Question 1

In purchase accounting, the cost of a merger and acquisitions department cannot be added to the cost of an acquisition either in total or proportionately.

Accepted Answer

In purchase accounting, the costs associated with a merger and acquisitions department, such as internal salaries and overhead, are considered period costs and must be expensed as incurred, rather than capitalized as part of the acquisition cost.

Question 2

In purchase accounting, a cost incurred can be added to the cost of the acquisition only if the cost can be directly traced to the acquisition.

Accepted Answer

In purchase accounting, only costs that can be directly attributed to the acquisition process, such as legal fees, due diligence costs, and valuation expenses, can be added to the cost of the acquisition. This is because these costs are directly related to acquiring the asset and can be capitalized as part of the acquisition cost.

Question 3

In purchase accounting, contingent consideration is recorded when the amount is reasonably estimable and it becomes probable (under FAS 5) that the consideration will be paid.

Accepted Answer

In purchase accounting, contingent consideration is recorded at fair value at the acquisition date, regardless of whether it is probable or reasonably estimable.

Question 4

In purchase accounting, contingent consideration based on security prices results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

Accepted Answer

The answer of In purchase accounting, contingent consideration based on...

Question 5

In purchase accounting, contingent consideration based on future sales prices results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

Accepted Answer

In purchase accounting, if the contingent consideration, which is based on future sales prices or other metrics, is subsequently paid, it results in an increase to the acquiring company's cost because it increases the total consideration transferred for the acquisition.

Question 6

In purchase accounting, contingent consideration based on future earnings results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

Accepted Answer

In purchase accounting, if the contingent consideration based on future earnings is subsequently paid, it increases the cost of the acquisition on the acquiring company's financial statements, as it represents an additional purchase price paid for the acquired company.

Question 7

In purchase accounting, contingent consideration based on security prices to be maintained results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

Accepted Answer

The answer of In purchase accounting, contingent consideration based on...

Question 8

In purchase accounting, contingent consideration based on security prices to be attained results in an increase to the acquiring company's cost if the consideration is subsequently paid.

Accepted Answer

The answer of In purchase accounting, contingent consideration based on...

Question 9

Goodwill arises when the cost of the acquisition exceeds the book value of the net assets.

Accepted Answer

The answer of Goodwill arises when the cost of the...

Question 10

Goodwill arises when the cost of the acquisition exceeds the current value of the net assets.

Accepted Answer

Goodwill is recognized in accounting when a company acquires another business for a price higher than the fair value of its net identifiable assets at the acquisition date. This excess is considered goodwill.

Question 11

A bargain purchase element exists when the cost of the acquisition is below the book value of the net assets.

Accepted Answer

A bargain purchase element exists when the acquisition cost is below the fair value, not the book value, of the net assets acquired.

Question 12

A bargain purchase element exists when the cost of the acquisition is below the current value of the net assets.

Accepted Answer

A bargain purchase occurs when the purchase price of an acquisition is less than the fair value of its net identifiable assets.

Question 13

A bargain purchase element exists when both the cost of the acquisition and the current value of the net assets are below the book value of the net assets.

Accepted Answer

A bargain purchase occurs when the acquisition cost is less than the fair value of the net assets acquired, not when both the cost and the current value of the net assets are below the book value.

Question 14

Goodwill cannot exist if a bargain purchase element exists.

Accepted Answer

Goodwill is an intangible asset that represents the excess of the purchase price of a business over the fair value of its identifiable net assets. A bargain purchase element exists when the purchase price of a business is less than the fair value of its identifiable net assets. In this case, there is no excess of the purchase price over the fair value of the identifiable net assets, so goodwill cannot exist.

Question 15

Goodwill cannot exist if a covenant not-to-compete exists.

Accepted Answer

Goodwill and a covenant not-to-compete can coexist in a business transaction. Goodwill represents the value of a company's brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology. A covenant not-to-compete is an agreement where the seller of a business agrees not to start a new, competing business and not to work for a competitor for a specified period within a certain geographic area. These are separate elements that can be part of the same business sale or acquisition.

