CHAPTER 1

THEORIES | True or False

True 1. When two entities competing in the same industry combine, it is called a horizontal
business combination.
False 2. Horizontal business combinations are likely to occur when management is attempting
to dominate a geographic segment of the market.
Note: Management also attempts to dominate an industry.
True 3. One way that a horizontal business combination can increase sales for an entity is to
expand into new product markets.
True 4. A vertical business combination generally involves companies attempting to improve
the efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.
False 5. When a retail clothing store purchases a competitor in another city, a vertical
combination has occurred.
Note: This is horizontal combination.
True 6. A vertical combination is one where the entities have a potential buyer-seller
relationship.
False 7. A business combination in which a supplier of raw materials is acquired is a
conglomerate combination.
Note: This is vertical combination.
True 8. A conglomerate combination is often undertaken to help increase income stability due
to diversifying the asset base of an entity.
True 9. Conglomerate combinations are easy for the government to challenge in court.
Note: True because of unrelated industries in conglomerate combinations.
True 10. If negotiation between management groups leads to a mutually agreeable business
combination, the process is called a friendly takeover.
Note: It may be acquisition of a 2/3 or ¾ positive vote.
True 11. An offer by an acquirer to buy the stock of another company is commonly called a
tender offer.
True 12. A tender offer that is opposed by the acquiree management is called a hostile bid.
False 13. Greenmail exists when a company is encouraged to buy a potential acquiree.
Note: Greenmail is the payment of a price above market value to acquire stock back
from a potential acquirer.
False 14. A poison pill is the term used to describe the issuance of a special kind of convertible
preferred stock to deter the acquisition of the company.
False 15. The sale of the crown jewels defensive maneuver involves the sale of more assets than
does the scorched earth defense.
True 16. The fatman defensive maneuver involved the acquisition of assets by the potential
acquiree.
False 17. Golden parachutes give a bonus to all employees if the company is acquired.
Note: Only the company executives will receive the bonus.
True 18. The packman defensive maneuver is where a potential acquiree attempts to purchase
the acquirer.
True 19. A business combination occurs when one entity gains control over the net assets of
another entity.
False 20. The only way to attain control over the net assets of another entity is to purchase the
net assets.
Note: It may also be by purchasing the acquiree’s voting common stock that represents
the ownership of the assets.
False 21. In an acquisition where the acquirer pays cash for the acquiree assets, the book value
of the acquirer increases.
Note: Amount of cash is equal to the net assets of the acquirer, or the book value is still
the same.
True 22. In an acquisition of assets for assets, the ownership structure of the acquiree does not
change.
False 23. In an acquisition of assets for assets, the ownership structure of the acquirer changes.
Note: No because there is no exchange of stocks.
True 24. There is an increase in the total capitalization of an acquirer when the acquirer issues
 stock for acquiree assets.
True 25. In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
acquiree does not change.
False 26. In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders
become acquirer stockholders.
Note: The acquiree corporation becomes an acquirer stockholder.
True 27. Control over the acquiree assets is directly achieved in an asset for asset
exchange but indirectly achieved in an asset (acquirer) for stock (acquiree)
exchange.
False 28. A business combination that occurs where only one of the original entities in
existence after the combination is called a statutory consolidation .
Note: It is a statutory merger.
True 29. The acquiree entity is liquidated in a statutory merger.
True 30. For a business combination to qualify as a statutory consolidation, a new
corporation must be formed.
False 31. In a statutory consolidation form of business combination, the Retained Earnings
account of the newly formed corporation has a balance of zero immediately after
the combination.
Note: The Retained Earnings of the acquiring entity is carried forward to the new
entity so it cannot be zero.
True 32. After completing a business combination in the form of a statutory merger or
statutory consolidation, there is only one legal entity in existence.
True 33. In a business combination accomplished as a stock acquisition normally two
companies exist after the combination.
False 34. A business combination accomplished as a stock acquisition must be
accomplished with a stock for stock exchange.
Note: The stock of the acquiree must be purchased by the acquirer but the value
transferred to acquiree stockholders does not have to be in stocks.
True 35. A stock acquisition is the only form of business combination that might require the
preparation of consolidated financial statements.
True 36. The substance of statutory mergers, statutory consolidations, and stock
acquisitions is the same if income tax considerations are ignored.
False 37. There are no uncertainties when two companies agree on a business combination.
Note: There are uncertainties. The consideration to be given by the acquirer is
sometimes not completely known because this may be based partially on the future
earnings of the acquiree or the market value of the acquired debt or stock.
True 38. When the acquisition price of an acquiree is contingent on acquiree future earnings, the
acquisition price may change?
False 39. When the acquisition price of an acquiree is contingent on the market value of the
acquirer stock, the acquisition price may change.
Note: The adjustment is to stock, and the APIC will remain the same.
False 40. For business combinations to qualify as reorganizations (for tax purposes), the
acquiree stockholders must receive voting common stock of the acquirer.
Note: The acquiree stockholders continue to have an indirect ownership interest in the
net assets but may stock preferred stock or a non-voting stock qualifies as indirect
ownership as well as for the voting common stock.
True 41. There are different required levels of stock ownership in the acquiree for the three
different types of reorganizations for tax purposes.
False 42. One important benefit in a business combination is any net operating loss carryfoward
that might exist and be available to the acquirer.
Note: A net operating loss carryforward cannot be acquired. They are only available to
the acquirer if the combination qualifies as a non-taxable exchange.
THEORIES | Multiple Choice
43. Which of the following types of business combinations typically occurs when management is
attempting to monopolize a particular industry?
a. Horizontal combination
b. Vertical combination
c. Conglomerate combination
d. Market domination can be the goal of any type of combination

