Deck 2: Mergers and Acquisitions

Question 1

ASC Topic 805 provides standards for reporting acquisition of a business. How does the reporting for the acquisition of a business differ from acquisition of a group of assets and liabilities?

A) In the acquisition of a business, the cost may exceed the fair value of the identifiable net assets acquired.
B) In the acquisition of a business, contingent consideration is not included in the measurement of total cost.
C) In the acquisition of a group of assets and liabilities, consulting fees paid to complete the transaction are expensed.
D) In the acquisition of a group of assets and liabilities, previously unreported identifiable intangible assets are likely to be recognized.

Answer 1

In the acquisition of a business, the cost may exceed the fair value of the identifiable net assets acquired.

Question 2

ASC Topic 805 provides standards for reporting business combinations. Which one of the following is most likely to be considered a business combination?

A) Formation of a joint venture by two or more existing companies.
B) Formation of a new subsidiary.
C) Purchase of a controlling interest in an international company.
D) Merger of an existing subsidiary with a parent.

Answer 2

Purchase of a controlling interest in an international company.

Question 3

The requirements of ASC Topic 805 do not apply to:

A) Acquisitions where control is obtained over one or more businesses
B) Combinations of two or more companies already under common control
C) Acquisitions where control is obtained by acquiring the voting stock of the acquired company
D) Acquisitions of product lines and divisions

Answer 3

Combinations of two or more companies already under common control

Question 4

ASC Topic 805 only applies to an acquisition if:

A) You are buying all the assets and liabilities of another company.
B) You are buying a business and obtaining control of that business.
C) You are a public company buying the assets and liabilities of another public company.
D) You are buying over 50% of the voting stock of another company.

Question 5

Acquisition accounting only applies to the acquisition of a business. What are the three elements of a business, per ASC Topic 805?

A) assets, liabilities, and equity
B) facilities, workforce, and contracts
C) input, process, and output
D) products, services, and workforce

Question 6

Acquisition accounting only applies to the acquisition of a business. ASC Topic 805 identifies an initial condition that immediately determines that the transaction is not an acquisition of a business, without further analysis. What is this condition?

A) Acquisition of a division within another company.
B) Acquisition of a single identifiable asset.
C) Acquisition of only intangible assets.
D) Acquisition of a single product line.

Question 7

In acquisition accounting, one company is identified as the acquiring company. Which statement below is most likely to be true concerning the acquiring company.

A) It pays cash for the acquisition rather than issuing stock.
B) Its shareholders sell their stock before the acquisition takes place.
C) Its shareholders receive a premium over market value in the exchange of shares.
D) It issues stock to acquire the other company.

Question 8

Proctor Company acquires the assets and liabilities of Singer Corporation, in a transaction reported as a merger. How are the assets and liabilities of Proctor and Singer reported?

A) Proctor's assets and liabilities remain at book value, and Singer's assets and liabilities are reported at fair value at the date of acquisition.
B) Singer's assets and liabilities remain at book value, and Proctor's assets and liabilities are reported at fair value at the date of acquisition.
C) The assets and liabilities of both Proctor and Singer are reported at fair value at the date of acquisition.
D) Proctor's assets and liabilities remain at book value, and Singer's assets and liabilities are reported at fair value at the balance sheet date, each time a balance sheet is prepared.

Question 9

The following intangibles have been identified for an acquired company. Which one(s) are most likely to be separately capitalized by the acquiring company, per ASC Topic 805?
•Developed technology
•Skilled workforce
•Brand names
•Prospective contracts

A) Developed technology, brand names, and prospective contracts
B) Brand names and prospective contracts
C) Developed technology and brand names
D) Skilled workforce and prospective contracts

Question 10

When a private company acquires another company, GAAP for private companies allows which identifiable intangible assets to be combined with goodwill and not separately capitalized?

A) Brand names
B) Technology
C) Software licenses
D) Noncompetition agreements

Question 11

Company A has unreported identifiable intangible assets that are very valuable, and would like investors to know about them. Which one of the following actions will allow these intangible assets to be reported?

A) Get a third-party appraisal of the intangible assets.
B) Reclassify Company A's reported plant and equipment as intangible assets.
C) Find a company to combine with, and designate Company A as the acquirer.
D) Find a company to combine with, and designate Company A as the company being acquired.

Question 12

Which of the following is least likely to be reported as an acquired identifiable intangible asset?

A) In-process research and development
B) Synergies in developing future products
C) Production processes
D) Broadcast rights

Question 13

Which one of the following items is most likely to be reported as goodwill?

A) Skilled workforce
B) Brand names
C) Developed technology
D) In-process research and development

Question 14

All of the following are examples of reportable identifiable intangible assets acquired in a business combination, except:

A) Mineral rights
B) Customer lists
C) Advertising jingles
D) Prospective customer contracts

Question 15

A company acquires the assets and liabilities of another company. The acquired company's assets and liabilities are reported on the acquiring company's books at fair value as of what date?

