Question 1

Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd) ("GEH") in2012. The Vice President, Finance of GWM has asked you, the manager in charge of this year's audit, whether or not GWM has to prepare consolidated financial statements for the year ended December 31, 2012. GWM has about fifteen wholly owned subsidiaries and has in the past prepared consolidated financial statements. Prepare a discussion around the need to prepare consolidated financial statements.

Accepted Answer

The answer of Great Western Manufacturing Inc. ("GWM") was acquired...

Question 2

Which of the following regarding the preparation of Consolidated Financial Statement is correct?

Accepted Answer

A)  Once the parent company prepares Consolidated Financial Statements, it no longer needs to prepare financial statements for its own activities. 
B)  Only the subsidiaries are required to prepare Financial Statements. 
C)  Consolidated Financial Statements are required by the Parent Company for reporting purposes only; each company must continue to prepare its own Financial Statements. 
D)  Consolidated Financial Statements are required only when both companies are publicly traded.

Question 3

ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on July 1, 2012. On the date, the balance sheets of each of these companies were as follows:  On that date, the fair values of DEF456 Assets and Liabilities were as follows:  In addition to the above, an independent appraiser deemed that DEF456 Inc. had trademarks with a fair market value of $100,000 which had not been accounted for. In turn, ABC123's fair market values were equal to their book values with the exception of the Company's Inventory and Plant and Equipment, which were said to have Fair Market Values of $30,000 and $480,000, respectively. Based on the information provided: a) Calculate the amount of Goodwill arising from this combination. b) Prepare the journal entry to record ABC123's acquisition of DEF456's shares. c) Prepare ABC123's Consolidated Balance Sheet immediately following its acquisition of DEF123's voting shares.

Accepted Answer

The answer of ABC123 Inc has decided to purchase 100%...

Question 4

In general, which of the following statements about the income tax implications of the form of a business combination is true?

Accepted Answer

A)  An acquisition of shares is generally better for the acquirer but worse for the seller. 
B)  An acquisition of net assets is generally better for the acquirer but worse for the seller. 
C)  An acquisition of shares is generally better for both the acquirer and the seller. 
D)  An acquisition of net assets is generally better for both the acquirer and the seller.

Question 5

During an acquisition, when should intangible assets NOT be recognized apart from Goodwill?

Accepted Answer

A)  The assets have been identified but not accounted for by the subsidiary. 
B)  The assets have been identified and accounted for by the subsidiary. 
C)  The assets can be sold, licensed or exchanged. 
D)  The assets have been accounted for by the subsidiary but have no Fair Value on the date of acquisition.

Question 6

Company A wishes to acquire control of Company B as cheaply as possible. For economic reasons, a consultant recommended that if Company A do this through purchase of assets, rather than purchase of shares. Which of the following statements regarding the above scenario is correct?

Accepted Answer

A)  A must purchase all of B's assets and liabilities. 
B)  A only needs to acquire control of B's net assets. 
C)  A only needs to acquire control of B's fixed assets. 
D)  The consideration given by A must exceed 50% of the Fair Market Value of B's Net Assets.

Question 7

Parent and Sub Inc. had the following balance sheets on December 31, 2012:  On January 1, 2013 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash. On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000, respectively. Assuming that Consolidated Financial Statements were prepared on that date, answer the following: The Shareholders' Equity section of the Consolidated Balance Sheet would show what amount?

Accepted Answer

A)  $19,000. 
B)  $90,000. 
C)  $98,000. 
D)  $121,000.

Question 8

A Inc. is contemplating a Business combination with B Inc. However, A Inc.'s management is uncertain as to whether it should purchase B's assets or a majority of B's voting shares. The fair market values of B's assets far exceed their book values. A's management should be advised that IN MOST CASES:

Accepted Answer

A)  A purchase of B's shares would likely be the cheaper method of acquiring control. However, it would be less advantageous to the consolidated entity from a Tax standpoint. 
B)  A purchase of B's shares would likely be the cheaper method of acquiring control. It would also be more advantageous to the consolidated entity from a Tax standpoint. 
C)  A purchase of B's shares would likely be the costlier method of acquiring control. However, it would be more advantageous to the consolidated entity from a Tax standpoint. 
D)  A purchase of B's shares would likely be the costlier method of acquiring control. It would also be less advantageous to the consolidated entity from a Tax standpoint.

Question 9

Company A makes a hostile take-over bid for control of Company B. In response, Company B makes a counter-offer to purchase shares from Company A's shareholders. Which of the following best describes Company B's response?

Accepted Answer

A)  Pac-man defence. 
B)  Selling the crown jewels. 
C)  Poison Pill. 
D)  Hostile Defence.

Question 10

Which of the following would NOT be included in the Acquisition Cost?

Accepted Answer

A)  Share issue costs. 
B)  The Fair Market Value of any Shares Issued. 
C)  Contingent Consideration. 
D)  The Fair Value of assets transferred.

Question 11

Company Y purchases a controlling interest in Company Z on January 1, 2012. Which of the following would appear as the Shareholders' Equity amount on Company Y's Consolidated Balance Sheet on the date of acquisition?

Accepted Answer

A)  Company Y's Shareholders' Equity. 
B)  The sum of the Shareholders' Equity of both companies. 
C)  Company Y's Shareholders' Equity as well as Company Y's proportional share of company Z's net assets at book value. 
D)  Company Y's Shareholders' Equity as well as Company Y's proportional share of company Z's net assets at Fair Market Value.

