Question 1

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

Accepted Answer

Appendix B of AASB 3/IFRS 3 Business Combinations requires disclosure of contingent consideration, the date of exchange, and carrying amounts of assets and liabilities in business combinations where shares are acquired.

Question 2

Core goodwill consists of:

Accepted Answer

Core goodwill typically consists of going concern goodwill, which is the value that arises from the business's ability to continue operating and generating profit, and combination goodwill, which is the value created from synergies in a business combination or acquisition.

Question 3

Newspaper mastheads are an example of a marketing-related intangible asset.

Accepted Answer

A newspaper masthead is a visual representation of a newspaper's brand and its reputation with its audience. It is an intangible asset that can have marketing value.

Question 4

Which of the following statements is incorrect?

Accepted Answer

Goodwill is not subject to amortisation. This is because goodwill is considered to have an indefinite useful life and does not have a finite useful life like other intangible assets. However, it is subject to impairment testing to ensure that the carrying value of the intangible asset is not more than its recoverable amount.

Question 5

Property, plant and equipment and investments are both examples of monetary assets.

Accepted Answer

Property, plant and equipment and investments are both examples of non-monetary assets. Monetary assets refer to assets that are readily convertible into cash, such as cash itself, short-term investments or accounts receivable.

Question 6

Suncorp Limited acquired a 15% interest in Milton Pty Ltd on 1 January 2014. On 15 September 2014 it acquired an additional 25% interest, and on 15 March 2015 a further 15%. Under AASB 3/IFRS 3, a business combination occurs on:

Accepted Answer

A business combination occurs when an entity gains control over another entity. Suncorp Limited gained control over Milton Pty Ltd on 15 March 2015 when its total interest reached 55%, which is typically considered a controlling interest.

Question 7

For a group of assets to constitute a business, they must be capable of providing a return.

Accepted Answer

A business is defined as an entity or organization that is engaged in commercial, industrial, or professional activities with the ultimate goal of earning a profit. Therefore, for a group of assets to be considered a business, they must be capable of generating revenue and providing a return on investment.

Question 8

Cockroaches Limited acquired the identifiable assets, liabilities and contingent liabilities of Inglis Limited for $268 000. The items acquired, stated at fair value, are: plant $144 000; inventory $80 000; accounts receivable $36 000; patents $20 000; and accounts payable $32 000. The difference on acquisition is:

Accepted Answer

The total fair value of identifiable net assets is $248,000 ($144,000 + $80,000 + $36,000 + $20,000 - $32,000). The acquisition cost is $268,000, resulting in goodwill of $20,000 ($268,000 - $248,000).

Question 9

For a deferred payment, the fair value to the acquirer is the amount the entity would have to borrow to settle the debt in the future.

Accepted Answer

The answer of For a deferred payment, the fair value...

Question 10

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

Accepted Answer

Appendix B of AASB 3/IFRS 3 provides application guidance, which is an integral part of the standard.

Question 11

The owners of Emily Limited sold the business to Georgia Limited. At acquisition date, the business had an item of plant which cost $70 000 and had accumulated depreciation of $24 000. The liquidation journal entry is which of the following?

Accepted Answer

When assets are sold during liquidation, the carrying amount of the asset (cost less accumulated depreciation) is removed from the books through a journal entry. In this case, the carrying amount of the plant is $70,000 - $24,000 = $46,000. Georgia Limited would record the purchase of the plant at its fair value, which is not given in the question. Therefore, the correct journal entry to remove the asset from Emily Limited's books is DR Liquidation $46,000 and DR Accumulated Depreciation $24,000, and CR Plant $70,000.

Question 12

In a business combination, equity instruments issued as part of the purchase consideration should be measured at their original issue price.

Accepted Answer

Equity instruments issued as part of the purchase consideration should be measured at their fair value, not their original issue price. This is in accordance with the accounting standard ASC 805 Business Combinations.

Question 13

Apha Limited acquired the net assets of Beta Limited. Alpha Limited provided an item of equipment as part of the consideration. The fair value of the equipment was $26 000. It cost $40 000 and had a carrying amount of $24 000. Which of the following entries appropriately reflects the gain or loss on the equipment?

Accepted Answer

The gain on the sale of the equipment is calculated as the fair value ($26,000) minus the carrying amount ($24,000), which equals $2,000. This results in a gain, not a loss, so it should be credited.

Question 14

Fair value is determined in the first instance by reference to observable prices in an active market for identical assets or liabilities.

Accepted Answer

Fair value is initially determined by observable prices in an active market for identical assets or liabilities. This is referred to as Level 1 of the fair value hierarchy. If there are no observable prices, fair value may be determined using other valuation techniques and inputs, such as comparable market transactions or discounted cash flow models, which fall under Levels 2 and 3 of the fair value hierarchy.

Question 15

The acquirer in a business combination is the party that loses control of a business.

Accepted Answer

The acquirer in a business combination is the party that gains control of a business. The party that loses control is known as the acquiree.

Question 16

The use of estimates when measuring the fair values of assets results that the measures are unreliable.

Accepted Answer

The use of estimates is a common and necessary practice in measuring the fair values of assets, especially when market values are not readily available. These estimates are based on the best information available and, when done correctly, provide a reliable measure of an asset's fair value.

Question 17

When an acquiree liquidates, the accounts of the acquiree are transferred to which two accounts?

Accepted Answer

When an acquiree liquidates, the accounts of the acquiree are transferred to two accounts: Liquidation account and shareholders' distribution account. The liquidation account is used to record the proceeds from the sale of assets, while the shareholders' distribution account is used to record the distribution of the proceeds to the shareholders. This distribution may include the return of capital and any remaining profits. Therefore, option B is the correct answer.

Question 18

The acquisition date is the date on which the contract between the acquirer and acquiree is signed.

Accepted Answer

The acquisition date is the date on which the acquirer obtains control of the acquiree, which may not necessarily be the same date the contract is signed.

Question 19

Acquisition-related costs associated with a business combination, such as professional fees paid to accountants, legal advisers and other consultants, are considered part of the cost of acquisition.

Accepted Answer

According to accounting standards such as IFRS 3 (Business Combinations), acquisition-related costs are expensed as incurred and not included in the cost of the acquisition.

Question 20

Which of the following statements in relation to contingent consideration is incorrect?

Accepted Answer

Subsequent adjustments to contingent consideration do not affect the goodwill calculated at acquisition date. Goodwill is measured at acquisition date and is not subject to subsequent remeasurement, except in very limited circumstances.

Quiz 3: Business Combinations