!h a co#&ination' rather than &" &uil$in! ne facilities( a. A co#&inat co#&ination ion #i #i!ht !ht pr pro)i$ o)i$e e cost a$)ant a$)anta!es a!es. . &. A co#&inatio co#&ination n #i!ht pro)i$ pro)i$e e feer operat operatin! in! $ela"s. $ela"s. c. A co co#& #&in inat atio ion n #i #i!h !ht t pr pro) o)i$ i$e e ea easi sier er ac acce cess ss to in inta tan! n!i& i&le le assets. $. All of the a&o)e a&o)e are possi& possi&le le reasons reasons that that a co#pan" co#pan" #i!ht choose a co#&ination.
LO2
*.
A &usin &usines ess s co#&i co#&ina nati tion on in hi hich ch a ne ne corpo corpora rati tion on is cre creat ate$ e$ an$ to or #or #ore e e%i e%isti stin! n! cor corpor porati ations ons are co# co#&in &ine$ e$ int into o the nel" create$ corporation is calle$ a a. &. c. $.
,.
#er!er. purcha pur chase se tra transa nsacti ction. on. poolin poo lin!+o !+of+i f+inte nteres rests. ts. cons co nsol oli$ i$at atio ion. n.
A &usi &usine ness ss co# co#&i &ina nati tion on occ occur urs s hen hen a co# co#pa pan" n" acac-ui uire res s an e-u e-uit it" " interest in another entit" an$ has a. &. c. $.
at least least */ onership onership in the the entit". entit". #ore than 0/ oners onership hip in in the enti entit". t". 1/ 1 / oners onership hip in in the entit entit". ". cont co ntro rol l o) o)er er th the e en enti tit" t"' ' ir irre resp spec ecti ti)e )e one$.
of
the th e
perc pe rcen enta ta!e !e
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5.
6ASB fa)ors consoli$ation of to entities hen a. one ac-uires less than */ e-uit" onership of the other. &. one co#pan"7s onership interest in another !i)es it control of the ac-uire$ co#pan"' "et the ac-uirin! co#pan" $oes not ha)e a #a8orit" onership in the ac-uire$. T"picall"' this is in the */+0/ interest ran!e. c. one ac-uires to thir$s e-uit" onership in the other. $. one !ains control o)er the entit"' irrespecti)e of the e-uit" percenta!e one$.
LO3 LO4
0.
Michan!elo Co. pai$ 91' in fees to its accountants an$ la"ers in ac-uirin! 6lorence Co#pan". Michan!elo ill treat the 91' as a. an e%pense for the current "ear. &. a prior perio$ a$8ust#ent to retaine$ earnin!s. c. a$$itional cost to in)est#ent of 6lorence on the consoli$ate$ &alance sheet. $. a re$uction in pai$+in capital.
:.
3icasso Co. issue$ 1' shares of its 91 par co##on stock' )alue$ at 95'' to ac-uire shares of Bull Co#pan" in an all+stock transaction. 3icasso pai$ the in)est#ent &ankers 9,0'. 3icasso ill treat the in)est#ent &anker fee as; a. &. c. $.
=.
an e%pense for the current "ear. a prior perio$ a$8ust#ent to
>urer Inc ac-uire$ Sea Corporation in a &usiness co#&ination an$ Sea Corp ent out of e%istence. Sea Corp $e)elope$ a patent liste$ as an asset on Sea Corp7s &ooks at the patent office filin! cost. In recor$in! the co#&ination a. fair )alue is not assi!ne$ to the patent &ecause the research an$ $e)elop#ent costs ha)e &een e%pense$ &" Sea Corp. &. Sea Corp7s prior e%penses to $e)elop the patent are recor$e$ as an asset &" >urer at purchase. c. the patent is recor$e$ as an asset at fair #arket )alue. $. the patent?s #arket )alue increases !oo$ill.
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@.
In a #er!er' hich of the folloin! ill occur( a. A #er!er occurs hen one corporation takes o)er the operations of another &usiness entit"' an$ the ac-uire$ entit" is $issol)e$. &. None of the &usiness entities ill &e $issol)e$. c. The ac-uire$ assets ill &e recor$e$ at &ook )alue &" the ac-uirin! entit". $. None of the a&o)e is correct.
