Deck 5: Business Combinations

Question 1

All out-of-pocket costs of a business combination are recognized as expenses by the combinor.

Answer 1

False

Question 2

Contingent consideration that is determinable on the date of a business combination is part of the total cost of the combinor's investment in the combinee.

Answer 2

True

Question 3

A bargain purchase excess in a business combination is credited to the Paid-in Capital in Excess of Par ledger account of the combined enterprise.

Answer 3

False

Question 4

Horizontal business combinations involve constituent companies in different industries.

Question 5

In a statutory merger, all except one of the constituent companies are liquidated.

Question 6

A business combination may be effected through the combinor's tender offer for the combinee's common stock.

Question 7

Carrying amounts of the combinee's identifiable net assets are disregarded in accounting for a business combination.

Question 8

A part of the cost of a combinee is allocated to identifiable tangible and intangible assets that resulted from research and development activities of the combinee.

Question 9

A combinee in a business combination may have preacquisition contingencies to which a value is assigned during the allocation period.

Question 10

The issuer of common stock in a business combination always is the combinor.

Question 11

Goodwill acquired in a business combination is amortized over its economic life.

Question 12

The defense against a hostile takeover known as a poison pill involves the amendment of the target company's articles of incorporation or bylaws to make it more difficult to obtain stockholder approval for a takeover.

Question 13

Two methods for arranging business combinations that begin with similar transactions by the combinor are:

A) Statutory merger and statutory consolidation
B) Statutory merger and acquisition of common stock
C) Acquisition of common stock and acquisition of net assets
D) Statutory consolidation and acquisition of common stock

Question 14

In a business combination, the appropriate accounting for an excess of current fair values the combinee's identifiable net assets over the combinor's cost is to:

A) Recognize as negative goodwill in the accounting records of the combinee
B) Recognize as additional paid-in capital in the accounting records of the combinor
C) Reduce proportionately current fair values assigned to the combinee's nonmonetary assets and recognize any remaining excess as a deferred credit
D) Reduce proportionately current fair values assigned to the combinee's noncurrent assets other than investments in marketable securities and recognize any remaining excess as a deferred credit
E) Take some other action

Question 15

The business enterprises that enter into a business combination are termed the:

A) Merging companies
B) Joining companies
C) Constituent companies
D) Combinor companies

Question 16

Which of the following is not included in the combinor's cost of a combinee in a business combination?

A) Present value of debt securities issued by combinor in the combination
B) Costs of issuing debt securities in the combination
C) Investment banker's finder's fee for the combination
D) Contingent consideration that is determinable on the date of the combination

Question 17

On March 1, 2006, Selig Corporation acquired for $1,400,000 (including out-of-pocket costs of the business combination) all the net assets of Maree Company. On the date of the combination, the carrying amount of Maree's identifiable net assets was $1,150,000. The current fair value of Maree's inventories was $200,000 less than their carrying amount, and the current fair value of Maree's plant assets was $400,000 larger than their carrying amount. The current fair values of all other identifiable net assets of Maree were equal to their carrying amounts. The journal entry prepared by Selig to record the business combination includes:

A) A debit of $200,000 to Inventories
B) A credit of $400,000 to Plant Assets (net)
C) A debit of $350,000 to Goodwill
D) A credit of $50,000 to Goodwill
E) None of the foregoing

Question 18

Direct out-of-pocket costs of a business combination that are part of the cost of the combinee do not include:

A) Legal fees for registration of securities issued by the combinor
B) Finder's fee
C) Legal fees for the contract of combination
D) CPA firm fees for pre-combination investigation of the combinee

Question 19

Slocum Corporation and Merton Company, both publicly owned companies, are planning a merger, with Slocum being the survivor. Which of the following is a requirement of the merger?

A) The Securities and Exchange Commission must approve the merger
B) The common stockholders of Merton must receive common stock of Slocum
C) The creditors of Merton must approve the merger
D) The boards of directors of both Slocum and Merton must approve the merger

Question 20

Subsequent to the date of a business combination, is goodwill recognized in the combination subject to:

A)
B)
C)
D)

Question 21

On May 1, 2006, Regis Corporation acquired all the net assets of Wayland Company for $550,000 cash and a $500,000, 10% promissory note due May 1, 2011. The total interest of $250,000 also was due on May 1, 2008. The current fair rate of interest for the promissory note was 12%. The balance sheet of Wayland and the related current fair values of its identifiable assets and liabilities on the date of the business combination follow:
Legal fees of $24,430 incurred by Regis to effect the business combination were paid by Regis on May 1, 2006. The present value of 1 due in five years at 12% is 0.567427.
Prepare journal entries on May 1, 2006, to record Regis Corporation's acquisition of the net assets of Wayland Company. Disregard income taxes.

Question 22

The balance sheet of Mongol Company on December 31, 2006, prior to its merger with Solway Corporation, was as follows:
On December 31, 2006, Solway issued 60,000 of its $10 par (current fair value $15) common stock for all the outstanding common stock of Mongol, which was then liquidated. Also on December 31, 2006, Solway paid $60,000 out-of-pocket costs in connection with the business combination, of which $25,000 were finder's, accounting, and legal fees directly related to the combination, and $35,000 were costs of registering and issuing the common stock to effect the combination. Current fair values of Mongol's inventories and plant assets were $180,000 and $620,000, respectively; other assets and liabilities had current fair values equal to their carrying amounts.
Prepare journal entries on December 31, 2006, for Solway Corporation to record the business combination with Mongol Company. Disregard income taxes.

Question 23

The balance sheet of Mintmore Company on September 30, 2006, with related current fair values for assets and liabilities, is shown as follows:
On September 30, 2006, Spooner Corporation paid $1,560,000 to Mintmore Company for all the Mintmore assets except its cash of $50,000, and assumed all liabilities of Mintmore, in a business combination that had been approved by the boards of directors and stockholders of both companies. Also on September 30, 2006, Spooner paid legal fees of $20,000 incurred to implement the business combination.
Prepare journal entries for Spooner Corporation on September 30, 2006, to record the business combination with Mintmore Company. Disregard income taxes.

Question 24

On May 31, 2006, Combinor Corporation issued $4,000,000 face amount of 20-year, 16% bonds to yield 20%, interest payable each May 31 and November 30, for all the net assets of Combinee Company. Also on May 31, 2006, Combinor paid the following out-of-pocket costs in connection with the combination:
The separate balance sheet of Combinee on May 31, 2006, prior to the business combination included the following:
Prepare journal entries for Combinor Corporation on May 31, 2006, to record the business combination with Combinee Company. Appropriate present value factors are as follows:

Question 25

Paragraph 43 of FASB Statement No. 141, "Business Combination," reads in part as follows:

The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed shall be recognized as an asset referred to as goodwill.

What deficiencies, if any, do you perceive in the foregoing definition of goodwill? Explain.