44. Horizontal business combinations occur when one entity purchases which of the following?
a. A supplier
b. A customer
c. A competitor
d. None of the above

45. Horizontal business combinations help sales increase by all but which of the following?
a. Entering new product markets
b. Taking control of a distribution system
c. Increasing production capacity
d. Expanding into new geographic regions

46. Which of the following types of business combinations typically occurs when management is
attempting to improve the efficiency of operations?
a. Horizontal combination
b. Vertical combination
c. Conglomerate combination
d. Improved efficiency can be the goal of any type of combination

47. A vertical combination occurs when one entity acquires another entity which has the following
characteristic(s)?
a. The acquiree purchases the acquirer's outputs
b. The acquiree is a competitor of the acquirer
c. The acquiree supplies raw materials to the acquirer
d. Either a. or c.

48. Which of the following is a vertical combination?

a. A combination where the two entities are unrelated
b. A combination where the two entities are competitors in the same industry
c. A combination where the two entities have a potential buyer/seller relationship
d. None of the above describes a vertical combination

49. Which of the following types if business combinations typically occurs when management is
attempting to diversify its investment?
a. Horizontal combination
b. Vertical combination
c. Conglomerate combination
d. Diversification can be the goal of any type of combination
50. Management acquires a business in a tangentially related industry to the current business. What form
of business combination is accomplished?
a. Vertical combination
b. Conglomerate combination
c. Mega combination
d. Horizontal combination

51. One reason for conglomerate combinations is that management has become more aware that it helps
accomplish which of the following?
a. It helps increase income stability provided by diversifying the asset base of an entity
b. It helps increase market share in the industry
c. It helps assure a constant supply of raw materials
d. A conglomerate combination helps accomplish all three

52. Business combinations that result in one dominant company in an industry are said to have formed
which of the following?
a. Pure competition
b. Monopoly
c. Oligopoly
d. Free market

53. The business enterprises that enter into a business combination are termed the
a. Merging companies
b. Joining companies
c. Constituent companies
d. Combiner companies

54. When an offer is made to acquire a company and the acquiree supports the offer, the offer is called
which of the following?
a. Friendly takeover
b. Tender offer
c. Hostile takeover
d. Defensive measure