A) The day the acquiring company takes control of the acquired company
B) The day the acquisition is announced to the public
C) The day the acquiring company obtains the financing necessary for the acquisition
D) The day the acquiring company completes its research concerning the value of the acquired assets and liabilities

Question 16

Prolean Corporation acquired Setlan Company for $10,000,000 in cash, paid to Setlan's former owners. The carrying value of Setlan's reported net assets totaled $2,000,000 at the date of acquisition. Setlan's reported asset and liability values equaled their fair values, except for the following:
$$\begin{array} { | l | r | r | } \hline & { \text { Fair Value } } & { \text { Book Value } } \\\hline \text { Inventory } & \$ 15,000 & \$ 40,000 \\\hline \text { Land } & 80,000 & 20,000 \\\hline \text { Identifiable intangible assets } & 400,000 & 0 \\\hline\end{array}$$ The identifiable intangible assets meet ASC Topic 805 requirements for separate capitalization. Goodwill reported for this acquisition is:

A) $7,965,000
B) $7,515,000
C) $7,565,000
D) $9,505,000

Question 17

X Company acquires all of Y Company's assets and liabilities for $15,000,000 in cash. The fair values of Y's assets and liabilities approximate their book values, except Y has developed technology valued at $8,000,000 that is not reported on its balance sheet, and its buildings are overvalued by $7,000,000. Here is Y's balance sheet just prior to the acquisition:
$\begin{array}{lr}&\text { Y Company }\\\text { Current assets } & \$ 500,000 \\\text { Land, buildings, and equipment } & 9,500,000 \\\text { Total assets } & \$ 10,000,000\\\\\text { Liabilities } & \$ 6,000,000 \\\text { Common stock, } \$ 1 \text { par } & 100,000 \\\text { Additional paid-in capital } & 2,915,000 \\\text { Ret ained earnings } & 1,000,000 \\\text { Treasury stock } & \{20,000\} \\\text { Accumulated other comprehensive income } & 5,000 \\\text { Total liabilities and equity } & \$ 10,000,000 \end{array}$
How much goodwill is recognized for this acquisition?

A) $12,000,000
B) $ 4,000,000
C) $10,000,000
D) $16,000,000

Question 18

Pringle Corporation acquires Snax Company at an acquisition cost of $50,000,000. Assets and liabilities of Snax are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Book Value } & { \text { Fair Value } } \\\hline \text { Current assets } & \$ 1,500,000 & \$ 800,000 \\\hline \text { Land, buildings, and equipment \{net\} } & 16,000,000 & 7,000,000 \\\hline \text { Brand names } & - 0 - & 8,000,000 \\\hline \text { Liabilities } & 12,000,000 & 11,500,000 \\\hline\end{array}$$ Goodwill arising from this acquisition is:

A) $45,700,000
B) $44,500,000
C) $20,500,000
D) $22,700,000

Question 19

Pyn Corporation acquires all of Sys Company at an acquisition cost of $100,000,000 in cash. Fair values of Sys' assets and liabilities are as follows:
$$\begin{array} { | l | r | } \hline & \text { Fair Value } \\\hline \text { Current assets } & \$ 1,000,000 \\\hline \text { Land, buildings and equipment } & 8,000,000 \\\hline \text { Brand names } & 2,000,000 \\\hline \text { Customer lists } & 4,000,000 \\\hline \text { Skilled workforce } & 15,000,000 \\\hline \text { Pot entially profitable fut ure projects } & 10,000,000 \\\hline \text { Liabilities } & 6,000,000 \\\hline\end{array}$$ Pyn records goodwill of:

A) $66,000,000
B) $76,000,000
C) $81,000,000
D) $91,000,000

Question 20

Kelly Corporation acquires the assets and liabilities of Lawson Company. Below is the balance sheet of Lawson, along with fair values of its assets and liabilities, at the date of acquisition.
$$\begin{array} { | l | r | r | } \hline & { \begin{array} { c } \text { Book value } \\\text { Dr (Cr) }\end{array} } & { \begin{array} { c } \text { Fair value } \\\text { Dr (Cr) }\end{array} } \\\hline \text { Current assets } & \$ 1,000,000 & \$ 500,000 \\\hline \text { Plant \& equipment } & 60,000,000 & 30,000,000 \\\hline \text { Identifiable intangibles } & 10,000,000 & 35,000,000 \\\hline \text { Goodwill } & 4,000,000 & 10,000,000 \\\hline \text { Current liabilities } & \{ 2,000,000 \} & \{ 2,000,000 \} \\\hline \text { Long-term liabilities } & \{ 52,000,000 \} & \{ 52,000,000 \} \\\hline \text { Capital stock } & \{ 3,000,000 \} & \\\hline \text { Retained earnings } & \{ 18,000,000 \} & \\\hline\end{array}$$ Kelly pays $50,000,000 in cash for the assets and liabilities of Lawson. How much goodwill does Kelly record for this acquisition?

A) $28,500,000
B) $34,500,000
C) $38,500,000
D) $0

Question 21

What is the most common way to value acquired intangible assets?

