Question 1

Tilman Company paid $360,000 to acquire the net assets of Wilver Company. If the business combination is treated as an acquisition and the fair value of Wilver Company's current assets is $135,000, its plant and equipment is $363,000, and its liabilities are $84,000, Tilman Company's financial statements immediately after the combination will include which additional item due to the acquisition of Wilver Company:

Accepted Answer

The fair value of Wilver Company's net assets is $414,000 ($135,000 + $363,000 - $84,000). Since Tilman Company paid only $360,000, there is a gain of $54,000 ($414,000 - $360,000) recognized in the financial statements.

Question 2

Quast Co. plans to acquire Fairweather Co. Fairweather has substantial depreciable assets that have fair values in excess of their book values. Considering only the income tax impact, which of the following statements is TRUE?

Accepted Answer

Quast would prefer to purchase Fairweather's assets because it can then step up the basis of the acquired assets to their fair market value, leading to higher depreciation deductions for tax purposes. Fairweather would prefer to sell its shares to minimize its tax liabilities, as asset sales could result in immediate taxation on gains.

Question 3

Attridge Ltd. and Ion Ltd. exchanged shares in a business combination. After the share exchange, each company held the same number of voting shares. Which of the following statements is TRUE?

Accepted Answer

The determination of the acquirer in a business combination involves analyzing various factors such as the control over the combined entity, the composition of the board of directors, and the terms of the share exchange. Without considering these factors, it is not possible to determine which company is the acquirer. Therefore, option A is the correct answer. Option B is incorrect because the question does not provide enough information to conclude that this is not a proper business combination. Option C is incorrect because the net assets of the companies do not necessarily determine which company is the acquirer. Option D is incorrect because going to court is not the usual course of action to determine the acquirer in a business combination.

Question 4

The use of ______________ 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

Control is the most appropriate criterion to determine the acquisition date because it focuses on whether the acquirer has obtained the ability to direct the relevant activities of the acquiree. This ensures that the substance of the transaction, i.e. the effective control, is the determining factor rather than the form of the transaction or other factors like payment or valuation. Physical possession and payment of consideration may not always be reliable indicators of control, while valuation is not a relevant criterion for determining the acquisition date.

Question 5

Whaley Company assigned goodwill of $60,000 to one of the reporting divisions of Rory company when it initially acquired it. Four years later the following information for this division follows: $\begin{array}{|l|r|r|}\hline&\text { Carrying Amount }&\text { Fair value}\
\hline \text { Cash } & \$ 20,000 & \$ 20,000 \
\hline \text { Inventory } & 35,000 & 40,000 \
\hline \text { Equipment } & 125,000 & 160,000 \
\hline \text { Goodwill } & 60,000 & \
\hline \text { Accounts Payable } & 30,000 & 30,000 \
\hline
\end{array}$ Based on the preceding information, what amount of goodwill will be reported for this division if its fair value of the division is now determined to be $200,000?

Accepted Answer

The answer of Whaley Company assigned goodwill of $60,000 to...

Question 6

At the acquisition date, the contingent consideration is:

Accepted Answer

Contingent consideration at the acquisition date can be classified either as equity or as a liability, depending on the specific terms and conditions of the contingent consideration arrangement.

Question 7

How should the cost of issuing debt (that is subsequently shown at amortized cost)in an acquisition be recognized initially?

Accepted Answer

The cost of issuing debt that is subsequently shown at amortized cost in an acquisition should initially be deducted from the value of the debt. This approach aligns with the accounting treatment under International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP), where such costs are considered as an adjustment to the carrying amount of the debt and are amortized over the term of the debt through the effective interest method.

Question 8

How often should goodwill acquired in a business combination be tested for impairment?

Accepted Answer

Goodwill acquired in a business combination should be tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that it might be impaired.

Question 9

Which of the following statements regarding accounting in the records of the acquiree is FALSE?

Accepted Answer

This statement is false because the acquiree does not necessarily have to liquidate if the acquirer purchases its assets and liabilities. The acquiree may continue to operate as a subsidiary or become a dormant entity. Therefore, option D is incorrect.

Question 10

Falter acquired 100% of Krystal's net assets for $300,000. On the acquisition date, the fair value of the current assets and the net capital assets were $208,000 and $432,000 respectively. The fair value of the liabilities equalled their book value. What is the amount of goodwill created in this acquisition? $\begin{array}{|l|r|r|}
\hline& \text { Falter Co. } & \text { Kustal Ltd. } \
\hline \text { Current assets } & \$ 480,000 & \$ 80,000 \
\hline \text { Net capital assets } & \underline{800,000} & \underline{480,000} \\hline & \$ 1,280,000 & \$ 560,000 \
\hline \text { Current liabilities } & \$ 336,000 & \$ 280,000 \
\hline \text { Long-term debt } & 160,000 & 96,000 \\hline \text { Share capital } & 720,000 & 1,000,000 \
\hline \text { Retained earnings } & \underline{64,000} & \underline{84,000} \
\hline & \$ \underline{1,280,000} & \$ \underline{560,000} \
\hline
\end{array}$

Accepted Answer

The amount of goodwill is calculated by subtracting the fair value of the net assets acquired from the purchase price. The fair value of the net assets is the sum of the fair value of current assets ($208,000) and net capital assets ($432,000) minus the liabilities, which are equal to their book value ($280,000 + $96,000 = $376,000). Thus, the fair value of the net assets is $208,000 + $432,000 - $376,000 = $264,000. The purchase price is $300,000. Therefore, the goodwill created is $300,000 - $264,000 = $36,000.