55. The defensive maneuver where a company buys the stock from a potential acquirer at a premium
over market price is called which of the following?
a. White knight
b. Shark repellent
c. Greenmail
d. Sale of the crown jewels

56. The defensive maneuver where a company seeks to be acquired by a company perceived to be a
better match than the company making on offer to buy the potential acquiree is called which of the
following?
a. Poison pill
b. White knight
c. Golden parachutes
d. Pac-man defense
57. Company A makes a hostile take-over bid for control of Company B. In response, Company B makes
a counter-offer to purchase shares from Company A's shareholders. Which of the following best
describes Company B's response?
a. Pac-man defense
b. Selling the crown jewels
c. Poison Pill
d. A Hostile Defense

58. Company A has made an offer to purchase all of the outstanding shares of Company B for P10 per
share (the current market value of the shares). In response to Company A’s offer, the shareholders of
Company B were given rights to purchase additional shares at P8 per share. Which of the following
tactics was employed by Company B to prevent Company A from acquiring control of Company B?
a. Pac-man defense
b. Selling the crown jewels
c. Poison Pill
d. A Reverse-takeover

59. What is the term used for the defensive maneuver where management of a potential acquiree sells
desirable assets to reduce the company’s value?
a. Sale of the crown jewels
b. Scorched earth defense
c. Pac-man defense
d. Greenmail

60. Shark repellent is a term for administrative measures that may make a hostile takeover more difficult.
Which of the following is not a form of shark repellent?
a. Staggering board of director terms
b. Residency requirement for board members
c. Issuance of convertible preferred stock that converts into common stock of the acquirer if
a takeover is accomplished
d. A supermajority vote is required to approve an acquisition

61. Defensive maneuvers can be internal to the potential acquiree (management or stockholders) or may
involve activities external to the acquiree. Which of the following is not an internal defensive
maneuver?
a. Residency requirement for board members
b. Golden parachutes
c. Pacman defense
d. A supermajority vote is required to approve an acquisition

62. Able Ltd. offers to buy shares from the existing shareholders of Wei Co. at a premium price. The
current management and board of directors of Wei have let the Wei shareholders know that they do
not approve of this. This is an example of a(n)
a. open market purchase
b. hostile takeover
c. poison pill strategy
d. reverse takeover
63. Control over an acquiree can be attained through which of the following?
a. Acquisition of the acquiree assets
b. Acquisition of the acquiree stock
c. Either acquisition of the acquiree assets or stock
d. Neither acquisition of the acquiree assets or stock

64. In an acquisition of assets, the acquirer must give up which of the following?
a. Cash
b. Other assets
c. Liabilities
d. Any of the above can be given

65. In an acquisition where there is an exchange of assets for assets, how does the value of the acquiree
net assets change?
a. The net asset increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

66. In an acquisition where there is an exchange of assets for assets, how does the ownership structure
of the acquiree change?
a. There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership oi the acquires
d. It is not possible to determine if there is a change in the acquiree ownership structure

67. In an acquisition where there an exchange of assets for assets, how does the ownership structure the
acquirer change?
a. There is no change in the acquirer ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if there is a change in the acquiree ownership structure

68. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how does the
value of the acquiree net assets change?
a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

69. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how ownership
structure of the acquiree change?
a. There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if there a change in the acquiree ownership structure
70. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how does
ownership structure of the acquirer change?
a. There is no change in the acquiree ownership structure
b. The acquiree (company) becomes a stockholder of the acquirer
c. The acquiree stockholders as individuals become owners of the acquirer
d. It is not possible to determine if there is a change in the acquirer ownership structure

71. Control over acquiree assets is attained in a business combination. Indirect control is attained in
which type of exchange?
a. Assets for assets
b. Stock (acquirer) for assets (acquiree)
c. Stock for stock
d. Either b or c

