Question 1

The third period of business combinations started after World War II and is called
A)horizontal integration.
B)merger mania.
C)operating integration.
D)vertical integration.

Accepted Answer

The period after World War II is commonly referred to as "merger mania" due to the large number of mergers and acquisitions that took place during this time.

Question 2

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory
A)acquisition.
B)combination.
C)consolidation.
D)merger.

Accepted Answer

Consolidation is the correct choice because it is the legal process by which two or more separate entities (in this case, corporations) merge to become a completely new entity with its own legal status, name, and ownership structure. In a consolidation, the original entities cease to exist as separate legal entities and instead become part of the newly created entity. This is different from a merger, where one company absorbs another, but both may continue to exist as separate legal entities.

Question 3

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
A)to provide information relevant to the controlling stockholders.
B)to represent the view that the affiliated companies are a separate, identifiable economic entity.
C)to emphasis control of the whole by a single management.
D)to include only a portion of the subsidiary's assets, liabilities, revenues, expenses, gains, and losses.

Accepted Answer

The parent company concept of consolidation focuses on providing information that is relevant to the controlling stockholders, emphasizing the perspective and interests of the parent company's shareholders.

Question 4

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n)
A)agreeable combination.
B)friendly combination.
C)hostile combination.
D)unfriendly combination.

Accepted Answer

A friendly combination is a business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms.

Question 5

Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward
A)an elevated status for the Statements of Financial Accounting Concepts.
B)convergence of standards.
C)fair value accounting.
D)representationally faithful reporting.

Accepted Answer

Many of FASB's recent pronouncements indicate a shift towards fair value accounting, which involves reporting assets and liabilities at their current market value instead of historical cost. This shift is most notably seen in the updated accounting standards for leases and financial instruments.

Question 6

Which of the following statements is correct?
A)Total elimination is consistent with the parent company concept.
B)Partial elimination is consistent with the economic unit concept.
C)Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.
D)none of these.

Accepted Answer

The answer of Which of the following statements is correct?
A)Total...

Question 7

Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.
A)is the same as
B)is higher than
C)is lower than
D)can be higher or lower than

Accepted Answer

Under the parent company concept, consolidated net income is the same as under the economic unit concept because both concepts ultimately aim to present the financial performance of the parent and its subsidiaries as a single economic entity, despite differences in their theoretical approaches to consolidation.

Question 8

Which of the following statements would not be a valid or logical reason for entering into a business combination?
A)to increase market share.
B)to avoid becoming a takeover target.
C)to reduce risk by acquiring established product lines.
D)the operating costs of the combined entity would be more than the sum of the separate entities.

Accepted Answer

The operating costs of the combined entity being more than the sum of separate entities would not be a valid or logical reason for entering into a business combination. In fact, a business combination is typically pursued in order to achieve cost synergies and efficiencies, which would result in lower overall operating costs for the combined entity. Therefore, D is the correct answer.

Question 9

The impairment standard as it relates to goodwill is an example of a
A)consumption of benefit approach.
B)loss or lack of benefit approach.
C)component of other comprehensive income.
D)direct matching of expenses to revenues.

Accepted Answer

The impairment standard as it relates to goodwill follows the loss or lack of benefit approach, which means that if the carrying value of goodwill on a company's balance sheet exceeds its implied fair value, an impairment charge must be recognized to reflect the loss in value. This is because goodwill represents intangible assets that have no physical substance and therefore their value is subject to change based on various factors.

Question 10

A merger between a supplier and a customer is a(n)
A)friendly combination.
B)horizontal combination.
C)unfriendly combination.
D)vertical combination.

Accepted Answer

A merger between a supplier and a customer is a vertical combination, as it involves two companies operating at different stages of the supply chain coming together.

Question 11

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
A)Cash
B)Issuing Debt
C)Issuing Stock
D)All of the above

Accepted Answer

A firm can use any or all of the above methods of financing for an acquisition. Cash may be used if the firm has excess cash reserves, but issuing debt or stock may also be viable options. Issuing debt may be particularly attractive if the firm has a strong credit rating, as it may be able to obtain favorable terms. On the other hand, issuing stock may be attractive if the firm's shares are trading at a high price and it wants to avoid taking on additional debt. Ultimately, the choice of financing method will depend on the specific circumstances of the acquisition and the firm's financial position.

