Deck 3: Business Combinations

Question 1

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 Goodwill arising from this Business Combination would be:

A) ($17,000).
B) $7,000.
C) $17,000.
D) $120,000.

Answer 1

B

Question 2

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?

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.

Answer 2

C

Question 3

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? (Assume that each of the methods is allowable)

A) Yes, this is permissible under the Acquisition method.
B) Yes, this is permissible under the Purchase Method under certain circumstances.
C) Yes, this is permissible under the New Entity Method is used.
D) No, this would not be possible under any circumstances.

Answer 3

C

Question 4

Which of the following pertaining to Consolidated Financial Statements is correct?

A) The preparation of consolidated Financial Statements means that the companies involved cease to operate as separate legal entities.
B) The preparation of Consolidated Financial Statements is at the Parent Company's discretion.
C) When one company has control over another, Consolidated Financial Statements must be prepared for the combined entity.
D) Before preparing Consolidated Financial Statements, a subsidiary's Financial Statements prior to the date of acquisition must be restated.

Question 5

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

A) it must be recognized in income immediately as an extraordinary item.
B) it must be recognized in income immediately.
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

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 Current Assets of the combined entity should be valued at:

A) $70,000.
B) $86,000.
C) $114,000.
D) $170,000 .

Question 7

Company A makes a hostile take-over bid for control of Company

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

Question 8

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. How much goodwill would be created by IOU's acquisition of UNI?

A) $30,000.
B) $50,000.
C) $80,000.
D) Nil.

Question 9

IAS 27 outlines the requirements for identifying the company that is the acquirer in a business combination when it's not clear who that is. Which is NOT a consideration in determining which company is the acquirer?

A) If the means of payment is cash, which party is paying the cash.
B) Relative holdings of voting shares in the combined entity.
C) Voting rights of the respective parties after the combination of their businesses.
D) Any by-laws or provisions of the incorporation acts of each company that details the manner in which a business combination will occur at law.

Question 10

How should intangible assets which are readily identifiable but not accurately measured be accounted for?

A) They should be ignored since they can't be accurately measured.
B) They should be independently appraised and accounted for at their appraised value.
C) They should be included in Goodwill.
D) They should be accounted for at an amount deemed reasonable by management.

Question 11

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 Fixed Assets of the combined entity should be valued at:

A) $70,000.
B) $120,000.
C) $154,000.
D) $160,000.

Question 12

The process of preparing Consolidated Financial Statements involves the elimination of inter-company transactions between a Parent Company and its subsidiary. Where would these entries be recorded?

A) On the Parent's books only.
B) On the Subsidiary's books.
C) The entries are not recorded in the books of either company. The entries are only made on the working papers.
D) The effect of any inter-company transaction must be reflected on the books of both companies.

Question 13

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

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

Question 14

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?

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

Question 15

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

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 16

How should the acquisition cost of a Business Combination be allocated prior to preparing Consolidated Financial Statements?

A) The difference between the acquisition cost and the book values of the acquirer's identifiable assets should be treated as goodwill.
B) The acquisition cost should be allocated to the acquired company's identifiable assets and liabilities to bring them to their fair value.
C) The acquisition cost should be reflected as an increase in the acquirer's Investment (in the subsidiary) account.
D) The treatment of the acquisition cost depends largely on the type of consideration given by the acquirer.

Question 17

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

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 18

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?

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

Question 19

Assume that two companies wish to engage in a Business Combination involving a share exchange. Once the share exchange is consummated, each shareholder group will have an equal number of voting shares. Which of the following statements best describes the course of action that must be taken under these circumstances?

A) No acquirer can be identified since no shareholder group has majority voting control, so the share exchange must be annulled.
B) The company with the largest net assets (at fair market value) is deemed to be the acquirer.
C) Other factors must be examined to determine which shareholder group is more dominant.
D) The Boards of Directors of both companies must enter into discussions to agree on which party will be the acquirer.

Question 20

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?

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 21

Which of the following statements is correct?

A) Under the purchase method, the company's net assets are recorded at the price paid for these assets on the date of acquisition.
B) Under the acquisition method, the company's net assets are recorded at the price paid for these assets on the date of acquisition.
C) As of January 1st, 2011, the Purchase method must be used to account for business combinations where an acquirer can be identified.
D) The acquisition method is consistent with the historical cost principle while the purchase method is not.

Question 22

Appendix A of IFRS 3 provides an extensive list of what must be disclosed for each Business Combination. Which of the following items is NOT included in that list?

A) The acquisition-date fair value of the total consideration given.
B) The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed.
C) Legal, contractual and regulatory restrictions and the carrying amount of the assets and liabilities to which those restrictions apply.
D) The net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination.

