Theories

BUSINESS COMBINATIONS- STATUTORY MERGERS AND STATUTORY
CONSOLIDATIONS
1. Statement 1 (S1): When two entities competing in the same industry combine, it is
called a horizontal business combination.
Statement 2 (S2): Horizontal business combinations are likely to occur when
management is attempting to dominate a geographic segment of the market.
a. S1- True; S2- True c. S1- False; S2- True
b. S1- True; S2- False d. S1- False; S2- False
2. Statement 1 (S1): One way that a horizontal business combination can increase
sales for an entity is to expand into new product markets.
Statement 2 (S2): A vertical business combination generally involves companies
attempting to improve the efficiency of operations by purchasing suppliers of inputs
or purchases of outputs.
3. Statement 1 (S1): When a retail clothing store purchases a competitor in another
city, a vertical combination has occurred.
Statement 2 (S2): A vertical combination is one where the entities have a potential
buyer- seller relationship.
4. Statement 1 (S1): A business combination in which a supplier or raw materials is
acquired is a conglomerate combination.
Statement 2 (S2): A conglomerate combination is often undertaken to help increase
income stability due to diversifying the asset base of an entity.
5. Statement 1 (S1): Conglomerate combinations are easy for the government to
challenge in court.
Statement 2 (S2): If negotiation between management groups leads to a mutually
agreeable business combination, the process is called a friendly takeover.
a. S1- True; S2- True d. S1- False; S2- False
b. S1- True; S2- False
c. S1- False; S2- True
6. Statement 1 (S1): An offer by an acquirer to buy the stock of another company is
commonly called a tender offer.
Statement 2 (S2): A tender offer that is opposed by the acquire management is
called a hostile bid.
7. Statement 1 (S1): Greenmail exists when a company is encouraged to buy a
potential acquiree.
Statement 2 (S2): 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.
8. Statement 1 (S1): The sale of crown jewels defensive maneuver involves the sale of
more assets than does the scorched earth defense.
Statement 2 (S2): The fatman defensive maneuver involved the acquisition of assets
by the potential acquiree.
9. Statement 1 (S1): Golden parachutes give a bonus to all employees if the company
is acquired.
Statement 2 (S2): The pacman defensive maneuver is where a potential acquiree
attempts to purchase the acquirer.
10. Statement 1 (S1): A business combination occurs when one entity gains control
over the new assets of another entity.
Statement 2 (S2): The only way to attain control over the net assets of another entity
is to purchase the net assets.
11. Statement 1 (S1): In an acquisition where the acquirer pays cash for the acquiree
assets, the book value of the acquirer increases.
Statement 2 (S2): In an acquisition of assets for assets, the ownership structure of
the aquiree does not change.
12. Statement 1 (S1): In an acquisition of assets for assets, the ownership structure of
the acquirer changes.
Statement 2 (S2): There is an increase in the total capitalization of an acquirer when
the acquirer issues stock for acquiree assets.
13. Statement 1 (S1): In an exchange of stock (acquirer) for assets (acquiree), the
ownership structure of the acquiree does not change.
Statement 2 (S2): In an exchange of stock (acquirer) for assets (acquiree), the
acquiree stockholders become acquirer stockholders.
14. Statement 1 (S1): 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.
Statement 2 (S2): A business combination that occurs where only one of the original
entities in existence after the combination is called a statutory consolidation.
15. Statement 1 (S1): The acquiree entity is liquidated in a statutory merger.
Statement 2 (S2): For a business combination to qualify as a statutory consolidation,
a new corporation must be formed.
16. Statement 1 (S1): 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.
Statement 2 (S2): After completing a business combination in the form of a statutory
merger or statutory consolidation, there is only one legal entity in existence.
17. Statement 1 (S1): In a business combination accomplished as a stock acquisition
normally two companies exist after the combination.
Statement 2 (S2): A business combination accomplished as a stock acquisition must
be accomplished with a stock for stock exchange.
18. Statement 1 (S1): A stock acquisition is the only form of business combination that
might require the preparation of consolidated financial statements.
Statement 2 (S2): The substance of statutory mergers, statutory consolidations, and
stock acquisitions is the same if income tax considerations are ignored.
19. Statement 1 (S1): There are no uncertainties when two companies agree on a
business combination.
Statement 2 (S2): When the acquisition price of an acquiree is contingent on
acquiree future earnings, the acquisition price may change
20. Statement 1 (S1): When the acquisition price of an acquiree is contingent on the
market value of the acquirer stock, the acquisition price may change
Statement 2 (S2): For business combinations to qualify as reorganizations (for tax
purposes), the acquiree stockholders must receive voting common stock of the
acquirer.
21. Statement 1 (S1): There are different required levels of stock ownership in the acquire for the
three different types of reorganizations for tax purposes.
Statement 2 (S2): One important benefit in a business combination is any net operating loss
carryforward that might exist and be available to the acquirer.
a. S1 -True; S2 - True c. S1- False; S2 - True

