Deck 3: Business Combinations

Question 1

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

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

Answer 1

D

Question 2

What is the most common valuation method used for intangible assets?

A)Market-based
B)Income-based
C)Cost-based
D)Amortized cost

Answer 2

B

Question 3

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

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

Answer 3

C

Question 4

Perez Co.acquired Roo Co.in a business combination.Perez issued new shares to Roo's shareholders in exchange for their outstanding shares.What type of share exchange is this?

A)Direct exchange
B)Indirect exchange
C)Hostile takeover
D)Reverse takeover

Question 5

How should accounting fees for an acquisition be treated?

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

Question 6

Perez Co.acquired Roo Co.in a business combination.Roo issued new shares to Perez's shareholders in exchange for their outstanding shares.What type of share exchange is this?

A)Direct exchange
B)Indirect exchange
C)Hostile takeover
D)Reverse takeover

Question 7

Which of the following is not a business combination?

A)Statutory amalgamation
B)Joint venture
C)A company's purchase of 100% of another company's net assets
D)A company's purchase of 80% of another company's voting shares

Question 8

Sya Ltd.acquired all the assets and liabilities of Littman Ltd.by issuing common shares to Littman.After this transaction,Littman owned 30% of Sya's outstanding shares.Which of the following statements is true?

A)Littman is now a subsidiary of Sya.
B)This is an intercorporate investment for Sya.
C)Sya does not need to prepare consolidated financial statements.
D)Sya should use the equity method to reflect its investment in Littman.

Question 9

Raj Co.acquired all of Event Ltd.'s common shares.At the date of acquisition,Event had $80,000 of goodwill resulting from its acquisition of Baker Ltd.a few years ago.At Raj's date of acquisition,what is the proper treatment of Event's $80,000 of goodwill?

A)Event's goodwill is an identifiable asset and should be included as part of Raj's purchase price discrepancy (PPD).
B)Event's goodwill is an identifiable asset but should not be included as art of Raj's PPD.
C)Event's goodwill is not an identifiable asset but should be included as part of Raj's PPD.
D)Event's goodwill is not an identifiable asset and should not be included as part of Raj's PPD.

Question 10

At December 31,20X0,Crowe Company has 80,000 common shares outstanding while Dylan Inc.has 40,000 common shares outstanding.Crowe wishes to gain control over Dylan and will enter into a reverse takeover of Dylan to gain Dylan's listing on the stock exchange.In order to facilitate the reverse takeover,which of the following would have to occur?

A)Dylan would have to issue more than 40,000 shares.
B)Dylan would have to issue less than 40,000 shares.
C)Crowe would have to issue less than 80,000 shares.
D)Crowe would have to issue more than 80,000 shares.

Question 11

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

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

Question 12

Able Ltd.offers to buy shares from the existing shareholders of Wei Co.at a premium price.The current management and board of directors of Wei have let the Wei shareholders know that they do not approve of this.This is an example of a(n)________.

A)open market purchase
B)hostile takeover
C)poison pill strategy
D)reverse takeover

Question 13

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

Question 14

Thad Ltd.acquired 100% of the common shares of Zoe Co.for $560,000.At the time of acquisition,Zoe had the following:

In this acquisition,how much goodwill has been created?

A)$0
B)$21,000
C)$35,000
D)$56,000

Question 15

How should negative goodwill be shown on the consolidated financial statements of the acquirer?

A)As a gain on the statement of comprehensive income
B)As a loss on the statement of comprehensive income
C)As a liability on the statement of financial position
D)As a separate amount under shareholders' equity on the statement of financial position

Question 16

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

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

Question 17

Sya Ltd.acquired all the assets and liabilities of Littman Ltd.by issuing common shares to Littman.After this transaction,Littman owned 30% of Sya's outstanding shares.Which of the following statements is true?

A)Littman Ltd.ceases to exist.
B)Littman must record its receipt of Sya shares using the equity method.
C)Sya must prepare single-entity and consolidated financial statements.
D)Sya should not treat this transaction as an inter-corporate investment.

Question 18

How should the cost of issuing debt in an acquisition be recognized?

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

Question 19

Cheers acquired 100% of Tapp's shares for $150,000.On the acquisition date,the fair value of the current assets and the net capital assets were $104,000 and $216,000 respectively.The fair value of the liabilities equalled their book value.What is the amount of goodwill created in this acquisition?

