Question 1

Company A has decided to purchase 100% of the voting shares of Company B for $100,000 cash on January 1, 2019. 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

Accepted Answer

The answer of Company A has decided to purchase 100%...

Question 2

A Inc. 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 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.

Accepted Answer

The answer of A Inc. is contemplating a business combination...

Question 3

Which of the following must be possible in order for a business combination to exist?
A) Control of a subsidiary's net assets that constitute a business
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

Accepted Answer

Control of a subsidiary's net assets that constitute a business is necessary for a business combination to exist. This involves gaining control over the operations and management of the subsidiary, which does not necessarily require 100% ownership of voting shares or ownership of all assets.

Question 4

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.

Accepted Answer

Under the new-entity method, the net assets of both the acquiring and acquired companies are recorded at their fair market value. This approach treats the business combination as the formation of a new entity, where all assets and liabilities of the combining entities are brought to fair value for the purpose of recording in the new entity's books.

Question 5

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

Company B's response is a type of Pac-man defence, which involves turning the tables on the hostile bidder by attempting to acquire their company instead. This strategy gets its name from the popular video game, where the player-controlled character turns the tables on its enemies by "eating" them. Selling the crown jewels refers to the sale of valuable assets to deter the hostile bidder, while a poison pill involves making the acquisition less attractive through actions such as issuing new shares or incurring excessive debt. A hostile defence is a general term for any strategy used by a target company to resist a hostile takeover.

Question 6

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 ability to direct the activities of a company that most significantly affect the investor's returns.
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.

Accepted Answer

IFRS 3 Business Combinations defines control as the ability to direct the activities of a company that most significantly affect the investor's returns. This definition is broader than just owning a majority of voting shares or being able to elect a majority of the board members, as it includes the ability to direct the company's activities regardless of the ownership structure or board composition. Therefore, option C is the closest to the IFRS 3 definition of control.

Question 7

A Inc. purchased 100% of the voting shares of B Inc. on July 1, 2019. Which of the following statements is TRUE?
A) The 2019 Consolidated Income Statement will include only the income of A Inc. from January 1, 2019 to June 30, 2019 and income for both A Inc. and B Inc. from July 1, 2019 to December 31, 2019.
B) The 2019 Consolidated Income Statement will include income for both A Inc. and B Inc. for the entire year.
C) The 2018 Income Statement (i.e. the comparative year), will retroactively include income for both A Inc. and B Inc.
D) The Consolidated Income Statement for 2019 will only include income from A Inc.

Accepted Answer

The answer of A Inc. purchased 100% of the voting...

Question 8

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 revalued to fair value to reflect the substance of the transaction which, in essence is, a new company has been formed.
C) As of January 1st, 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.

Accepted Answer

The new-entity method involves recording both companies' net assets at their fair market values on the date of acquisition, which is accurately described in option A.

Question 9

A Corporation had net income of $50,000 in 2019 and $60,000 in 2020, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2019 and $40,000 in 2020. On January 1, 2020, 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 2020 in its comparative consolidated financial statements at the end of 2020?
A) $40,000
B) $60,000
C) $80,000
D) $100,000

Accepted Answer

A Corporation would report a net income of $100,000 for 2020 in its comparative consolidated financial statements. This includes its own net income of $60,000 plus the net income of B Company ($40,000) after the acquisition date, totaling $100,000.

Question 10

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.

Accepted Answer

According to IFRS, control can be achieved either through ownership of a majority of the voting rights, or through the ability to influence the direction and management of an entity. Zen Inc. has achieved control of Sun Inc. by electing a majority of the board members, even though it only owns 35% of the voting shares. The low turnout at the annual meeting also indicates that the other shareholders are not organized in a way to actively cooperate when they vote, further strengthening Zen's influence over Sun. Therefore, under IFRS, Zen is deemed to control Sun.

