Chapter 1 Test Bank

BUSINESS COMBINATIONS

Multiple Choice Questions LO1 1. Which of the follo in! is a reason h" a co#pan" oul$ e%pan$ throu!h a co#&ination' rather than &" &uil$in! ne facilities( a. A co#&ination #i!ht pro)i$e cost a$)anta!es. &. A co#&ination #i!ht pro)i$e fe er operatin! $ela"s. c. A co#&ination #i!ht pro)i$e easier access to intan!i&le assets. $. All of the a&o)e are possi&le reasons that a co#pan" #i!ht choose a co#&ination. LO2 *. A &usiness co#&ination in hich a ne corporation is create$ an$ t o or #ore e%istin! corporations are co#&ine$ into the ne l" create$ corporation is calle$ a a. &. c. $. #er!er. purchase transaction. poolin!+of+interests. consoli$ation.

,.

A &usiness co#&ination occurs hen a co#pan" ac-uires an e-uit" interest in another entit" an$ has a. &. c. $. at least *./ o nership in the entit". #ore than 0./ o nership in the entit". 1../ o nership in the entit". control o)er the entit"' irrespecti)e of the percenta!e o ne$.

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5.

6ASB fa)ors consoli$ation of t o entities

hen

a. one ac-uires less than *./ e-uit" o nership of the other. &. one co#pan"7s o nership interest in another !i)es it control of the ac-uire$ co#pan"' "et the ac-uirin! co#pan" $oes not ha)e a #a8orit" o nership in the ac-uire$. T"picall"' this is in the *./+0./ interest ran!e. c. one ac-uires t o thir$s e-uit" o nership in the other. $. one !ains control o)er the entit"' irrespecti)e of the e-uit" percenta!e o ne$. LO3 LO4 0. Michan!elo Co. pai$ 91..'... in fees to its accountants an$ la "ers in ac-uirin! 6lorence Co#pan". Michan!elo ill treat the 91..'... as a. an e%pense for the current "ear. &. a prior perio$ a$8ust#ent to retaine$ earnin!s. c. a$$itional cost to in)est#ent of 6lorence on the consoli$ate$ &alance sheet. $. a re$uction in pai$+in capital. :. 3icasso Co. issue$ 1.'... shares of its 91 par co##on stock' )alue$ at 95..'...' to ac-uire shares of Bull Co#pan" in an all+stock transaction. 3icasso pai$ the in)est#ent &ankers 9,0'.... 3icasso ill treat the in)est#ent &anker fee as; a. &. c. $. =. an e%pense for the current "ear. a prior perio$ a$8ust#ent to <etaine$ Earnin!s. a$$itional !oo$ ill on the consoli$ate$ &alance sheet. a re$uction in pai$+in capital.

>urer Inc ac-uire$ Sea Corporation in a &usiness co#&ination an$ Sea Corp ent out of e%istence. Sea Corp $e)elope$ a patent liste$ as an asset on Sea Corp7s &ooks at the patent office filin! cost. In recor$in! the co#&ination a. fair )alue is not assi!ne$ to the patent &ecause the research an$ $e)elop#ent costs ha)e &een e%pense$ &" Sea Corp. &. Sea Corp7s prior e%penses to $e)elop the patent are recor$e$ as an asset &" >urer at purchase. c. the patent is recor$e$ as an asset at fair #arket )alue. $. the patent?s #arket )alue increases !oo$ ill.

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In a #er!er'

hich of the follo in!

ill occur(

a. A #er!er occurs hen one corporation takes o)er the operations of another &usiness entit"' an$ the ac-uire$ entit" is $issol)e$. &. None of the &usiness entities ill &e $issol)e$. c. The ac-uire$ assets ill &e recor$e$ at &ook )alue &" the ac-uirin! entit". $. None of the a&o)e is correct. 2. Accor$in! to 6ASB State#ent 151' hich one of the follo in! ite#s #a" not &e accounte$ for as an intan!i&le asset apart fro# !oo$ ill( a. &. c. $. 1.. A pro$uction &acklo!. A talente$ e#plo"ee orkforce. Noncontractual custo#er relationships. E#plo"#ent contracts.

