Deck 3: Business Combinations

Question 1

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

A) The acquisition cost should be allocated to the acquiree's book value.
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.

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.
Assuming that the acquisition was properly recorded at cost, which of the following journal entries is required to prepare Consolidated Financial Statements the day following the acquisition?

A)
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Investment in UNI } & \$ 800,000 & \\\hline \text { Cash } & & \$ 800,000 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Inventory } & \$ 2,000,000 & \\\hline \text { Land } & \$ 170,000 & \\\hline \text { Goodwill } & \$ 30,000 & \\\hline \text { Liabilities } & & \$ 1,400,000 \\\hline \text { Investments in UNI } & & \$ 800,000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Net As sets } & \$ 800,000 & \\\hline \text { Cash } & & \$ 800,000 \\\hline\end{array}$$
D)No entry.

Answer 2

$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Inventory } & \$ 2,000,000 & \\\hline \text { Land } & \$ 170,000 & \\\hline \text { Goodwill } & \$ 30,000 & \\\hline \text { Liabilities } & & \$ 1,400,000 \\\hline \text { Investments in UNI } & & \$ 800,000 \\\hline\end{array}$$

Question 3

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.

Answer 3

C

Question 4

Parent and Sub Inc. had the following balance sheets on December 31, 2018: $$\begin{array} { | l | l | l |} \hline & \text { Parent } & \text { Sub } \\\hline \text { Current Assets } & \$ 60,000 & \$ 10,000 \\\hline \text { Fixed Assets (net) } & \$ 100,000 & \$ 60,000 \\\hline \text { Total Assets } & \$ 160,000 & \$ 70,000 \\\hline\\\hline \text { Current Liabilities } & \$ 42,000 &\$ 35,000 \\\hline \text { Bonds Payable } & \$ 20,000 &\$ 12,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 12,000 \\\hline \text { Retained Earnings } & \$ 8,000 &\$ 11,000 \\\hline \text { Total Liabilities and Equity } & \$ 160,000 &\$70,000 \\\hline\end{array}$$ On January 1, 2019 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 5

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 6

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 7

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 8

Parent and Sub Inc. had the following balance sheets on December 31, 2018: $$\begin{array} { | l | l | l |} \hline & \text { Parent } & \text { Sub } \\\hline \text { Current Assets } & \$ 60,000 & \$ 10,000 \\\hline \text { Fixed Assets (net) } & \$ 100,000 & \$ 60,000 \\\hline \text { Total Assets } & \$ 160,000 & \$ 70,000 \\\hline\\\hline \text { Current Liabilities } & \$ 42,000 &\$ 35,000 \\\hline \text { Bonds Payable } & \$ 20,000 &\$ 12,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 12,000 \\\hline \text { Retained Earnings } & \$ 8,000 &\$ 11,000 \\\hline \text { Total Liabilities and Equity } & \$ 160,000 &\$70,000 \\\hline\end{array}$$
On January 1, 2019 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

Question 9

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 10

The IASB standard (IFRS 3 Business Combinations) 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 11

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 12

Which of the following would NOT be included in the acquisition cost?

A) Share issue costs.
B) Fair value of any shares issued.
C) Fair value of contingent consideration.
D)Fair value of assets transferred.

Question 13

Parent and Sub Inc. had the following balance sheets on December 31, 2018: $$\begin{array} { | l | l | l |} \hline & \text { Parent } & \text { Sub } \\\hline \text { Current Assets } & \$ 60,000 & \$ 10,000 \\\hline \text { Fixed Assets (net) } & \$ 100,000 & \$ 60,000 \\\hline \text { Total Assets } & \$ 160,000 & \$ 70,000 \\\hline\\\hline \text { Current Liabilities } & \$ 42,000 &\$ 35,000 \\\hline \text { Bonds Payable } & \$ 20,000 &\$ 12,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 12,000 \\\hline \text { Retained Earnings } & \$ 8,000 &\$ 11,000 \\\hline \text { Total Liabilities and Equity } & \$ 160,000 &\$70,000 \\\hline\end{array}$$ On January 1, 2019 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) $46,000
C) $114,000
D)$170,000

Question 14

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 15

IFRS 10 Consolidated Financial Statements 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 16

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.

