Chapter 1 Test Bank

BUSINESS COMBINATIONS
Multiple Choice Questions
1.

Which of the following is a reason why a company would expand through a

combination, rather than by building new facilities?
a.
b.
c.
d.

2.

A business combination in which a new corporation is created and two or more

existing corporations are combined into the newly created corporation is called
a
a.
b.
c.
d.

3.

c.
d.

one acquires less than 20% equity ownership of the other.

one companys ownership interest in another gives it control of the
acquired company, yet the acquiring company does not have a majority
ownership in the acquired. Typically, this is in the 20%-50% interest
range.
one acquires two thirds equity ownership in the other.
one gains control over the entity, irrespective of the equity percentage
owned.

Michangelo Co. paid $100,000 in fees to its accountants and lawyers in

acquiring Florence Company. Michangelo will treat the $100,000 as
a.
b.
c.
d.

6.

at least 20% ownership in the entity.

more than 50% ownership in the entity.
100% ownership in the entity.
control over the entity, irrespective of the percentage owned.

FASB favors consolidation of two entities when

a.
b.

5.

merger.
purchase transaction.
pooling-of-interests.
consolidation.

A business combination occurs when a company acquires an equity interest in

another entity and has
a.
b.
c.
d.

4.

A combination might provide cost advantages.

A combination might provide fewer operating delays.
A combination might provide easier access to intangible assets.
All of the above are possible reasons that a company might choose a
combination.

an expense for the current year.

a prior period adjustment to retained earnings.
additional cost to investment of Florence on the consolidated balance
sheet.
a reduction in paid-in capital.

Picasso Co. issued 10,000 shares of its $1 par common stock, valued at
$400,000, to acquire shares of Bull Company in an all-stock transaction.
Picasso paid the investment bankers $35,000. Picasso will treat the
investment banker fee as:
a.
b.
c.
d.

an expense for the current year.

a prior period adjustment to Retained Earnings.
additional goodwill on the consolidated balance sheet.
a reduction in paid-in capital.

7.

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
Corps books at the patent office filing cost. In recording the combination
a.
b.
c.
d.

8.

fair value is not assigned to the patent because the research and
development costs have been expensed by Sea Corp.
Sea Corps prior expenses to develop the patent are recorded as an
asset by Durer at purchase.
the patent is recorded as an asset at fair market value.
the patent's market value increases goodwill.

In a merger, which of the following will occur?

a.
b.
c.
d.

9.

A merger occurs when one corporation takes over the operations of

another business entity, and the acquired entity is dissolved.
None of the business entities will be dissolved.
The acquired assets will be recorded at book value by the acquiring
entity.
None of the above is correct.

According to FASB Statement 141, which one of the following items may not
be accounted for as an intangible asset apart from goodwill?
a.
b.
c.
d.

10.

Under the provisions of FASB Statement No. 141R, in a business combination,

when the fair value exceeds the investment cost, which of the following
statements is correct?
a.
b.
c.
d.

11.

A production backlog.
A talented employee workforce.
Noncontractual customer relationships.
Employment contracts.

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.
the value 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.
it is allocated first to reduce proportionately (according to market value)
non-current assets, and any negative remainder is classified as an
extraordinary gain.
It 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.

With respect to goodwill, an impairment

a.
b.
c.
d.

will be amortized over the remaining useful life.

is a two-step process which analyzes each business unit of the entity.
is a one-step process considering the entire firm.
occurs when asset values are adjusted to fair value in a purchase.

Use the following information in answering questions 12 and 13.

Manet Corporation exchanges 150,000 shares of newly issued $1 par value common
stock with a fair market value of $25 per share for all of the outstanding $5 par value
common stock of Gardner Inc and Gardner is then dissolved. Manet paid the following
costs and expenses related to the business combination:
Costs of special shareholders meeting
to vote on the merger
$13,000
Registering and issuing securities
14,000
Accounting and legal fees
9,000

Salaries of Manets employees assigned

to the implementation of the merger
15,000
Cost of closing duplicate facilities
11,000
12.

In the business combination of Manet and Gardner

a.
b.
c.
d.

13.

the costs of registering and issuing the securities are included as part of
the purchase price for Gardner.
only the salaries of Manet's employees assigned to the merger are
treated as expenses.
all of the costs except those of registering and issuing the securities are
included in the purchase price of Gardner.
only the accounting and legal fees are included in the purchase price of
Gardner.

In the business combination of Manet and Gardner

a.
b.

14.

all of the items listed above are treated as expenses.

all of the items listed above except the cost of registering and issuing the
securities are expensed.
c.
the costs of registering and issuing the securities are deducted from the
fair market value of the common stock used to acquire Gardner.
d. only the costs of closing duplicate facilities, the salaries of Manet's
employees assigned to the merger, and the costs of the shareholders'
meeting would be treated as expenses.
In Statement 142, which of the following methods does the FASB consider the
best indicators of fair values in the evaluation of goodwill impairment?
a.
b.
c.
d.

15.

Raphael Company paid $2,000,000 for the net assets of Paris Corporation and
Paris was then dissolved. Paris had no liabilities. The fair values of Paris
assets were $2,500,000. Pariss only non-current assets were land and
equipment with fair values of $160,000 and $640,000, respectively. At what
value will the equipment be recorded by Raphael?
a.
b.
c.
d.

16.

$640,000
$240,000
$400,000
$0

According to FASB 141, liabilities assumed in an acquisition will be valued at

the
a.
b.
c.
d.

17.

Senior executives estimates.

Financial analyst forecasts.
Market value.
The present value of future cash flows discounted at the firms cost of
capital.

estimated fair value.

historical book value.
current replacement cost.
present value using market interest rates.

In reference to the FASB disclosure requirements, which of the following is

correct?
a.
b.
c.
d.

Information related to several minor acquisitions may not be combined.

Firms are not required to disclose the business purpose for a
combination
Notes to the financial statements of an acquiring corporation must
disclose that the business combination was accounted for by the
acquisition method.
All of the above are correct.

18.

Goodwill arising from a business combination is

a.
b.
c.
d.

19.

In reference to international accounting for goodwill, which of the following

statements is correct?
a.
b.
c.
d.

20.

charged to Retained Earnings after the acquisition is completed.

amortized over 40 years or its useful life, whichever is longer.
amortized over 40 years or its useful life, whichever is shorter.
never amortized.

U.S. companies have complained that past accounting rules for

amortizing goodwill placed them at a disadvantage in competing against
foreign companies for merger partners.
Some foreign countries permitted the immediate write-off of goodwill to
stockholders equity.
The IASB and the FASB are working to eliminate differences in
accounting for business combinations.
All of the above are correct.

In recording acquisition costs, which of following procedures is correct?

a.
b.
c.
d.

Registration costs are expensed, and not charged against the fair value
of the securities issued.
Indirect costs are charged against the fair value of the securities issued.
Consulting fees are expensed.
None of the above procedures is correct.

Solutions:
Multiple Choice Questions
1
6
11
16

D
D
B
A

2
7
12
17

D
B
B
C

3
8
13
18

D
A
C
D

4
9
14
19

B
B
C
D

5
10
15
20

C
A
A
C