Un$er the pro)isions of 6ASB State#ent No. 151<' in a &usiness co#&ination' hen the fair )alue e%cee$s the in)est#ent cost' hich of the follo in! state#ents is correct( a. A !ain fro# a &ar!ain purchase is reco!niAe$ for the a#ount that the fair )alue of the i$entifia&le net assets ac-uire$ e%cee$s the ac-uisition price. &. the )alue is allocate$ first to re$uce proportionatel" Baccor$in! to #arket )alueC non+current assets' then to non+#onetar" current assets' an$ an" ne!ati)e re#ain$er is classifie$ as a $eferre$ cre$it. c. it is allocate$ first to re$uce proportionatel" Baccor$in! to #arket )alueC non+current assets' an$ an" ne!ati)e re#ain$er is classifie$ as an e%traor$inar" !ain. $. It is allocate$ first to re$uce proportionatel" Baccor$in! to #arket )alueC non+current' $eprecia&le assets to Aero' an$ an" ne!ati)e re#ain$er is classifie$ as a $eferre$ cre$it.

11.

With respect to !oo$ ill' an i#pair#ent a. ill &e a#ortiAe$ o)er the re#ainin! useful life. &. is a t o+step process hich anal"Aes each &usiness unit of the entit". c. is a one+step process consi$erin! the entire fir#. $. occurs hen asset )alues are a$8uste$ to fair )alue in a purchase.
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Use the follo in! infor#ation in ans erin! -uestions 1* an$ 1,. Manet Corporation e%chan!es 10.'... shares of ne l" issue$ 91 )alue co##on stock ith a fair #arket )alue of 9*0 per share for of the outstan$in! 90 par )alue co##on stock of Dar$ner Inc Dar$ner is then $issol)e$. Manet pai$ the follo in! costs e%penses relate$ to the &usiness co#&ination; Costs of special sharehol$ers7 #eetin! to )ote on the #er!er <e!isterin! an$ issuin! securities Accountin! an$ le!al fees Salaries of Manet7s e#plo"ees assi!ne$ to the i#ple#entation of the #er!er Cost of closin! $uplicate facilities 1*. 91,'... 15'... 2'... 10'... 11'... par all an$ an$

In the &usiness co#&ination of Manet an$ Dar$ner a. the costs of re!isterin! an$ issuin! the securities are inclu$e$ as part of the purchase price for Dar$ner. &. onl" the salaries of Manet?s e#plo"ees assi!ne$ to the #er!er are treate$ as e%penses. c. all of the costs e%cept those of re!isterin! an$ issuin! the securities are inclu$e$ in the purchase price of Dar$ner. $. onl" the accountin! an$ le!al fees are inclu$e$ in the purchase price of Dar$ner.

1,.

In the &usiness co#&ination of Manet an$ Dar$ner a. all of the ite#s liste$ a&o)e are treate$ as e%penses. &. all of the ite#s liste$ a&o)e e%cept the cost of re!isterin! an$ issuin! the securities are e%pense$. c. the costs of re!isterin! an$ issuin! the securities are $e$ucte$ fro# the fair #arket )alue of the co##on stock use$ to ac-uire Dar$ner. $. onl" the costs of closin! $uplicate facilities' the salaries of Manet?s e#plo"ees assi!ne$ to the #er!er' an$ the costs of the sharehol$ers? #eetin! oul$ &e treate$ as e%penses.

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15.

In State#ent 15*' hich of the follo in! #etho$s $oes the 6ASB consi$er the &est in$icators of fair )alues in the e)aluation of !oo$ ill i#pair#ent( a. &. c. $. Senior e%ecuti)e7s esti#ates. 6inancial anal"st forecasts. Market )alue. The present )alue of future cash flo s $iscounte$ at the fir#7s cost of capital.

10.

<aphael Co#pan" pai$ 9*'...'... for the net assets of 3aris Corporation an$ 3aris as then $issol)e$. 3aris ha$ no lia&ilities. The fair )alues of 3aris7 assets ere 9*'0..'.... 3aris7s onl" non+current assets ere lan$ an$ e-uip#ent ith fair )alues of 91:.'... an$ 9:5.'...' respecti)el". At hat )alue ill the e-uip#ent &e recor$e$ &" <aphael( a. &. c. $. 9:5.'... 9*5.'... 95..'... 9.