Question 12

Which of the following is closest to IAS 27 definition of control?

Accepted Answer

A)  A company is deemed to have control over another only when it owns a majority of the voting shares of another company. 
B)  A company is deemed to have control when it can elect a majority of the Board members of another company. 
C)  Control is the power of one company to govern the financial and operating policies of an entity so as to obtain the benefits of its activities. 
D)  Control exists only when a company has the continuing power to determine the operating and financing policies of another company and attempts to exercise such powers.

Question 13

XYZ Inc. owns 55% of DEF's 100,000 outstanding voting shares. Another company, GHI Inc., owns 40%, with the remaining shares being held by many individual investors. GHI Inc. also owns $25,000,000 worth of DEF Inc.'s $1,000 par value bonds, each of which is convertible to one voting share of DEF Inc. Which of the following statements regarding the control of DEF Inc. is correct?

Accepted Answer

A)  XYZ Inc. has control over DEF Inc. as it owns a majority of the latter's currently outstanding voting shares. 
B)  XYZ Inc. does not have control over DEF Inc., as it cannot exercise control over DEF's strategic operating, investing and Financing activities without the cooperation of GHI Inc. 
C)  XYZ Inc. has de facto control over DEF Inc. 
D)  As long as GHI Inc. does not exercise its option to convert its bonds to voting shares, XYZ Inc. has control over DEF Inc.

Question 14

Which of the following must be possible in order for a Business Combination to exist?

Accepted Answer

A)  Control of a subsidiary's net assets. 
B)  Ownership of 100 % of a subsidiary's voting shares. 
C)  Ownership of all of a subsidiary's assets. 
D)  Ownership of all of a subsidiary's operating assets.

Question 15

Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1,2012. On the date, the balance sheets of each of these companies were as follows:  On that date, the fair values of Intron's Assets and Liabilities were as follows:  Based on the information provided, answer the following: a) Prepare the journal entry to record the purchases Intron's shares. b) Prepare the required journal entry prior to the preparation of the Consolidated Financial Statements.

Accepted Answer

The answer of Telecom Inc has decided to purchase the...

Question 16

Which of the following is required when preparing a consolidated balance sheet on the date of the formation of a subsidiary by its parent company?

Accepted Answer

A)  The assets and liabilities of the subsidiary must be revalued to fair value. 
B)  The goodwill from the business combination must be calculated. 
C)  The parent's investment account must be eliminated against the subsidiary's share capital. 
D)  The parent's investment account must be eliminated against the subsidiary's retained earnings.

Question 17

On April 1, 2012, the balance sheets of Optimum Inc. and Electra Inc. were as follows:  On that date, the fair values of Electra's Assets and Liabilities were as follows:  On April 1, 2012, Optimum Inc. decided to purchase all the assets and liabilities of Electra Inc. for $250,000 in cash. a) Calculate the amount of Goodwill arising from this combination. b) Prepare the journal entry to record Optimum's acquisition of Electra's assets. c) Prepare Optimum's Consolidated Balance Sheet immediately following its acquisition of Electra's assets.

Accepted Answer

The answer of On April 1, 2012, the balance sheets...

Question 18

IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. On the date of acquisition, UNI's assets included $2,000,000 of Inventory and Land with a Book value of $120,000.UNI also had $1,400,000 in Liabilities on that date. UNI's book values were equal to their fair market values, with the exception of the company's Land, which was estimated to have a fair market value which was $50,000 higher than its book value. Parent Company acquires Subsidiary Company's common shares for cash. On the date of acquisition, Subsidiary had Goodwill of $100,000 on its books. Which of the following statements regarding Subsidiary's Goodwill on the date of acquisition is correct?

Accepted Answer

A)  Subsidiary's goodwill is considered as an identifiable asset and should therefore be included in Parent Company's Acquisition Differential calculation. 
B)  Subsidiary's goodwill is considered as an identifiable asset and should therefore be excluded from Parent Company's Acquisition Differential calculation. 
C)  Subsidiary's goodwill is not considered as an identifiable asset and should therefore be excluded from Parent Company's Acquisition Differential calculation. 
D)  Subsidiary's goodwill is not considered as an identifiable asset and should therefore be included in Parent Company's Acquisition Differential calculation.

Question 19

Under the new-entity method, which of the following statements is TRUE?

Accepted Answer

A)  The net assets of the acquiring company remain at book value while those of the acquired company are recorded at fair value. 
B)  The net assets of the acquiring company are recorded at fair value while those of the acquired company are recorded at book value. 
C)  The net assets of both companies are recorded at fair market value. 
D)  The net assets of both companies are recorded at book value.

Question 20

George Inc. acquired all of the outstanding shares of Martha Limited by paying $200,000 in cash, issuing a debenture for $300,000 and issuing 10,000 common shares with a fair value of $50 each. George Inc. incurred costs of $60,000 in investigation, accounting and legal fees directly related to the acquisition. In addition, the company incurred costs of $10,000 for the issue of the debenture and another $10,000 for the issue of the additional shares. Prepare the journal entries necessary to record the acquisition and related costs on the books of George Inc.

Accepted Answer

The answer of George Inc. acquired all of the outstanding...

Exam 3: Business Combinations