b. S1- True; S2 - False d. S1 - False; S2 - False
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21. 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
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22. 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
24. 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
attempting to improve the efficiency of operations?
a. Horizonal Combination
b. Vertical combination
d. Improved efficiency can be the goal of any type of combination
26. A vertical combination occurs when one entity acquires another entity which has the
following characteristic(s)?
a. the acquire purchase the acquirer’s outputs

b. the acquire is a competitor of the acquirer
c. The acquire supplies raw materials to the acquirer
d. Either a or c
27. 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 gave a potential buyer/seller relationship
d. None of the above described a vertical combination
attempting to diversity its investment?
a. Horizontal combination
c. Conglomerate combination
d. Diversification can be the goal of any type of combination
29. Management acquires a business in o 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
30. 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
31. 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
32. The business enterprises that enter into a business combination are termed the
a. Merging companies
b. Constituent companies
c. Joining companies
d. Combiner companies
33. When an offer is made to acquire a company and the acquiree management supports
the offer, the offer is called which of the following?
a. Friendly takeover
C. Hostile takeover
b. Tender offer
d. Defensive measure
34. The defensive maneuver where a company buýs stock from a potential acquirer at
premium over the market price is called which of the following
a. White knight
b. Shark repellent
c. Greenmail
d. Sale of the crown jewels
35. The defensive maneuver where a company seeks to be acquired by a company
perceived to be a better match than the company making an 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
36. 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
37. 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
38. What is the term used for the defensive maneuver where management of a potential
acquiree sells desirable assets to reduce the company's values
a. Sale of the crown jewels

b. Scorched earth defense
c. Pac-man defense
d. Greenmail
39. 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 fakeover is accomplished
d. A supermajority vote is required to approve an acquisition
40. 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. Pac-man defense
41. Able Ltd. offers to buy shares from existing shareholders of Wei Co. at a premium price. The
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
42. 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
43. 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
44. 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 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
45. 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 of the acquiree
d. It is not possible to determine if ther is a change in the acquiree ownership structure
structure of the acquirer change?
a. There is no change in the acquirer ownership structure

d. It is not possible to determine if there is a change in the acquiree ownership structure
47. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree),
47. .How does the value of the acquiree net assets change?

C. There is no changes in net assets
how does the ownership structure of the acquiree change

49. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree)
how does the ownership structure of the acquirer change?

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
50. 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
51. 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
52. Which of the following is not a true statement with regard to a 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 one true statements with regard to a statutory merger
53. Which of the following is not true with regard to the 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 entitles must be acquired with assets of the new
corporation
d. The combining entities both cease to exist after the combination
54. 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
55. Which of the following is not true with regard to a business combination accomplished in
the form of 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
56. 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
57. To qualify as a reorganization (for tax purposes), a 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. Combination must be for a valid business purpose
d. all of the above criteria are required for a combination to quality as a reorganization
58. 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 shores
59. 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
60 . After an exchange or shares in a business combination, each group of shareholders held

50% of the voting right, 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
61. 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 shares and Roo would prefer to sell its assets to Perez.
c. Both Perez and Roo would prefer Perez to purchase Roo's shares.
d. Both Perez and Roo would prefer Perez to purchase Roo's assets.
62. 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 c. Hostile takeover