1:.

Accor$in! to 6ASB 151' lia&ilities assu#e$ in an ac-uisition ill &e )alue$ at the a. &. c. $. esti#ate$ fair )alue. historical &ook )alue. current replace#ent cost. present )alue usin! #arket interest rates. hich of the

1=.

In reference to the 6ASB $isclosure re-uire#ents' follo in! is correct(

a. Infor#ation relate$ to se)eral #inor ac-uisitions #a" not &e co#&ine$. &. 6ir#s are not re-uire$ to $isclose the &usiness purpose for a co#&ination c. Notes to the financial state#ents of an ac-uirin! corporation #ust $isclose that the &usiness co#&ination as accounte$ for &" the ac-uisition #etho$. $. All of the a&o)e are correct.

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Doo$ ill arisin! fro# a &usiness co#&ination is a. char!e$ to <etaine$ Earnin!s after the ac-uisition is co#plete$. &. a#ortiAe$ o)er 5. "ears or its useful life' hiche)er is lon!er. c. a#ortiAe$ o)er 5. "ears or its useful life' hiche)er is shorter. $. ne)er a#ortiAe$.

12.

In reference to international accountin! for !oo$ ill' the follo in! state#ents is correct(

hich of

a. U.S. co#panies ha)e co#plaine$ that past accountin! rules for a#ortiAin! !oo$ ill place$ the# at a $isa$)anta!e in co#petin! a!ainst forei!n co#panies for #er!er partners. &. So#e forei!n countries per#itte$ the i##e$iate rite+off of !oo$ ill to stockhol$ers7 e-uit". c. The IASB an$ the 6ASB are orkin! to eli#inate $ifferences in accountin! for &usiness co#&inations. $. All of the a&o)e are correct. *.. In recor$in! ac-uisition costs' is correct( hich of follo in! proce$ures

a. <e!istration costs are e%pense$' an$ not char!e$ a!ainst the fair )alue of the securities issue$. &. In$irect costs are char!e$ a!ainst the fair )alue of the securities issue$. c. Consultin! fees are e%pense$. $. None of the a&o)e proce$ures is correct.

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E%ercises EO* E%ercise 1 On Fanuar" *' *..0 Bison Corporation issue$ 1..'... ne shares of its 90 par )alue co##on stock )alue$ at 912 a share for all of >eer Corporation7s outstan$in! co##on shares. Bison pai$ 910'... to re!ister an$ issue shares. Bison also pai$ 91.'... for the $irect co#&ination costs of the accountants. The fair )alue an$ &ook )alue of >eer?s i$entifia&le assets an$ lia&ilities ere the sa#e. Su##ariAe$ &alance sheet infor#ation for &oth co#panies 8ust &efore the ac-uisition on Fanuar" *' *..0 is as follo s; Bison Cash In)entories Other current assets Ean$ 3lant assets+net Total Assets Accounts pa"a&le Notes pa"a&le Capital stock' 90 par 3ai$+in capital <etaine$ Earnin!s Total Eia&ilities G E-uities 9 10.'... ,*.'... 0..'... ,0.'... 5'...'... 90',*.'... 91'...'... 1',..'... *'...'... 1'...'... *.'... 90',*.'... 9 >eer 1*.'... 5..'... 0..'... *0.'... 1'0..'... 9*'==.'... 9 ,..'... ::.'... 0..'... 1..'... 1'*1.'... 9*'==.'...

<e-uire$; 1. 3repare Bison?s !eneral 8ournal entr" for the ac-uisition of >eer' assu#in! that >eer sur)i)es as a separate le!al entit". *. 3repare Bison?s !eneral 8ournal entr" for the ac-uisition of >eer' assu#in! that >eer ill $issol)e as a separate le!al entit".

