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Business Combinations-Statutory Mergers and Statutory Consolidations
Business Combinations-Statutory Mergers and Statutory Consolidations
Business Combinations-Statutory Mergers and Statutory Consolidations
CONSOLIDATIONS
1. Statement 1 (S1): When two entities competing in the same industry combine, it is
called a horizontal business combination.
Statement 2 (S2): Horizontal business combinations are likely to occur when
management is attempting to dominate a geographic segment of the market.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
2. Statement 1 (S1): One way that a horizontal business combination can increase
sales for an entity is to expand into new product markets.
Statement 2 (S2): A vertical business combination generally involves companies
attempting to improve the efficiency of operations by purchasing suppliers of inputs
or purchases of outputs.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
3. Statement 1 (S1): When a retail clothing store purchases a competitor in another
city, a vertical combination has occurred.
Statement 2 (S2): A vertical combination is one where the entities have a potential
buyer- seller relationship.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
4. Statement 1 (S1): A business combination in which a supplier or raw materials is
acquired is a conglomerate combination.
Statement 2 (S2): A conglomerate combination is often undertaken to help increase
income stability due to diversifying the asset base of an entity.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
5. Statement 1 (S1): Conglomerate combinations are easy for the government to
challenge in court.
Statement 2 (S2): If negotiation between management groups leads to a mutually
agreeable business combination, the process is called a friendly takeover.
a. S1- True; S2- True d. S1- False; S2- False
b. S1- True; S2- False
c. S1- False; S2- True
6. Statement 1 (S1): An offer by an acquirer to buy the stock of another company is
commonly called a tender offer.
Statement 2 (S2): A tender offer that is opposed by the acquire management is
called a hostile bid.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
7. Statement 1 (S1): Greenmail exists when a company is encouraged to buy a
potential acquiree.
Statement 2 (S2): A poison pill is the term used to describe the issuance of a special
kind of convertible preferred stock to deter the acquisition of the company.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
8. Statement 1 (S1): The sale of crown jewels defensive maneuver involves the sale of
more assets than does the scorched earth defense.
Statement 2 (S2): The fatman defensive maneuver involved the acquisition of assets
by the potential acquiree.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
9. Statement 1 (S1): Golden parachutes give a bonus to all employees if the company
is acquired.
Statement 2 (S2): The pacman defensive maneuver is where a potential acquiree
attempts to purchase the acquirer.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
10. Statement 1 (S1): A business combination occurs when one entity gains control
over the new assets of another entity.
Statement 2 (S2): The only way to attain control over the net assets of another entity
is to purchase the net assets.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
11. Statement 1 (S1): In an acquisition where the acquirer pays cash for the acquiree
assets, the book value of the acquirer increases.
Statement 2 (S2): In an acquisition of assets for assets, the ownership structure of
the aquiree does not change.
a. S1- True; S2- True d. S1- False; S2- False
b. S1- True; S2- False
c. S1- False; S2- True
12. Statement 1 (S1): In an acquisition of assets for assets, the ownership structure of
the acquirer changes.
Statement 2 (S2): There is an increase in the total capitalization of an acquirer when
the acquirer issues stock for acquiree assets.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
13. Statement 1 (S1): In an exchange of stock (acquirer) for assets (acquiree), the
ownership structure of the acquiree does not change.
Statement 2 (S2): In an exchange of stock (acquirer) for assets (acquiree), the
acquiree stockholders become acquirer stockholders.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
14. Statement 1 (S1): Control over the acquiree assets is directly achieved in an asset
for asset exchange but indirectly achieved in an asset (acquirer) for stock (acquiree)
exchange.
Statement 2 (S2): A business combination that occurs where only one of the original
entities in existence after the combination is called a statutory consolidation.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
15. Statement 1 (S1): The acquiree entity is liquidated in a statutory merger.
Statement 2 (S2): For a business combination to qualify as a statutory consolidation,
a new corporation must be formed.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
16. Statement 1 (S1): In a statutory consolidation form of business combination, the
Retained Earnings account of the newly formed corporation has a balance of zero
immediately after the combination.
Statement 2 (S2): After completing a business combination in the form of a statutory
merger or statutory consolidation, there is only one legal entity in existence.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
17. Statement 1 (S1): In a business combination accomplished as a stock acquisition
normally two companies exist after the combination.
Statement 2 (S2): A business combination accomplished as a stock acquisition must
be accomplished with a stock for stock exchange.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
18. Statement 1 (S1): A stock acquisition is the only form of business combination that
might require the preparation of consolidated financial statements.
Statement 2 (S2): The substance of statutory mergers, statutory consolidations, and
stock acquisitions is the same if income tax considerations are ignored.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
19. Statement 1 (S1): There are no uncertainties when two companies agree on a
business combination.