Question 11

A Corporation had net income of $50,000 in 2019 and $60,000 in 2020, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2019 and $40,000 in 2020. On January 1, 2020, 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 2020?
A) $30,000
B) $50,000
C) $80,000
D) $100,000

Accepted Answer

In 2019, A Corporation did not own B Company, so any income from B Company is excluded from A Corporation's net income. Therefore, A Corporation's net income for 2019 is $50,000. The acquisition of B Company happened on January 1, 2020, so B Company's net income for 2020 is included in A Corporation's consolidated financial statements. A Corporation's net income for 2020 is the sum of A Corporation's net income ($60,000) and B Company's net income ($40,000), which is $100,000. However, the question only asks for A Corporation's net income for 2019, which is before the acquisition of B Company. Therefore, A Corporation's net income for 2019 is $50,000, and the best choice is B.

Question 12

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 and allocated to the fair value of the identifiable net assets of the acquired company.

Accepted Answer

Negative goodwill occurs when the fair value of the identifiable net assets acquired exceeds the purchase price. Therefore, the acquiring company will report a gain on acquisition. This gain is recognized as income in the income statement.

Question 13

A Inc. 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 which of the following?
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

Accepted Answer

In the consolidation process, the acquirer (A Inc.) records the assets and liabilities of the acquiree (B Inc.) at their fair market value on the date of acquisition. Therefore, the consolidated balance sheet of A Inc. will include the book value of A's assets and liabilities plus the fair market value of B's assets and liabilities.

Question 14

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 DEF Inc.'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.

Accepted Answer

The answer of XYZ Inc. owns 55% of DEF Inc.'s...

Question 15

Company A wishes to acquire control of Company B's business. A consultant recommended that Company A can do this through a purchase of assets rather than a purchase of shares. Which of the following statements regarding the above scenario is correct?
A) Company A needs to purchase all of Company B's assets and assume all of its liabilities.
B) Company A only needs to acquire the assets of Company B that it needs to enhance its business operations.
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.

Accepted Answer

The answer of Company A wishes to acquire control of...

Question 16

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) Other factors must be examined to determine which shareholder group is more dominant.
B) The company with the largest net assets (at fair market value) is deemed to be the acquirer.
C) No acquirer can be identified since no shareholder group has majority voting control, so the share exchange must be annulled.
D) The Boards of Directors of both companies must enter into discussions to agree on which party will be the acquirer.

Accepted Answer

Other factors must be examined to determine which shareholder group is more dominant. In situations where voting power is equally distributed and no clear acquirer can be identified through voting shares alone, other qualitative and quantitative factors are considered to determine which party has obtained control or is more dominant in the combination.

Question 17

Appendix B of IFRS 3 provides 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 primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree.
C) The percentage of voting equity interests acquired.
D) The net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination.

Accepted Answer

The net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination is not included in the list of items that must be disclosed in Appendix B of IFRS 3.

Question 18

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.
D) No, this would not be possible under any circumstances.

Accepted Answer

The answer of One company is considering entering into a...

Question 19

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.

Accepted Answer

Statutory amalgamation typically requires that both companies are governed under the same jurisdiction, either both under federal law or both under provincial law. Since one company is incorporated under federal law and the other under provincial law, a statutory amalgamation would not be possible.

Question 20

IFRS 3 outlines the accounting requirements for business combinations. 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.

Accepted Answer

According to IFRS 3, the only acceptable method of accounting for business combinations is the acquisition method. Companies cannot choose the new entity method, and this method cannot be used if cash is the sole consideration offered by the acquirer.

Quiz 3: Business Combinations

Which of the following must be possible in order for a business combination to exist?

Under the new-entity method, which of the following statements is TRUE?

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?

Which of the following is closest to IFRS 3 Business Combinations definition of control?

A Inc. purchased 100% of the voting shares of B Inc. on July 1, 2019. Which of the following statements is TRUE?

Which of the following statements is correct?

How is negative goodwill treated under the acquisition method?

A Inc. 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 which of the following?

Company A wishes to acquire control of Company B's business. A consultant recommended that Company A can do this through a purchase of assets rather than a purchase of shares. Which of the following statements regarding the above scenario is correct?

Appendix B of IFRS 3 provides an extensive list of what must be disclosed for each Business Combination. Which of the following items is NOT included in that list?

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?

IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements is correct?