Deck 3: Business Combinations

Question 1

Bellvista Limited acquired the net assets and contingent liabilities of Aroona Limited for a purchase consideration of $600 000. Aroona Limited's net assets and contingent liabilities at fair value were: total assets $840 000; total liabilities $300 000; and contingent liabilities $100 000. The amount of goodwill to be recognised by Bellvista Limited when recording the business combination is:

A) $160 000.
B) $260 000.
C) $400 000.
D) $440 000.

Answer 1

A

Question 2

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date is defined in AASB 3/IFRS 3 Business Combinations as the:

A) market value.
B) fair value.
C) present value.
D) current replacement cost.

Answer 2

B

Question 3

Goodwill arising in a business combination is classified as a/an:

A) item in equity.
B) asset.
C) liability.
D) expense associated with the acquisition.

Answer 3

B

Question 4

The date on which the acquirer obtains control of the acquiree is referred to as the:

A) business combination date.
B) acquisition date.
C) control date.
D) purchase date.

Question 5

In a business combination, the acquirer is the entity that:

A) obtains control of the acquiree.
B) concedes control over the acquired entities.
C) sells the acquired entity.
D) the acquiree obtains control of in a business combination.

Question 6

According to AASB 3/IFRS 3 Business Combinations, the appropriate accounting treatment for the costs of issuing shares by the acquirer as part of a business combination is to record them as a debit to:

A) share capital.
B) share issue reserve.
C) retained earnings.
D) acquisition expenses.

Question 7

How many input levels does AASB 13/IFRS 13 Fair Value Measurement identify for the inputs to the valuation techniques?

A) 2
B) 6
C) 4
D) 3

Question 8

Which of the following is not an example of a contract-based intangible asset?

A) Franchise agreements
B) Unpatented technology
C) Trademarks
D) Pictures and photographs

Question 9

Under AASB 3/IFRS 3 Business Combinations, a gain on bargain purchase arises when the acquirer's interest in the net fair value of the acquiree's identifiable assets and liabilities is:

A) less than the carrying amount of the net assets acquired.
B) less than the consideration transferred.
C) greater than the consideration transferred.
D) more than the book values of the identifiable assets acquired.

Question 10

According to the Conceptual Framework, recognition of an asset occurs if it is probable that future economic benefits will flow to the entity and:

A) it has a value that can be measured with reliability.
B) it is a non-current asset.
C) it has a value that can be measured with certainty.
D) it is a current asset.

Question 11

In a business combination, the acquiree is the business that:

A) finances the business combination.
B) the acquirer obtains control of in a business combination.
C) obtains control of the acquiree.
D) pays the acquisition consideration.

Question 12

Under AASB 3/IFRS 3 Business Combinations, the required method of accounting for a business combination is the:

A) control method.
B) acquisition method.
C) purchase method.
D) combination method.

Question 13

Which of the following is an example of asset recognised by the acquirer as part of a business combination but that is not recognised by the acquiree?

A) Inventory
B) Land and buildings
C) Prepaid insurance
D) Internally generated brands

Question 14

Maroons Limited acquired the net assets and contingent liabilities of Lewis Limited for $60 000. Lewis Limited's net assets and contingent liabilities were: total assets $84 000; total liabilities $10 000; and contingent liabilities $12 000. Maroons Limited will record a:

A) goodwill of $2000.
B) gain on bargain purchase of $2000.
C) goodwill of $14 000.
D) gain on bargain purchase of $60 000.

Question 15

The cost approach to determining fair value involves:

A) determining an amount which reflects the amount currently needed to replace the service capacity of an asset.
B) using prices generated by market transactions involving identical or comparable assets or liabilities.
C) converting future amounts such as cash flows to a current, discounted amount.
D) none of the above.

Question 16

The two types of contingent liabilities are:

A) current obligations and non-current obligations.
B) present obligations and possible obligations.
C) present obligations and impossible obligations.
D) future obligations and possible obligations.

Question 17

Ying Limited acquires the net assets of Yang Limited for a cash consideration of $50 000. One half is to be paid on acquisition date and one half is payable in one year's time. The appropriate discount rate is 5% p.a. The present value of the cash outflow in one year's time is:

A) $23 810.
B) $25 000.
C) $26 190.
D) $30 000.

Question 18

A business combination is defined in AASB 3/IFRS 3 as a transaction:

A) in which an acquiree obtains control of one or more businesses.
B) in which one entity obtains significant influence over one or more other entities.
C) or other event in which an acquirer obtains control of one or more businesses.
D) or other event in which an entity obtains control of one or more businesses.

Question 19

According to Johnson and Petrone (1998), which of the following is not a component of goodwill?

A) Overpayment by the acquirer.
B) Overvaluation of the consideration paid by the acquirer.
C) Excess of the book values over the fair values of the acquiree's recognised assets.
D) Excess of the fair values over the book values of the acquiree's recognised assets.

Question 20

Where the acquirer purchases the assets and assumes the liabilities of another entity, it does not need to consider the measurement of:

A) the liabilities assumed.
B) the identifiable assets.
C) the equity of the acquiree.
D) goodwill or a gain from bargain purchase.

Question 21

Appendix B of AASB 3/IFRS 3 Business Combinations requires disclosure of which of the following? I. Details of contingent consideration.
II) The date of exchange.
III) Carrying amounts of assets and liabilities in business combinations where shares are acquired.
IV) A qualitative description of the factors that make up goodwill.