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LO2 E%ercise * On Fanuar" *' *..0 Alta#ira Co#pan" issue$ @.'... ne shares of its 9* par )alue co##on stock )alue$ at 91* a share for all of Eascau% Corporation7s outstan$in! co##on shares. Alta#ira pai$ 90'... for the $irect co#&ination costs of the accountants. Alta#ira pai$ 91.'... to re!ister an$ issue shares. The fair )alue an$ &ook )alue of Eascau%?s i$entifia&le assets an$ lia&ilities ere the sa#e. Su##ariAe$ &alance sheet infor#ation for &oth co#panies 8ust &efore the ac-uisition on Fanuar" *' *..0 is as follo s;

Cash In)entories Other current assets Ean$ 3lant assets+net Total Assets Accounts pa"a&le Notes pa"a&le Capital stock' 9* par 3ai$+in capital <etaine$ Earnin!s Total Eia&ilities G E-uit"

Alta#ira 9 =0'... 1:.'... *..'... 1=0'... 1'0..'... 9*'11.'... 9 1..'... =..'... :..'... 50.'... *:.'... 9*'11.'...

Eascau% 9 :.'... *..'... *0.'... 1*0'... =0.'... 91',@0'... 9 100'... ,,.'... *0.'... 0.'... :..'... 91',@0'...

<e-uire$; 1. 3repare Alta#ira?s !eneral 8ournal entr" for the ac-uisition of Eascau% assu#in! that Eascau% sur)i)es as a separate le!al entit". *. 3repare Alta#ira?s !eneral 8ournal entr" for the ac-uisition of Eascau% assu#in! that Eascau% ill $issol)e as a separate le!al entit".

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E%ercise , >ol#en Corporation purchase$ the net assets of Carnac Inc on Fanuar" *' *..0 for 9*@.'... an$ also pai$ 91.'... in $irect ac-uisition costs. Carnac?s &alance sheet on Fanuar" *' *..0 as as follo s; Accounts recei)a&le+net In)entor" Ean$ Buil$in!+net E-uip#ent+net Total assets 9 2.'... 1@.'... *.'... ,.'... 5.'... 9,:.'... Current lia&ilities Eon! ter# $e&t Co##on stock B91 parC 3ai$+in capital <etaine$ earnin!s Total lia&. G e-uit" 9 ,0'... @.'... 1.'... *10'... *.'... 9,:.'...

6air )alues a!ree ith &ook )alues e%cept for in)entor"' lan$' an$ e-uip#ent' that ha)e fair )alues of 9*..'...' 9*0'... an$ 9,0'...' respecti)el". Carnac has patent ri!hts )alue$ at 91.'.... <e-uire$; 3repare >ol#en?s !eneral 8ournal entr" for the cash purchase of Carnac?s net assets.

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E%ercise 5 The &alance sheets of 3alisa$e Co#pan" an$ Salis&ur" Corporation as follo s on >ece#&er ,1' *..5; Current Assets E-uip#ent+net Buil$in!s+net Ean$ Total Assets Current Eia&ilities Co##on Stock' 90 par 3ai$+in Capital <etaine$ Earnin!s Total Eia&ilities an$ Stockhol$ers? e-uit" 3alisa$e *:.'... 55.'... :..'... 1..'... 91'5..'... 1..'... 1'...'... 1..'... *..'... 91'5..'... 9 Salis&ur" 1*.'... 5@.'... *..'... *..'... 91'...'... 1*.'... 5..'... *@.'... *..'... 91'...'... 9 ere

On Fanuar" 1' *..0 3alisa$e issue$ ,.'... of its shares ith a #arket )alue of 95. per share in e%chan!e for all of Salis&ur"?s shares' an$ Salis&ur" as $issol)e$. 3alisa$e pai$ 9*.'... to re!ister an$ issue the ne co##on shares. It cost 3alisa$e 90.'... in $irect co#&ination costs. Book )alues e-ual #arket )alues e%cept that Salis&ur"7s lan$ is orth 9*0.'.... <e-uire$; 3repare a 3alisa$e &alance sheet after the &usiness co#&ination on Fanuar" 1' *..0.