Question 23

A Inc. purchased 100% of B Inc.'s voting shares for cash. The Assets and Liabilities reported in the Consolidated Balance Sheet of A Inc. prepared on the date of acquisition will include:

A) the book value of A's assets and liabilities plus the book value of B's assets and liabilities.
B) the fair market value of A's assets and liabilities plus the book value of B's assets and liabilities.
C) the book value of A's assets and liabilities plus the fair market value of B's assets and liabilities.
D) the fair market value of A's assets and liabilities plus the fair market value of B's assets and liabilities.

Question 24

Company A has decided to purchase 100% of the voting shares of Company B for $100,000 on January 1, 2012. Immediately before the acquisition, A and B reported cash balances of $300,000 and $150,000 respectively. If Consolidated Financial Statements were prepared immediately following the acquisition, how much Cash would be reported on A's consolidated balance sheet?

A) $250,000.
B) $350,000.
C) $450,000.
D) $550,000.

Question 25

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?

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 26

A Corporation had net income of $50,000 in 2012 and $60,000 in 2013, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2012 and $40,000 in 2013. On January 1, 2013, A Corporation acquired all of the outstanding common shares of B Company for a cash payment of $300,000. Assume that there was no acquisition differential on this business combination. What net income would A Corporation report for 2012 in its comparative consolidated financial statements at the end of 2013?

A) $30,000.
B) $50,000.
C) $80,000.
D) $100,000.

Question 27

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

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 28

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

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 29

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:

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 30

How is negative goodwill treated under the acquisition method?

A) The acquiring company will report a gain on acquisition.
B) The acquiring company will report a loss on acquisition.
C) The negative goodwill will be included in other comprehensive income, as it is essentially an unrealized gain.
D) The negative goodwill is prorated using the fair values of the acquired company's net assets.

Question 31

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?

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 32

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?

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 33

Zen Inc. owns 35% of Sun Inc.'s voting shares. Zen is by far the largest single shareholder of Sun Inc.'s shares, with the rest of Sun's shares being very widely held by individual investors. There was a very poor turnout at Sun Inc.'s recent annual meeting, enabling Zen Inc. to elect the majority of Sun's Board of Directors. Does Zen control Sun under IFRS?

A) No, Zen does not control Sun because it cannot exercise control over Sun without the cooperation of Sun's other shareholders.
B) Yes, Zen controls Sun because it is Sun's single largest shareholder group.
C) Yes, Zen is deemed to control Sun because it has elected a majority of Sun's Board members and the other shareholders are not organized in such a way to actively cooperate when they vote.
D) Zen could only control Sun if it owned 50% of Sun's voting shares.

Question 34

1234567 Inc. is contemplating a Business Combination with 7654321 Inc. One company is incorporated under Federal law, the other under provincial law. Is a statutory amalgamation permissible under these circumstances?

A) Yes, provided the combination is accounted for using the Acquisition Method.
B) Yes, provided the surviving corporation would have had control of the purchased company.
C) No, a statutory amalgamation would not be possible, since one company is incorporated under federal law and the other under provincial law.
D) Cannot be determined from the information given.

Question 35

One common criticism of the Purchase Method is that:

A) Fair market values can never be accurately assessed.
B) The Consolidated Balance Sheet contains both Book Values and Fair Market Values.
C) The Fair Values of a Subsidiary's assets cannot be adjusted to reflect changes in valuation.
D) The use of the term "Purchase" can mislead users of the Consolidated Financial Statements, since it implies that cash has been exchanged.

Question 36

Which of the following statements is correct?

A) Beginning in 2011, companies may choose between the Purchase Method and the Acquisition Method when accounting for Business Combinations.
B) Beginning in 2011, the only acceptable method of accounting for Business Combinations is the Purchase Method.
C) Beginning in 2011, the only acceptable method of accounting for Business Combinations is the Acquisition Method.
D) The Purchase Method can only be used when Cash is the sole consideration offered by the acquirer in a Business Combination.

Question 37

When are parent companies allowed to comprehensively revalue the assets and liabilities of a subsidiary to their fair values at the acquisition date, following a business combination?

A) When reporting under ASPE and there is a significant noncontrolling interest.
B) When reporting under ASPE and there is an insignificant (or no) noncontrolling interest.
C) When reporting under IFRS and there is a significant noncontrolling interest.
D) When reporting under IFRS and there is an insignificant (or no) noncontrolling interest.

Question 38

A Inc. purchases 100% of the voting shares of B Inc. on July 1, 2012. On that date, A Inc. would be required to prepare which of the following statements?

A) No statement preparation is required.
B) A Consolidated Income Statement.
C) A Consolidated Balance Sheet.
D) A Consolidated Income Statement and a Consolidated Balance Sheet.

