Question 1

Under purchase price accounting, the excess of the purchase price paid over the book value of equity of the target firm is assigned only to the tangible assets up to their fair market value or to goodwill.

Accepted Answer

Under purchase price accounting, the excess of the purchase price paid over the book value of equity of the target firm is assigned to both tangible and intangible assets, including goodwill.

Question 2

Tax free reorganizations generally require that all or substantially all of the target company's assets or shares be acquired in order to ensure that the acquiring firm has a continuing ownership interest in the combined firms.

Accepted Answer

Tax free reorganizations typically require the acquiring firm to acquire all or substantially all of the target company's assets or shares in order to qualify for tax-free treatment under the Internal Revenue Code. This ensures that the acquiring firm has a continuing ownership interest in the combined firms following the reorganization.

Question 3

A transaction is usually taxable to the target firm's shareholders, if the acquirer's stock is used to purchase at least 30% of the target firm's stock or assets.

Accepted Answer

In the United States, the taxability of a transaction to the target firm's shareholders primarily depends on whether the transaction is structured as a taxable or a non-taxable event, not merely on the percentage of the acquirer's stock used in the transaction. Non-taxable transactions often involve stock swaps but must meet specific IRS criteria to qualify.

Question 4

According to Section 338 of the U.S. tax code, a purchaser of 80% or more of the assets of the target may elect to treat the acquisition as if it were an acquisition of the target's assets for tax purposes.

Accepted Answer

Section 338 of the U.S. tax code allows a purchaser of 80% or more of the stock of a corporation to elect to treat the acquisition as an asset purchase for tax purposes, not the purchase of assets directly.

Question 5

The major advantages of using a triangular structure are limitations of the voting rights of acquiring shareholders and that the acquirer gains control of the target through a subsidiary without being directly responsible for the target's known and unknown liabilities.

Accepted Answer

Triangular structures involve the acquisition of a subsidiary that then acquires the target company, which limits the voting rights of the acquiring shareholders and shields the acquirer from direct responsibility for the target's liabilities.

Question 6

In a taxable purchase of target stock with cash, the target firm does not restate (i.e., revalue) its assets and liabilities for tax purposes to reflect the amount that the acquirer paid for the shares of common stock. Rather, the tax basis (i.e., their value on the target's financial statements) of assets and liabilities of the target before the acquisition carries over to the acquirer after the acquisition.

Accepted Answer

In a taxable purchase of target stock with cash, the tax basis of assets and liabilities of the target before the acquisition carries over to the acquirer after the acquisition.

Question 7

The sale of stock, rather than assets, is generally preferable to the target firm shareholders to avoid double taxation, if the target firm is structured as a limited liability company.

Accepted Answer

Limited Liability Companies (LLCs) are typically taxed as pass-through entities, meaning profits and losses pass through to the owners without being taxed at the company level, thus avoiding the double taxation issue that affects C corporations.

Question 8

Empirical studies generally show that the tax shelter resulting from the ability of the acquiring firm to increase the value of acquired assets to their FMV is a highly important motivating factor for a takeover.

Accepted Answer

Empirical studies do not generally show that the tax shelter resulting from the ability of the acquiring firm to increase the value of acquired assets to their fair market value (FMV) is a highly important motivating factor for a takeover. Instead, motivations for takeovers often include achieving economies of scale, entering new markets, acquiring new technologies, or other strategic business reasons. Tax considerations can play a role, but they are typically not the primary motivating factor.

Question 9

The form of payment does not affect whether a transaction is taxable to the seller's shareholders.

Accepted Answer

The answer of The form of payment does not affect...

Question 10

From the viewpoint of the seller or target company shareholder, transactions may be tax-free or entirely or partially taxable.

Accepted Answer

Depending on the structure of the transaction and the tax laws, the seller or target company shareholder may be able to benefit from tax-free or partially taxable transactions.

Question 11

Under purchase accounting, the difference between the combined firm's shareholders' equity immediately following closing and the acquiring firm's shareholders' equity equals the purchase price paid for the target firm.

