Deck 3: Fair Value Adjustments and Tax Effects

Question 1

An acquirer in a business combination can acquire:

A) the assets and liabilities of a business
B) the issued shares of an acquire company
C) either A or B
D) none of the above

Answer 1

C

Question 2

A contingent liability recognised in a business combination will be recorded:

A) in the subsidiary's accounts
B) in the group accounts
C) either A or B
D) none of the above

Answer 2

B

Question 3

A company records a gain on bargain purchase of $40,000 on the acquisition of a subsidiary.Assuming there are no other tax adjustments for any companies,if the trading profit of the group before tax was $140,000 and given a tax rate of 30% the group income tax expense would be:

A) $42,000
B) $54,000
C) $30,000
D) none of the above

Answer 3

A

Question 4

A company purchases all the issued shares of B company for $2,000,000.The net assets of B Company consist of land $2,100,000 and a liability of $100,000.A company will record the acquisition as follows:

A) DR Land $2,100,000 CR Liability $100,000
CR Cash $2,000,000
B) DR Shares in B $2,000,000 CR Share Capital $2,000,000
C) DR Shares in B $2,000,000 CR Cash $2,000,000
D) none of the above

Question 5

The acquisition method applies to:

A) the sale of a subsidiary
B) the sale of individual assets
C) the sale of a business
D) all of the above

Question 6

In accounting for a reverse acquisition it is necessary to recognise the fair value of the net assets of:

A) the acquiree
B) the acquirer
C) both the acquiree and acquirer
D) none of the above

Question 7

A Company purchases the net assets of B Company which consists of land $2,100,000 and a liability of $100,000,paying by issuing 2,000,000 x $1 which is the fair value of the shares in A Company.A Company will record the acquisition as follows:

A) DR Investment in B $2,000,000 CR Share Capital $2,000,000
B) DR Land $2,100,000 CR Liability $100,000
CR Cash $2,000,000
C) DR Land $2,100,000 CR Liability $100,000
CR Share Capital $2,000.000
D) none of the above

Question 8

Intra group dividends do not result in a requirement for tax effect adjustments on consolidation if:

A) group companies are Australian
B) the dividend is fully franked
C) Both A and B
D) none of the above

Question 9

Revaluation of assets to fair value in a business combination will be accounted for:

A) in the records of the subsidiary
B) on consolidation
C) either A or B
D) none of the above

Question 10

On consolidation,adjustment to deferred tax assets and liabilities is required for:

A) unrealised intra group profits
B) unrealised intra group losses
C) fair value adjustments
D) all of the above

Question 11

Goodwill recorded by an acquiree in a business combination must be:

A) recognised at fair value on acquisition
B) recognised at carrying amount on acquisition
C) not recognised in the business combination
D) none of the above

Question 12

In the year ended June 30 20X7,Woof Ltd acquired the assets and assumed the liabilities of the Doggie Biscuits operation from Fido Ltd for $10,000,000.At the date of acquisition,the fair values of the net separable assets and liabilities of the operation were $8,000,000 and $1,000,000 respectively.Based on this information,the transaction has resulted in:

A) A business combination of Woof Ltd and Doggie Biscuits.
B) The acquisition of certain assets and liabilities, which is not a business combination since Doggie Biscuits is not a business but simply part of the Fido Ltd business.
C) The acquisition of certain assets and liabilities, which is not a business combination since Doggie Biscuits is not managed to provide a return to investors but only to provide a return to Fido Ltd.
D) None of the above.

Question 13

The recorded equity of a subsidiary at acquisition will always equal the fair value of the subsidiary's net assets.

Question 14

Accounting standard AASB3 Business Combinations does not apply to:

A) joint ventures
B) acquisition of assets not constituting a business
C) business combinations involving entities under common control
D) all the above

Question 15

The fair value of financial instruments acquired in a business combination will be:

A) market value in an active market
B) an estimate of fair value
C) either A or B
D) none of the above

Question 16

If a contingent liability of a subsidiary is recognised in a business combination,on consolidation the group will record:

A) a deferred tax liability
B) a deferred tax asset
C) a reduction in goodwill
D) none of the above

Question 17

On consolidation a group can only offset current tax assets against current tax liabilities when the group:

A) has adopted tax consolidation
B) has no partly owned subsidiaries
C) operated wholly within Australia
D) all of the above

Question 18

If the carrying amount of an asset of a subsidiary in a business combination is increased to fair value,on consolidation the group will record:

A) a deferred tax liability
B) a deferred tax asset
C) a gain on bargain purchase
D) none of the above

Question 19

Where the value of an investment in a subsidiary increases,a deferred tax liability is generally not required to be recognised when:

A) it is unlikely that profits of the subsidiary will be distributed as dividends
B) it is unlikely that the subsidiary investment will be sold
C) both A and B
D) none of the above

Question 20

Fair value adjustments relate to:

A) differences between fair value and carrying amount of parent assets and liabilities
B) differences between fair value and carrying amount of subsidiary assets and liabilities
C) both A and B
D) none of the above

Question 21

Discuss the reasons for the existence of reverse acquisitions.

Question 22

Discuss the reasons why the fair value of a subsidiary's net assets may not be equal to their carrying amount

Question 23

Management of acquiring companies have incentive to provide for as many future costs as possible in a business combination

Question 24

Explain the basis on which adjustments to deferred tax assets and liabilities arise on consolidation

Question 25

Accounting Standard AASB 3 Business Combinations requires the recognition of contingent assets in a business combination

Question 26

Adjustments required in a reverse acquisition only affect the consolidated financial statements.

Question 27

A gain on bargain purchase arising in a business combination does not have any deferred tax implications

Question 28

Revaluation of acquiree's assets in a business combination via a consolidation adjustment represents the use of the cost model

Question 29

Discuss the reasons for ignoring tax effects in respect of goodwill recognised on consolidation in a business combination

Question 30

Discuss the differential treatment for tax purposes of investments in subsidiaries compared to other assets.

Question 31

Current accounting standards require the use of the acquisition method in accounting for all business combinations

Question 32

All assets acquired in a business combination must be recognised at fair value

Question 33

The choice of the method of recording fair value adjustments in a business combination will be influenced by what factors?

Question 34

Intra group dividends do not require any tax effect adjustments on consolidation