2.
Accor$in! to 6ASB State#ent 151' hich one of the folloin! ite#s #a" not &e accounte$ for as an intan!i&le asset apart fro# !oo$ill(
a. &. c. $.
1.
A pro$uction &acklo!. A talente$ e#plo"ee orkforce. Noncontractual custo#er relationships. E#plo"#ent contracts.
Un$er the pro)isions of 6ASB State#ent No. 151<' in a &usiness co#&ination' hen the fair )alue e%cee$s the in)est#ent cost' hich of the folloin! state#ents is correct( a. A !ain fro# a &ar!ain purchase is reco!nie$ for the a#ount that the fair )alue of the i$entifia&le net assets ac-uire$ e%cee$s the ac-uisition price. &. the )alue is allocate$ first to re$uce proportionatel" accor$in! to #arket )alue non+current assets' then to non+#onetar" current assets' an$ an" ne!ati)e re#ain$er is classifie$ as a $eferre$ cre$it. c. it is allocate$ first to re$uce proportionatel" accor$in! to #arket )alue non+current assets' an$ an" ne!ati)e re#ain$er is classifie$ as an e%traor$inar" !ain. $. It is allocate$ first to re$uce proportionatel" accor$in! to #arket )alue non+current' $eprecia&le assets to ero' an$ an" ne!ati)e re#ain$er is classifie$ as a $eferre$ cre$it.
11.
With respect to !oo$ill' an i#pair#ent a. ill &e a#ortie$ o)er the re#ainin! useful life. &. is a to+step process hich anal"es each &usiness unit of the entit". c. is a one+step process consi$erin! the entire fir#. $. occurs hen asset )alues are a$8uste$ to fair )alue in a purchase. *2 3earson E$ucation' Inc. pu&lishin! as 3rentice 4all
1+,
Use the folloin! infor#ation in anserin! -uestions 1* an$ 1,. Manet Corporation e%chan!es 10' shares of nel" issue$ 91 )alue co##on stock ith a fair #arket )alue of 9*0 per share for of the outstan$in! 90 par )alue co##on stock of Dar$ner Inc Dar$ner is then $issol)e$. Manet pai$ the folloin! costs e%penses relate$ to the &usiness co#&ination; Costs of special sharehol$ers7 #eetin! to )ote on the #er!er
1*.
par all an$ an$
91,' 15' 2' 10' 11'
In the &usiness co#&ination of Manet an$ Dar$ner a. the costs of re!isterin! an$ issuin! the securities are inclu$e$ as part of the purchase price for Dar$ner. &. onl" the salaries of Manet?s e#plo"ees assi!ne$ to the #er!er are treate$ as e%penses. c. all of the costs e%cept those of re!isterin! an$ issuin! the securities are inclu$e$ in the purchase price of Dar$ner. $. onl" the accountin! an$ le!al fees are inclu$e$ in the purchase price of Dar$ner.
1,.
In the &usiness co#&ination of Manet an$ Dar$ner a. all of the ite#s liste$ a&o)e are treate$ as e%penses. &. all of the ite#s liste$ a&o)e e%cept the cost of re!isterin! an$ issuin! the securities are e%pense$. c. the costs of re!isterin! an$ issuin! the securities are $e$ucte$ fro# the fair #arket )alue of the co##on stock use$ to ac-uire Dar$ner. $. onl" the costs of closin! $uplicate facilities' the salaries of Manet?s e#plo"ees assi!ne$ to the #er!er' an$ the costs of the sharehol$ers? #eetin! oul$ &e treate$ as e%penses.
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15.
In State#ent 15*' hich of the folloin! #etho$s $oes the 6ASB consi$er the &est in$icators of fair )alues in the e)aluation of !oo$ill i#pair#ent( a. &. c. $.
10.
1:.
9:5' 9*5' 95' 9
Accor$in! to 6ASB 151' lia&ilities assu#e$ in an ac-uisition ill &e )alue$ at the a. &. c. $.
1=.
Senior e%ecuti)e7s esti#ates. 6inancial anal"st forecasts. Market )alue. The present )alue of future cash flos $iscounte$ at the fir#7s cost of capital.
esti#ate$ fair )alue. historical &ook )alue. current replace#ent cost. present )alue usin! #arket interest rates.
In reference to the 6ASB $isclosure re-uire#ents' hich of the folloin! is correct( a. Infor#ation relate$ to se)eral #inor ac-uisitions #a" not &e co#&ine$. &. 6ir#s are not re-uire$ to $isclose the &usiness purpose for a co#&ination c. Notes to the financial state#ents of an ac-uirin! corporation #ust $isclose that the &usiness co#&ination as accounte$ for &" the ac-uisition #etho$. $. All of the a&o)e are correct.
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1@.
Doo$ill arisin! fro# a &usiness co#&ination is a. char!e$ to
12.
In reference to international accountin! for !oo$ill' hich of the folloin! state#ents is correct( a. U.S. co#panies ha)e co#plaine$ that past accountin! rules for a#ortiin! !oo$ill place$ the# at a $isa$)anta!e in co#petin! a!ainst forei!n co#panies for #er!er partners. &. So#e forei!n countries per#itte$ the i##e$iate rite+off of !oo$ill to stockhol$ers7 e-uit". c. The IASB an$ the 6ASB are orkin! to eli#inate $ifferences in accountin! for &usiness co#&inations. $. All of the a&o)e are correct.
*.
In recor$in! ac-uisition costs' hich of folloin! proce$ures is correct( a.
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E%ercises O* E%ercise 1 On Fanuar" *' *0 Bison Corporation issue$ 1' ne shares of its 90 par )alue co##on stock )alue$ at 912 a share for all of >eer Corporation7s outstan$in! co##on shares. Bison pai$ 910' to re!ister an$ issue shares. Bison also pai$ 91' for the $irect co#&ination costs of the accountants. The fair )alue an$ &ook )alue of >eer?s i$entifia&le assets an$ lia&ilities ere the sa#e. Su##arie$ &alance sheet infor#ation for &oth co#panies 8ust &efore the ac-uisition on Fanuar" *' *0 is as follos; Bison
>eer
Cash In)entories Other current assets an$ 3lant assets+net Total Assets
9
10' ,*' 0' ,0' 5'' 90',*'
9
1*' 5' 0' *0' 1'0' 9*'=='
Accounts pa"a&le Notes pa"a&le Capital stock' 90 par 3ai$+in capital
91'' 1',' *'' 1'' *' 90',*'
9
,' ::' 0' 1' 1'*1' 9*'=='
eer' assu#in! that >eer sur)i)es as a separate le!al entit". *. 3repare Bison?s !eneral 8ournal entr" for the ac-uisition of >eer' assu#in! that >eer ill $issol)e as a separate le!al entit".
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LO2
E%ercise * On Fanuar" *' *0 Alta#ira Co#pan" issue$ @' ne shares of its 9* par )alue co##on stock )alue$ at 91* a share for all of ascau% Corporation7s outstan$in! co##on shares. Alta#ira pai$ 90' for the $irect co#&ination costs of the accountants. Alta#ira pai$ 91' to re!ister an$ issue shares. The fair )alue an$ &ook )alue of ascau%?s i$entifia&le assets an$ lia&ilities ere the sa#e. Su##arie$ &alance sheet infor#ation for &oth co#panies 8ust &efore the ac-uisition on Fanuar" *' *0 is as follos;
Cash In)entories Other current assets an$ 3lant assets+net Total Assets Accounts pa"a&le Notes pa"a&le Capital stock' 9* par 3ai$+in capital
Alta#ira 9 =0' 1:' *' 1=0' 1'0' 9*'11'
ascau% 9 :' *' *0' 1*0' =0' 91',@0'
9
9
1' =' :' 50' *:' 9*'11'
100' ,,' *0' 0' :' 91',@0'
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E%ercise , >ol#en Corporation purchase$ the net assets of Carnac Inc on Fanuar" *' *0 for 9*@' an$ also pai$ 91' in $irect ac-uisition costs. Carnac?s &alance sheet on Fanuar" *' *0 as as follos; Accounts recei)a&le+net In)entor" an$ Buil$in!+net E-uip#ent+net Total assets
9 2' 1@' *' ,' 5' 9,:'
Current lia&ilities on! ter# $e&t Co##on stock 91 par 3ai$+in capital
9 ,0' @' 1' *10' *' 9,:'
6air )alues a!ree ith &ook )alues e%cept for in)entor"' lan$' an$ e-uip#ent' that ha)e fair )alues of 9*'' 9*0' an$ 9,0'' respecti)el". Carnac has patent ri!hts )alue$ at 91'. ol#en?s !eneral 8ournal entr" for the cash purchase of Carnac?s net assets.
