Deck 2: Business Combinations

Question 1

At the acquisition date, the contingent consideration is measured at book value.

Answer 1

False

Question 2

How should legal fees for an acquisition be treated?

A)Capitalized as part of the acquisition cost.
B)Expensed in the period of acquisition.
C)Deferred and amortized.
D)Deferred until the company is disposed of or wound-up.

Answer 2

B

Question 3

Where the acquirer purchases the acquiree's assets and liabilities, the acquiree may continue in existence or it may liquidate.

Answer 3

True

Question 4

A business combination could occur without any exchange of assets or equity between the entities involved in the exchange.

Question 5

After an exchange of shares in a business combination, each group of shareholders held 50% of the voting rights. Which of the following factors would be the strongest to be considered in determining the acquirer?

A)Composition of the board of directors.
B)If there are material transactions between the combining companies.
C)Which company initiated the combination.
D)Head office location.

Question 6

The transaction costs of issuing shares in an acquisition are expensed.

Question 7

Accounting fees for an acquisition should be deferred and amortized.

Question 8

IFRS defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses.

Question 9

Normally, the entity that is the acquirer is the one that undertakes action to take over the acquiree.

Question 10

An acquirer can obtain its controlling interest in the acquiree by acquiring further shares and thereby adding to its previously held equity interest.

Question 11

The use of physical possession as the key criterion to determine the acquisition date ensures that the substance of the transaction determines the accounting rather than the form of the transaction.

Question 12

Subsequent to the acquisition date, a contingent liability is measured as the amount initially recognized less, if appropriate, cumulative amortization recognized.

Question 13

Under IFRS 3, Business Combinations, which method must be used to account for business combinations?

A)Purchase method.
B)Acquisition method.
C)New entity method.
D)Pooling-of-interests method.

Question 14

How should the transaction costs of issuing shares in acquisition be recognized?

A)Deducted from shareholders' equity, net of related income tax benefits.
B)Expensed.
C)Capitalized as part of the cost of the shares.
D)Deducted in total from shareholders' equity.

Question 15

The acquirer is usually the combining entity whose owners have the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity.

Question 16

Having recognized any contingent liabilities of the acquiree as liabilities, the acquirer must then determine a subsequent measurement for the liability. The liability is initially recognized at book value.

Question 17

The acquirer is usually the entity that has the largest minority voting interest in an entity that has a widely dispersed ownership.

Question 18

Goodwill acquired in a business combination should be tested for impairment once a year.

Question 19

Having recognized goodwill arising in the business combination, goodwill cannot be revalued.

Question 20

Cowan Ltd. acquired 100% of the net assets of Opus Co. for $1,120,000. At the time of acquisition, Opus had the following: $\begin{array}{|l|r|r|} \hline& \text { Book Value } & \text { Fair value } \\\hline \text { Inventory } & \$ 2,800,000 & \$ 2,800,000 \\\hline \text { Land } & 168,000 & 238,000 \\\hline \text { Liabilities } & 1,960,000 & 1,960,000 \\\hline\end{array}$ In this acquisition, how much goodwill has been created?

A)$0
B)42,000
C)$70,000
D)$112,000

Question 21

Tilman Company paid $360,000 to acquire the net assets of Wilver Company. If the business combination is treated as an acquisition and the fair value of Wilver Company's current assets is $135,000, its plant and equipment is $363,000, and its liabilities are $84,000, Tilman Company's financial statements immediately after the combination will include which additional item due to the acquisition of Wilver Company:

A)Negative goodwill of $54,000.
B)Plant and equipment of $498,000.
C)Plant and equipment of $414,000.
D)A gain of $54,000.

Question 22

Quast Co. plans to acquire Fairweather Co. Fairweather has substantial depreciable assets that have fair values in excess of their book values. Considering only the income tax impact, which of the following statements is TRUE?

A)Quast would prefer to purchase Fairweather's shares and Fairweather would prefer to sell its assets to Quast.
B)Both Quast and Fairweather would prefer Quast to purchase Fairweather's shares.
C)Both Quast and Fairweather would prefer Quast to purchase Fairweather's assets.
D)Quast would prefer to purchase Fairweather's assets and Fairweather would prefer to sell its shares to Quast.

Question 23

Attridge Ltd. and Ion Ltd. exchanged shares in a business combination. After the share exchange, each company held the same number of voting shares. Which of the following statements is TRUE?

A)A number of factors must be considered to determine which company is the acquirer.
B)There is no acquirer as this is not a proper business combination.
C)The company with the highest net assets is considered the acquirer.
D)The companies must ask the courts to decide which company is the acquirer.

Question 24

The use of ______________ as the key criterion to determine the acquisition date ensures that the substance of the transaction determines the accounting rather than the form of the transaction.

A)physical possession
B)control
C)payment of consideration
D)valuation.

Question 25

Whaley Company assigned goodwill of $60,000 to one of the reporting divisions of Rory company when it initially acquired it. Four years later the following information for this division follows: $\begin{array}{|l|r|r|}\hline&\text { Carrying Amount }&\text { Fair value}\\\hline \text { Cash } & \$ 20,000 & \$ 20,000 \\\hline \text { Inventory } & 35,000 & 40,000 \\\hline \text { Equipment } & 125,000 & 160,000 \\\hline \text { Goodwill } & 60,000 & \\\hline \text { Accounts Payable } & 30,000 & 30,000 \\\hline\end{array}$ Based on the preceding information, what amount of goodwill will be reported for this division if its fair value of the division is now determined to be $200,000?

A)$0
B)$60,000
C)$30,000
D)$10,000

Question 26

At the acquisition date, the contingent consideration is:

A)Measured at book value.
B)Classified either as equity or as a liability.
C)Classified as equity.
D)Classified as a liability.

Question 27

How should the cost of issuing debt (that is subsequently shown at amortized cost)in an acquisition be recognized initially?

A)Amortized over the term of the debt.
B)Deducted from shareholders' equity.
C)Deducted from the value of the debt.
D)Expensed.

Question 28

How often should goodwill acquired in a business combination be tested for impairment?

A)At least once a year.
B)At least once every two years.
C)Whenever there is an indication of impairment.
D)Whenever there is a change in circumstances in the business.

Question 29

Which of the following statements regarding accounting in the records of the acquiree is FALSE?

A)Where the acquirer purchases the acquiree's assets and liabilities, the acquiree may continue in existence or it may liquidate.
B)If the acquiree subsequently decides to liquidate, it transfers the cash remaining to the shareholders as a liquidating dividend.
C)When the acquirer buys only shares in the acquiree from the shareholders of the acquiree, there are no entries in the records of the acquiree because the transaction is between the acquirer and the shareholders of the acquiree entity.
D)Where the acquirer purchases the acquiree's assets and liabilities, the acquiree must liquidate.

Question 30

Falter acquired 100% of Krystal's net assets for $300,000. On the acquisition date, the fair value of the current assets and the net capital assets were $208,000 and $432,000 respectively. The fair value of the liabilities equalled their book value. What is the amount of goodwill created in this acquisition? $\begin{array}{|l|r|r|}\hline& \text { Falter Co. } & \text { Kustal Ltd. } \\\hline \text { Current assets } & \$ 480,000 & \$ 80,000 \\\hline \text { Net capital assets } & \underline{800,000} & \underline{480,000} \\\hline & \$ 1,280,000 & \$ 560,000 \\\hline \text { Current liabilities } & \$ 336,000 & \$ 280,000 \\\hline \text { Long-term debt } & 160,000 & 96,000 \\\hline \text { Share capital } & 720,000 & 1,000,000 \\\hline \text { Retained earnings } & \underline{64,000} & \underline{84,000} \\\hline & \$ \underline{1,280,000} & \$ \underline{560,000} \\\hline\end{array}$

A)$(48,000)
B)$ 0
C)$36,000
D)$80,000

Question 31

A business combination involves the joining together of assets and liabilities under the control of a specific entity. Therefore, the business combination occurs at the date:

A)the net assets are under the control of the acquirer.
B)the contract is signed.
C)the consideration is paid.
D)nominated in the contract.

