Question 1

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

Accepted Answer

Goodwill is a residual that remains after the acquirer's interest in the identifiable tangible assets,intangible assets,liabilities and contingent liabilities of the acquiree are recognised.The possible components of goodwill (identified by Johnson and Petrone,1998,p.295)include (1)excess of the fair values over the book values of the acquiree's recognised assets (2)fair values of other net assets not recognised by the acquiree (3)fair value of the ongoing concern element of the acquiree's existing business (4)fair value from combining the acquirer's and acquiree's businesses and net assets (5)overvaluation of the consideration paid by the acquirer and (6)overpayment (or Underpayment)by the acquirer.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

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:

Accepted Answer

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 5

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?

Accepted Answer

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

Question 6

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:

Accepted Answer

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

Question 7

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

Accepted Answer

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

Question 8

Adjustments cannot be made subsequent to the initial accounting for:

Accepted Answer

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

Question 9

Outline the accounting treatment of goodwill subsequent to acquisition date.

Accepted Answer

The answer of Outline the accounting treatment of goodwill subsequent...

Question 10

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:

Accepted Answer

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

Question 11

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

Accepted Answer

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 12

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.

Accepted Answer

The answer of Explain the four key steps involved in...

Question 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

The answer of Explain how a gain on bargain purchase...

Question 15

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:

Accepted Answer

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 16

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:

Accepted Answer

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

Question 17

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?

Accepted Answer

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 18

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

Accepted Answer

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

Question 19

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.

Accepted Answer

The answer of In many situations it is easy to...

Question 20

A business combination is defined as:

Accepted Answer

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

Exam 10: Business Combinations