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LO4 E%ercise 0 3ara$ise Inc purchase$ the net assets of Su&li#e Co#pan" on Fanuar" *' *..0 for 9,*.'... an$ also pai$ 90'... in $irect ac-uisition costs. Su&li#e?s &alance sheet on Fanuar" *' *..0 as as follo s; Accounts recei)a&le+net In)entor" Ean$ Buil$in!+net E-uip#ent+net Total assets 91@.'... 1@.'... ,.'... ,.'... ,.'... 950.'... Current lia&ilities Eon! ter# $e&t Co##on stock B91 parC 3ai$+in capital <etaine$ earnin!s Total lia&. G e-uit" 9 *0'... 2.'... 1.'... **0'... 1..'... 950.'...

6air )alues a!ree ith &ook )alues e%cept for in)entor"' lan$' an$ e-uip#ent' that ha)e fair )alues of 9*..'...' 9*0'... an$ 9,0'...' respecti)el". Solitaire has patent ri!hts )alue$ at 91.'.... <e-uire$; 3repare 3ara$ise?s !eneral 8ournal entr" for the cash purchase of Su&li#e?s net assets.

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LO4 E%ercise : On Fanuar" *' *..0 Tennessee Corporation issue$ 1..'... ne shares of its 90 par )alue co##on stock )alue$ at 912 a share for all of Alaska Co#pan"7s outstan$in! co##on shares in an ac-uisition. Tennessee pai$ 910'... for re!isterin! an$ issuin! securities an$ 91.'... for other $irect costs of the &usiness co#&ination. The fair )alue an$ &ook )alue of Alaska?s i$entifia&le assets an$ lia&ilities ere the sa#e. Su##ariAe$ &alance sheet infor#ation for &oth co#panies 8ust &efore the ac-uisition on Fanuar" *' *..0 is as follo s;

Cash In)entories Other current assets Ean$ 3lant assets+net Total Assets Accounts pa"a&le Notes pa"a&le Capital stock' 90 par 3ai$+in capital <etaine$ Earnin!s Total Eia&ilities G E-uities

Tennessee 9 10.'... ,*.'... 0..'... ,0.'... 5'...'... 90',*.'... 91'...'... 1',..'... *'...'... 1'...'... *.'... 90',*.'...

Alaska 1*.'... 5..'... 0..'... *0.'... 1'0..'... 9*'==.'... 9 9 ,..'... ::.'... 0..'... 1..'... 1'*1.'... 9*'==.'...

<e-uire$; 3repare a &alance sheet for Tennessee Corporation i##e$iatel" after the &usiness co#&ination.

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E%ercise = Balance sheet infor#ation for Sphin% Co#pan" at Fanuar" 1' *..0' is su##ariAe$ as follo s; Current assets 3lant assets 9 9 *,.'... 50.'... :@.'... Eia&ilities 9 Capital stock 91. par <etaine$ earnin!s 9 ,..'... *..'... 1@.'... :@.'...

Sphin%7s assets an$ lia&ilities are fairl" )alue$ e%cept for plant assets that are un$er)alue$ &" 90.'.... On Fanuar" *' *..0' 3"ra#i$ Corporation issues *.'... shares of its 91. par )alue co##on stock for all of Sphin%7s net assets an$ Sphin% is $issol)e$. Market -uotations for the t o stocks on this $ate are; 3"ra#i$ co##on; Sphin% co##on; Butler pa"s the co#&ination; 9*@... 912.0. fees an$ costs in connection 91.'... :'... ith the

follo in!

6in$er7s fee Ee!al an$ accountin! fees <e-uire$;

1. Calculate 3"ra#i$7s in)est#ent cost of Sphin% Corporation. *. Calculate an" !oo$ ill fro# the &usiness co#&ination.

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Solutions;
Multiple Choice Questions 1 : 11 1: E%ercise 1 1. Deneral 8ournal entr" recor$e$ &" Bison for the ac-uisition of >eer B>eer sur)i)es as a separate le!al entit"C; In)est#ent in >eer Co##on stock 3ai$+in capital In)est#ent in >eer 3ai$+in capital Cash *. 1'2..'... 0..'... 1'5..'... 1.'... 10'... *0'... > > B A * = 1* 1= > B B C , @ 1, 1@ > A C > 5 2 15 12 B B C > 0 1. 10 *. C A A C

Deneral 8ournal entr" recor$e$ &" Bison for the ac-uisition of >eer B>eer $issol)es as a separate le!al entit"C; Cash In)entories Other current assets Ean$ 3lant assets Doo$ ill Accounts pa"a&le Notes pa"a&le Co##on stock 3ai$+in capital 1*.'... 5..'... 0..'... *0.'... 1'0..'... =0'... ,..'... ::.'... 0..'... 1',@0'...