Question 11

A business combination involves the joining together of assets and liabilities under the control of a specific entity. Therefore, the business combination occurs at the date:

Accepted Answer

A business combination occurs when assets and liabilities come under the control of a specific entity, which is the acquirer. Therefore, the most appropriate date for business combination is the date when the net assets are under the control of the acquirer. This is because, at this point, the acquirer has the power to govern the financial and operating policies of the acquired entity. The other options such as the contract signing or payment of consideration may happen before or after the business combination.

Question 12

There are many forms of business combinations that can occur. However, for which of the following are the requirements for accounting for a business combination NOT used?

Accepted Answer

The requirements for accounting for a business combination are not used in the formation of a joint venture. Joint ventures involve two or more parties creating a new entity by both contributing equity and sharing control, which is distinct from a business combination where one entity acquires control over another.

Question 13

Which of the following statements regarding acquirers and acquirees is FALSE?

Accepted Answer

The statement that the acquiree is usually the entity that has the largest minority voting interest in an entity that has a widely dispersed ownership is false. The acquiree is typically the target company being acquired, regardless of its ownership structure or level of voting interest.

Question 14

Which of the following is NOT a reason why a private enterprise may be acquired as a bargain purchase?

Accepted Answer

The statement does not provide a valid reason for a private enterprise to be acquired as a bargain purchase. The lack of debt financing may have an impact on the financial health of the business, but it is not a sufficient reason for acquiring it at a bargain price. The other options provide plausible reasons that could lead to a seller accepting a lower price for their business.

Question 15

Which of the following statements regarding contingent liabilities subsequent to the initial accounting for a business combination is FALSE?

Accepted Answer

Subsequent measurement of contingent liabilities after their initial recognition in a business combination does not involve amortization. Instead, these liabilities are measured at the best estimate of the expenditure required to settle the present obligation at the reporting date or at their initially recognized amount adjusted for changes in the amount or timing of the expected outflows.

Question 16

Which of the following statements about a bargain purchase is TRUE?

Accepted Answer

In a bargain purchase, the assets and liabilities of the acquired company are reported at their fair value. This is because the purchase price is lower than the fair value of the assets and liabilities acquired. The excess of fair value over the purchase price is recognized as a gain on the acquirer's financial statements. Therefore, options A, C, and D are incorrect.

Question 17

Under IFRS 3.25, an acquirer is required to recognize and measure:

Accepted Answer

Under IFRS 3.25, an acquirer is required to recognize and measure the effect of any temporary differences and carryforwards of an acquiree that exist at the acquisition date or that arise as a result of the acquisition. Temporary differences are differences between the carrying amount of an asset or liability in the financial statements and its tax base. Carryforwards are unused tax losses or unused tax credits that an entity can use to reduce its future tax liabilities. Therefore, choice B is the best answer that correctly reflects the requirements of IFRS 3.25.

Question 18

Which of the following statements regarding step acquisitions is FALSE?

Accepted Answer

Step acquisitions are acquisitions in which an acquirer obtains its controlling interest in an acquiree by purchasing additional shares over time. In each step acquisition, the acquirer recognizes an investment in the acquiree at book value. However, in case of business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. Hence, statement C is false as it does not apply in such a scenario.

Question 19

Which of the following statements is FALSE?

Accepted Answer

The statement "A business generally must be capable of providing a return to the owners, and would always involve entities whose activities have inputs, processes and outputs" is not completely accurate. While a business aims to provide a return to the owners, it is not necessary that all entities with inputs, processes, and outputs are considered as businesses. For example, a charitable organization or a government entity may have inputs, processes, and outputs, but they may not be considered as businesses.

Question 20

Conway Ltd. acquired all the assets and liabilities of Elliott Ltd. by issuing common shares to Elliott. After this transaction, Elliott owned 30% of Conway's outstanding shares. How should Conway record Elliott's assets and liabilities on its books?

Accepted Answer

According to the information provided, the transaction involved the acquisition of all assets and liabilities of Elliott Ltd by Conway Ltd. Therefore, it would be appropriate for Conway to record the assets and liabilities acquired at their fair market value. This approach ensures that the assets and liabilities are valued accurately and reflect their current market value. Additionally, fair market value is typically the most reliable basis for determining the value of assets and liabilities in an acquisition. As such, this option should be chosen.

Quiz 2: Business Combinations