Deck 18: Business Acquisitions and Divestituresassets Versus Shares

Question 1

Sam Sherwood wishes to purchase Kitchen Cabinets, Inc. (KCI)Which of the following is TRUE if Sam purchases the assets of the corporation rather than the shares from the company's sole shareholder?

A)Sam will have to acquire all of the assets of KCI.
B)Payment of the purchase price will flow directly to Steve Oaks.
C)Kitchen Cabinets Inc. may be subject to business income and capital gains.
D)Sam will have no choice but to assume the liabilities of KCI.

Answer 1

C

Question 2

The Flower Company is for sale. The anticipated average profits for the next five years of the business have been calculated at $150,000. The business has been valued at $750,000 using the earnings method. The net tangible assets have been appraised at
$625,000. Which of the following is TRUE for the Flower Company?

A)The company is expected to yield a 24% return for the purchaser, and goodwill of $475,000 is present.
B)The company is expected to yield a 20% return for the purchaser, and goodwill of $125,000 is present.
C)The company is expected to yield a 24% return for the purchaser, and goodwill of $125,000 is present.
D)The company is expected to yield a 20% return for the purchaser, and the cost of the business is too low.

Answer 2

B

Question 3

Stick Co. owns land with a fair market value of $100,000, a building with a fair market value of $75,000, and equipment with a fair market value of $25,000. These assets are used for active business conducted in Canada. Which of the following would disqualify Stick Co. from being a small business corporation?

A)Stick Co. sold the equipment and used the funds to purchase 35% of the shares of Tree Co., a small business corporation.
B)Stick Co. also has long-term investments valued at $30,000.
C)Stick Co. also owns 40% of the shares of Rock Co. (a small business corporation), which have a fair market value of $20,000.
D)Stick Co. also owns shares in Leaf Co., (a public corporation), which have a fair market value of $5,000.

Answer 3

B

Question 4

A purchaser has agreed to purchase the shares of a qualified small business corporation. Which of the following is not applicable?

A)The purchaser may try to discount the value of the shares if the assets of the company will potentially be sold for more than their cost.
B)The sale will result in the immediate taxation of the corporation, and the after-tax proceeds will be paid to the seller.
C)The seller may be eligible for the capital gains deduction.
D)The purchaser will assume the corporation's current UCC values.

Question 5

A purchaser has agreed to purchase all of the shares of Tee Co., a CCPC. Tee Co. owns fifteen significant capital assets, some of which have appreciated in value. Which of the following is TRUE?

A)The sale will result in business income for the vendor.
B)The purchaser will be responsible for the liabilities of Tee Co.
C)The purchaser will obtain a cost base of the assets equal to fair market value.
D)The capital cost allowance on the assets will be higher for the purchaser than it was for the vendor.