A) Income method
B) Market approach
C) Cost approach
D) Opportunity cost approach

Question 22

Acquired developed technology is expected to generate after-tax operating income of $50,000 in the first year and grow at a rate of 5% over the next two years. Depreciation expense included in operating expenses is expected to be $5,000 in the first year, growing at a rate of 3% over the next two years. The value of acquired developed technology is estimated as the present value of operating cash flow over the first three years. The appropriate discount rate is 20%, and cash flows are assumed to occur at year-end for purposes of valuing acquired developed technology.
Which value is closest to the amount at which the acquired developed technology should be reported on the acquiring company's balance sheet?

A) $ 85,000
B) $100,000
C) $121,000
D) $143,000

Question 23

Peters Corporation acquires all of the voting shares of Stefan Company by issuing 500,000 shares of $1 par common stock valued at $10,000,000. Included in the agreement is a contingency guaranteeing the former shareholders of Stefan that Peters' shares will be worth at least $18 per share after one year. If the shares are worth less, Peters will pay the former shareholders of Stefan enough cash to reimburse them for the decline in value below $18 per share. Peters estimates that there is a 5% chance that the stock value will be $16 at the end of one year, and a 95% chance that the stock value will be $18 per share or higher. A discount rate of 10% is appropriate. Which amount below is closest to the value of the contingent consideration at the date of acquisition?

A) $1,000,000
B) $ 45,000
C) $ 50,000
D) $ 865,000

Question 24

Poppy Corporation acquires Stevens Company, paying the owners of Stevens 1,000,000 new shares with a par value of $0.50 per share and a fair value of $50 per share at the date of acquisition. Poppy also incurs cash registration fees of $100,000 and consulting fees of $700,000. Several of Stevens' former owners will stay on as employees, and Poppy agrees to pay them an additional amount if they remain with the company. The present value of this agreement at the date of acquisition is $400,000. What is Poppy's reported acquisition cost?

A) $50,000,000
B) $50,700,000
C) $50,400,000
D) $51,200,000

Question 25

A company acquires the assets and liabilities of another company. The fair value of the acquired company's identifiable net assets is $5,000,000. The acquisition transaction includes the following:
•$5,000,000 in cash paid to the former owners of the acquired company
•150,000 new shares of stock with a market value $45/share. Registration fees, paid in cash, were $1,000,000.
•$4,000,000 in cash paid to the underwriter for consulting services
•Earnings contingency with an expected present value of $3,000,000 at the date of acquisition
Goodwill for this acquisition is:

A) $11,750,000
B) $14,750,000
C) $10,750,000
D) $ 9,750,000

Question 26

Prescott acquires all of the stock of Sanders by issuing new stock to the previous shareholders of Sanders. Prescott paid consulting, accounting, and legal fees, and registration fees for the new stock issued by Sanders. What effect will these two items have on the amount of goodwill reported on the acquisition?
$\begin{array}{lrr} \text {Consulting Fees } & \text { Registration Fees} &\\\end{array}$

A) $\begin{array}{ll}\text { No effect } & &&&\text { Increase } \\\end{array}$
B) $\begin{array}{ll}\text { Increase } &&&&& \text { Increase } \\\end{array}$
C) $\begin{array}{ll}\text { No effect } &&&& \text { No effect } \\\end{array}$
D) $\begin{array}{ll}\text { Increase } &&&& \text { No effect }\end{array}$

Question 27

The expected present value of contingent payments made by an acquiring company to the former owners of the acquired company are part of the acquisition cost

A) At all times.
B) When they are compensation for future employee services.
C) When they are tied to a future company performance goal.
D) Never.

Question 28

An acquirer includes an earnout, or earnings contingency, in the acquisition price. Additional cash will be paid to the former owners of the acquired company if the acquired company's performance exceeds certain thresholds within the next three years. The payoff, if any, would occur three years after the acquisition.
Which of the following statements is true?

A) The earnout is not reported at the date of acquisition but is reported as an adjustment to the acquisition price if and when paid.
B) The earnout is reported as a liability on the acquiring company's books at the date of acquisition.
C) If the discount rate increases, the date-of-acquisition earnout value increases.
D) The earnout usually reduces reported goodwill at the date of acquisition.

Question 29

ABC Corporation acquires the assets and liabilities of XYZ Company in a merger. If ABC offers the former shareholders of XYZ an earnings contingency, what is the likely result of having this contingency, on ABC's balance sheet at the date of acquisition?

A) ABC will report less goodwill.
B) ABC will revalue XYZ's previously reported assets at higher amounts.
C) ABC will revalue XYZ's previously reported liabilities at higher amounts.
D) ABC will report a liability for the earnings contingency.

Question 30

Parish Corporation issues new stock with $1/share par value to the former shareholders of Sanford Company, in a merger. The registration fees Parish pays to issue the new stock will

A) Increase goodwill.
B) Reduce Parish's income.
C) Increase previously unreported identifiable intangible assets acquired.
D) Reduce Parish's additional paid-in capital.