b. Indirect exchange d. Reverse takeover
63. Perez Co. acquired Roo Co. in a business combination. Perez issued new shares to Roo's
a. Direct exchange c. Hostile takeover
64. Ho 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.
65. How should the transaction costs of issuing shares in an acquisition be recognized?
a. Expensed
p. 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
66. 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
67. How accounting fees for an acquisition should 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
68. 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 fo to continue the
business.
b. The owner has health problems and does not have a successor.
c. The business only has equity financing and hos no debt financing.
d. The owner is no longer interested in the business.
69. 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.
70. What is the most common valuation method used for intangible assets?
a. Market-based c. Cost-based
b. Income-based d. Amortized cost
71. How should negative goodwill be shown on the consolidated financial státements 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
72. Roj 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 date
of acquisition. what is the proper treatment of Event's P80,000 of goodwill?
a. Event's goodwill ls 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 RG
PPD.
d. Event's goodwill is not an identifiable asset and should not be included as part or
Raj's PPD.
73. 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 51% of B Corp's voting shares for P1,000,000 ín Cash.
d. A Corp acquires 51% of B Corp's voting shares for future considerations.
74. 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 .he. initial tender offer.
d. A business combination in which only one company continues to exist as a legal
entity.
75. A statutory merger is a(n)
a. Business combination in which only one of the two companies continues to exist as
a legal 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
76. 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.
77. In reference to the IASB disclosure requirements, which of the following is correct?
a. Information related to several minor acquisitions may not be combined.

a. firms are not required to disclose the business purpose for a combination
b. notes to the financial statements of an acquiring corporation must disclose that
c. the business combination was accounted for by the acquisition method.
d. "all of the above are correct.
78. Goodwill arising from business combination is:
a. charged to Retained Earnings after the acquisition is completed.

b. amortized over 40 years or its useful life, whichever is longer.
c. amortized over 40 years or its useful life, whichever is shorter.
d. never amortized.
79. In reference to international accounting for goodwill, which of the following statements is
correct?
a. U.S. companies have complained that 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
c. The IA9B and the FASB are working to eliminate differences in accounting for business
equity combinations.
d. All of the above are correct
80. In recording acquisition costs, which of the following procedures is correct?
a. Registration costs are expensed, and nof charged against the fair value of the
b. Indirect costs are charged against the fair value of the securities issued.
securities issued.
c. Consulting fees are expensed.
d. None of the above procedures is correct.
81. Which one of the following statements is incorrect?
a. In an asset acquisition, the books of the acquired company are 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.
82. Which of the following can be used as consideration in a stock acquisition?
a. Cash c. Stock
b. Debt d. Any of the above may be used
83. Slocum Corporation and Merton Company, both publicly owned companies, are
Planning a merger, with Slocum being the survivor. Which of the following is are 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 slocum
c. The creditors of Merton must approve the merger
d. The boards of directors of both Slocum and Merton must approve the merger
84: PFRS 3 requires that all 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.
85. 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. allocated 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.
86. 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
87. When the acquisition price of an acquired firm is less than the fair value of the identifiable
net assets, all of the following are recorded at fair value except
a. Assumed liabilities.
b. Current assets.
c. Long-lived assets.
d. Each of the above is recorded at fair value
88. 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 capitalized and indirect costs are to be expense
d. indirect Costs are to be capitalized and direct costs are to be expensed
89. A business combination is accounted for properly as an acquisition. Which of the following
expenses related to effecting the business combination should enter into
determination of net income of the combined corporation for the period in which expenses are
incurred?
Security Overhead allocated
issue costs to the merger
a. Yes Yes
b. Yes No
c. No Yes
d. No No
90. In a business combination, which of the following costs are assigned to the valuation of the
security?
Professional or Security
consultinig fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No
91. Parental Company and Sub Company were combined in an 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 repot the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.
92. 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 incured.
93. In a business combination accounted for as an acquisition, how should the excess of fair
value of net. assets acquired over the consideration paid be treated?
a. Amortized as a credit to income Over a period not fo exceed forty years.

b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained edrnings over a period not to exceed forty years.
d. Recorded as an ordinary gain.
94. If the value implied by the purchase price of an acquired company exceeds the fair
values of identifiable net assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder
as an ordinary gain.
c. allocated to reduce long-lived assets.
d. allocated goodwill
95. 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 shares 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 will treat the issuance of the additional
shares as a (decrease in)
a. retained earnings.
b. goodwill.
c. paid-in capital.
d. non-current liabilities of S Company assumed by P Company.
96. 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 all 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.
97. 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 c. Book value

b. Fair value d. Average value
98. What is the appropriate accounting treatment for the value assigned to in-process
research and 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.
99. 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.
100. Under PFRS 3, when is a gain recognized in consolidating financial information?
a. When any bargain purchase is treated.

