Question 1

At the acquisition date, the contingent consideration is measured at book value.

Accepted Answer

At the acquisition date, the contingent consideration is measured at fair value, not book value.

Question 2

How should legal fees for an acquisition be treated?
A)Capitalized as part of the acquisition cost.
B)Expensed in the period of acquisition.
C)Deferred and amortized.
D)Deferred until the company is disposed of or wound-up.

Accepted Answer

Legal fees incurred in an acquisition should be expensed in the period of acquisition. This is because they are associated with activities and services that are not aimed at generating future economic benefits.

Question 3

Where the acquirer purchases the acquiree's assets and liabilities, the acquiree may continue in existence or it may liquidate.

Accepted Answer

When an acquirer purchases the acquiree's assets and liabilities, the acquiree may continue in existence or it may choose to liquidate. Therefore, the statement is true.

Question 4

A business combination could occur without any exchange of assets or equity between the entities involved in the exchange.

Accepted Answer

A business combination can occur through different methods such as mergers, acquisitions, and consolidations, and it does not always involve an exchange of assets or equity. For example, a company may acquire another company through a share swap, in which the acquiring company issues its own shares to the shareholders of the target company in exchange for their shares. However, it could also occur through other means such as a purchase of assets, a merger of entities under common control, or a joint venture.

Question 5

After an exchange of shares in a business combination, each group of shareholders held 50% of the voting rights. Which of the following factors would be the strongest to be considered in determining the acquirer?
A)Composition of the board of directors.
B)If there are material transactions between the combining companies.
C)Which company initiated the combination.
D)Head office location.

Accepted Answer

The composition of the board of directors is a strong indicator of control and thus helps in determining the acquirer in a business combination. It reflects which group of shareholders has the ability to influence the operating and financial policies of the combined entity.

Question 6

The transaction costs of issuing shares in an acquisition are expensed.

Accepted Answer

The answer of The transaction costs of issuing shares in...

Question 7

Accounting fees for an acquisition should be deferred and amortized.

Accepted Answer

Accounting fees for an acquisition are generally expensed as incurred and not deferred and amortized.

Question 8

IFRS defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses.

Accepted Answer

This is the definition of a business combination according to IFRS.

Question 9

Normally, the entity that is the acquirer is the one that undertakes action to take over the acquiree.

Accepted Answer

This is generally true in a typical acquisition scenario where one company is acquiring another. However, there may be exceptions where the acquiree takes action to initiate or facilitate the acquisition process.

Question 10

An acquirer can obtain its controlling interest in the acquiree by acquiring further shares and thereby adding to its previously held equity interest.

Accepted Answer

Acquiring further shares is one of the ways an acquirer can obtain a controlling interest in an acquiree. This is done by adding to its previously held equity interest.

Question 11

The use of physical possession as the key criterion to determine the acquisition date ensures that the substance of the transaction determines the accounting rather than the form of the transaction.

Accepted Answer

The use of physical possession as the key criterion might not always reflect the substance of the transaction, as legal ownership and risks and rewards of ownership can transfer at different times, which are often more indicative of the substance of the transaction.

Question 12

Subsequent to the acquisition date, a contingent liability is measured as the amount initially recognized less, if appropriate, cumulative amortization recognized.

Accepted Answer

A contingent liability is not amortized. Instead, it is reassessed at each reporting date for any changes in the amount or likelihood of the obligation.

Question 13

Under IFRS 3, Business Combinations, which method must be used to account for business combinations?
A)Purchase method.
B)Acquisition method.
C)New entity method.
D)Pooling-of-interests method.

Accepted Answer

Under IFRS 3, the only method allowed to account for business combinations is the acquisition method. The purchase method, new entity method, and pooling-of-interests method are not permitted under IFRS 3.

Question 14

How should the transaction costs of issuing shares in acquisition be recognized?
A)Deducted from shareholders' equity, net of related income tax benefits.
B)Expensed.
C)Capitalized as part of the cost of the shares.
D)Deducted in total from shareholders' equity.

Accepted Answer

Transaction costs of issuing shares in an acquisition should be deducted from shareholders' equity, net of related income tax benefits, as they are considered a cost of raising capital.

Question 15

The acquirer is usually the combining entity whose owners have the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity.

Accepted Answer

This statement is true. The acquirer is the entity that is taking over or combining with another entity, and its owners typically hold the power to elect, appoint, or remove members of the governing body of the combined entity.

Question 16

Having recognized any contingent liabilities of the acquiree as liabilities, the acquirer must then determine a subsequent measurement for the liability. The liability is initially recognized at book value.

Accepted Answer

The liability is initially recognized at fair value, not book value, at the acquisition date. Subsequent measurement depends on the nature of the liability.

Question 17

The acquirer is usually the entity that has the largest minority voting interest in an entity that has a widely dispersed ownership.

Accepted Answer

The acquirer is usually the entity that has the largest minority voting interest in an entity that has a widely dispersed ownership. This is because the acquirer is typically the entity that has the most to gain from acquiring the target entity, and therefore is willing to pay the highest price for it.

Question 18

Goodwill acquired in a business combination should be tested for impairment once a year.

Accepted Answer

Goodwill acquired in a business combination should be tested for impairment at least once a year, and more frequently if events or changes in circumstances indicate that the fair value of the reporting unit may be below its carrying amount. This requirement is outlined in Accounting Standards Codification (ASC) 350-20-35-3.

Question 19

Having recognized goodwill arising in the business combination, goodwill cannot be revalued.

Accepted Answer

Goodwill is an intangible asset that arises when a company acquires another business for a price that exceeds the fair value of its identifiable assets and liabilities. Goodwill is not revalued as it represents the reputation, customer base, and other intangible factors that are not easily quantifiable or separable from the overall business entity. Even if the fair value of the acquired business decreases, under the generally accepted accounting principles (GAAP), goodwill is not subject to impairment until further analysis is performed.

Question 20

Cowan Ltd. acquired 100% of the net assets of Opus Co. for $1,120,000. At the time of acquisition, Opus had the following: $\begin{array}{|l|r|r|} 
\hline& \text { Book Value } & \text { Fair value } \
\hline \text { Inventory } & \$ 2,800,000 & \$ 2,800,000 \
\hline \text { Land } & 168,000 & 238,000 \
\hline \text { Liabilities } & 1,960,000 & 1,960,000 \
\hline
\end{array}$ In this acquisition, how much goodwill has been created?
A)$0
B)42,000
C)$70,000
D)$112,000

Accepted Answer

The goodwill is the difference between the purchase price and the fair value of the net assets acquired. In this case, the purchase price is $1,120,000 and the fair value of the net assets acquired is $2,800,000 + $238,000 - $1,960,000 = $1,078,000. Therefore, the goodwill is $1,120,000 - $1,078,000 = $42,000.

Quiz 2: Business Combinations