Accepted Answer

Under purchase accounting, the acquiring firm records the target firm's assets and liabilities at their fair values on the acquisition date. The difference between the combined firm's shareholders' equity immediately following closing and the acquiring firm's shareholders' equity equals the purchase price paid for the target firm.

Question 12

As a general rule, a transaction is taxable to the target company shareholders if they receive the acquiring firm's stock and non-taxable if they receive cash.

Accepted Answer

This statement is not entirely true. Whether a transaction is taxable or not depends on the specific details of the transaction, such as the type of acquisition, the structure of the deal, and the tax laws applicable to the parties involved. While receiving cash in a transaction may result in a non-taxable event, receiving stock could also be non-taxable or taxable, depending on the circumstances.

Question 13

It is seldom important that the buyer and seller agree on the allocation of the sales price among the assets being sold, since the allocation will determine the potential tax liability that would be incurred by the seller but that could by passed on to the buyer through to terms of the sales contract.

Accepted Answer

It is important for the buyer and seller to agree on the allocation of the sales price among the assets being sold, as it will affect the tax liabilities of both parties. The allocation should be documented in the sales contract to avoid any disputes or misunderstandings.

Question 14

Taxable transactions usually involve the purchase of the target's voting stock, because the purchase of assets automatically will trigger a taxable gain for the target if the fair market value of the acquired assets exceeds the target firm's tax basis in the assets.

Accepted Answer

In a taxable transaction, purchasing the target's assets can indeed trigger a taxable gain if the fair market value of those assets exceeds the target's tax basis in them, because the transaction is treated as a sale of each asset, leading to capital gains tax on the difference.

Question 15

A transaction generally will be considered non-taxable to the seller or target firm's shareholder if it involves the purchase of the target's stock or assets for substantially all cash, notes, or some other nonequity consideration.

Accepted Answer

A transaction involving the purchase of the target's stock or assets for substantially all cash, notes, or some other nonequity consideration is generally considered a taxable event for the seller or target firm's shareholder, as it typically results in a realization event where gains or losses are recognized for tax purposes.

Question 16

If a transaction involves a cash purchase of target stock, the target company's tax cost or basis in the acquired stock or assets is increased or "stepped up" automatically to their fair market value (FMV), which is equal to the purchase price paid by the acquirer.

Accepted Answer

In a cash purchase of target stock, it is the acquirer's tax basis in the acquired stock that is stepped up to the purchase price, not the target company's tax basis in its assets. The target company's tax basis in its assets would only be stepped up in certain types of transactions, such as a taxable asset purchase or a merger structured to qualify for asset step-up.

Question 17

Purchase accounting affects only the cash flow of the combined firms but not the reported net income.

Accepted Answer

Purchase accounting affects both the cash flow and the reported net income of the combined firms. This is because the assets and liabilities of the acquired company are recorded at fair value, which may result in changes to depreciation, amortization, and other expenses that impact net income.

Question 18

In a cash purchase of assets. the target's shareholders could be taxed twice, once when the firm pays taxes on any gains and a second time when the proceeds from the sale are paid to the shareholders either as a dividend or distribution following liquidation of the corporation.

Accepted Answer

In a cash purchase of assets, the firm would need to pay taxes on any gains from the sale, and then the shareholders would also be taxed on the proceeds they receive from the sale either as a dividend or as part of a liquidation distribution. This results in potential double taxation for the shareholders.

Question 19

The IRS generally views forward triangular cash mergers as a purchase of target stock followed by a liquidation of the target for which target shareholders will recognize a taxable gain or loss as if they had sold their shares.

Accepted Answer

The answer of The IRS generally views forward triangular cash...

Question 20

In a triangular cash merger, the target firm may either be merged into an acquirer's operating or shell acquisition subsidiary with the subsidiary surviving or the acquirer's subsidiary is merged into the target firm with the target surviving.

Accepted Answer

This statement is true. In a triangular cash merger, there are two possible scenarios for the merger: either the target company is merged into the acquirer's subsidiary (where the subsidiary survives), or the acquirer's subsidiary is merged into the target company (where the target survives).

Quiz 12: Structuring the Deal: