Question 1

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) A Hostile Defence.

Question 2

In a Business Combination involving two companies,when can a company ALWAYS be deemed to be the acquirer?

Accepted Answer

A) The company is significantly larger than the other. 
B) The company holds more than 50% of the voting shares of the combined entity. 
C) The company has a larger Board of Directors 
D) A company can be deemed to be the acquirer only when it holds 50% of the voting shares of the combined entity AND has a larger Board of Directors than the other company.

Question 3

The following information pertains to Questions 
ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on July1,2008.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.
-Assume that both companies would be wound up and a new company called ABCDEF Inc.was created in its place.Prepare the Balance Sheet to reflect this occurrence as at July 1,2008.The new entity would have10,000 voting shares issued to the current shareholders for a total market value of $1,222,000.

Accepted Answer

The answer of The following information pertains to Questions 
ABC123...

Question 4

Which of the following regarding the preparation of Consolidated Financial Statement(s)is/are 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 5

The new IASB standard issued with respect to the treatment of negative goodwill requires that:

Accepted Answer

A) it must be recognized in income immediately as an extraordinary item. 
B) it must be recognized in income immediately but not necessarily as an extraordinary item. 
C) it can be deferred and amortized over a maximum of 40 years. 
D) it must be reflected as an increase in Liabilities and a Reduction in Capital for the Parent Company.

Question 6

Company Y purchases a controlling interest in Company Z on January 1,2002.Which of the following would appear as the Shareholder Equity amount on Company Y's Consolidated Balance Sheet on the date of acquisition?

Accepted Answer

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

Question 7

DEF Inc.is contemplating a business combination involving GHI Inc.DEF can either purchase the assets and liabilities of GHI Inc,or it can engage in a Pooling of Interests with GHI Inc.Assuming that the Fair Market Values of GHI's identifiable assets are equal to their book values,which method would show a higher net income for the consolidated entity (assume that the Pooling of Interests Method is allowable)?

Accepted Answer

A) The Purchase Method) 
B) The Pooling of Interests Method) 
C) The Purchase Method and The Pooling of Interests Method would show the same income. 
D) It depends on the accounting policies used by each company.

Question 8

Company A has made an offer to purchase all of the outstanding shares of Company B for $10 per share (the current market value of the shares).In response to Company A's offer,the shareholders of Company B were given rights to purchase additional shares at $8 per share.Which of the following tactics was employed by Company B to prevent Company A from acquiring control of Company B?

Accepted Answer

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

Question 9

One company is considering entering into a business combination with another.The potential acquirer wishes to acquire the subsidiary's assets and liabilities but wishes to prepare Consolidated Financial Statements using the Fair Market Values of its own assets and liabilities as well of those of its potential subsidiary.Can this be accomplished?

Accepted Answer

A) Yes,this is permissible under the Pooling of Interests method) 
B) Yes,this is permissible under the Purchase Method under certain circumstances. 
C) Yes,this would be possible,but only if the New Entity Method is used) 
D) No,this would not be possible under any circumstances as it would be a violation of GAAP.

Question 10

In order for one company to establish control over another,

Accepted Answer

A) consideration given must include cash or voting shares. 
B) it must have elected the majority of the members of the Board of Directors of that company. 
C) the acquisition cost must be disbursed to the subsidiary prior to exercising its control. 
D) consideration of some kind must be given.However,the consideration given is irrelevant to the substance of the relationship between the two companies.

Question 11

Which of the following methods of accounting for Business Combinations is/are consistent with the Historical Cost Principle?

Accepted Answer

A) The Pooling of Interests Method 
B) The Purchase Method) 
C) The New Entity Method) 
D) The Acquisition Method)

Question 12

Suppose that you worked for Sonic Inc.and you were only made aware of the Business Combination after it had taken place and been accounted for.You have been handed the balance sheets of both companies as well as the following draft Balance Sheet prepared on that date:  
Required:
What can be concluded about the accounting of this Business Combination?

Accepted Answer

The answer of Suppose that you worked for Sonic Inc.and...

Question 13

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on July 31,2006:  Yours Inc's Book Values were equal to their Fair Values on the date of acquisition,with the exception of Yours' Plant and Equipment,which was worth $100,000.
-What amount would appear in Yours' Investment Account after the Pooling of Interests in Question 29 has taken place?

Accepted Answer

A) $200,000 
B) $12,000 
C) $100,000 
D) Nil

Exam 3: Business Combinations