Question 32

There are many forms of business combinations that can occur. However, for which of the following are the requirements for accounting for a business combination NOT used?

A)A acquires the assets only of B, and B pays off the liabilities and then liquidates.
B)A acquires all the assets and only some of the liabilities of B, and B pays the remaining liabilities before liquidating.
C)The business combination results in the formation of a joint venture.
D)A acquires a group of net assets of B, the group of net assets constituting a business, such as a division, branch or segment, of B.

Question 33

Which of the following statements regarding acquirers and acquirees is FALSE?

A)The acquiree is usually the entity that has the largest minority voting interest in an entity that has a widely dispersed ownership.
B)The acquirer is usually the combining entity whose owners have the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity.
C)In a takeover, it is normally the larger company that takes over the smaller company.
D)Normally, the entity that is the acquirer is the one that undertakes action to take over the acquiree.

Question 34

Which of the following is NOT a reason why a private enterprise may be acquired as a bargain purchase?

A)The business only has equity financing and has no debt financing.
B)It is a family business and the next generation does not want to continue the business.
C)The owner has health problems and does not have a successor.
D)The owner is no longer interested in the business.

Question 35

Which of the following statements regarding contingent liabilities subsequent to the initial accounting for a business combination is FALSE?

A)Having recognized any contingent liabilities of the acquiree as liabilities, the acquirer must then determine a subsequent measurement for the liability.
B)The liability is initially recognized at fair value.
C)Subsequent to acquisition date, the liability is measured as the amount initially recognized less, if appropriate, cumulative amortization recognized.
D)The liability would be measured at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

Question 36

Which of the following statements about a bargain purchase is TRUE?

A)It is reported on the financial statements as an "excess of fair value over cost of assets acquired".
B)Assets and liabilities of the acquired company are reported at their fair value.
C)It is reported as a deferred credit on the financial statements called negative goodwill.
D)Assets and liabilities of the acquired company are reported at net book value.

Question 37

Under IFRS 3.25, an acquirer is required to recognize and measure:

A)The effect of any temporary differences of an acquiree that exist at the acquisition date or that arise as a result of the acquisitions.
B)The effect of any temporary differences and carryforwards of an acquiree that exist at the acquisition date or that arise as a result of the acquisitions.
C)The effect of any carryforwards of an acquiree that arise as a result of the acquisitions.
D)Any temporary differences and carryforwards of an acquiree that exist at the acquisition date.

Question 38

Which of the following statements regarding step acquisitions is FALSE?

A)An acquirer can obtain its controlling interest in the acquiree by acquiring further shares and thereby adding to its previously held equity interest.
B)There may be a number of step purchases of shares in the acquiree prior to the obtaining of control.
C)The acquirer will recognize an investment in the acquiree with each step acquisition being measured at book value.
D)In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss.

Question 39

Which of the following statements is FALSE?

A)IFRS defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses.
B)IFRS 3 applies only to combinations involving 'businesses', thereby excluding other exchanges of assets between entities.
C)A business generally must be capable of providing a return to the owners, and would always involve entities whose activities have inputs, processes and outputs.
D)IFRS 3 excludes certain combinations of businesses from its scope, including those established as joint ventures or under common control.

Question 40

Conway Ltd. acquired all the assets and liabilities of Elliott Ltd. by issuing common shares to Elliott. After this transaction, Elliott owned 30% of Conway's outstanding shares. How should Conway record Elliott's assets and liabilities on its books?

A)At their fair market value.
B)At their original cost.
C)At their net book value.
D)At their fair market value plus an allocated share of goodwill to each item.

Question 41

When the acquirer buys only shares in the acquiree from the shareholders of the acquiree, what is the impact on the acquiree's records?

Question 42

Most business combinations are an exchange of equal amounts, given markets in which the parties to the business combinations are informed and willing participants in the transaction. Therefore, the existence of a _____________ is expected to be an unusual or rare event.

A)bargain purchase
B)contingent liability
C)carryforward
D)contingent consideration.

Question 43

In a business acquisition, an acquirer purchases the assets and liabilities of an entity. What is the "consideration transferred" and how is it measured and calculated?