Question 31

Which one of the following items increases the amount of goodwill recognized in an acquisition?

A) Consulting fees paid to Goldman Sachs
B) Payments offered to employees of the acquired company that are based on their future performance
C) An earnout added to an acquisition agreement to motivate the acquired company's shareholders to sell
D) Registration fees the acquiring company pays to issue new stock in an acquisition

Question 32

All of the following increase the acquisition cost of the acquired company except:

A) Fair market value of stock issued by the acquiring company to the former shareholders of the acquired company
B) Fair market value of debt issued by the acquiring company to acquire the voting stock of the acquired company
C) Payments to the former owners of the acquired company that are contingent on continued employment in the firm
D) Earnings contingency that is dependent on the future performance of the acquired company

Question 33

ABC Corporation acquires the assets and liabilities of XYZ Company. Holding everything else constant, which situation will result in ABC reporting less goodwill on this acquisition?

A) XYZ has previously unreported identifiable intangible assets.
B) The market rate of interest on XYZ's liabilities has declined.
C) The fair value of XYZ's buildings and equipment is lower than its book value.
D) ABC includes an earnings contingency in the acquisition cost.

Question 34

Which item affects the reported net income of an acquiring company at the date of acquisition?

A) An earnout agreement promising future payments to the former owners of the acquired company, dependent on the acquired company's future performance
B) Fees paid to outside accountants and lawyers
C) Identifiable intangible assets acquired, that were not previously reported by the acquired company
D) Goodwill recognized as a result of the acquisition

Question 35

An acquired company's former owners become employees of the acquiring company. At the date of acquisition, an acquiring company promises to make future payments to these former owners, which are terminated when the former owners are no longer employed. At the date of acquisition, the acquiring company:

A) Does not report these contingent payments
B) Reports the contingent payments as a liability, at expected present value
C) Reports the contingent payments as a liability, by summing up the expected future payments
D) Reports the contingent payments as a credit to equity

Question 36

An acquiring company pays $45 million in cash, and issues new no-par stock with a fair value of $75 million, to the acquired company's former owners, for the assets and liabilities of the acquired company. Registration fees associated with the new stock issuance are $300,000, paid in cash. Consulting fees for the acquisition are $1 million, paid in cash. The fair value of the acquired company's identifiable net assets is $65 million.
The entry or entries the acquiring company makes to record the acquisition have what net effect on its account balances?

A) Capital stock increases by $75 million.
B) Expenses increase by 1.3 million.
C) Cash decreases by $46 million.
D) Goodwill increases by $55 million.

Question 37

Pyn Corporation acquires all of Sys Company's assets and liabilities, reported as a merger. Acquisition-related items are as follows:
•$60 million in cash paid to Sys' former shareholders
•$25 million fair value of stock issued
•$1 million consulting fees, paid in cash
•$4 million in new stock registration fees, paid in cash
•Earnout with an expected present value of $2 million
Fair values of Sys' assets and liabilities are as follows:
$$\begin{array} { | l | c | } \hline & \text { Fair Value } \\\hline \text { Current assets } & \$ 1,000,000 \\\hline \text { Land, buildings, and equipment } & 8,000,000 \\\hline \text { Brand names } & 2,000,000 \\\hline \text { Customer lists } & 4,000,000 \\\hline \text { Skilled workforce } & 15,000,000 \\\hline \text { Potentially profitable future projects } & 10,000,000 \\\hline \text { Liabilities } & 6,000,000 \\\hline\end{array}$$ Pyn records goodwill of:

A) $79,000,000
B) $83,000,000
C) $81,000,000
D) $78,000,000

Question 38

Sheetz Company is purchased by Pulsar Corporation, at an acquisition cost that is $25,000,000 greater than the fair value of the identifiable net assets acquired. One of the assets acquired is a building, originally valued at $15,000,000 at the date of the purchase. Six months after the acquisition, it is discovered that the building was actually worth $7,000,000 at the date of acquisition.
What entry is made to reflect this new information?

A) Dr. goodwill; Cr. building for $8,000,000
B) Dr. loss on building; Cr. building for $8,000,000
C) Dr. retained earnings; Cr. building for $8,000,000
D) no entry is made

Question 39

Pearson Company acquired Sunview Company at an acquisition cost that was $20 million greater than the fair value of identifiable net assets acquired. Pearson assigned a fair value of $1,000,000 to Sunview's land. Ten months later, Pearson obtained information that the land was worth $4,000,000 at the date of acquisition.
How does Pearson account for this value change?

A) Gain of $3,000,000, reported in income
B) Increase goodwill by $3,000,000
C) Loss of $3,000,000, reported in other comprehensive income
D) Reduce goodwill by $3,000,000

Question 40

An acquirer made the following entry to report an acquisition:
$$\begin{array} { | l | l | r | r | } \hline \text { Tangible assets } & & 4,000 & \\\hline \text { Customer lists } & & 600 & \\\hline \text { Goodwill } & & 1,000 & \\\hline & \text { Liabilities } & & 2,000 \\\hline & \text { Cash } & & 3,600 \\\hline\end{array}$$ Six months after the acquisition, the customer lists are determined to be worthless. How is this information reported if (1) the new information relates to the value of the customer lists as of the date of acquisition, and (2) the new information relates to changes in value since acquisition?