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E%ercise * 1. Deneral 8ournal entr" recor$e$ &" Alta#ira for the ac-uisition of Eascau% BEascau% sur)i)es as a separate le!al entit"C;

In)est#ent in Eascau% 2:.'... Co##on stock 1:.'... 3ai$+in capital @..'... In)est#ent in Eascau% 0'... 3ai$+in capital 1.'... Cash 10'... *. Deneral 8ournal entr" recor$e$ &" Alta#ira for the ac-uisition of Eascau% BEascau% $issol)es as a separate le!al entit"C; Cash In)entories Other current assets Ean$ 3lant assets Doo$ ill Accounts pa"a&le Notes pa"a&le Co##on stock 3ai$+in capital E%ercise , Deneral 8ournal entr" for the purchase of Carnac?s net assets; Accounts recei)a&le In)entor" Ean$ Buil$in! E-uip#ent 3atent Doo$ ill Current lia&ilities Eon!+ter# $e&t Cash 2.'... *..'... *0'... ,.'... ,0'... 1.'... 10'... :.'... *..'... *0.'... 1*0'... =0.'... 00'...

100'... ,,.'... 1:.'... =2.'...

,0'... @.'... *2.'...

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E%ercise 5 The stockhol$ers? e-uit" section for 3alisa$e Corporation su&se-uent to its ac-uisition of Salis&ur" Corporation on Fanuar" 1' *..0 ill appear as follo s; 3alisa$e Corporation Balance Sheet Fanuar" 1' *..0 Current Assets E-uip#ent+net Buil$in!s+net Ean$ Doo$ ill Total Assets Current Eia&ilities Co##on Stock' 90 par 3ai$+in Capital <etaine$ Earnin!s Total Eia&ilities an$ Stockhol$ers? e-uit"

,1.'... 2*.'... @..'... ,0.'... ,*.'... 9*'*=.'... **.'... 1'10.'... 1'1,.'... *..'... 9*'=..'...

E%ercise 0 Deneral 8ournal entr" for the purchase of Su&li#e?s net assets; Accounts recei)a&le In)entor" Ean$ Buil$in!+net E-uip#ent+net 3atent ri!hts Current lia&ilities Eon!+ter# $e&t Cash E%traor$inar" !ain 1@.'... *..'... *0'... ,.'... ,0'... 1.'... *0'... 2.'... ,*0'... 5.'...

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E%ercise : Tennessee Corporation Balance Sheet Fanuar" 1' *..0 Assets; Cash 9 *50'... In)entor" =*.'... Other current assets 1'...'... Total current assets 1'2:0'... Ean$ 3lant assets+net Doo$ ill Total E.T. assets Total assets :..'... 0'0..'... 1..'... :'*..'... 9@'1:0'... Eia&ilities; Accounts pa"a&le Notes pa"a&le Total lia&ilities 91',..'... 1'2:.'... ,'*:.'...

E-uit"; Co##on stock B90 parC *'0..'... 3ai$+in capital *',@0'... <etaine$ earnin!s *.'... Total e-uit" 5'2.0'... Total lia&.G e-. 9@'1:0'...

E%ercise = <e-uire#ent 1 6MH of shares issue$ &" 3"ra#i$; *.'... % 9*@...I 6in$er7s fees Ee!al an$ accountin! fees Total ac-uisition cost for Sphin% Corporation; <e-uire#ent * In)est#ent cost fro# a&o)e; Eess; 6air )alue of Sphin%7s net assets B9:@.'... of total assets plus 90.'... of un$er)alue$ plant assets #inus 9,..'... of $e&tC E-uals; Doo$ ill fro# in)est#ent in Sphin%; 9 0=:'... 5,.'... 15:'... 9 9 0:.'... 1.'... :'... 0=:'...

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