Question 17

Parent and Sub Inc. had the following balance sheets on December 31, 2018: $$\begin{array} { | l | l | l |} \hline & \text { Parent } & \text { Sub } \\\hline \text { Current Assets } & \$ 60,000 & \$ 10,000 \\\hline \text { Fixed Assets (net) } & \$ 100,000 & \$ 60,000 \\\hline \text { Total Assets } & \$ 160,000 & \$ 70,000 \\\hline\\\hline \text { Current Liabilities } & \$ 42,000 &\$ 35,000 \\\hline \text { Bonds Payable } & \$ 20,000 &\$ 12,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 12,000 \\\hline \text { Retained Earnings } & \$ 8,000 &\$ 11,000 \\\hline \text { Total Liabilities and Equity } & \$ 160,000 &\$70,000 \\\hline\end{array}$$
On January 1, 2019 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 18

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 19

Company Y purchases a controlling interest in Company Z on January 1, 2018. 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 20

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.
Which of the following is the correct journal entry to record IOU's acquisition of UNI?

A)
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Investment in UNI } & \$ 800,000 & \\\hline \text { Cash } & & \$ 800,000 \\\hline\end{array}$$
B)
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Inventory } & \$ 2,000,000 & \\\hline \text { Land } & \$ 170,000 & \\\hline \text { Goodwill } & \$ 30,000 & \\\hline \text { Liabilities } & & \$ 1,400,000 \\\hline \text { Cash } & & \$ 800,000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | l | l | } \hline & \text { Debit } & \text { Credit } \\\hline \text { Net As sets } & \$ 800,000 & \\\hline \text { Cash } & & \$ 800,000 \\\hline\end{array}$$
D)No entry.

Question 21

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 22

AInc. 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 23

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.

Question 24

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 25

A Corporation had net income of $50,000 in 2018 and $60,000 in 2019, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2018 and $40,000 in 2019. On January 1, 2019, 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 2019 in its comparative consolidated financial statements at the end of 2019?

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

Question 26

Which of the following is closest to IFRS 3 Business Combinations 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 27

AInc. purchases 100% of the voting shares of B Inc. on July 1, 2018. 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 28

Which of the following statements is correct?

A) Under the New Entity Method, both of the company's net assets are recorded at their fair market values for these assets on the date of acquisition.
B) Under the Acquisition Method, the acquirer company's net assets are recorded at the price paid for the assets on the date of acquisition.
C) As of January 1^st, 2011, the New Entity 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 New Entity Method is not.

Question 29

Which of the following statements is correct?

A) Companies may choose between the New Entity Method and the Acquisition Method when accounting for business combinations.
B) The only acceptable method of accounting for business combinations is the New Entity Method.
C) The only acceptable method of accounting for business combinations is the Acquisition Method.
D)The New Entity Method can only be used when Cash is the sole consideration offered by the acquirer in a business combination.

Question 30

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 31

XYZ Inc. owns 55% of DEF Inc.'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

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 33

Company A wishes to acquire control of Company B as cheaply as possible. For economic reasons, a consultant recommended that Company A can do this through purchase of assets, rather than purchase of shares. Which of the following statements regarding the above scenario is correct?

A) Company A must purchase all of Company B's assets and liabilities.
B) Company A only needs to acquire control of Company B's net assets.
C) Company A only needs to acquire control of Company B's fixed assets.
D)The consideration given by Company A must exceed 50% of the fair market value of Company B's net assets.

Question 34

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 35

A Corporation had net income of $50,000 in 2018 and $60,000 in 2019, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2018 and $40,000 in 2019. On January 1, 2019, 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 2018 in its comparative consolidated financial statements at the end of 2019?

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

Question 36

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

Question 37

AInc. 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) the 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) the 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) the 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)the 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 38

Company A has decided to purchase 100% of the voting shares of Company B for $100,000 cash on January 1, 2018. 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 39

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 40

Appendix A of IFRS 3provides 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 41

Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1^st, 2017, 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.

Question 42

ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { ABC123 Inc } & \text { DEF 456 Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 900,000 & \$ 200,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 120,000 \\\hline \text { Plant and Equipment (net) } & \$ 350,000 & \$ 150,000 \\\hline \text { Goodwill } & \$ - & \$ 80,000 \\\hline \text { Total Assets } & \$ 1,300,000 & \$ 550,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 400,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 220,000 & \$ 90,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,300,000 & \$ 550,000 \\\hline\end{array}$$ On that date, the fair values of DEF456 Assets and Liabilities were as follows:
$\begin{array}{|l|l|}\hline \text { Cash and Short-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 90,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 88,000 \\\hline\end{array}$ 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

Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc. for $300,000 in Cash on May 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { Sonic Inc } & \text { Jackson Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 750,000 & \$ 30,000 \\\hline \text { Inventory } & \$ 60,000 & \$ 20,000 \\\hline \text { Plant and Equipment (net) } & \$ 280,000 & \$ 140,000 \\\hline \text { Total Assets } & \$ 1,090,000 & \$ 190,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 150,000 & \$ 25,000 \\\hline \text { Bonds Pay able } & \$ 120,000 & \$ 30,000 \\\hline \text { Common Shares } & \$ 120,000 & \$ 70,000 \\\hline \text { Retained Earnings } & \$ 700,000 & \$ 65,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,090,000 & \$ 190,000 \\\hline\end{array}$$ On that date, the fair values of Jackson's assets and liabilities were as follows: $$\begin{array} { | l | l | } \hline \text { Cash and Short-Term Securities } & \$ 40,000 \\\hline \text { Inventory } & \$ 15,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 25,000 \\\hline \text { Bonds Payable } & \$ 25,000 \\\hline\end{array}$$
Sonic's Book Values approximated their Fair Values on that date.
Required:
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 44

Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { Telecom Inc } & \text { Intron Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 920,000 & \$ 200,000 \\\hline \text { Inuentory } & \$ 150,000 & \$ 20,000 \\\hline \text { Plant and Equipment (net) } & \$ 330,000 & \$ 180,000 \\\hline \text { Total Assets } & \$ 1,400,000 & \$ 400,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 420,000 & \$ 90,000 \\\hline \text { Bonds Payable } & \$ 700,000 & \$ 200,000 \\\hline \text { Common Shares } & \$ 180,000 & \$ 60,000 \\\hline \text { Retained Earnings } & \$ 100,000 & \$ 50,000 \\\hline \text { Total Labilities and Equiby } & \$ 1,400,000 & \$ 400,000 \\\hline\end{array}$$ On that date, the fair values of Intron's assets and liabilities were as follows:
$$\begin{array} { | l | l | } \hline \text { CashiShort-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 15,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 90,000 \\\hline \text { Bonds Payable } & \$ 210,000 \\\hline\end{array}$$ 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.
Required:
Prepare the necessary journal entry to write-down the goodwill as well as another Consolidated Balance Sheet to reflect the new Goodwill amount.

Question 45

On December 31, 2018, A Company has capital assets with a cost of $250,000 and accumulated depreciation of $150,000 and B Company has capital assets with a cost of $180,000 and accumulated depreciation 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, 2019, 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 depreciation of $230,000.
B) Cost of $450,000 and accumulated depreciation of $150,000.
C) Cost of $610,000 and accumulated depreciation of $310,000.
D)Cost of $630,000 and accumulated depreciation of $230,000.

Question 46

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 47

Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd) ("GEH") in 2018. 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, 2018. GWM has about fifteen wholly owned subsidiaries and has in the past prepared consolidated financial statements.
Required:
Prepare a discussion around the need to prepare consolidated financial statements.

Question 48

ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { ABC123 Inc } & \text { DEF 456 Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 900,000 & \$ 200,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 120,000 \\\hline \text { Plant and Equipment (net) } & \$ 350,000 & \$ 150,000 \\\hline \text { Goodwill } & \$ - & \$ 80,000 \\\hline \text { Total Assets } & \$ 1,300,000 & \$ 550,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 400,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 220,000 & \$ 90,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,300,000 & \$ 550,000 \\\hline\end{array}$$ On that date, the fair values of DEF456 Assets and Liabilities were as follows:
$\begin{array}{|l|l|}\hline \text { Cash and Short-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 90,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 88,000 \\\hline\end{array}$
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 49

Company A makes an offer to purchase all of the shares of Company B from Company B's shareholders. The board of directors of Company B 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 as:

A) Poison pill.
B) Pac-man defence.
C) White knight.
D)Selling the crown jewels.

Question 50

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 financial statements available for public use and comply with IFRS.
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 and its other owner have not been informed about the parent not presenting consolidated financial statement.

