Exam 27: Business Combinations

Pop Entity acquires 75,000 of Soda Entity's 100,000 outstanding shares in exchange for $3 million. The fair value of all the net identifiable assets of Soda Entity at acquisition date is $3.5 million. Assuming fair value treatment of the non-controlling interest, should Pop Entity recognize a positive or negative goodwill (i.e., bargain purchase) and how much will this amount be on the consolidated financial statements of Pop Entity.

Which of the following correctly describes the importance of the acquisition date in business combination accounting?

An intangible asset may meet the separability criterion, even if the asset would have to be bundled with another asset to transfer.

Alpha Co has also acquired several lease contracts from Beta Co in which Beta Co is the lessor. These leases are currently $50,000 unfavorable for Alpha Co in comparison to the market. How should Alpha Co account for this decreased value?

An asset is not considered "identifiable" if it doesn't meet the separability criterion and if the legal rights are not transferable or separable from the acquiree.

Parent Entity owns 40% of AcquireCo voting shares, Sub Entity (a subsidiary of Parent Entity) owns 11% of AcquireCo voting shares, and AcquireCo has 49% of voting shares. Which company is considered to have control?

Remark Entity owns 40% of the voting ordinary shares in Retail Entity. On June 15, 20X1, acquires an additional 5% of voting ordinary shares. Remark Entity also owns call options that would give it an additional 10% of the voting rights. These options have not been exercised, but are exercisable. On October 15, 20X1, Remark Entity exercises all of the call options. On which of the following dates does Remark Entity gain control of Retail Entity?

Palm Entity acquires Sap Entity on June 30, 20X1. Palm Entity uses an independent valuation organization to value a patent that was acquired from Sap. As of Dec. 31, 20X1, the valuation team had not finalized their valuation, and the patent was recognized at $500,000 with a useful life of 20 years. Consequentially, goodwill was valued at $200,000. Three months later, Sap was informed by the valuation organization that the patent was actually worth $600,000. By what amount should the carrying amount of the Dec. 31, 20X1 patent be changed? By what amount should goodwill be changed? How much should amortization expense be increased or decreased for 20X1?

Peanut Entity acquired Scooby Entity for $500 million. The fair value of the net assets of Scooby upon acquisition was $400 million (i.e., goodwill = $100 million). Six months after acquisition, new information comes to light that suggests that Scooby has an additional deferred tax benefit of $25 million. How should Peanut account for this discovery of information?

The measurement period for all items acquired in an acquisition is limited to one year after the acquisition date.

What is a non-controlling interest? Give an example of a situation in which a non-controlling interest would be created.

Plant Entity holds 15% of Seed Entity as available-for-sale securities. The following table outlines the changes in value of the stock for Seed Entity. Value per share Date No. of shares Ownership interest Value cost Fair value 12/31/\times3 7500 15\% 18 20 12/31/\times4 7500 15\% 18 23 12/31/\times5 20000 40\% 25 25 Determine what the re-measurement from OCI to P&L would be at December 31, 20X5.

Which of the following statements concerning goodwill is not true?

Joint ventures should be accounted for under IFRS 3.

ABC Entity acquired XYZ Entity buy purchasing 18,750 of XYZ's 25,000 shares for $375,000 in cash. The fair value of the net identifiable assets of XYZ is $400,000. The trading price on the date of acquisition is $20 per share. Determine the goodwill to be recognized and the amount to be allocated to the NCI under the fair value method and the NCI's share of the acquiree's identifiable net assets method.

In post-acquisition periods, long-lived assets classified as held for sale should be depreciated and amortized over their expected useful lives.

ParentCo has acquired FinanceCo, and is trying to value the receivables. The current gross amount of receivables is $500,000. The contra-account, allowance for doubtful accounts, is $50,000. Assume the fair value is the same as the net value of the assets. What value should ParentCo put FinanceCo's receivables on its books for?

Goodwill does not have to be present in a business combination, but the presence of goodwill is compelling evidence of the acquisition of a business.

The accounting and billing functions of a business are two examples of processes in a business.

Alpha Co has just acquired Beta Co. Beta Co was the lessee for several operating leases on various buildings. Because of market conditions, these leases are worth $100,000 more to the lessee on the date of acquisition. How should Alpha Co account for this?