Question 1

Parent and Sub Inc. had the following balance sheets on December 31, 2012:  On January 1, 2013 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.

Accepted Answer

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. 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.

Accepted Answer

C

Question 3

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.

Accepted Answer

C

Question 4

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.

Accepted Answer

Consolidated Financial Statements are required when one company has control over another, typically through ownership of more than 50% of the voting shares, to present the financial position and results of the parent and its subsidiaries as a single entity.

Question 5

The new IASB standard 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.

Accepted Answer

The IASB requires that negative goodwill, or a bargain purchase, be recognized immediately in profit or loss, not as an extraordinary item or deferred.

Question 6

Parent and Sub Inc. had the following balance sheets on December 31, 2012:  On January 1, 2013 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) $86,000.
C) $114,000.
D) $170,000 .

Accepted Answer

The answer of Parent and Sub Inc. had the following...

Question 7

Company A makes a hostile take-over bid for control of Company B. In response, Company B makes a counter-offer to purchase shares from Company A's shareholders. Which of the following best describes Company B's response?
A) Pac-man defence.
B) Selling the crown jewels.
C) Poison Pill.
D) Hostile Defence.

Accepted Answer

The Pac-man defense is a strategy where the target company (Company B) attempts to take over the company that is trying to acquire it (Company A), effectively turning the tables on the acquirer.

Question 8

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.

Accepted Answer

The purchase price is $800,000. The net identifiable assets are calculated as: Inventory ($2,000,000) + Land ($120,000 + $50,000 fair value adjustment) - Liabilities ($1,400,000) = $770,000. Goodwill is the purchase price minus net identifiable assets: $800,000 - $770,000 = $30,000.

Question 9

IAS 27 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.

Accepted Answer

The by-laws or provisions of the incorporation acts of each company are not typically considered in determining the acquirer in a business combination according to IAS 27. The focus is more on control, voting rights, and the means of payment.

Question 10

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.

Accepted Answer

The answer of How should intangible assets which are readily...

Question 11

Parent and Sub Inc. had the following balance sheets on December 31, 2012:  On January 1, 2013 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.

Accepted Answer

The answer of Parent and Sub Inc. had the following...

Question 12

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.

Accepted Answer

The answer of The process of preparing Consolidated Financial Statements...

Question 13

Which of the following would NOT be included in the Acquisition Cost?
A) Share issue costs.
B) The Fair Market Value of any Shares Issued.
C) Contingent Consideration.
D) The Fair Value of assets transferred.

Accepted Answer

Share issue costs are not included in the acquisition cost; they are considered as costs related to equity transactions and are typically deducted from equity.

Question 14

Parent and Sub Inc. had the following balance sheets on December 31, 2012:  On January 1, 2013 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.

Accepted Answer

The answer of Parent and Sub Inc. had the following...

Question 15

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.

Accepted Answer

Consolidated Financial Statements are required by the Parent Company for reporting purposes only; each company must continue to prepare its own Financial Statements. The preparation of Consolidated Financial Statements does not replace the need for the parent and subsidiary companies to prepare their own individual Financial Statements. Consolidated Financial Statements combine the financial information of the parent and subsidiary companies in order to provide a comprehensive view of the entire group's financial performance.

Question 16

How should the acquisition cost of a Business Combination be allocated prior to preparing Consolidated Financial Statements?
A) The difference between the acquisition cost and the book values of the acquirer's identifiable assets should be treated as goodwill.
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.

Accepted Answer

The acquisition cost should be allocated to the acquired company's identifiable assets and liabilities to bring them to their fair value.

Question 17

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.

Accepted Answer

If the intangible assets have already been accounted for by the subsidiary but have no fair value on the date of acquisition, they should not be recognized apart from goodwill. This is because there is no reliable way to determine their fair value and separating them from goodwill may not provide useful information to users of the financial statements.

Question 18

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.

Accepted Answer

The tactic employed by Company B is known as a poison pill. This is a defensive strategy in which a company makes its shares less attractive to the acquiring company by issuing rights to its existing shareholders to purchase additional shares at a discounted price, thus diluting the share value of the acquirer. This makes the acquisition more costly and less attractive to the potential acquirer. The other tactics mentioned, such as Pac-man defense and selling the crown jewels, involve different defensive strategies. A reverse-takeover is a completely different scenario, in which a smaller company takes over a larger one in order to become a public company.

Question 19

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.

Accepted Answer

The answer of Assume that two companies wish to engage...

Question 20

Company Y purchases a controlling interest in Company Z on January 1, 2012. 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.

Accepted Answer

Company Y's Shareholders' Equity would appear on the consolidated balance sheet. The acquisition would also include the fair value of Company Z's net assets, but this is not part of the shareholders' equity section.

Quiz 3: Business Combinations

Which of the following pertaining to Consolidated Financial Statements is correct?

The new IASB standard issued with respect to the treatment of negative goodwill requires that:

Company A makes a hostile take-over bid for control of Company B. In response, Company B makes a counter-offer to purchase shares from Company A's shareholders. Which of the following best describes Company B's response?

IAS 27 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?

How should intangible assets which are readily identifiable but not accurately measured be accounted for?

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?

Which of the following would NOT be included in the Acquisition Cost?

Which of the following regarding the preparation of Consolidated Financial Statement is correct?

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

During an acquisition, when should intangible assets NOT be recognized apart from Goodwill?

Company Y purchases a controlling interest in Company Z on January 1, 2012. Which of the following would appear as the Shareholders' Equity amount on Company Y's Consolidated Balance Sheet on the date of acquisition?