Deck 27: Business Combinations

Question 1

Which of the following statements concerning goodwill is not true?

A) Goodwill reflects intangible assets that could not be measured separately?
B) Goodwill is a residual value that reflects consideration paid that could not be assigned to other assets.
C) Only goodwill from current acquisition is recognized.
D) All of the above are true statements regarding goodwill.

Answer 1

All of the above are true statements regarding goodwill.

Question 2

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?

A) Parent Entity
B) Sub Entity
C) AcquireCo
D) None of the above

Answer 2

Parent Entity

Question 3

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?

A) January 1, 20X1
B) June 15, 20X1
C) October 15, 20X1
D) Remark Entity does not have control over Retail Entity

Answer 3

June 15, 20X1

Question 4

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?

A) $500,000 gross receivables amount, with a $50,000 allowance for doubtful accounts.
B) $450,000, with no contra-account balance
C) $500,000 with no contra-account balance.
D) $450,000 with a $50,000 allowance for doubtful accounts.

Question 5

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?

A) Recognize a $100,000 gain on the lease contract
B) Recognize a $100,000 intangible asset related to the lease contract
C) Recognize a $100,000 liability on the contract
D) Don't recognize any amount related to the change in value for the lease contract

Question 6

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?

A) Recognize a $50,000 loss on the lease contracts
B) Recognize a $50,000 liability on the lease contracts
C) Recognize a $50,000 intangible asset on the lease contracts
D) Don't recognize any amount related to the change in value for the lease contract

Question 7

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

A) The acquisition date is the date that the consideration transferred in a business combination is measured, including contingent consideration and the acquirer's equity interests issued to the seller.
B) The acquisition date is the date that assets acquired, liabilities assumed, and non-controlling interests are measured.
C) The acquisition date is the date that the acquirer begins consolidating the entity.
D) All of the above

Question 8

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?

A) Write down goodwill by $25 million
B) Recognize a gain upon discovery of $25 million
C) Directly credit retained earnings for $25 million
D) Increase goodwill by $25 million

Question 9

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.

A) Bargain Purchase of $375,000
B) Bargain Purchase of $500,000
C) Goodwill of $375,000
D) Goodwill of $500,000

Question 10

Plant Entity acquires Seed Entity by purchasing 40,000 of Seed Entity's 50,000 shares for $20/share. The fair value of Seed Entity's net identifiable assets is $750,000. What is the difference in goodwill recognized between the fair value method and the NCI's share of net identifiable assets method?

A) $0
B) $50,000
C) $100,000
D) $150,000

Question 11

Joint ventures should be accounted for under IFRS 3.

Question 12

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

Question 13

Entity A acquires all the inputs and processes of Entity B. However, Entity A later disposes of the processes of Entity B to merge the inputs of Entity A with its own processes. Entity A should account for this transaction as a business combination.

Question 14

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.

Question 15

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

Question 16

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.

Question 17

Any tax benefits arising from the difference between the income tax basis and the IFRS carrying amount for goodwill should be accounted for as any other temporary difference at the date of acquisition.

Question 18

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

Question 19

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

Question 20

General and administrative expenses related to maintaining an internal acquisitions department may be expensed as acquisition costs.

Question 21

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

Question 22

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.

Question 23

Diamond Entity has three cash generating units located in various parts of Eurasia. Below is information regarding the three CGU's. Determine if there is impairment in any of the cash generating units. If so, determine what portion should be allocated to goodwill and other assets.
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Information about CGU's }$

$\begin{array} { l r r r } & \text { CGU 1 } & \text { CGU 2 } & \text { CGU 3 } \\ \text { Carrying amount (including goodwill) } & 300,000 & 250,000 & 430,000 \\ \text { Carrying amount of goodwill } & 60,000 & 40,000 & 85,000 \\ \text { Fair value less costs to sell } & 310,000 & 175,000 & 390,000 \\ \text { Value in use } & 290,000 & 180,000 & 400,000 \end{array}$
$\begin{array}{l}\text { Recoverable amount}\\\text { Indicated impairment}\\\text { Impairment of goodwill}\\\text { Impairment of other assets}\end{array}$

Question 24

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.
$$\begin{array}{l}&&&\quad\text { Value per share }\\\text { Date } & \text { No. of shares } & \text { Ownership interest } & \text { Value cost } & { \text { Fair value } } \\12 / 31 / \times 3 & 7500 & 15 \% & 18 & 20 \\12 / 31 / \times 4 & 7500 & 15 \% & 18 & 23 \\12 / 31 / \times 5 & 20000 & 40 \% & 25 & 25\end{array}$$ Determine what the re-measurement from OCI to P&L would be at December 31, 20X5.

Question 25

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?