A) (1) $600 gain on acquisition in income (2) $600 decrease in goodwill
B) (1) $600 increase in goodwill (2) $600 loss in income
C) (1) $600 loss in income (2) $600 increase in goodwill
D) (1) $600 decrease in cash (2) $600 loss in income

Question 41

Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, land belonging to Lawson at the date of acquisition is discovered. The land has a fair value of $5,000,000.
The entry to reflect this new information includes:

A) A credit to goodwill of $5,000,000
B) A credit to land of $5,000,000
C) A gain of $5,000,000, reported in income
D) A loss of $5,000,000, reported in income

Question 42

Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, it is determined that because of a downturn in the economy after the acquisition, acquired brand names with indefinite lives are worth $5,000,000 less than originally estimated.
The entry to reflect this new information includes:

A) A credit to goodwill of $5,000,000
B) A debit to identifiable intangibles of $5,000,000
C) A gain of $5,000,000, reported in income
D) A loss of $5,000,000, reported in income

Question 43

The estimated value of assets acquired and liabilities assumed change subsequent to the acquisition. When should a company record the change as a correction of the initial acquisition entry?

A) The change takes place within one year of the acquisition.
B) The change is normally reported in income.
C) The change is normally reported as an adjustment to other comprehensive income.
D) The change reflects value as of the date of acquisition.

Question 44

Portland Company paid $100,000,000 in cash for Seattle Company's assets and liabilities, recording goodwill of $75,000,000. As part of the as part of the acquisition, previously unreported brand names were capitalized at a value of $4,000,000. Three months later, Seattle's brand names are determined to have been worthless as of the date of acquisition. The entry to record this information includes:

A) A debit to loss of $4,000,000, reported in income
B) A debit to brand names of $4,000,000
C) A debit to goodwill of $4,000,000
D) A debit to retained earnings of $4,000,000

Question 45

Portland Company paid $20,000,000 in cash for Seattle Company's assets and liabilities, recording a bargain gain of $1,500,000. As part of the as part of the acquisition, previously unreported brand names were capitalized at a value of $4,000,000. Three months later, Seattle's brand names are determined to have been worthless as of the date of acquisition. The entry to record this information includes:

A) A debit to loss of $2,500,000, reported in income
B) A debit to brand names of $4,000,000
C) A debit to goodwill of $2,500,000
D) A debit to retained earnings of $2,500,000

Question 46

Portland Company paid $20,000,000 in cash for Seattle Company's assets and liabilities, recording a bargain gain of $1,500,000. Three months later, it is determined that Seattle's acquisition-date liabilities, related to pending lawsuits, were actually $3,000,000 lower as of the date of acquisition. The entry to record this information includes:

A) A credit to gain on acquisition of $3,000,000
B) A credit to liabilities of $3,000,000
C) A debit to goodwill of $3,000,000
D) A credit to goodwill of $3,000,000

Question 47

Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the measurement period, additional information on Southern's expected future performance at the date of acquisition reveals that the earnout actually had a fair value of $200,000 at the date of acquisition.
The entry to record the new information includes a credit of $800,000 to:

A) Intangible assets
B) Goodwill
C) Gain on acquisition
D) Earnings contingency liability

Question 48

Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the next year, increases in the demand for Southern's products subsequent to acquisition require that the earnout be revalued to $1,800,000. The entry to record the new information includes a debit of $800,000 to:

A) Intangible assets
B) Goodwill
C) Loss on contingency
D) Earnings contingency liability

Question 49

ABC Corporation acquires all of the assets and liabilities of XYZ Company, at a price that is significantly higher than the fair value of the identifiable net assets acquired. Four months after the acquisition, a fire destroys some of XYZ's property.
How does ABC report this?

A) ABC will report less goodwill from the acquisition.
B) ABC will report more goodwill from the acquisition.
C) ABC will not report this event.
D) ABC will report a loss on property in income.

Question 50

Pacific Company acquired Starz Company for $100 million and recognized $70 million in goodwill. Within a year after the acquisition, due to improvement in the economy Starz' land is worth $15 million more than the amount estimated at the date of acquisition.
How is this information reported?

A) Gain on acquisition of $15 million
B) Gain on land of $15 million
C) Reduction in goodwill of $15 million
D) Not reported

Question 51

Pacific Company acquired Starz Company for $100 million and recognized $70 million in goodwill. When it recorded the acquisition, Pacific recognized an additional liability not already reported on Starz' balance sheet, for a pending lawsuit against Starz, and estimated its value at $12 million. Three months after the date of acquisition, Pacific determined that the present value of the lawsuit liability was really $2 million, because of events occurring subsequent to the date of acquisition.
How is this information reported?