Question 44

Identify and discuss some indicators provided by IFRS 3 to assist in assessing which entity is the acquirer in situtations of a share for share exchange.

Question 45

Where the acquirer buys shares of the acquiree from the shareholders, there is _____ effect on the acquiree records.

A)considerable
B)minimal
C)contingent
D)no

Question 46

Having recognized goodwill arising in the business combination, which of the following statements regarding the subsequent accounting is FALSE?

A)Goodwill is subject to amortization.
B)Goodwill is subject to an annual impairment test.
C)Goodwill cannot be revalued.
D)IAS38 does not allow the recognition of internally generated goodwill.

Question 47

Having recognized a contingent consideration and classified it as equity, the subsequent treatment is:

A)It is re-measured at fair value with changes in the income statement.
B)It is carried at book value with no adjustments made.
C)No remeasurement is required and the subsequent settlement is accounted for within equity.
D)It is re-measured at fair value with changes in OCI.

Question 48

Xenon acquired 100% of Volt's net assets for $300,000. On the acquisition date, the fair value of the current assets and the net capital assets were $208,000 and $438,000 respectively. The fair value of the liabilities equalled their book value. On Xenon's statement of financial position, what is the total of its shareholders' equity? $\begin{array}{|l|r|r|} \hline& \text { Xenon Co. } & \text { Volt Ltd. } \\\hline \text { Current assets } & \$ 480,000 & \$ 80,000 \\\hline \text { Net capital assets } & \underline{800,000} & \underline{480,000} \\\hline & \$ 1,280,000 & \$ 560,000 \\\hline \text { Current liabilities } & \$ 336,000 & \$ 280,000 \\\hline \text { Long-term debt } & 160,000 & 96,000 \\\hline \text { Share capital } & 720,000 & 100,000 \\\hline \text { Retained earnings } & -64,000 & \$ \underline{64,000} \\\hline & \$ 1,280,000 & \$ \underline{560,000} \\\hline\end{array}$

A)$968,000
B)$184,000
C)$784,000
D)$1,084,000

Question 49

Where the contingent consideration is a financial liability, it will be accounted for under IFRS #9 and measured at ____________ value with movements being accounted for in accordance with that standard.

A)book
B)fair
C)carrying
D)future

Question 50

A may issue its shares to acquire the shares of B. However, because of the greater number of A shares given to the former B shareholders relative to those held by the shareholders in A before the combination, the former shareholders in B may have the majority of shares in A and be able to determine the operating and financial policies of the combined entities. This is known as a:

A)Reverse acquisition.
B)Goodwill gesture.
C)Hostile takeover.
D)Contingent consideration.

Question 51

A business combination could occur without any exchange of ____________ between the entities involved in the exchange.

A)assets
B)assets or equity
C)liabilities
D)equity.

Question 52

The acquisition-related costs associated with a business combination are accounted for as ____________ in the periods in which they are incurred and the services are received.

A)liabilities
B)expenses
C)equity
D)goodwill

Question 53

There are many forms of business combinations that can occur, such as A acquiring the assets only of B, and B paying off the liabilities and then liquidating.Alternatively, A may acquire all the assets and only some of the liabilities of B, and B pays the remaining liabilities before liquidating. The number of possible arrangements is quite large.
What are the two exceptions where the requirements for accounting for a business combination are not used?

Question 54

When the future income of the acquiree is regarded as uncertain, the agreement may contain a clause that requires the acquirer to provide additional consideration to the acquiree if the income of the acquiree exceeds a specified amount over some specified period. For example, A may agree to pay $100,000 to acquire B and promise to pay an additional $50,000 in two years if B earns at least $100,000 for the next two years. A is concerned that the owners of B are integral to the success of B and may not stay involved if they receive full payment immediately. This is an example of:

A)goodwill.
B)contingent consideration.
C)monetary assets.
D)intangible assets.

Question 55

Having recognized any contingent liabilities of the acquiree as liabilities, the acquirer must then determine a subsequent measurement for the liability. The liability is initially recognized at fair value.
Subsequent to acquisition date, how is the liability measured?