Statement 2 (S2): When the acquisition price of an acquiree is contingent on
acquiree future earnings, the acquisition price may change
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
20. Statement 1 (S1): When the acquisition price of an acquiree is contingent on the
market value of the acquirer stock, the acquisition price may change
Statement 2 (S2): For business combinations to qualify as reorganizations (for tax
purposes), the acquiree stockholders must receive voting common stock of the
acquirer.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
21. Statement 1 (S1): There are different required levels of stock ownership in the acquire for the
three different types of reorganizations for tax purposes.
Statement 2 (S2): One important benefit in a business combination is any net operating loss
carryforward that might exist and be available to the acquirer.
a. Horizontal Combination
b. Vertical Combination
c. Conglomerate Combination
d. Market domination can be the goal of any type of combination
22. Horizontal business combinations occur when one entity purchases which of the following?
a. A supplier
b. A customer
c. A Competitor
d. none of the above
24. Horizontal business combinations help sales increase by all but which of the following?
25. Which of the following types of business combinations typically occurs when management is
attempting to improve the efficiency of operations?
a. Horizonal Combination
b. Vertical combination
c. Conglomerate Combination
d. Improved efficiency can be the goal of any type of combination
26. A vertical combination occurs when one entity acquires another entity which has the
following characteristic(s)?
28. Which of the following types of business combinations typically occurs when management is
attempting to diversity its investment?
a. Horizontal combination
b. Vertical combination
c. Conglomerate combination
d. Diversification can be the goal of any type of combination
29. Management acquires a business in o tangentially related Industry to the current business.
What form of business combination is accomplished?
a. Vertical combination
b. Conglomerate combination
c. Mega combination
d. Horizontal combination
30. One reason for conglomerate combinations is that management has become more aware that
it helps accomplish which of the following?
a.. It helps increase income stability provided by diversifying the asset base of an entity
b. It helps increase market share in the industry
c. It helps assure a constant supply of raw materials
d. A conglomerate combination helps accomplish all three
31. Business combinations that result in one dominant company in an industry are said to
have formed which of the following?
a. Pure competition
b.Monopoly
c. Oligopoly
d. Free market
32. The business enterprises that enter into a business combination are termed the
a. Merging companies
b. Constituent companies
c. Joining companies
d. Combiner companies
33. When an offer is made to acquire a company and the acquiree management supports
the offer, the offer is called which of the following?
a. Friendly takeover
C. Hostile takeover
b. Tender offer
d. Defensive measure
34. The defensive maneuver where a company buýs stock from a potential acquirer at
premium over the market price is called which of the following
a. White knight
b. Shark repellent
c. Greenmail
d. Sale of the crown jewels
35. The defensive maneuver where a company seeks to be acquired by a company
perceived to be a better match than the company making an offer to buy the potential
acquiree is called which of the following?
a. Poison pill
b. White knight
c. Golden parachutes
d. Pac-man defense
36. Company A makes a hostile take-over bid 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
a. Pac-man defense
b. Selling the crown jewels.
c. Poison Pill.
d. A Hostile Defense
37. Company A has made an offer to purchase all of the outstanding shares of Company B
for P10 per share (the current market value of the shares). In response to Company A's
offer, the shareholders of Company B were given rights to purchase additional shares at
P8 per share. Which of the following tactics was employed by Company B to prevent
Company A from acquiring control of Company B?
a. Pac-man defense
b. Selling the crown jewels
C. Poison Pill
d. A Reverse-takeover
38. What is the term used for the defensive maneuver where management of a potential
acquiree sells desirable assets to reduce the company's values
41. Able Ltd. offers to buy shares from existing shareholders of Wei Co. at a premium price. The
management and board of directors of Wei have let the Wei shareholders know that they do not
approve of this. This is an example of a(n) __________
42. Control over an acquiree can be attained through which of the following?
43. In an acquisition of assets, the acquirer must give up which of the following?
a. Cash
b. Other assets
c. Liabilities
d. Any of the above can be given
44. In an acquisition where there is an exchange of assets for assets, how does the value of
the acquiree net assets change?
45. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquiree change?
46. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquirer change?
47. .How does the value of the acquiree net assets change?
48. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree),
how does the ownership structure of the acquiree change
49. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree)
how does the ownership structure of the acquirer change?
50. Control over acquiree assets is attained in a business combination. Indirect control is
attained in which type of exchange?
a. Assets for assets
b. Stock (acquirer) for assets (acquiree)
c Stock for stock
d. Either b or c
51. Which of the following forms of business combination is not subject to laws specific to
business combinations?
52. Which of the following is not a true statement with regard to a statutory merger?
53. Which of the following is not true with regard to the statutory consolidation form of
business combination?
54. Following the completion of a business combination in the form of a statutory consolidation,
what is the balance in the new corporation's Retained Earnings account?