A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 22

Core goodwill consists of:

A) current goodwill and non-current goodwill.
B) going concern goodwill and combination goodwill.
C) current goodwill and future goodwill.
D) present goodwill and future goodwill.

Question 23

Newspaper mastheads are an example of a marketing-related intangible asset.

Question 24

Which of the following statements is incorrect?

A) Goodwill cannot be revalued.
B) Goodwill is subject to amortisation.
C) Goodwill is not subject to amortisation.
D) AASB 138/IAS 38 Intangible Assets does not allow the recognition of internally generated goodwill.

Question 25

Property, plant and equipment and investments are both examples of monetary assets.

Question 26

Suncorp Limited acquired a 15% interest in Milton Pty Ltd on 1 January 2014. On 15 September 2014 it acquired an additional 25% interest, and on 15 March 2015 a further 15%. Under AASB 3/IFRS 3, a business combination occurs on:

A) 1 January 2014.
B) 15 September 2014.
C) 15 March 2015.
D) all of the above.

Question 27

For a group of assets to constitute a business, they must be capable of providing a return.

Question 28

Cockroaches Limited acquired the identifiable assets, liabilities and contingent liabilities of Inglis Limited for $268 000. The items acquired, stated at fair value, are: plant $144 000; inventory $80 000; accounts receivable $36 000; patents $20 000; and accounts payable $32 000. The difference on acquisition is:

A) gain on bargain purchase $20 000.
B) gain on bargain purchase $32 000.
C) goodwill of $20 000.
D) goodwill of $248 000.

Question 29

For a deferred payment, the fair value to the acquirer is the amount the entity would have to borrow to settle the debt in the future.

Question 30

The information contained within Appendix B of AASB 3/IFRS 3 Business Combinations in relation to disclosure:

A) is an integral part of AASB 3/IFRS 3 containing application guidance.
B) is not mandatory, but contains optional additional disclosures.
C) contains prescribed presentation formats for disclosure of business combinations.
D) is complementary to the main disclosure requirements within the body of AASB 3/IFRS 3.

Question 31

The owners of Emily Limited sold the business to Georgia Limited. At acquisition date, the business had an item of plant which cost $70 000 and had accumulated depreciation of $24 000. The liquidation journal entry is which of the following?

A) DR Liquidation $70 000 CR Plant $70 000
B) DR Liquidation $46 000 DR Accumulated depreciation $24 000
CR Plant $70 000
C) DR Plant $46 000 CR Liquidation $46 000
D) DR Plant $46 000 DR Accumulated depreciation $24 000
CR Liquidation $70 000

Question 32

In a business combination, equity instruments issued as part of the purchase consideration should be measured at their original issue price.

Question 33

Apha Limited acquired the net assets of Beta Limited. Alpha Limited provided an item of equipment as part of the consideration. The fair value of the equipment was $26 000. It cost $40 000 and had a carrying amount of $24 000. Which of the following entries appropriately reflects the gain or loss on the equipment?

A) DR Loss on sale $2000
B) CR Loss on sale $2000
C) CR Gain on sale $2000
D) Dr Gain on sale $2000.

Question 34

Fair value is determined in the first instance by reference to observable prices in an active market for identical assets or liabilities.

Question 35

The acquirer in a business combination is the party that loses control of a business.

Question 36

The use of estimates when measuring the fair values of assets results that the measures are unreliable.

Question 37

When an acquiree liquidates, the accounts of the acquiree are transferred to which two accounts?

A) Share capital and retained earnings
B) Liquidation and shareholders' distribution
C) Cash at bank and liquidation
D) Shareholders' distribution and retained earnings

Question 38

The acquisition date is the date on which the contract between the acquirer and acquiree is signed.

Question 39

Acquisition-related costs associated with a business combination, such as professional fees paid to accountants, legal advisers and other consultants, are considered part of the cost of acquisition.

Question 40

Which of the following statements in relation to contingent consideration is incorrect?

A) At acquisition date, contingent consideration is measured at fair value.
B) Where the contingent consideration is classified as equity, there is no remeasurement required on settlement.
C) Subsequent adjustments to contingent consideration affect the goodwill calculated at acquisition date.
D) Changes in the amount of an expected cashflow where the contingent consideration represents a liability that is within the scope of AASB 137/IAS 37 are accounted for through profit and loss.

Question 41

A gain on bargain purchase is recognised in profit or loss in the year it arises.

Question 42

In respect to a business combination, a gain on bargain purchase arises where the acquirer's interest in the net fair value of the identifiable assets and liabilities acquired is greater than the consideration transferred by the acquirer to the acquiree.

Question 43

At the date of acquisition, goodwill is measured as the excess of the consideration transferred over the net fair value of the identifiable assets acquired and liabilities assumed.

Question 44

In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income.

Question 45

Where equity instruments are issued as part of the consideration in a business combination, any costs associated with issuing such equity instruments are included as part of the cost of the business combination.

Question 46

Where an acquiree liquidates, the balance of the Shareholders' Distribution account is transferred to the Liquidation account.

Question 47

When the acquirer buys only shares in the acquiree, there are no entries in the records of the acquiree.

Question 48

Subsequent to initial recognition, goodwill acquired under a business combination may be revalued.

Question 49

AASB 3/IFRS 3 Business Combinations requires an acquiree to go into liquidation in the event of a business combination.

Question 50

AASB 3/IFRS 3 Business Combinations requires disclosure of 'a qualitative description of the factors that make up goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors'.