72. Which of the following forms of business combination is not subject to laws specific to business
combinations?
a. Asset for asset acquisition
b. Statutory merger
c. Statutory consolidation
d. All three are subject to laws

73. Which of the following is not a true statement with regard toa statutory merger?
a. One entity continues to exist
b. One entity ceases to exist
c. The name of the new entity is not the same as either of the entities
d. All of the above are true statements with regard to a statutory merger

74. Which of the following is not true with regard to statutory consolidation form of business combination?
a. A new corporation must be formed
b. Control of the net assets of the combining entities must be acquired by the new entity
c. The net assets of the combining entities must be acquired with assets of the new
corporation
d. The combining entities both cease to exist after the combination

75. Following the completion of a business combination in the form of a statutory consolidation, what is
the balance in the new corporation's Retained Earnings account?
a. The acquirer Retained Earnings account balance
b. The acquiree Retained Earnings account balance
c. Zero
d. The sum of the acquirer and acquiree Retained Earnings account balances

76. Which of the following is not true with regard to a business combination accomplished in the form a
stock acquisition?
a. Two companies remain in existence after the combination
b. A parent-subsidiary relationship is said to exist
c. Consolidated financial statements are normally required
d. All of the above statements are true
77. Which of the following contingencies may change the cost of an acquisition?
a. Future acquiree earnings
b. Future value of acquiree stock
c. Future value of acquirer stock
d. Future value of acquirer debt

78. To qualify as o reorganization (for tax purposes), a business combination must meet which of the
following criteria?
a. Acquiree stockholders continue an indirect ownership interest in the acquiree
b. The acquirer must continue the acquiree business or employ a significant portion of the acquiree
net assets in an ongoing business
c. The combination must be for a valid business purpose
d. All of the above criteria are required for a combination to qualify as a reorganization

79. Which of the following is not a business combination?

a. Statutory amalgamation
b. Joint venture
c. A company's purchase of 100% of another company's net assets
d. A company's purchase of 80% of another company’s voting shares

80. Under PFRS 3, Business Combinations, which method must be used to account for business
combinations?
a. Purchase method
b. Pooling-of-interests method
c. Acquisition method
d. New entity method

81. After an exchange of shores in a business combination, each group of shareholders held 50% of
voting rights. Which of the following factors should be considered in determining the acquirer?
a. Head office location
b. Composition of the board of directors
c. If there are material transactions between the combining companies
d. Which company initiated the combination

82. Perez Co. plans to acquire Roo Co. Roo 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?
a. Perez would prefer to purchase Roo's assets and Roo would prefer to sell its shares to
Perez.
b. Perez would prefer to purchase Roo's shores and Roo would prefer to sell its assets to Perez.
c. Both Perez and Roo would prefer Perez to purchase Rods shares.
d. Both Perez and Roo would prefer Perez to purchase assets.

83. Perez Co. acquired Roo Co. in a business combination. Roo issued new shares to Perez’s
shareholders in exchange for their outstanding shares. What type of share exchange is this?
a. Direct exchange
b. Indirect exchange
c. Hostile takeover
d. Reverse takeover
84. Perez Co. acquired Roo Co. in a business combination. Perez issues new shares to Roo’s
shareholders in exchange for their outstanding shares. What type of exchange is this?
a. Direct exchange
b. Indirect exchange
c. Hostile takeover
d. Reverse takeover

85. Ha Ltd. and Hee 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?
a. The company with the highest net assets is considered the acquirer.
b. The companies must ask the courts to decide which company is the acquirer.
c. A number of factors must be considered to determine which company is the acquirer.
d. There is no acquirer as this is not a proper business combination.