A)$(24,000)
B)$ 0
C)$18,000
D)$40,000

Question 20

Perez Co.plans to acquire Roo Co.Roo 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)Perez would prefer to purchase Roo's assets and Roo would prefer to sell its shares to Perez.
B)Perez would prefer to purchase Roo's shares and Roo would prefer to sell its assets to Perez.
C)Both Perez and Roo would prefer Perez to purchase Roo's shares.
D)Both Perez and Roo would prefer Perez to purchase Roo's assets.

Question 21

Push-down accounting requires ________.

A)fair value adjustments to be recorded on the subsidiary company's books
B)fair value adjustments to be recorded on the parent company's books
C)fair value adjustments to be recorded on the consolidation worksheet only
D)no fair value adjustments

Question 22

On September 1,20X7,Spike Limited decided to buy 100% of the outstanding shares of Volley Inc.for $1,200,000 paid for with the issuance of shares.In addition Spike has agreed to pay an additional $250,000 if the revenues of Volley have a 5% growth over the next two years from the date of the acquisition.It has been determined that the fair value of this contingent consideration is $175,000.
The balances showing on the statement of financial position for the two companies at August 31,20X7 are as follows:

After a review of the financial assets and liabilities,Spike determines that some of the assets of Volley have fair values different from their carrying values.These items are listed below:
Capital assets - fair value is $1,350,000
Patent - fair value is $255,000
Brand name - fair value is $135,000
Required:
Determine the amount of goodwill that will be recorded on the business combination.
Prepare the consolidated statement of financial position as at September 1,20X7.

Question 23

On January 1,20X7,Falcon acquired the net assets of Intra for $3,400,000 with the issue of shares.The statement of financial position for Intra at the date of acquisition is shown below together with estimated of the fair values of Intra's recorded assets and liabilities.
Required:
What is the amount of goodwill to be recorded for this business combination?
Prepare the journal entry that Falcon will use to record the business combination.Prepare the statement of financial position for Intra on January 1,20X7 directly after the transaction is completed.Reconcile the book value of the retained earnings for Intra on December 31,20X6 to its balance on January 1,20X7.Explain any differences.

Question 24

In Canada,what type of business combination can still use the pooling-of-interests method?

A)Statutory amalgamation
B)Corporate restructuring
C)Reverse takeover
D)Hostile takeover

Question 25

What does push down accounting refer to?

A)Writing down assets where value is impaired
B)Applying the lower of cost or market approach
C)Recording fair values on a subsidiary's books after a business combination
D)Recording all consolidation adjustments on the books of the subsidiary.

Question 26

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

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

Question 27

On December 31,20X5,CI Co.purchased 100% of the outstanding common shares of SA Ltd.for $1,500,000 in cash;80% of the cash was obtained by issuing a five-year note payable.The statements of financial position of CI and SA immediately before the acquisition and issuance of the notes payable were as follows (in 000s):
Required:
Prepare the journal entry that CI will post to record the acquisition of CI.Prepare the consolidated statement of financial position for CI immediately following the acquisition of SA.

Question 28

Cheers acquired 100% of Tapp's shares for $150,000.On the acquisition date,the fair value of the current assets and the net capital assets were $104,000 and $216,000 respectively.The fair value of the liabilities equalled their book value.On Cheers' consolidated statement of financial position,what is the total of its shareholders' equity?

A)$92,000
B)$392,000
C)$484,000
D)$542,000

Question 29

On December 31,20X6,the statements of financial position of the Power Company and the Pro Company are as follows: (in 000s)
Power Company has 100,000 shares of common stock outstanding.Pro Company has 45,000 shares outstanding.On January 1,20X7 Power issued an additional 90,000 shares of common stock in exchange for all the net assets of Pro.All assets and liabilities have book value equal to fair values,except as noted.In addition,Pro has a patent that has an appraised fair value of $450.
Market value of the new shares issued was $95 per share at the date of acquisition.
Required:
a.What is the amount of goodwill to be recorded for this business combination? Prepare the journal entry that Power would record on January 1,20X7 related to this acquisition.In this case,who are the shareholders and their percentage holdings on January 1,20X7? Prepare the statement of financial position for Power as at January 1,20X7.
b.How would your answer differ if Power had purchased the shares rather than the net assets of Pro Company? In this case,who are the shareholders and their percentage holdings on January 1,20X7?

Question 30

There are a number of possible approaches to reporting consolidated financial statements after one company acquires control over another.Which of the following methods reports the consolidated amounts by adding together the carrying values of the assets and liabilities of the parent and the subsidiary?

