Deck 25: Business Combinations

Question 1

Under AASB 3/IFRS 3, the method of accounting for a business combination is the:

A) purchase method.
B) acquisition method.
C) joint venture method.
D) market value method.

Answer 1

B

Question 2

Kingscliff Limited estimated that the net present value of future cash flows from machinery acquired in a business combination is $70 000. The cost of replacing the machinery is estimated to be $76 000. The machinery has been independently appraised at a value of $68 000. A similar item of machinery cost the acquirer $78 000 last year. The value at which the machinery will be recognised when recording the business combination is:

A) $76 000.
B) $78 000.
C) $68 000.
D) $70 000.

Answer 2

C

Question 3

Byron Limited estimated the net present value of future cash flows from specialised equipment acquired under a business combination to be $120 000. A replacement cost for the equipment is estimated to be $132 000. The equipment has been independently appraised at a value of $122 000. A similar item of equipment cost the acquirer $118 000 last year. What is the value for recognition of the equipment under a business combination?

A) $118 000.
B) $122 000.
C) $120 000.
D) $132 000.

Answer 3

B

Question 4

The net amount of employee benefit liabilities acquired in a business combination are measured by using the:

A) estimated total of future cash outflows, undiscounted.
B) face value of the liabilities.
C) present value method.
D) cash method.

Question 5

A business combination is defined as:

A) a transaction in which an acquirer obtains control of an acquiree.
B) a transaction in which one entity obtains control of one or more other entities.
C) a transaction or other event in which an acquirer obtains control of one or more businesses.
D) a transaction or other event in which an entity obtains control of one or more businesses.

Question 6

Under AASB 3/IFRS 3 Business Combinations, a gain on bargain purchase arises when the acquirer's interest in the fair value of the acquiree's identifiable assets and liabilities is:

A) less than the consideration transferred.
B) greater than the consideration transferred.
C) less than the carrying amount of the net assets acquired.
D) more than the book values of the identifiable assets acquired.

Question 7

The acquisition date for a business combination is the date on which:

A) the business combination is announced to the public.
B) the acquirer announces the acquisition to the acquiree.
C) the acquirer effectively obtains control of the acquiree.
D) a substantive agreement between the combining parties is reached.

Question 8

When accounting for a business combination a contingent liability is recognised if:

A) its fair value can be measured reliably.
B) it is a possible obligation and it is probable that it will occur.
C) it is a present obligation that has failed to meet the recognition criteria.
D) it is probable that an outflow of resources may occur in order to settle the obligation.

Question 9

Goodwill arising in a business combination is classified as a(n):

A) asset.
B) liability.
C) expense associated with the acquisition.
D) item in equity.

Question 10

AASB 3/IFRS 3 is relevant when accounting for a business combination that:

A) involves mutual entities.
B) results in the formation of a joint venture.
C) involves entities or businesses that are not investor owned.
D) results in an entity acquiring the net assets of another entity.

Question 11

If shares are issued as part of the consideration paid, transactions costs such as brokerage fees may be incurred. Under AASB 3/IFRS 3 Business Combinations, the appropriate accounting treatment for such costs in the records of the acquirer is a debit to:

A) cash.
B) investments.
C) share capital.
D) acquisition expenses.

Question 12

In a business combination, the acquirer is the party that:

A) sells the acquired entity.
B) obtains control of the other entities.
C) receives the acquisition consideration.
D) concedes control over the acquired entities.

Question 13

Which of the following items would not be recognised as an intangible asset in a business combination?

A) experienced marketing team.
B) newspaper mastheads.
C) patents.
D) trademarks.

Question 14

In a business combination, the acquiree is the party that:

A) pays the acquisition consideration.
B) finances the business combination.
C) gives up control over the net assets acquired.
D) obtains control of the net assets the other entity.

Question 15

For a tangible asset to be recognised by an acquirer under a business combination it must be probable that future economic benefits will flow to the acquirer and:

A) it must be a current item.
B) it may not be a non-monetary asset.
C) its fair value can be reliably measured.
D) it must be measured using the present value method.

Question 16

Mary Limited acquired the identifiable assets and liabilities of Joan Limited for $530 000. The items acquired, stated at fair value, are: equipment $296 000; inventories $160 000; accounts receivable $104 000; patents $60 000; accounts payable $80 000. The difference on acquisition is:

A) goodwill of $10 000
B) goodwill of $170 000
C) gain on bargain purchase $10 000
D) gain on bargain purchase $170 000

Question 17

An acquirer accounting for a business combination must consider:
I. Recognition of the liabilities assumed.
II. Measurement of the liabilities assumed.
III. Recognition of the identifiable assets acquired.
IV. Measurement of the identifiable assets acquired.

A) I and II only.
B) I and III only.
C) II and IV only.
D) I, II, III and IV.

Question 18

Watson Limited acquires the net assets of Lake Limited for a cash consideration of $160 000. One half is to be paid on acquisition date and the other half is payable in one year's time. The appropriate discount rate is 8% p.a. The present value of the cash outflow in one year's time is:

A) $800 000
B) $74 072
C) $86 402
D) $72 728

Question 19

The consideration transferred in a business combination is measured as the fair value of the:

A) consideration given.
B) net assets acquired.
C) costs directly attributable to the combination.
D) consideration given plus directly attributable costs.

Question 20

Where the acquirer purchases assets and assumes liabilities of another entity it does not need to consider measurement of:

A) goodwill.
B) consideration transferred.
C) fair values of identifiable net assets.
D) carrying amounts of identifiable net assets.

Question 21

The information contained within Appendix B of AASB 3/IFRS 3 in relation to disclosure:

A) is not mandatory, but contains optional additional disclosures.
B) is an integral part of AASB 3/IFRS 3.
C) contains prescribed presentation formats for disclosure of business combinations.
D) is complementary to the main disclosure requirements within the body of AASB 3/IFRS 3.

Question 22

Goodwill is measured as the difference between the:

A) cost of the assets given up, and the cost of the net assets acquired.
B) cost of the net assets acquired, and the net present value of the consideration given up.
C) present value of the consideration transferred, and the present value of the net assets acquired
D) fair value of the consideration transferred, and the fair value of the assets and liabilities acquired.

Question 23

Appendix B of AASB 3/IFRS 3 requires disclosure of which of the following?
I. A qualitative description of the factors that make up goodwill.
II. Details of contingent consideration.
III. The date of exchange.
IV. Carrying amounts of assets and liabilities in business combinations where shares are acquired.

A) I, II and IV only.
B) I, III and IV only.
C) I, II and III only.
D) I, II, III and IV.