Question 51

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 52

Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { Telecom Inc } & \text { Intron Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 920,000 & \$ 200,000 \\\hline \text { Inuentory } & \$ 150,000 & \$ 20,000 \\\hline \text { Plant and Equipment (net) } & \$ 330,000 & \$ 180,000 \\\hline \text { Total Assets } & \$ 1,400,000 & \$ 400,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 420,000 & \$ 90,000 \\\hline \text { Bonds Payable } & \$ 700,000 & \$ 200,000 \\\hline \text { Common Shares } & \$ 180,000 & \$ 60,000 \\\hline \text { Retained Earnings } & \$ 100,000 & \$ 50,000 \\\hline \text { Total Labilities and Equiby } & \$ 1,400,000 & \$ 400,000 \\\hline\end{array}$$ On that date, the fair values of Intron's assets and liabilities were as follows:
$$\begin{array} { | l | l | } \hline \text { CashiShort-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 15,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 90,000 \\\hline \text { Bonds Payable } & \$ 210,000 \\\hline\end{array}$$ Required:
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 53

ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { ABC123 Inc } & \text { DEF 456 Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 900,000 & \$ 200,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 120,000 \\\hline \text { Plant and Equipment (net) } & \$ 350,000 & \$ 150,000 \\\hline \text { Goodwill } & \$ - & \$ 80,000 \\\hline \text { Total Assets } & \$ 1,300,000 & \$ 550,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 400,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 220,000 & \$ 90,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,300,000 & \$ 550,000 \\\hline\end{array}$$ On that date, the fair values of DEF456 Assets and Liabilities were as follows: $\begin{array}{|l|l|}\hline \text { Cash and Short-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 90,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 88,000 \\\hline\end{array}$
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, 2018. The new entity would have10,000 voting shares issued to the current shareholders for a total market value of $1,222,000.

Question 54

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 55

ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { ABC123 Inc } & \text { DEF 456 Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 900,000 & \$ 200,000 \\\hline \text { Inventory } & \$ 50,000 & \$ 120,000 \\\hline \text { Plant and Equipment (net) } & \$ 350,000 & \$ 150,000 \\\hline \text { Goodwill } & \$ - & \$ 80,000 \\\hline \text { Total Assets } & \$ 1,300,000 & \$ 550,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 160,000 \\\hline \text { Bonds Payable } & \$ 400,000 & \$ 100,000 \\\hline \text { Common Shares } & \$ 500,000 & \$ 200,000 \\\hline \text { Retained Earnings } & \$ 220,000 & \$ 90,000 \\\hline \text { Total Liabilities and Equity } & \$ 1,300,000 & \$ 550,000 \\\hline\end{array}$$ On that date, the fair values of DEF456 Assets and Liabilities were as follows:
$\begin{array}{|l|l|}\hline \text { Cash and Short-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 90,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 160,000 \\\hline \text { Bonds Pay able } & \$ 88,000 \\\hline\end{array}$ 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 56

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.
Required:
Prepare the journal entries necessary to record the acquisition and related costs on the books of George Inc.

Question 57

Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as follows: $$\begin{array} { | l | l | l | } \hline & \text { Telecom Inc } & \text { Intron Inc } \\\hline & & \\\hline \text { Cash and Short-Term Securities } & \$ 920,000 & \$ 200,000 \\\hline \text { Inuentory } & \$ 150,000 & \$ 20,000 \\\hline \text { Plant and Equipment (net) } & \$ 330,000 & \$ 180,000 \\\hline \text { Total Assets } & \$ 1,400,000 & \$ 400,000 \\\hline & & \\\hline \text { Current Liabilities } & \$ 420,000 & \$ 90,000 \\\hline \text { Bonds Payable } & \$ 700,000 & \$ 200,000 \\\hline \text { Common Shares } & \$ 180,000 & \$ 60,000 \\\hline \text { Retained Earnings } & \$ 100,000 & \$ 50,000 \\\hline \text { Total Labilities and Equiby } & \$ 1,400,000 & \$ 400,000 \\\hline\end{array}$$ On that date, the fair values of Intron's assets and liabilities were as follows:
$$\begin{array} { | l | l | } \hline \text { CashiShort-Term Securities } & \$ 200,000 \\\hline \text { Inventory } & \$ 15,000 \\\hline \text { Plant and Equipment (net) } & \$ 250,000 \\\hline \text { Current Liabilities } & \$ 90,000 \\\hline \text { Bonds Payable } & \$ 210,000 \\\hline\end{array}$$ Required:
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 58

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 59

Assume that X Inc. wishes to enter into a Business Combination with Y Inc. on January 1, 2017. X is unsure whether it should purchase Y's assets or liabilities or whether it should purchase all of Y's outstanding voting shares. X and Y are incorporated in different jurisdictions. On January 1, Y Inc was estimated to have various intangibles estimated to be worth a total of $1,000,000. Of this amount, $250,000 can be attributable to a Trademark owned by Y.
Required:
In the absence of any other figures, prepare a brief report explaining anything that would be of interest the Board of Directors of X Inc.