Question 12

The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows:
A)to improve the relevance, comparability, and transparency of financial information related to business combinations.
B)to eliminate the amortization of Goodwill.
C)to facilitate the convergence project of the FASB and the International Accounting Standards Board.
D)a and b only

Accepted Answer

FASB 141R aims to improve the relevance, comparability, and transparency of financial information related to business combinations. FASB 160 aims to eliminate the amortization of Goodwill and improve transparency in the reporting of noncontrolling interests in consolidated financial statements. While convergence with international accounting standards may be a long-term goal, it is not the main objective of these two standards.

Question 13

Estimated goodwill is determined by computing the present value of the
A)average earnings.
B)excess earnings.
C)expected future earnings.
D)normal earnings.

Accepted Answer

Goodwill is determined by computing the present value of excess earnings. Excess earnings are the earnings that are in excess of what would be considered a normal return on assets for a business. This excess represents the value of the intangible assets of the business, such as the brand name, customer loyalty, and other factors that contribute to the business's earning power.

Question 14

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the
A)bonus.
B)goodwill.
C)implied offering price.
D)takeover premium.

Accepted Answer

The excess over the prior stock price of the acquired firm is known as the takeover premium, which represents the premium paid by the acquiring company to gain control of the acquired company. This premium is typically a reflection of the anticipated synergies and benefits that the acquiring company expects to derive from the acquisition. Therefore, option D is the correct answer. Options A, B, and C are incorrect because they are not relevant in this context.

Question 15

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called
A)poison pill.
B)pac-man defense.
C)greenmail.
D)white knight.

Accepted Answer

This defense tactic is called greenmail, in which a company will purchase its own shares held by the potential acquiring company at a premium price in order to prevent the takeover. This strategy is often used to avoid a hostile takeover and can be seen as a way for the target company to protect its independence.

Question 16

The first step in estimating goodwill in the excess earnings approach is to
A)determine normal earnings.
B)identify a normal rate of return for similar firms.
C)compute excess earnings.
D)estimate expected future earnings.

Accepted Answer

Identifying a normal rate of return for similar firms is the first step in the excess earnings approach to estimating goodwill. This rate is used to calculate the expected return on the tangible assets of the firm, which is then subtracted from the firm's total expected earnings to determine the excess earnings attributable to goodwill.

Question 17

Which of the following situations best describes a business combination to be accounted for as a statutory merger?
A)Both companies in a combination continue to operate as separate, but related, legal entities.
B)Only one of the combining companies survives and the other loses its separate identity.
C)Two companies combine to form a new third company, and the original two companies are dissolved.
D)One company transfers assets to another company it has created.

Accepted Answer

In a statutory merger, one of the companies involved retains its legal identity while the other company is absorbed and ceases to exist as a separate legal entity. This is what is described in option B.

Question 18

Which of the following is not a component of other comprehensive income under GAAP?
A)earnings.
B)gains and losses that bypass earnings.
C)impairment losses.
D)accumulated other comprehensive income.

Accepted Answer

The answer of Which of the following is not a...

Question 19

The difference between normal earnings and expected future earnings is
A)average earnings.
B)excess earnings.
C)ordinary earnings.
D)target earnings.

Accepted Answer

Normal earnings refer to the current earnings of a business, while expected future earnings refer to the forecasted earnings that the business is expected to generate in the future. The difference between these two is known as excess earnings, as it represents the amount of earnings that exceeds the current level and is anticipated to be earned in the future.

Question 20

Stock given as consideration for a business combination is valued at
A)fair market value
B)par value
C)historical cost
D)None of the above

Accepted Answer

When stock is given as consideration for a business combination, it should be valued at the fair market value of the stock at the date of the combination. This is because fair market value reflects the actual value of the stock as determined by market forces, whereas par value and historical cost do not necessarily reflect the current value of the stock.

Quiz 1: Introduction to Business Combinations and the Conceptual Framework

The third period of business combinations started after World War II and is called

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n)

Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward

Which of the following statements is correct?

Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.

Which of the following statements would not be a valid or logical reason for entering into a business combination?

The impairment standard as it relates to goodwill is an example of a

A merger between a supplier and a customer is a(n)

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?

The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows:

Estimated goodwill is determined by computing the present value of the

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called

The first step in estimating goodwill in the excess earnings approach is to

Which of the following situations best describes a business combination to be accounted for as a statutory merger?

Which of the following is not a component of other comprehensive income under GAAP?

The difference between normal earnings and expected future earnings is

Stock given as consideration for a business combination is valued at