Deck 3: Fair Value Adjustments and Tax Effects

Question 1

An acquirer in a business combination can acquire:

A) the assets and liabilities of a business.
B) the issued shares of an acquire company.
C) either A or B.
D) none of the above.

Answer 1

C

Question 2

On consolidation,a group can only offset current tax assets against current tax liabilities when the group:

A) has adopted tax consolidation.
B) has no partly owned subsidiaries.
C) operated wholly within Australia.
D) all of the above.

Answer 2

D

Question 3

Accounting standard AASB3 Business Combinations does not apply to:

A) joint ventures.
B) acquisition of assets not constituting a business.
C) business combinations involving entities under common control.
D) all the above.

Answer 3

D

Question 4

In allocating the cost of a business combination,what is not required to exist at the date of acquisition?

A) Assets
B) Liabilities
C) Goodwill
D) Contingent liabilities

Question 5

Where the value of an investment in a subsidiary increases,a deferred tax liability is generally not required to be recognised when:

A) it is unlikely that profits of the subsidiary will be distributed as dividends.
B) it is unlikely that the subsidiary investment will be sold.
C) both A and B.
D) none of the above.

Question 6

The recorded equity of a subsidiary at acquisition will always equal the fair value of the subsidiary's net assets.

Question 7

According to AASB 3,how is goodwill acquired in a business combination recognised?

A) As an asset, initially measured at cost
B) As a contingent liability, initially measured at fair value
C) As an asset, initially measured at fair value
D) As an equity account, initially measured at cost

Question 8

Fair value adjustments relate to:

A) differences between fair value and carrying amount of parent assets and liabilities.
B) differences between fair value and carrying amount of subsidiary assets and liabilities.
C) both A and B.
D) none of the above.

Question 9

If the carrying amount of an asset of a subsidiary in a business combination is increased to fair value,on consolidation the group will record:

A) a deferred tax liability.
B) a deferred tax asset.
C) a gain on bargain purchase.
D) none of the above.

Question 10

A company records a gain on bargain purchase of $40 000 on the acquisition of a subsidiary.Assuming there are no other tax adjustments for any companies,if the trading profit of the group before tax were $140 000,and given a tax rate of 30%,the group income tax expense would be:

A) $42 000.
B) $54 000.
C) $30 000.
D) none of the above.

Question 11

In the year ended June 30 20X7,Woof Ltd acquired the assets and assumed the liabilities of the Doggie Biscuits operation from Fido Ltd for $10 000 000.At the date of acquisition,the fair values of the net separable assets and liabilities of the operation were $8 000 000 and $1 000 000 respectively.Based on this information,the transaction has resulted in:

A) a business combination of Woof Ltd and Doggie Biscuits.
B) the acquisition of certain assets and liabilities, which is not a business combination since Doggie Biscuits is not a business but simply part of the Fido Ltd business.
C) the acquisition of certain assets and liabilities, which is not a business combination since Doggie Biscuits is not managed to provide a return to investors but only to provide a return to Fido Ltd.
D) none of the above.

Question 12

Explain the two circumstances under which a business combination may occur?

Question 13

Goodwill recorded by an acquiree in a business combination must be:

A) recognised at fair value on acquisition.
B) recognised at carrying amount on acquisition.
C) not recognised in the business combination.
D) none of the above.

Question 14

Discuss the reasons for ignoring tax effects in respect of goodwill recognised on consolidation in a business combination.

Question 15

The acquisition method applies to:

A) the sale of a subsidiary.
B) the sale of individual assets.
C) the sale of a business.
D) all of the above.

Question 16

Explain the basis on which adjustments to deferred tax assets and liabilities arise on consolidation.

Question 17

Current accounting standards require the use of the acquisition method in accounting for all business combinations.

Question 18

AASB 3 Business Combinations does not apply to joint arrangements.

Question 19

Discuss the differential treatment for tax purposes of investments in subsidiaries compared to other assets.

Question 20

On consolidation,adjustment to deferred tax assets and liabilities is required for:

A) unrealised intragroup profits.
B) unrealised intragroup losses.
C) fair value adjustments.
D) all of the above.