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.
101. Company B acquired the net assets of company S in exchange for cash. The acquisition
price exceeds 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
102. 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
d. book value of an acquired company
103. When the acquisition of another company occurs, IASB recommends disclosing, all of
the
following EXCEPT
a. goodwill assigned to each reportable segment.
b. information concerning contingent consideration including a description of the 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
104. Separately identified intangible assets are accounted for by amortizing:
a. exclusively by impairment testing

b. based upon the 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 minimum of 40 yrs
105. 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 it 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.
106. 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
MULTIPLE CHOICE THEORIES - ANSWERS
1. B 35. B 69. D
2. A 36. A 70. B
3. C 37. C 71. A
4. C 38. A 72. C
5. A 39. C 73. B
6. A 40. C 74. D
7. D 41. B 75. A
8. C 42. C 76. A
9. C 43. D 77. C
10. B 44. D 78. D
11. C 45. A 79. D
12. C 46. A 80. C
13. B 47. D 81. D
14. B 48. A 82. D
15. A 49. B 83. D
16. C 50. C 84. C
17. B 51. A 85. D
18. A 52. C 86. D
19. C 53. C 87. D
20. D 54. A 88. B
21. B 55. D 89. C
22. A 56. A 90. C
23. C 57. D 91. C
24. B 58. B 92. A
25. B 59. C 93. D
26. D 60. B 94. D
27. C 61. A 95. C
28. C 62. D 96. B
29. B 63. A 97. B
30. A 64. C 98. B
31. B 65. D 99. A
32. C 66. C 100.
33. A 67. A A
34. C 68. C
101.
B
102.
B
103.
C
104.
B
105.
C
106.
C
Chapter 4 Key
1. The purchase price of an entity includes:
A. the book value of the subsidiary's shareholders' equity and the acquisition differential.
B. the book value of the subsidiary's shareholders' equity and goodwill.
C. the fair market value of the subsidiary's shareholders' equity and the purchase price
discrepancy.
D. the fair market value of the subsidiary's net assets.
Accessibility: Keyboard Navigation

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 04 #1
Learning Objective: 04-01 Define non-controlling interest and explain how it is measured on the consolidated balance sheet.
Topic: 04-01 Non-Wholly Owned Subsidiaries
Topic: 04-02 Consolidation Theories
2. On the date of acquisition, consolidated shareholders' equity under proprietary theory is

equal to:
A. the sum of the parent and subsidiary's shareholders' equities.

B. the sum of the parent's shareholders' equity plus its pro rata share of the subsidiary's
shareholders' equity on the date of acquisition.
C. the parent's shareholders' equity.
D. the subsidiary's shareholders' equity.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
3. When preparing the consolidated balance sheet on the date of acquisition, the parent's
investment (in subsidiary company) is:
A. revalued to fair market value.

B. replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
C. replaced with 100% of the assets and liabilities of the subsidiary at book value.
D. replaced with the parent's pro rata share of the assets and liabilities of the subsidiary
at fair market value.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
4. When the parent forms a new subsidiary:
A. there should be no acquisition differential.

B. gain or loss will usually arise.
C. push down accounting rules must be followed.
D. it should not be included in the company's consolidated financial statements as this
would effectively be double-counting.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
5. Any negative goodwill arising on the date of acquisition:
A. is recognized as a gain on the date of acquisition.

B. is prorated among the parent company's identifiable net assets.
C. should be amortized over a predetermined period.
D. is recognized as a loss on the date of acquisition.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Learning Objective: 04-04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business
combination.
Topic: 04-07 Bargain Purchases
6. A company owning a majority (but less than 100%) of another company's voting shares on
the date of acquisition should account for its subsidiary (in its consolidated balance
sheet):
A. by including only its share of the fair market values of the subsidiary's net assets.
B. by including only its share of the book values of the subsidiary's net assets.
C. by including 100% of the fair market values of the subsidiary's net assets.
D. by including 100% of the fair market values of the subsidiary's net assets and
accounting for any unowned portion of the subsidiary's voting shares using the non-
controlling interest (NCI) account.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
Topic: 04-03 Entity Theory
Topic: 04-04 Example 1 Fair Value of Non-Controlling Interest as Evidenced by Market Trades
Topic: 04-05 Example 2
7. HRN Enterprises Inc. purchases 80% of the outstanding voting shares of NHR Inc. on
January 1, 2018. On that date, which of the following statements pertaining to non-
controlling interest (NCI) is TRUE?
A. HRN's non-controlling interest (NCI) account will include 20% of the fair value of NHR's
net assets.
B. HRN's non-controlling interest (NCI) account will include 20% of the book value of
NHR's net assets.
C. HRN's non-controlling interest (NCI) account will include 20% of the acquisition
differential on the date of acquisition.
D. HRN's non-controlling interest (NCI) account will include 20% of any unallocated
portion of the acquisition differential on the date of acquisition.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
combination.
Topic: 04-08 Negative Acquisition Differential
Topic: 04-09 Subsidiary with Goodwill
8. Under the Proprietary Theory, non-controlling interest (NCI) is:
A. nonexistent. Goodwill is established based on the Parent's pro-rata share of any

