Deck 10: Business Combinations

Question 1

The acquisition date for a business combination is the date on which:

A)a substantive agreement between the combining parties is reached
B)the acquirer effectively obtains control of the acquiree
C)the business combination is announced to the public
D)the acquirer announces the acquisition to the acquiree.

Answer 1

B

Question 2

The following items are not deemed to be items that would meet the definition of an intangible asset under AASB 3:

A)trademarks
B)experienced marketing team
C)newspaper mastheads
D)order backlogs.

Answer 2

B

Question 3

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

A)obtains control of the other entities
B)concedes control over the acquired entities
C)sells the acquired entity
D)receives the acquisition consideration.

Answer 3

A

Question 4

Johnson Limited estimated the net present value of future cash flows from specialised Plant acquired under a business combination to be $30 000.A replacement cost for the Plant is estimated to be $33 000.The Plant has been independently appraised at a value of $31 000.A similar item of Plant cost the acquirer $29 000 last year.What is the fair value for recognition of the Plant under a business combination?

A)$29 000
B)$30 000
C)$33 000
D)$31 000.

Question 5

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

A)finances the business combination
B)gives up control over the net assets acquired
C)obtains control of the net assets the other entity
D)pays the acquisition consideration.

Question 6

Valdez Limited acquired a 25% interest in Alaska Pty Ltd on 1 January 2011.On 15 September 2011 it acquired an additional 10% interest,and on 15 March 2012 a further 40%.Under AASB 3 a business combination occurs on:

A)1 January 2011
B)15 September 2011
C)15 March 2012
D)All of the above

Question 7

Transaction costs are capitalised into the cost of an investment in another entity when:

A)the entity makes an irrevocable election to present subsequent changes in fair value in other profit or loss rather than other comprehensive income.
B)the entity makes an irrevocable election to present subsequent changes in fair value in other comprehensive income rather than in profit or loss.
C)the entity measures the investment at cost
D)the entity measures the investment at fair value

Question 8

A business combination is defined as:

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

Question 9

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

A)consideration transferred
B)fair values of identifiable net assets
C)carrying amounts of identifiable net assets
D)goodwill

Question 10

In order for a tangible asset to be recognised by an acquirer under a business combination it must be probable that future economic benefits will flow to the acquirer and:

A)its fair value can be measured reliably
B)it must be a non-current item
C)it must be measured using the present value method d,it may not be a non-monetary asset.

Question 11

The consideration transferred in a business combination is measured as the fair value of the:

A)net assets acquired
B)costs directly attributable to the combination
C)consideration given only
D)consideration given plus directly attributable costs.

Question 12

Adjustments cannot be made subsequent to the initial accounting for:

A)Goodwill
B)Restructuring costs
C)Contingent consideration
D)Contingent liabilities

Question 13

Bolton Limited acquires the net assets of Pamelia Limited for a cash consideration of $100 000.One half is to be paid on acquisition date and one half is payable in one year's time.The appropriate discount rate is 10% p.a.The present value of the cash outflow in one year's time is:

A)$45 454
B)$50 000
C)$54 545
D)$55 000

Question 14

Under AASB 3 Business Combinations,a gain on bargain purchase arises when the acquirer's interest in the net fair value of the acquiree's identifiable net assets and contingent 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 15

If shares are issued as part of the consideration paid,transactions costs such as brokerage fees may be incurred.According to AASB 3 Business Combinations the appropriate accounting treatment for such costs in the records of the acquirer is a debit to:

A)share capital
B)investments
C)cash
D)acquisition expenses.

Question 16

Damon Limited acquired the net assets of Gina Limited.Damon Limited provided an item of equipment as part of the consideration.The fair value of the equipment was $13 000.It cost $20 000 and had a carrying amount of $12 000.Which of the following entries appropriately reflects the gain or loss on the equipment?

A)DR Loss on sale $1 000
B)CR Loss on sale $1 000
C)CR Gain on sale $1 000
D)Dr Gain on sale $1 000.

Question 17

Fredericks Limited acquired the identifiable assets,liabilities and contingent liabilities of Nicole Limited for $134 000.The items acquired,stated at fair value,are: Plant $72 000 Inventory $40 000 Accounts receivable $18 000 Patents $10 000 Accounts payable $16 000.The difference on acquisition is:

A)Gain on bargain purchase $10 000
B)Gain on bargain purchase $16 000
C)Goodwill of $10 000
D)Goodwill of $124 000.

Question 18

Net employee benefit liabilities acquired in a business combination are measured by using the:

A)present value method
B)estimated total of future cash outflows,undiscounted
C)face value of the liabilities
D)cash method.

Question 19

Oliveira Limited estimated that the net present value of future cash flows from Equipment acquired in a business combination is $15 000.The cost of replacing the Equipment is estimated to be $18 000.The Equipment has been independently appraised at a value of $14 000.A similar item of Equipment cost the acquirer $19 000 last year.The fair value at which the Equipment will be recognised when recording the business combination is:

A)$14 000
B)$15 000
C)$18 000
D)$19 000.

Question 20

Appendix B of AASB 3 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 21

In many situations it is easy to identify the acquirer in a business combination.In other cases this is more difficult and requires judgement.Outline three indicative factors provided in AASB 3 to assist in assessing which entity is the acquirer.

Question 22

Define goodwill and identify the possible components of this intangible asset.

Question 23

Explain how a gain on bargain purchase might arise under a business combination.

Question 24

Outline the accounting treatment of goodwill subsequent to acquisition date.

Question 25

Explain the four key steps involved in the acquisition method of accounting for business combinations under AASB 3.
a.Identify an acquirer
b.Determine the acquisition date.
c.Recognise and measure the identifiable assets acquired,the liabilities assumed,and any noncontrolling interest in the acquiree.
d.Recognise and measure goodwill or a gain from a bargain purchase.
The above steps result in determining the existence of any goodwill or gain on bargain purchase which must be accounted for.