86. How should the transaction costs of issuing shares in an acquisition be recognized?
a. Expensed
b. Capitalized as part of the cost of the shares
c. Deducted in total from shareholders' equity
d. Deducted from shareholders' equity, net of related income tax benefits

87. How should the cost of issuing debt in an acquisition be recognized?

a. Expensed
b. Amortized over the term of the debt
c. Deducted from the value of the debt
d. Deducted from shareholders' equity

88. How should accounting fees for an acquisition be treated?

a. Expensed in the period of acquisition
b. Capitalized as part of the acquisition cost
c. Deferred and amortized
d. Deferred until the company is disposed of or wound-up

89. Which of the following is not a reason why a private enterprise may be acquired as a bargain
purchase?
a. It is a family business and the next generation does not want to continue the business.
b. The owner has health problems and does not have a successor.
c. The business only has equity financing and has no debt financing.
d. The owner is no longer interested in the business.

90. Which of the following statements about a bargain purchase is true?

a. It is reported on the financial statements as an "excess of fair value over cost of assets acquired".
b. It is reported as a deferred credit on the financial statements called negative goodwill.
c. Assets and liabilities of the acquired company are reported at net book value.
d. Assets and liabilities of the acquired company are reported at their fair value.

91. What is the most common valuation method used for intangible assets?
a. Market-based
b. Income-based
c. Cost-based
d. Amortized cost
92. How should negative goodwill be shown on the consolidated financial statements of the acquirer?
a. As a gain on the statement of comprehensive income
b. As a loss on the statement of comprehensive income
c. As a liability on the statement of financial position
d. As a separate amount under shareholders' equity on the statement of financial position

93. Raj Co. acquired all of Event Ltd.'s common shares. At the date of acquisition. Event had P80,000 of
goodwill resulting from its acquisition of Baker Ltd. a few years ago. At Raj's date of acquisition, what
is the proper treatment of Event’s P80,000 of goodwill?
a. Event's goodwill is an identifiable asset and should be included as part of Raj's purchase price
discrepancy (PPD),
b. Event's goodwill is an identifiable asset but should not be included as art of Raj's PPD.
c. Event's goodwill is not an identifiable asset but should be included as part of Raj's PPD.
d. Event's goodwill is not an identifiable asset and should not be included as part of Raj’s PPD

94. Which of the following does NOT constitute a Business Combination under IFRS 3?
a. A Corp purchases the net assets of B Corp.
b. A Corp enters into a Joint Venture with B Corp.
c. A Corp acquires of B Corp's voting shores for P1,000,000 in Cash.
d. A Corp acquires of B Corp's voting shares for future considerations.

95. What is a statutory merger?

a. A merger approved by the Securities and Exchange Commission.
b. An acquisition involving the purchase of both stock and assets.
c. A takeover completed within one year of the initial tender offer.
d. A business combination in which only one company continues to exist as a legal entity.

96. A statutory merger is a(n)

a. Business combination in which only one of the two companies continues to exist
corporation
b. Business combination in which both companies continues to exist
c. Acquisition of a competitor
d. Acquisition of a supplier or a customer
e. Legal proposal to acquire outstanding shares of the target’s stock

97. Liabilities assumed in an acquisition will be valued at the

a. estimated fair value.
b. historical book value.
c. current replacement cost.
d. present value using market interest rates.

98. In reference to the IASB disclosure requirements, of the following is correct?

a. information related to several minor acquisitions troy not be combined.
b. firms are not required to disclose the business purpose for o combination.
c. notes to the financial statements of an acquiring corporation must disclose that the
business.
d. combination was accounted for by the acquisition method.
99. Goodwill arising from business combination is:
a. charged to Retained Earnings after the acquisition is completed.
b. amortized over 40 years or its useful fife. whichever is longer.
c. amortized over 40 years cc its useful fife, whichever is shorter.
d. never amortized.

100. In reference to international accounting for goodwill. which of the following statements is correct?
a. U.S. companies have complained 'hat past accounting rules for amortizing goodwill placed them
at a disadvantage in competing against foreign
b. Some foreign countries permitted the immediate write-off of goodwill to stockholders' equity.
c. The IASB and the FASB are working to eliminate differences in accounting for business
combinations.
d. All of the above are correct.