acquisition differential.
B. nonexistent. Goodwill is established based on the Parent's acquisition cost.
C. based on the fair market values of the subsidiary's net assets. Goodwill is established
based on the Parent's acquisition cost.
D. based on the book values of the subsidiary's net assets. Goodwill is established based
on the Parent's acquisition cost.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
9. The calculation of Goodwill and non-controlling interest (NCI) under the Entity Theory is
derived :
A. by using an imputed acquisition cost, which would be the presumed cost of acquiring
100% of the outstanding voting shares of the subsidiary.
B. by using the actual acquisition cost.
C. by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net
assets at fair market value.
D. by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net
assets at book value.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
10. One weakness associated with the Entity Theory is that:
A. it is inconsistent with the historical cost principle.

B. non-controlling interest (NCI) is computed using the fair market values of the
subsidiary's net assets.
C. non-controlling interest (NCI) is computed using the book values of the subsidiary's net
assets.
D. the presumed acquisition cost may be unrealistic when the parent purchases
significantly less than 100% of the subsidiary's voting shares, or voting control is
achieved incrementally.

Blooms: Knowledge
Difficulty: Moderate
Gradable: automatic
11. Under the Parent Company Theory, which of the following statements pertaining to
consolidated financial statements is TRUE?
A. The consolidated balance sheet is prepared by adding the carrying amounts of both the
Parent and its subsidiary.
B. The consolidated balance sheet is prepared by adding the carrying amounts of both the
Parent and its subsidiary as well as the Parent's share of any acquisition differentials.
C. The consolidated balance sheet is prepared by adding the fair market values of both the
Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D. The consolidated balance sheet is prepared by adding together the fair market values
of both the parent and its subsidiary.

Blooms: Knowledge
Gradable: automatic
12. On the date of formation of a 100% owned subsidiary by the parent, which of the following
statements pertaining to consolidated financial statements is TRUE?
A. It is possible to prepare consolidated financial statements that include all the assets
and liabilities of the subsidiary.
B. Consolidated financial statements are difficult to prepare because the assets and
liabilities of the subsidiary have yet to be determined.
C. Consolidation requires the elimination of the parent's investment account against the
subsidiary's share capital.
D. Consolidation will not be required since a new legal entity will have been formed.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
13. Contingent consideration should be valued at:
A. the fair value of the consideration on the date of acquisition.

B. the book value of the consideration at the date of acquisition.
C. the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of
acquisition.
D. the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of
acquisition.

Blooms: Knowledge
Gradable: automatic
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.
Topic: 04-10 Contingent Consideration
14. Contingent consideration will be classified as a liability when:
A. it will be paid in the form of additional equity.

B. it will be paid in the form of cash or another asset.
C. the form of payment will be determined at a future date.
D. the acquirer decides the appropriate time to make a payment.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Topic: 04-11 Contingent Consideration Classified as a Liability
15. Which consolidation theory should be used in preparing consolidated financial statements
in accordance with IFRS?
A. Proprietary Theory.
B. Parent Company Theory.
C. Proportionate Consolidation.
D. Either Entity Theory or Parent Company Extension Theory.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
16. A negative acquisition differential:
A. is always equal to negative goodwill.