A) Loss on acquisition of $10 million
B) Gain on lawsuit of $10 million
C) Reduction in goodwill of $10 million
D) Not reported

Question 52

Atold Corporation reports goodwill of $40 million on acquisition of Benholm Company. Subsequently, Atold learns that one of Benholm's buildings has increased in value by $4 million. How is this reported, if the information is discovered (1) within the measurement period, and (2) after the measurement period is over?

A) Decrease in goodwill ,Gain on income statement
B) Increase in goodwill ,Not reported
C) Decrease in goodwill ,Not reported
D) Increase in goodwill ,Gain on income statement

Question 53

Atold Corporation reports goodwill of $40 million on acquisition of Benholm Company. One month later, Atold learns that Benholm's portfolio of AFS debt investments is worth $3 million more than estimated at the date of acquisition. How is this reported, if the information is (1) a better estimate of the portfolio's value at the date of acquisition (within the measurement period), or (2) is due to events occurring subsequent to the acquisition (after the measurement period).

A) Decrease in goodwill ,Gain in OCI
B) Decrease in goodwill ,Not reported
C) Gain in OCI ,Not reported
D) Not reported ,Gain in OCI

Question 54

Pluto Corporation purchased Saturn Corporation's assets and liabilities for $4,500,000 in cash. Saturn's reported assets and liabilities have the following fair values at the date of acquisition:
$$\begin{array} { | l | c | } \hline & \begin{array} { c } \text { Fair Value } \\\text { Dr (Cr) }\end{array} \\\hline \text { Cash, receivables } & \$ 5,000,000 \\\hline \text { Inventory } & 7,000,000 \\\hline \text { Land and buildings } & 30,000,000 \\\hline \text { Liabilities } & ( 40,000,000 ) \\\hline\end{array}$$ Saturn also has brand names, with a fair value of $4,000,000, that are not reported on its balance sheet. The gain on acquisition is:

A) $3,000,000
B) $1,500,000
C) $-0-
D) $5,500,000

Question 55

Titan Company pays $2,000,000 in cash to acquire Victory Company's assets and liabilities. Book and fair values of Victory's assets and liabilities appear below.
$$\begin{array} { | l | r | r | } \hline & { \text { Book Value } } &{ \text { Fair Value } } \\\hline \text { Current assets } & \$ 300,000 & \$ 200,000 \\\hline \text { HTM investments } & 100,000 & 120,000 \\\hline \text { Buildirg s, net } & 1,200,000 & 1,000,000 \\\hline \text { Equipment, net } & 2,000,000 & 500,000 \\\hline \text { Identifiable intangible assets } & 0 & 1,000,000 \\\hline \text { Liabilities } & 500,000 & 520,000 \\\hline\end{array}$$ What is the gain on acquisition?

A) $820,000
B) $-0-
C) $280,000
D) $300,000

Question 56

Packard Company acquires the assets and liabilities of Sutton Company, with an acquisition cost that is less than the fair value of its identifiable net assets. The difference between acquisition cost and the fair value of identifiable net assets acquired

A) Increases net income on the income statement
B) Increases other comprehensive income
C) Reduces noncurrent assets acquired
D) Reduces goodwill

Question 57

A company acquires the assets and liabilities of another company, paying the former owners cash plus an earnings contingency. A gain on acquisition is reported in income if:

A) The cash paid is less than the book value of the net assets acquired.
B) The cash paid plus the present value of the earnings contingency is less than the fair value of the identifiable net assets acquired.
C) The cash paid plus the present value of the earnings contingency is less than the fair value of the tangible net assets acquired.
D) The cash paid is less than the fair value of identifiable net assets acquired.

Question 58

An acquiring company may be motivated to report a larger bargain gain to improve its bottom line. All of the following manipulations could be used to overstate the gain, except which one?

A) Understate the present value of an earnings contingency.
B) Understate the discount rate used to measure the fair value of acquired liabilities.
C) Understate the value of previously unreported intangible assets acquired.
D) Understate the value of acquired contingent liabilities such as pending lawsuits.

Question 59

Which of the following actions reduces the likelihood of reporting a bargain gain on an acquisition?

A) Pick a higher discount rate to value the earnings contingency.
B) If stock is issued, pick an acquisition date when the market value of the stock is higher.
C) Make cash payments to former owners conditional on continued employment in the company.
D) If stock is issued, classify fewer cash outlays as registration fees.

Question 60

Which of the following actions reduces the likelihood of reporting a bargain gain on an acquisition?

A) Identify additional previously unreported acquired identifiable intangible assets.
B) Use a lower discount rate to measure the present value of expected cash flows from previously unreported acquired favorable leases.
C) Identify additional previously unreported acquired contingent liabilities.
D) Classify acquired equity investments as investments with significant influence rather than investments with no significant influence.