55. Which of the following is not true with regard to a business combination accomplished in
the form of a stock acquisition?
a. Two companies remain in existence after the combination
b. A parent-subsidiary relationship is said to exist
c. Consolidated financial statements are normally required
d. All of the above statements are true
56. Which of the following contingencies may change the cost of an acquisition
a. Statutory amalgamation
b. Joint venture
c. A company's purchase of 100% of another company's net assets
d. A company's purchase of 80% of another company's voting shores
59. Under PFRS 3, Business Combinations, which method must be used to account for business
combinations?
a. Purchase method
b. Pooling-of-interests method
c. Acquisition method
d. New entity method
a. Perez would prefer to purchase Roo's assets and Roo would prefer to sell its shares to Perez.
b. Perez would prefer to purchase Roo's shares and Roo would prefer to sell its assets to Perez.
c. Both Perez and Roo would prefer Perez to purchase Roo's shares.
d. Both Perez and Roo would prefer Perez to purchase Roo's assets.
62. Perez Co. acquired Roo Co. in a business combination. Roo issued new shares to Perez's
shareholders in exchange for their outstanding shares. What type of share exchange is this?
63. Perez Co. acquired Roo Co. in a business combination. Perez issued new shares to Roo's
shareholders in exchange for their outstanding shares. What type of share exchange is this?
a. Direct exchange c. Hostile takeover
b. Indirect exchange d. Reverse takeover
64. Ho Ltd. and Hee Ltd. exchanged shares in a business combination. After the share
Exchange, each company held the same number of voting shares, Which of the following
statements is true?
a. The company with the highest net assets is considered the acquirer.
b. The companies must ask the courts to decide which company is the acquirer
c. A number of factors must be considered to determine which company is the acquirer.
d. There is no acquirer as this is not a proper business combination.
65. How should the transaction costs of issuing shares in an acquisition be recognized?
a. Expensed
p. Capitalized as part of the cost of the shares
c. Deducted in total from shareholders' equity
d. Deducted from shareholders equity, net of related income tax benefits
a. Expensed
b. Amortized over the term of the debt
c. Deducted from the value of the debt
d. Deducted from shareholders' equity
68. Which of the following is not a reason why a private enterprise may be acquired as a
bargain purchase?
a. It is a family business and the next generation does not want fo to continue the
business.
b. The owner has health problems and does not have a successor.
c. The business only has equity financing and hos no debt financing.
d. The owner is no longer interested in the business.
70. What is the most common valuation method used for intangible assets?
a. Market-based c. Cost-based
b. Income-based d. Amortized cost
71. How should negative goodwill be shown on the consolidated financial státements of
the acquirer?
72. Roj Co. acquired all of Event Ltd.'s common shares. At the date of acquisition, Event
had P80,000 of goodwill resulting from its acquisition of Baker Ltd. a few years ago. At Raj date
of acquisition. what is the proper treatment of Event's P80,000 of goodwill?
73. Which of the following does NOT constitute a Business Combination under IFRS 3?
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 continues 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
77. In reference to the IASB disclosure requirements, which of the following is correct?
79. In reference to international accounting for goodwill, which of the following statements is
correct?
a. U.S. companies have complained that past accounting rules for amortizing goodwill placed
them at a disadvantage in competing against foreign
b. Some foreign countries permitted the immediate write-off of goodwill to stockholders
c. The IA9B and the FASB are working to eliminate differences in accounting for business
equity combinations.
d. All of the above are correct
a. Registration costs are expensed, and nof charged against the fair value of the
b. Indirect costs are charged against the fair value of the securities issued.
securities issued.
c. Consulting fees are expensed.
d. None of the above procedures is correct.
a. In an asset acquisition, the books of the acquired company are closed out and its
assets and liabilities are transferred to the books of the acquirer.
b. In many cases, stock acquisitions entail lower total cost than asset acquisitions.
c. Regulations pertaining to one of the firms do not automatically extend to the entire
merged entity in a stock acquisition.
d. A Stock acquisition occurs when one corporation pays cash, issues stock, or issues
debt for all or part of the voting stock of another company: and the acquired
company dissolves and ceases to exist as a separate legal entity.
a. Cash c. Stock
b. Debt d. Any of the above may be used
83. Slocum Corporation and Merton Company, both publicly owned companies, are
Planning a merger, with Slocum being the survivor. Which of the following is are requirement of
the merger?
84: PFRS 3 requires that all business combinations be accounted for using
85. Under the acquisition method, if the fair values of identifiable net assets exceed the
value implied by the purchase price of the acquired company, the excess should be
86. PFRS 3 requires that the acquirer disclose each of the following for each material business
combination except the
87. When the acquisition price of an acquired firm is less than the fair value of the identifiable
net assets, all of the following are recorded at fair value except
a. Assumed liabilities.
b. Current assets.
c. Long-lived assets.
d. Each of the above is recorded at fair value
89. A business combination is accounted for properly as an acquisition. Which of the following
expenses related to effecting the business combination should enter into
determination of net income of the combined corporation for the period in which expenses are
incurred?