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E%ercise 5 The &alance sheets of 3alisa$e Co#pan" an$ Salis&ur" Corporation ere as follos on >ece#&er ,1' *5;
Current Assets E-uip#ent+net Buil$in!s+net an$ Total Assets Current ia&ilities Co##on Stock' 90 par 3ai$+in Capital
3alisa$e 9 *:' 55' :' 1' 91'5' 1' 1'' 1' *' 91'5'
Salis&ur" 9 1*' 5@' *' *' 91'' 1*' 5' *@' *' 91''
On Fanuar" 1' *0 3alisa$e issue$ ,' of its shares ith a #arket )alue of 95 per share in e%chan!e for all of Salis&ur"?s shares' an$ Salis&ur" as $issol)e$. 3alisa$e pai$ 9*' to re!ister an$ issue the ne co##on shares. It cost 3alisa$e 90' in $irect co#&ination costs. Book )alues e-ual #arket )alues e%cept that Salis&ur"7s lan$ is orth 9*0'.
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LO4
E%ercise 0 3ara$ise Inc purchase$ the net assets of Su&li#e Co#pan" on Fanuar" *' *0 for 9,*' an$ also pai$ 90' in $irect ac-uisition costs. Su&li#e?s &alance sheet on Fanuar" *' *0 as as follos; Accounts recei)a&le+net In)entor" an$ Buil$in!+net E-uip#ent+net Total assets
91@' 1@' ,' ,' ,' 950'
Current lia&ilities on! ter# $e&t Co##on stock 91 par 3ai$+in capital
9 *0' 2' 1' **0' 1' 950'
6air )alues a!ree ith &ook )alues e%cept for in)entor"' lan$' an$ e-uip#ent' that ha)e fair )alues of 9*'' 9*0' an$ 9,0'' respecti)el". Solitaire has patent ri!hts )alue$ at 91'.
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LO4
E%ercise :
On Fanuar" *' *0 Tennessee Corporation issue$ 1' ne shares of its 90 par )alue co##on stock )alue$ at 912 a share for all of Alaska Co#pan"7s outstan$in! co##on shares in an ac-uisition. Tennessee pai$ 910' for re!isterin! an$ issuin! securities an$ 91' for other $irect costs of the &usiness co#&ination. The fair )alue an$ &ook )alue of Alaska?s i$entifia&le assets an$ lia&ilities ere the sa#e. Su##arie$ &alance sheet infor#ation for &oth co#panies 8ust &efore the ac-uisition on Fanuar" *' *0 is as follos;
Cash In)entories Other current assets an$ 3lant assets+net Total Assets
Tennessee 9 10' ,*' 0' ,0' 5'' 90',*'
Alaska 9 1*' 5' 0' *0' 1'0' 9*'=='
Accounts pa"a&le Notes pa"a&le Capital stock' 90 par 3ai$+in capital
91'' 1',' *'' 1'' *' 90',*'
9
,' ::' 0' 1' 1'*1' 9*'=='
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E%ercise = Balance sheet infor#ation for Sphin% Co#pan" at Fanuar" 1' *0' is su##arie$ as follos; Current assets 3lant assets
9
*,' 50'
9
:@'
ia&ilities 9 Capital stock 91 par
,' *' 1@' :@'
Sphin%7s assets an$ lia&ilities are fairl" )alue$ e%cept for plant assets that are un$er)alue$ &" 90'. On Fanuar" *' *0' 3"ra#i$ Corporation issues *' shares of its 91 par )alue co##on stock for all of Sphin%7s net assets an$ Sphin% is $issol)e$. Market -uotations for the to stocks on this $ate are; 3"ra#i$ co##on; Sphin% co##on; Butler pa"s the co#&ination;
9*@. 912.0
folloin!