Question 39

A Corporation had net income of $50,000 in 2012 and $60,000 in 2013, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2012 and $40,000 in 2013. On January 1, 2013, A Corporation acquired all of the outstanding common shares of B Company for a cash payment of $300,000. Assume that there was no acquisition differential on this business combination. What net income would A Corporation report for 2013 in its comparative consolidated financial statements at the end of 2013?

A) $40,000.
B) $60,000.
C) $80,000.
D) $100,000.

Question 40

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

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 41

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. Prepare any disclosure required for ABC123 Inc. under IFRS. Assume DEF456 produces high-end loudspeakers for touring musicians.

Question 42

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.

Question 43

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.

Question 44

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. 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, 2012. The new entity would have10,000 voting shares issued to the current shareholders for a total market value of $1,222,000.

Question 45

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: Assume that Intron's Assets and Liabilities were purchased instead of its shares for $300,000. Prepare the journal entry to record this purchase.

Question 46

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: Assume that two days after the acquisition, the Goodwill was put to an impairment test, after which it was decided that its true value was $70,000. Prepare the necessary journal entry to write-down the goodwill as well as another Consolidated Balance Sheet to reflect the new Goodwill amount.

Question 47

On December 31, 2012, A Company has capital assets with a cost of $250,000 and accumulated amortization of $150,000 and B Company has capital assets with a cost of $180,000 and accumulated amortization of $80,000. B Company's capital assets have a fair value of $200,000 on that date. If Company A acquires Company B on January 1, 2013, and prepares a consolidated balance sheet on that date, at what values should the capital assets appear on that balance sheet (using the net method)?

A) Cost of $430,000 and accumulated amortization of $230,000.
B) Cost of $450,000 and accumulated amortization of $150,000.
C) Cost of $610,000 and accumulated amortization of $310,000.
D) Cost of $630,000 and accumulated amortization of $230,000.

Question 48

Which of the following conditions need NOT be met before a parent company is not required to present consolidated financial statements for external reporting purposes?

A) Its ultimate or any intermediate parent company produces consolidated financial statements.
B) It does not have any debt or equity instruments traded in a public market.
C) It has not filed, nor is in the process of filing, financial statements with a regulatory organization for the purposes of a public offering.
D) It is a wholly-owned subsidiary of another entity.

Question 49

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. Assuming that DEF456's Plant and Equipment was worth $400,000. Calculate the goodwill arising from this business combination and state how it would be shown in the consolidated balance sheet on the acquisition date.

Question 50

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.

Question 51

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.

Question 52

Which of the following is NOT required for an investor to have control over an investee?

A) The investor must have power over the investee.
B) The investor must have exposure to variable returns from the investment.
C) The investor must be able to use its power to affect the amount of its returns.
D) The investor must currently own a majority of the voting shares of the investee.

Question 53

Company A makes an offer to purchase all of the shares of Company B from Company B's shareholders. The board of directors of B Company does not feel that the offer is adequate and seeks out another purchaser who might offer more for the shares. This defence to the takeover is referred to as:

A) poison pill.
B) pac-man defence.
C) white knight.
D) selling the crown jewels.

Question 54

Which of the following is NOT considered to be part of the acquisition cost of a subsidiary?

A) Any cash paid to the seller.
B) The fair value of any contingent consideration.
C) The present value of any debt issued by the acquirer to the seller.
D) The cost of issuing shares as part of the consideration.

Question 55

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.

Question 56

Which of the following is NOT considered to be part of the acquisition cost of a subsidiary?

A) The fair value of any assets transferred to the seller.
B) The fair value of any shares issued.
C) Due diligence fees paid to accountants, consultants and/or lawyers.
D) The fair value of any contingent considerations.

Question 57

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

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 58

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 issued 5,000 new common shares with a market value of $50.00 per share as consideration for Electra's net assets. Prior to the issue, Optimum had 10,000 outstanding common shares. 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. d) Prepare Electra's Balance Sheet following the acquisition.

Question 59

Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc. for $300,000 in Cash on May 1, 2012. On the date, the balance sheets of each of these companies were as follows: On that date, the fair values of Jackson's Assets and Liabilities were as follows: Sonic's Book Values approximated their Fair Values on that date. a) Calculate the amount of Goodwill arising from this combination. b) Prepare the journal entry to record Sonic's acquisition of Jackson's Shares. c) Prepare Sonic's Consolidated Balance Sheet immediately following its acquisition of Jackson's assets.

Question 60

Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1st, 2011, Firm Inc. would like to purchase all of the voting shares of its main competitor, N-CORP Inc. Briefly discuss the purported accounting implications of this transaction.