Question 61

In a nontaxable acquisition, assets acquired were reported on the acquired company's books at $1,000, but they are reported on the acquiring company's books at a fair value of $8,000. The acquiring company's tax rate is 25% and the assets have a 5-year life.
At the date of acquisition, the acquiring company reports an acquired deferred tax liability of:

A) $7,000
B) $4,000
C) $ 350
D) $1,750

Question 62

An acquirer reports a deferred tax asset as one of the assets acquired in a business combination when:

A) The acquisition is taxable.
B) The book value of acquired assets is greater than fair value.
C) The book value of acquired assets is less than fair value.
D) The acquiree's tax rate is lower than the acquirer's tax rate.

Question 63

Potash Company acquires Spokane Corporation's assets and liabilities, in a nontaxable acquisition. The tax basis of Spokane's buildings is $50 million, with an average remaining life of 25 years, straight-line. The fair value of the buildings at the date of acquisition is $30 million. Assume the tax rate is 20%.
Based on this information, because of the difference between reporting Spokane's buildings on the books versus tax return, each year for the next 25 years Potash will:

A) Credit deferred tax asset $4,000,000
B) Debit deferred tax asset $160,000
C) Debit deferred tax liability $4,000,000
D) Credit deferred tax asset $160,000

Question 64

Peer Company acquires Spear Corporation's assets and liabilities, in a nontaxable acquisition. The tax basis of Spear's identifiable intangible assets is $1 million, with an average remaining life of 5 years, straight-line. The fair value of the identifiable intangible assets at the date of acquisition is $26 million. Assume the tax rate is 25%.
Based on this information, because of the difference between reporting Spear's plant assets on the books versus tax return, each year for the next 5 years Peer will:

A) Credit deferred tax liabilities $6.25 million
B) Debit deferred tax liabilities $1.25 million
C) Debit deferred tax assets $1.25 million
D) Credit deferred tax assets $6.25 million

Question 65

An acquired company's tax basis of identifiable net assets acquired is lower than the fair value of identifiable net assets acquired. The acquisition is nontaxable. Which statement below is true?

A) The acquiring company reports an acquired deferred tax asset.
B) In future years, because of the difference in tax basis and fair value of acquired identifiable net assets, reported tax expense will be less than taxes paid.
C) No deferred tax assets or liabilities are acquired.
D) In future years, taxable income will be lower than earnings before tax reported on the books.

Question 66

Cognitive Company acquires the assets and liabilities of Tableau in a nontaxable acquisition. The carrying value of Tableau's equipment is greater than its fair value. This tax situation will have what effect on Cognitive's acquisition entry?

A) Goodwill is lower.
B) Goodwill is higher.
C) Acquired equipment is recorded at a lower amount.
D) There is no effect on the acquisition entry.

Question 67

Century Company acquires the assets and liabilities of Horizon Company in a nontaxable acquisition. The acquisition results in recognition of a deferred tax liability. Which of the following is a possible explanation for this deferred tax liability?

A) The acquisition was a bargain purchase.
B) Horizon had previously unreported liabilities.
C) The book value of Horizon's buildings was less than their market value.
D) The acquisition's cost equaled Horizon's book value.

Question 68

Century Company acquires the assets and liabilities of Horizon Company in a nontaxable acquisition. The acquisition results in recognition of a deferred tax asset. Which of the following is a possible explanation for this deferred tax liability?

A) The acquisition resulted in goodwill.
B) Horizon had previously unreported limited-life assets.
C) The book value of Horizon's buildings was greater than their market value.
D) The acquisition's cost equaled Horizon's book value.

Question 69

Pivot Corporation owns 80% of the voting stock of Speegee Company. It then acquires the remaining 20% of Speegee's voting stock. Which statement is true concerning reporting for the acquisition of the remaining 20%, if the acquisition is reported as a merger?

A) The assets and liabilities of Speegee are revalued to fair value.
B) If the acquisition cost is greater than the fair value of identifiable assets acquired, goodwill is recognized.
C) If the carrying value of the purchased noncontrolling interest is greater than its acquisition cost, a gain is recognized in income.
D) If the carrying value of the purchased noncontrolling interest is less than its acquisition cost, equity declines.

Question 70

Asena Corporation owns 30% of the voting stock of Tapestry Company, and reports it as an equity method investment. It then pays cash to acquire the remaining 70% of Tapestry's voting stock. Which statement is false concerning reporting for the acquisition of the remaining 70%, if the acquisition is reported as a merger?

A) If the total acquisition cost is greater than the fair value of identifiable assets acquired, goodwill is recognized.
B) The equity method investment is written off as a reduction in additional paid-in capital.
C) The assets and liabilities of Tapestry are revalued to fair value.
D) The assets and liabilities of Tapestry will now appear on Asena's books.

Question 71

Nebulus Corporation owns 70% of the voting stock of Suite Company. It reports the 30% interest in the equity section of its balance sheet at $32,000,000, and all of Suite's assets and liabilities are reported on Nebulus' balance. Nebulus acquires the remaining 30% interest for $45,000,000 in cash. At that time, the fair value of Suite's identifiable net assets was $125,000,000. As part of the acquisition entry, Nebulus records

A) A gain on acquisition of $13,000,000, in income.
B) A $45,000,000 net reduction in shareholders' equity.
C) A $32,000,000 net reduction in shareholders' equity.
D) A gain on acquisition of $45,000,000, in income.