fees
an$
6in$er7s fee e!al an$ accountin! fees
costs
in
connection
ith
91' :'
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the
Solutions;
Multiple Choice Questions 1 : 11 1:
> > B A
* = 1* 1=
> B B C
, @ 1, 1@
> A C >
5 2 15 12
B B C >
0 1 10 *
E%ercise 1
1.
Deneral 8ournal entr" recor$e$ &" Bison for the ac-uisition of >eer >eer sur)i)es as a separate le!al entit"; In)est#ent in >eer Co##on stock 3ai$+in capital In)est#ent in >eer 3ai$+in capital Cash
*.
1'2' 0' 1'5' 1' 10' *0'
Deneral 8ournal entr" recor$e$ &" Bison for the ac-uisition of >eer >eer $issol)es as a separate le!al entit"; Cash In)entories Other current assets an$ 3lant assets Doo$ill Accounts pa"a&le Notes pa"a&le Co##on stock 3ai$+in capital
1*' 5' 0' *0' 1'0' =0' ,' ::' 0' 1',@0'
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C A A C
E%ercise * 1.
Deneral 8ournal entr" recor$e$ &" Alta#ira for the ac-uisition of ascau% ascau% sur)i)es as a separate le!al entit";
In)est#ent in ascau% 2:' Co##on stock 1:' 3ai$+in capital @' In)est#ent in ascau% 0' 3ai$+in capital 1' Cash 10' *. Deneral 8ournal entr" recor$e$ &" Alta#ira for the ac-uisition of ascau% ascau% $issol)es as a separate le!al entit"; Cash In)entories Other current assets an$ 3lant assets Doo$ill Accounts pa"a&le Notes pa"a&le Co##on stock 3ai$+in capital
:' *' *0' 1*0' =0' 00' 100' ,,' 1:' =2'
E%ercise , Deneral 8ournal entr" for the purchase of Carnac?s net assets; Accounts recei)a&le In)entor" an$ Buil$in! E-uip#ent 3atent Doo$ill Current lia&ilities on!+ter# $e&t Cash
2' *' *0' ,' ,0' 1' 10' ,0' @' *2'
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E%ercise 5 The stockhol$ers? e-uit" section for 3alisa$e Corporation su&se-uent to its ac-uisition of Salis&ur" Corporation on Fanuar" 1' *0 ill appear as follos; 3alisa$e Corporation Balance Sheet Fanuar" 1' *0 Current Assets E-uip#ent+net Buil$in!s+net an$ Doo$ill Total Assets Current ia&ilities Co##on Stock' 90 par 3ai$+in Capital
9
,1' 2*' @' ,0' ,*' 9*'*=' **' 1'10' 1'1,' *' 9*'='
E%ercise 0 Deneral 8ournal entr" for the purchase of Su&li#e?s net assets; Accounts recei)a&le In)entor" an$ Buil$in!+net E-uip#ent+net 3atent ri!hts Current lia&ilities on!+ter# $e&t Cash E%traor$inar" !ain
1@' *' *0' ,' ,0' 1' *0' 2' ,*0' 5'
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E%ercise : Tennessee Corporation Balance Sheet Fanuar" 1' *0 Assets; Cash 9 *50' In)entor" =*' Other current assets 1'' Total current assets 1'2:0' an$ 3lant assets+net Doo$ill Total .T. assets Total assets
ia&ilities; Accounts pa"a&le Notes pa"a&le Total lia&ilities
:' 0'0' 1' :'*'
91',' 1'2:' ,'*:'
E-uit"; Co##on stock 90 par *'0' 3ai$+in capital *',@0'
9@'1:0'
E%ercise =
9
9
0:' 1' :' 0=:'
9
0=:'
9
5,' 15:'
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