Question 21

The fair value of financial instruments acquired in a business combination will be:

A) market value in an active market.
B) an estimate of fair value.
C) either A or B.
D) none of the above.

Question 22

All assets acquired in a business combination must be recognised at fair value.

Question 23

A gain on bargain purchase arising in a business combination does not have any deferred tax implications.

Question 24

A company purchases all the issued shares of B company for $2 000 000.The net assets of B Company consist of land $2,100 000 and a liability of $100 000.A company will record the acquisition as follows:

A) DR Land $2 100 000
CR Liability $100 000
CR Cash $2 000 000
B) DR Shares in B $2 000 000
CR Issued Capital $2 000 000
C) DR Shares in B $2 000 000
CR Cash $2 000 000
D) none of the above

Question 25

Explain why an acquiring company recognizes goodwill.

Question 26

Goodwill is measured as the difference between book values and fair values
of the net identifiable assets acquired from the cost of acquisition.

Question 27

An acquired entity may realize its brand name.

Question 28

Revaluation of an acquiree's assets in a business combination via a consolidation adjustment represents the use of the cost model.

Question 29

A contingent liability recognised in a business combination will be recorded:

A) in the subsidiary's accounts.
B) in the group accounts.
C) either A or B.
D) none of the above.

Question 30

If a contingent liability of a subsidiary is recognised in a business combination,on consolidation the group will record:

A) a deferred tax liability.
B) a deferred tax asset.
C) a reduction in goodwill.
D) none of the above.

Question 31

Management of acquiring companies have incentive to provide for as many future costs as possible in a business combination.

Question 32

A Company purchases the net assets of B Company,which consists of land $2 100 000 and a liability of $100 000,paying by issuing 2 000 000 x $1,which is the fair value of the shares in A Company.A Company will record the acquisition as follows:

A) $\begin{array} { l l } \text { DR Investment in B } & \$ 2,000,000 \\\text { CR Issued Capital } & \$ 2,000,000\end{array}$
B) $\begin{array} { l l } \text { DR Land } & \$ 2,100,000 \\\text { CR Liability } & \$ 100,000 \\\text { CR Cash } & \$ 2,000,000\end{array}$
C) $\begin{array} { l l } \text { DR Land } & \$ 2,100,000 \\\text { CR Liability } & \$ 100,000 \\\text { CR Issued Capital } & \$ 2,000.000\end{array}$
D) none of the above

Question 33

The choice of the method of recording fair value adjustments in a business combination will be influenced by what factors?

Question 34

What is the accounting treatment for a group where the reporting entity is being sued?

A) Upon consolidation, the unrecorded liability will be recognised at its fair value.
B) No reporting is necessary until the case is settled.
C) Only a footnote in the consolidated financial statements is required.
D) Recognition is appropriate only if a loss is probable.

Question 35

Revaluation of assets to fair value in a business combination will be accounted for:

A) in the records of the subsidiary.
B) on consolidation.
C) either A or B.
D) none of the above.

Question 36

Intragroup dividends do not require any tax effect adjustments on consolidation.

Question 37

Accounting standard AASB 3 Business Combinations requires the recognition of contingent assets in a business combination.

Question 38

Why does a group's taxable temporary difference decrease as a plant asset ages?

Question 39

Intragroup dividends do not result in a requirement for tax effect adjustments on consolidation if:

A) group companies are Australian.
B) the dividend is fully franked.
C) both A and B.
D) none of the above.

Question 40

The dividend imputation system covers all members of a group,whether or not they are Australian residents.

Question 41

Discuss the reasons for the existence of reverse acquisitions.

Question 42

Adjustments required in a reverse acquisition only affect the consolidated financial statements.

Question 43

Describe the accounting effects of a reverse acquisition.

Question 44

Which accounts are affected when a dividend elimination entry occurs?

A) Dividend revenue and dividend paid
B) Cash and dividend revenue
C) Dividend revenue and dividend declared
D) Dividend declared and cash

Question 45

In accounting for a reverse acquisition,it is necessary to recognise the fair value of the net assets of:

A) the acquiree.
B) the acquirer.
C) both the acquiree and acquirer.
D) none of the above.

Question 46

Discuss the reasons why the fair value of a subsidiary's net assets may not be equal to their carrying amount.