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

Question 31

Nashman Ltd.is a private enterprise with five subsidiaries.Which of the
Following statements is true?

A)Nashman must prepare consolidated financial statements.
B)Nashman should report all subsidiaries on the same basis.
C)Nashman must use the cost basis to report all subsidiaries.
D)Nashman can choose the subsidiaries it wishes to include in its consolidated financial statements.

Question 32

On December 31,20X5,CI Co.purchased 100% of the outstanding common shares of SA Ltd.for $1,100,000 in cash;80% of the cash was obtained by issuing a five-year note payable.The statements of financial position of CI and SA immediately before the acquisition and issuance of the notes payable were as follows (in 000s):
Required:
Prepare the journal entry that CI will post to record the acquisition of CI.Prepare the consolidated statement of financial position for CI immediately following the acquisition of SA.

Question 33

On December 31,20X6,the statements of financial position of the Power Company and the Pro Company are as follows: (in 000s)
Power Company has 100,000 shares of common stock outstanding.Pro Company has 45,000 shares outstanding.On January 1,20X7 Power issued an additional 90,000 shares of common stock in exchange for all the outstanding shares of Pro.All assets and liabilities have book value equal to fair values,except as noted.In addition,Pro has a patent that has an appraised fair value of $450.
Market value of the new shares issued was $95 per share at the date of acquisition.
Required: What is the amount of goodwill to be recorded for this business combination? Prepare the journal entry that Power would record on January 1,20X7 related to this acquisition.Prepare the consolidated statement of financial position as at January 1,20X7.

Question 34

On March 17,20X2,Cho Co.acquired 100% of the shares of Bisset Ltd.for $1,000,000.The net assets of Bisset included 10 acres of land,which was carried on Bisset's books at $100,000 even though its market value was approximately $350,000.Cho did not own any land prior to the acquisition of Bisset's net assets.If push down accounting was applied,what amount would be shown for land on the consolidated the separate-entity balance sheets for Bisset on March 18,20X2?

A)
B)
C)
D)

Question 35

Hurricane Inc.wants to acquire 100% of the net assets of Flood Inc.using all cash consideration.From the Flood's shareholders' point of view,what are the advantages and disadvantages of Hurricane purchasing shares rather than net assets of Flood?

Question 36

Ski Ltd.has 500,000 shares outstanding.On July 1,20X7,Ski purchased all of the outstanding shares of Snow Ltd.The consideration paid by Ski was in the form of 500,000 shares,valued at $20 per share,which was premium of 10% over the market value prior to the announcement.It has been decided that the CEO of the combined company will come from Ski,but the CFO and the COO will come from Snow.The Chairman of the Board of Directors will come from Snow.The Board will have six other directors,three from Ski and three from Snow.
Required:
Define what the acquirer is in a business combination.How would you identify the acquirer in the above transaction?

Question 37

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)It is reported as a deferred credit on the financial statements called negative goodwill.
C)Assets and liabilities of the acquired company are reported at net book value.
D)Assets and liabilities of the acquired company are reported at their fair value.

Question 38

Dupuis Ltd.acquired Waul Ltd.through a business combination using the direct method.How should Waul record this on its books?

A)Waul should debit an "Investment in Dupuis" account and credit its share capital account.
B)Waul should debit an "Investment in Dupuis" account and remove all its asset and liability accounts.
C)Waul should close all its balance sheet accounts.
D)No entry should be made.

Question 39

Sugar Corp and Syrup Limited have reached an agreement in principle to combine their operations as of October 1,20X9.However,the Board of directors cannot decide on the best way to accomplish the combination.Below are the alternatives being considered:
1.Sugar acquires the net assets of Syrup for $1,700,000 cash.
2.Sugar acquires only the assets for $2,650,000 cash.
3.Sugar acquires all of the outstanding shares of Syrup by issuing shares with a fair market value of $1,700,000.
Syrup has the following assets and liabilities at October 1,20X9,(in thousands of dollars)

The only item that has a fair value different from its carrying value is the property,plant and equipment,which has a fair value of $1,900.
Required:
Explain how each transaction is different from the acquirer's point of view.Prepare the journal entry that would be recorded by Sugar for each these alternatives.

Question 40

Slade Co.has 1,000,000 shares outstanding and is traded on the TSX.On October 1,20X6,Slade purchased all of the outstanding shares of Print Co.by issuing 1,200,000 shares at $50 per share.
Required:
Explain the legal form of this transaction.What is the transaction in substance? How will this transaction be accounted for? Why might the transaction have been accomplished in this manner?