Question 16

A bargain purchase element cannot exist if a covenant not-to-compete exists.

Accepted Answer

A bargain purchase element can still exist even if a covenant not-to-compete exists. The existence of a covenant not-to-compete does not preclude the possibility of a transaction being considered a bargain purchase, which occurs when the purchase consideration paid for an acquisition is less than the fair value of the net assets acquired.

Question 17

In a business combination in which the consideration was cash, the target company's assets and liabilities are revalued to their current values for consolidated reporting purposes regardless of whether common stock or assets were acquired.

Accepted Answer

In a business combination paid for in cash, the acquired company's assets and liabilities are indeed revalued to their fair market values on the acquisition date for the purpose of consolidated financial reporting, regardless of the form of the acquisition (whether through common stock or assets). This is in accordance with accounting standards that aim to reflect the true economic value of the acquired assets and liabilities at the time of the acquisition.

Question 18

In a purchase business combination in which common stock was acquired, the target company's assets and liabilities are revalued to their current values for consolidated reporting purposes.

Accepted Answer

In a purchase business combination, the assets and liabilities of the target company are indeed revalued to their fair market values on the acquisition date for the purposes of consolidated financial reporting. This process ensures that the financial statements reflect the current value of these assets and liabilities at the time of the acquisition.

Question 19

In a purchase business combination in which common stock was acquired, the target company's monetary and nonmonetary assets are revalued to their current values for consolidated reporting purposes.

Accepted Answer

In a purchase business combination, the assets (both monetary and nonmonetary) and liabilities of the target company are revalued to their fair market values on the acquisition date for the purpose of preparing consolidated financial statements. This revaluation reflects the actual cost to the acquirer and provides a more accurate representation of the combined entity's financial position.

Question 20

In a purchase business combination in which common stock was acquired, the target company's monetary assets are not revalued to their current values for consolidated reporting purposes.

Accepted Answer

In a purchase business combination, the assets and liabilities of the target company, including monetary assets, are revalued to their fair market values on the acquisition date for consolidated reporting purposes.

Quiz 5: The Purchase Method: at Date of Acquisition-100 Ownership

In purchase accounting, the cost of a merger and acquisitions department cannot be added to the cost of an acquisition either in total or proportionately.

In purchase accounting, a cost incurred can be added to the cost of the acquisition only if the cost can be directly traced to the acquisition.

In purchase accounting, contingent consideration is recorded when the amount is reasonably estimable and it becomes probable (under FAS 5) that the consideration will be paid.

In purchase accounting, contingent consideration based on security prices results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

In purchase accounting, contingent consideration based on future sales prices results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

In purchase accounting, contingent consideration based on future earnings results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

In purchase accounting, contingent consideration based on security prices to be maintained results in an increase to the acquiring company's cost if the contingent consideration is subsequently paid.

In purchase accounting, contingent consideration based on security prices to be attained results in an increase to the acquiring company's cost if the consideration is subsequently paid.

Goodwill arises when the cost of the acquisition exceeds the book value of the net assets.

Goodwill arises when the cost of the acquisition exceeds the current value of the net assets.

A bargain purchase element exists when the cost of the acquisition is below the book value of the net assets.

A bargain purchase element exists when the cost of the acquisition is below the current value of the net assets.

A bargain purchase element exists when both the cost of the acquisition and the current value of the net assets are below the book value of the net assets.

Goodwill cannot exist if a bargain purchase element exists.

Goodwill cannot exist if a covenant not-to-compete exists.

A bargain purchase element cannot exist if a covenant not-to-compete exists.

In a business combination in which the consideration was cash, the target company's assets and liabilities are revalued to their current values for consolidated reporting purposes regardless of whether common stock or assets were acquired.

In a purchase business combination in which common stock was acquired, the target company's assets and liabilities are revalued to their current values for consolidated reporting purposes.

In a purchase business combination in which common stock was acquired, the target company's monetary and nonmonetary assets are revalued to their current values for consolidated reporting purposes.

In a purchase business combination in which common stock was acquired, the target company's monetary assets are not revalued to their current values for consolidated reporting purposes.