101. In recording acquisition costs. which of the following procedures is correct?

a. Registration costs are expensed, and not charged against the fair value of the securities issued.
b. Indirect costs are charged against the fair value of the securities issued.
c. Consulting fees are expensed.
d. None of the above procedures is correct.

102. Which one of the following statements is incorrect?

a. In an asset acquisition, the books of the acquired company closed out and its assets and
liabilities are transferred to the books of the acquirer.
b. In many cases. stock acquisitions entail lower total cost than asset acquisitions.
c. Regulations pertaining to one of the firms do not automatically extend to the entire merged entity
in a stock acquisition.
d. A stock acquisition occurs when one corporation pays cash, issues stock, or issues debt
for all or part of the voting stock of another company: and the acquired company
dissolves and ceases to exist as a separate legal entity.

103. Which of the following can be used as consideration in a stock acquisition?

a. Cash
b. Debt
c. Stock
d. Any of the above may be used

104. Stocum Corporation and Merton Company, both publicly owned companies, are planning a
merger, with Stocum being the survivor. Which of the following is a requirement of the merger?
a. The Securities and Exchange Commission must approve the merger
b. The common stockholders of Merton must receive common stock Of Stocum
c. The creditors of Merton must approve the merger
d. The boards of directors of both Stocum and Merton must approve the merger

105. PFRS 3 requires that a/ business combinations be accounted for using

a. The pooling of interests method.
b. The acquisition method.
c. Either the acquisition or the pooling of interests methods.
d. Neither the acquisition nor the pooling of interests methods.
106. Under the acquisition method if the fair values of identifiable net assets exceed the value implied
by the purchase price of the acquired company, the excess should be
a. accounted for as goodwill.
b. to reduce current and long-lived assets.
c. allocated to reduce current assets and classify any remainder as an extraordinary gain.
d. allocated to reduce any previously recorded goodwill on the seller's books and classify
any remainder as an ordinary gain.

107. PFRS 3 requires that the acquirer disclose each of the following for each material business
combination except the
a. name and a description of the acquiree acquired.
b. percentage of voting equity instruments acquired.
c. fair value of the consideration transferred.
d. each of the above is a required disclosure.

108. When the acquisition price of on acquired firm is less than the fair value of the identifiable net
assets, all of the following recorded at fair value except
a. Assumed abilities
b. Current assets
c. Long-lived assets
d. Each of the above is recorded at fair value

109. Under PFRS 3:

a. both direct and indirect costs are to be capitalized.
b. both direct and indirect costs are to be expensed.
c. direct costs are to be capitated and indirect costs are to be expensed.
d. indirect costs are to be capitalized and costs are to be expensed.

110. A business combination is accounted properly an acquisition. Which of the following expenses
related to effecting the business combination should enter into the determination of net income of the
combined corporation for the period in which the expenses are incurred?
Security Overhead allocated
issue costs to the merger
a. Yes Yes
b. Yes No
c. No Yes
d. No No

111. In a business combination, which of the following costs are assigned to the of the security?
Professional or Security
consulting fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No
112. Parental Company and Sub Company were combined in on acquisition transaction. Parental was
able to acquire Sub at a bargain price. The sum of the fair values of identifiable assets acquired less
the fair value of liabilities assumed exceeded the cost to Parental. After eliminating previously
recorded goodwill, there was still some "negative goodwill. Proper accounting treatment by Parental is
to report the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.

113. With an acquisition, direct and indirect expenses are

a. expensed in the period incurred.
b. capitalized and amortized over a discretionary period.
c. considered a part of the total cost of the acquired company.
d. charged to retained earnings when incurred.

114. In a business combination accounted for as an acquisition, how should the excess of assets
acquired over the consideration paid be treated?
a. Amortized as credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recorded as an ordinary gain.

115. If the value implied by the purchase price of on acquired company exceeds the identifiable net
assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary
gain.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce long-lived assets.
d. allocated goodwill.