Security Overhead allocated
issue costs to the merger
a. Yes Yes
b. Yes No
c. No Yes
d. No No
90. In a business combination, which of the following costs are assigned to the valuation of the
security?
Professional or Security
consultinig fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No
91. Parental Company and Sub Company were combined in an acquisition transaction.
Parental was able to acquire Sub at a bargain price. The sum of the fair values of
identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Parental.
After eliminating previously recorded goodwill, there was still some "negative goodwill." Proper
accounting treatment by Parental is to repot the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.
93. In a business combination accounted for as an acquisition, how should the excess of fair
value of net. assets acquired over the consideration paid be treated?
94. If the value implied by the purchase price of an acquired company exceeds the fair
values of identifiable net assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder
as an ordinary gain.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce long-lived assets.
d. allocated goodwill
95. P Co. issued 5,000 shares of its common stock, valued at P200,000, to the former
shareholders of S Company two years after S Company was acquired in an all-stock
transaction. The additional shares were issued because P Company agreed to issue
additional shares of common stock if the average post combination earnings over the
next two years exceeded P500.000. P Company will treat the issuance of the additional
shares as a (decrease in)
a. retained earnings.
b. goodwill.
c. paid-in capital.
d. non-current liabilities of S Company assumed by P Company.
96. The fair value of assets and liabilities of the acquired entity is to be reflected in the
financial statements of the combined entity. When the acquisition takes place over a
period of time rather than all at once, at what time is the fair value of the assets and
liabilities of the acquired entity determined?
97. Under PFRS 3, what value of the assets and liabilities is reflected in the financial statements
on the acquisition date of a business combination?
98. What is the appropriate accounting treatment for the value assigned to in-process
research and development acquired in a business combination?
99. An acquired entity has a long-term operating lease for an office building used for central
management. The terms of the lease are very favorable relative to current market rates. However,
the lease prohibits subleasing or any other transfer of rights. In its financial statements, the
acquiring firm should report the value assigned to the lease contract as
101. Company B acquired the net assets of company S in exchange for cash. The acquisition
price exceeds fair value of the net assets acquired. How should company B determine the
amounts to be reported for the plant and equipment, and for long term debt of the
acquired Company S?
a. sum of the fair values assigned to intangible assets less liabilities assumed
b. sum of the fair values assigned to tangible and identifiable intangible assets acquired less
liabilities assumed
c. sum of the fair values assigned to intangibles acquired less liabilities
d. book value of an acquired company
103. When the acquisition of another company occurs, IASB recommends disclosing, all of
the
following EXCEPT
a. goodwill assigned to each reportable segment.
b. information concerning contingent consideration including a description of the and the
range of outcomes.
c. results of operations for the current period if both companies had remained separate.
d. a qualitative description of factors that make up the goodwill recognized
105. Acquisition costs such as the fees of accountants and lawyers that were necessary to
negotiate and consummate the purchase are
a. recorded as a deferred asset and amortized over a period not to exceed 15 years.
b. expensed if immaterial but capitalized and amortized it over 2% of the acquisition
price.
c. expensed in the period of the purchase.
d. included as part of the price paid for the company purchased.
106. Which of the following income factors should not be factored into an estimation of
goodwill?
a. sales for the period
b. income tax expense
c. extraordinary items
d. cost of goods sold
MULTIPLE CHOICE THEORIES - ANSWERS
1. B 35. B 69. D
2. A 36. A 70. B
3. C 37. C 71. A
4. C 38. A 72. C
5. A 39. C 73. B
6. A 40. C 74. D
7. D 41. B 75. A
8. C 42. C 76. A
9. C 43. D 77. C
10. B 44. D 78. D
11. C 45. A 79. D
12. C 46. A 80. C
13. B 47. D 81. D
14. B 48. A 82. D
15. A 49. B 83. D
16. C 50. C 84. C
17. B 51. A 85. D
18. A 52. C 86. D
19. C 53. C 87. D
20. D 54. A 88. B
21. B 55. D 89. C
22. A 56. A 90. C
23. C 57. D 91. C
24. B 58. B 92. A
25. B 59. C 93. D
26. D 60. B 94. D
27. C 61. A 95. C
28. C 62. D 96. B
29. B 63. A 97. B
30. A 64. C 98. B
31. B 65. D 99. A
32. C 66. C 100.
33. A 67. A A
34. C 68. C
101.
B
102.
B
103.
C
104.
B
105.
C
106.
C