B. occurs when the fair value of the subsidiary's net assets are less than their carrying
amounts.
C. implies that the parent company may have overpaid for its acquisition.
D. cannot occur under the acquisition method.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
combination.
Topic: 04-08 Negative Acquisition Differential
Parent and Sub Inc. had the following balance sheets on July 31, 2018:
Parent Inc Sub Inc Sub Inc

(carrying value) (carrying value) (fair value)
Cash $180,000 $36,000 $36,000
Accounts Receivable $100,000 $40,000 $40,000
Inventory $ 60,000 $24,000 $27,000
Plant and Equipment (net) $200,000 $80,000 $93,000
Goodwill $- $ 8,000
Trademark $- $12,000 $15,000
Total Assets $540,000 $200,000
Current Liabilities $ 80,000 $50,000 $50,000
Bonds Payable $320,000 $20,000 $24,000
Common Shares $ 90,000 $80,000
Retained Earnings $ 50,000 $50,000
Total Liabilities and Equity $540,000 $200,000
The net income for Parent Inc and Sub Inc for the year ended July 31, 2018 were $120,000 and
$60,000 respectively.
Hilton - Chapter 04
17. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and
decides to prepare an Income Statement for the combined entity on the date of
acquisition. If Parent acquired 100% of Sub Inc. on that date, what would be the net
income reported for the combined entity (for the year ended July 31, 2018)?
A. $60,000
B. $120,000
C. $180,000
D. Nil

Blooms: Application
Difficulty: Easy
Gradable: automatic
18. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and
decides to prepare an Income Statement for the combined entity on the date of
acquisition. If Parent acquired 80% of Sub Inc. on that date, what would be the net income
reported for the combined entity (for the year ended July 31, 2018)?
A. $104,000
B. $120,000
C. $130,000
D. Nil

Blooms: Application
Difficulty: Easy
Gradable: automatic
19. Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2018, what amount would
appear in the Non-Controlling Interest (NCI) Account on the Consolidated Balance Sheet
on the date of acquisition if the Proprietary Method were used?
A. Nil
B. $100,000
C. $120,000
D. $200,000
Proprietary theory views the consolidated entity from the standpoint of the shareholders of
the parent company. The consolidated statements do not acknowledge or show the equity
of the non-controlling shareholders.The consolidated balance sheet on the date of
acquisition reflects only the parent's share of the assets and liabilities of the subsidiary,
based on their fair values, and the resultant goodwill from the combination.

Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
20. Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition
(August 1, 2018) for $180,000, what would be the amount of the Non-Controlling Interest
(NCI) on the date of acquisition if the Entity Method were used?
A. $26,000
B. $38,000
C. $45,000
D. $104,000
Implied value for 100% of Sub Inc = $225,000 = $180,000 / 0.80.NCI on date of acquisition
under Entity Method = $45,000 = $225,000 x 20%.

Blooms: Knowledge
Gradable: automatic
21. Assuming that the Proprietary Theory was applied, what would be the amount of Goodwill
appearing on the Consolidated Balance Sheet on the date of acquisition, assuming that
Parent purchased 80% of Sub Inc. for $180,000 on August 1, 2018?
A. $72,000
B. $88,000
C. Nil
D. Cannot be determined from the information given.

Blooms: Application
Difficulty: Difficult
Gradable: automatic
22. Assuming the Entity Theory was applied, what would be the amount of Goodwill appearing
on the Consolidated Balance Sheet on the Date of acquisition, assuming that Parent
purchased 80% of Sub Inc. for $180,000?
A. $88,000
B. $130,000
C. $137,000
D. $138,000
Calculation and allocation of acquisition differential (entity theory):
Blooms: Application
Gradable: automatic
23. The Shareholders' Equity section of Parent's consolidated balance sheet on the date of
acquisition would total what amount under the Entity Method?
A. $140,000
B. $185,000
C. $244,000
D. $270,000
On date of acquisition, the shareholders equity on the consolidated balance sheet equals
the shareholders equity of the parent + NCI = $185,000 = $90,000 common shares +
$50,000 retained earnings + NCI $45,000 (= $180,000 / 0.80 x 20%).

Blooms: Application
Gradable: automatic
24. Assuming Parent purchased 80% of Sub Inc. for $180,000; the assets section of Parent's
consolidated balance sheet on the date of acquisition (August 1, 2018) would total what
amount under the Entity Method?
A. $552,000
B. $639,200
C. $651,000
D. $659,000
Under the entity theory, the assets on the consolidated balance sheet would be:
Blooms: Application
Gradable: automatic
25. If Parent Company purchased 80% of Sub Inc. for $180,000, the liabilities section of
Parent's consolidated balance sheet on the date of acquisition (August 1, 2018) would
total what amount under the Entity Method?
A. $470,000
B. $474,000
C. $500,000
D. $519,000
Under the entity theory, the liabilities on the consolidated balance sheet would be:
Blooms: Application
Gradable: automatic
26. What would be the amount of Non-Controlling Interest (NCI) appearing on the
consolidated balance sheet on the date of acquisition (August 1, 2018), under the
Proprietary Method, assuming that Parent purchased 80% of Sub Inc. for $180,000?
A. $0
B. $36,000
C. $45,000
D. The answer cannot be determined from the information given.
NCI = $0 under the proprietary method. Proprietary theory views the consolidated entity
from the standpoint of the shareholders of the parent company. The consolidated
statements do not acknowledge or show the equity of the non-controlling shareholders.
The consolidated balance sheet on the date of acquisition reflects only the parent's share
of the assets and liabilities of the subsidiary, based on their fair values, and the resultant
goodwill from the combination.