116. P Co. issued 5,000 shares of its common stock, valued at P200,000, to the former shareholders
of S Company two years after S Company was acquired in an all-stock transaction. The additional
were issued because P Company agreed to issue additional shares of common stock if the average
post combination earnings over the next two years exceeded P500,000. P Company treat the
issuance of the additional shares as a (decrease in)
a. retained earnings.
b. goodwill.
c. paid-in capital.
d. noncurrent liabilities of S Company assumed by P Company.

117. The fair value of assets and liabilities of the acquired entity is to be reflected in the financial
statements of the combined entity. When the acquisition takes place over a period of time rather than
at once, at what time is the fair value of the assets and liabilities of the acquired entity determined?
a. the date the interest in the acquiree was acquired.
b. the date the acquirer obtains control of the acquiree
c. the date of acquisition of the largest portion of the interest in the acquiree.
d. the date of the financial statements.
118. Under PFRS 3, what value of the assets and liabilities is reflected in the financial statements on
the acquisition date of a business combination?
a. Carrying value
b. Fair value
c. Book value
d. Average value

119. What is the appropriate accounting treatment for the value assigned to in-process development
acquired in a business combination?
a. Expense upon acquisition.
b. Capitalize as an asset.
c. Expense if there is no alternative use for the assets Used in the research and development and
technological feasibility has yet to be reached.
d. Expense until future economic benefits become certain and then capitalize as an asset.

120. An acquired entity has a long-term operating lease for an office building used for central
management. The terms of the lease are very favorable relative to current market rates. However, the
lease prohibits subleasing or any other transfer of rights. In its financial statements, the acquiring firm
should report the value assigned to the lease contract as
a. An intangible asset under the contractual legal criterion.
b. A part of goodwill.
c. An intangible asset under the separability criterion.
d. A building.

121. Under PFRS 3 when is a gain recognized in consolidating financial information?

a. When any bargain purchase is created.
b. In a combination created in the middle of a fiscal year.
c. In an acquisition when the value of all assets and liabilities cannot be determined.
d. When the amount of a bargain purchase exceeds the value of the applicable expense (other than
certain exceptions) held by the acquired company.

122. Company B acquired the net assets of Company S in exchange for cash. The acquisition
exceeds the fair value of the net assets acquired. How should Company B determine the amounts to
be reported for the plant and equipment and for long-term debt of the acquired Company S?
Plant and Equipment Long-Term Debt
a. Fair value S’s carrying amount
b. Fair value Fair value
c. S’s carrying amount Fair value
d. S’s carrying amount S’s carrying amount

123. Goodwill represents the excess cost of an acquisition over the

a. sum of the fair values assigned to intangible assets less liabilities assumed.
b. sum of the fair values assigned to tangible and identifiable intangible assets acquired less
liabilities assumed.
c. sum of the fair values assigned to intangibles acquired less liabilities assumed.
d. book value of an acquired company.
124. When an acquisition of another company occurs, IASB recommends disclosing all of the
EXCEPT:
a. goodwill assigned to each reportable segment.
b. information concerning contingent consideration including a description of the arrangements and
the range of outcomes.
c. results of operations for the current period if both companies had remained separate.
d. a qualitative description of factors that make up the goodwill recognized.

125. Separately identified intangible assets are accounted for by amortizing:

a. exclusively by using impairment testing.
b. based upon a pattern that reflects the benefits conveyed by the asset.
c. over the useful economic life less residual value using only the straight-line method.
d. over a period not to exceed a maximum of 40 years.

126. Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate
and consummate the purchase are
a. recorded as a deferred asset and amortized over a period not to exceed 15 years.
b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price.
c. expensed in the period of the purchase.
d. included as part of the price paid for the company purchased.

127. Which of the following income factors should not be factored into an estimation of goodwill?
a. sales for the period
b. income tax expense
c. extraordinary items
d. cost of goods sold