Question 72

Nebulus Corporation owns 30% of the voting stock of Suite Company. It reports the 30% interest as an equity method investment, with a current carrying value of $32,000,000 and a market value of $45,000,000. Nebulus acquires the remaining 70% interest for $120,000,000 in cash. At that time, the fair value of Suite's identifiable net assets was $125,000,000, and Suite's book value was $45,000,000. As part of the acquisition entry, Nebulus records

A) A gain of $13,000,000, in income.
B) Goodwill of 27,000,000.
C) Goodwill of $107,000,000.
D) A gain of $5,000,000, in income.

Question 73

Average Company acquired all of the assets and liabilities of Best Company. Best Company has research and development projects in process, which have not yet been completed. How does Average Company report Best's in-process research and development?

A) As a limited life intangible asset, at fair value
B) As an indefinite life intangible asset, at fair value
C) As part of goodwill
D) It is not reported

Question 74

Plaza Corporation acquires all of the assets and liabilities of Spiceland Company. How are Spiceland's research and development costs of ongoing projects reported on Plaza's books at the date of acquisition?

A) Included as part of goodwill
B) Identifiable asset, at fair value
C) Operating expense, at fair value
D) Loss on acquisition, at Spiceland's cost

Question 75

If an acquired company has in-process R&D projects, the value of the R&D is reported as an acquired intangible asset:

A) Only if it already appears on the acquired company's balance sheet
B) Only if it has an alternative future use
C) If the probability of success is greater than 50%
D) At fair value

Question 76

Which statement is true concerning U.S. GAAP versus IFRS reporting for business combinations?

A) U.S. GAAP requires recognition of an earnout as part of initial acquisition cost, while IFRS requires an earnout to be recorded only when it is paid.
B) U.S. GAAP expenses consulting costs while IFRS includes these costs as part of goodwill.
C) U. S. GAAP and IFRS both require capitalization of in-process R&D as an identifiable intangible asset.
D) U.S. GAAP and IFRS both require all asset and liability valuation corrections to be reported in income.

Question 77

An acquirer discovers that a competitor has filed a patent infringement lawsuit against the company it is acquiring. This lawsuit is not currently recognized on the acquiree's books. How should the acquirer report the lawsuit at the date it makes the acquisition?

A) Don't report it until it is settled.
B) Report it as a liability if it is a probable liability and its value can be reasonably estimated.
C) Report it as a liability if it is a contractual or separable obligation.
D) Report it as a liability if it is more likely than not that they will lose the lawsuit.

Question 78

An acquirer pays cash for the assets and liabilities of another company. Which of the following is most likely to be reported by the acquirer as one of the liabilities acquired from the other company?

A) Contingent consideration (earnout) included as part of the acquisition
B) Warranty liability not previously reported by the acquiree
C) Unreported unsettled lawsuit against the acquiree
D) Promised payments to former owners of the acquiree, not related to future employment

Question 79

Pawan Corporation acquires all of Sesa Company at an acquisition cost of $80,000,000 in cash. Sesa's reported assets and liabilities are as follows:
$$\begin{array} { | l | r | r | } \hline & { \begin{array} { c } \text { Book Value } \\\text { Dr (Cr) }\end{array} } & { \begin{array} { c } \text { Fair Value } \\\text { Dr (Cr) }\end{array} } \\\hline \text { Current assets } & \$ 5,000,000 & \$ 7,000,000 \\\hline \text { Land, buildings, and equipment (net) } & 60,000,000 & 40,000,000 \\\hline \text { Liabilities } & ( 40,000,000 ) & ( 39,000,000 ) \\\hline\end{array}$$ Pawan determines that Sesa has the following identifiable intangible assets, not reported on its balance sheet:
$$\begin{array} { | l | r | } \hline & { \text { Fair Value } } \\\hline \text { Favo rable leaseholds } & \$ 4,000,000 \\\hline \text { In-process research \& develo pment } & 3,000,000 \\\hline \text { Advertising contracts } & 5,000,000 \\\hline\end{array}$$ Pawan also discovers that Sesa has not properly recorded the expected liability from a settled lawsuit, currently estimated at $6,000,000.
Pawan records goodwill of:

A) $69,000,000
B) $60,000,000
C) $66,000,000
D) $54,000,000

Question 80

Relic Corporation acquires the assets and liabilities of Vware Company and reports goodwill of $40 million. At the time of the acquisition, Vware was a defendant in a customer's lawsuit, but it was expected that Vware would win, so the lawsuit was not recorded. Within a year of the acquisition, the lawyers persuade both parties to settle out of court for $8,000,000. How is this payment most likely to be reported? Credit cash, and debit:

A) Retained earnings (balance sheet)
B) Other comprehensive income (statement of comprehensive income)
C) Loss (income statement)
D) Lawsuit liability (balance sheet)