Blooms: Application
Gradable: automatic
27. Any goodwill on the subsidiary company's books on the date of acquisition:
A. must be revalued.
B. must be eliminated in preparing consolidated financial statements.
C. must be recorded as a loss on acquisition.
D. must be subject to an impairment test.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
combination.
Topic: 04-09 Subsidiary with Goodwill
28. When the Non-Controlling Interest's share of the subsidiary's goodwill cannot be reliably
determined, the method used to prepare consolidated financial statements is:
A. the Entity Theory.

B. the Proprietary Theory.
C. the Parent Company Theory.
D. the Parent Company Extension Theory.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.
Topic: 04-06 Parent Company Extension Theory
29. The focus of the consolidated financial statements on the shareholders of the parent
company is characteristic of:

D. both the Parent Company Theory and the Proprietary Theory.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
30. Non-Controlling Interest (NCI) is presented in the Shareholders' Equity section of the
Balance Sheet under:

D. both the Parent Company Extension Theory and the Proprietary Theory.
NCI is not presented under the Proprietary Theory.NCI is presented as a liability under the
Parent Company Theory.NCI is presented as a component of shareholders' equity under
the Parent Company Extension Theory and under Entity Theory.

Difficulty: Easy
Gradable: automatic
31. Non-Controlling Interest (NCI) is presented under the Liabilities section of the
Consolidated Balance Sheet using the:

D. both the Parent Company Theory and the Proprietary Theory.

Difficulty: Easy
Gradable: automatic
32. When a contingent consideration arising from a business combination is classified as a
liability, how is any difference between the original estimate of the amount to be paid and
the actual amount paid accounted for if the difference arises due to a change in
circumstances?
A. As an adjustment to the consideration paid for the subsidiary.

B. As an adjustment to an estimate included in the determination of net income.
C. As a direct adjustment to consolidated retained earnings.
D. As an adjustment to consolidated contributed surplus.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
33. When a contingent consideration arising from a business combination is classified as a

liability, how is any change in its fair value as a result of new information about the facts
and circumstances that existed at the acquisition date accounted for if identified and
measured within one year subsequent to the acquisition date?

C. As a direct adjustment to consolidated retained earnings.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
34. When a contingent consideration arising from a business combination is classified as
equity, how is any change in its fair value accounted for if the difference arises due to a
change in circumstances?

C. As a memorandum entry indicating that additional shares had been issued.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Topic: 04-12 Contingent Consideration Classified as Equity
35. Which statement about the differences between consolidation methods permitted under
ASPE and IFRS is true?
A. IFRS and ASPE both require the use of the entity theory or the parent company
extension theory.
B. IFRS and ASPE both require the use of the parent company extension theory.
C. IFRS permits either the entity theory or the parent company extension theory; ASPE
requires the entity theory.
D. IFRS permits either the entity theory or the parent company extension theory; ASPE
requires the parent company extension theory.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Learning Objective: 04-06 Analyze and interpret financial statements involving consideration of non-wholly owned subsidiaries.
Topic: 04-14 Analysis and Interpretation of Financial Statements
36. IFRS permits several methods to be used to determine the fair value of the non-controlling
interest in a subsidiary at the acquisition date. Which of the following is NOT an
appropriate method to determine the fair value of the non-controlling interest (NCI)?
A. The NCI may be valued at the market value of the subsidiary's shares.
B. The NCI may be valued by determining the fair value of the business by means of an
independent business valuation and then deducting the fair value of the controlling
interest.
C. The NCI may be valued proportionately to the price paid by the parent for its controlling
interest.
D. The NCI may be valued at the fair value of the subsidiary's identifiable net assets.

Gradable: automatic
37. Which accounts differ on the consolidated balance sheet when Entity Theory compared to
Parent Company Extension Theory?
A. The investment in subsidiary balance and the consolidated retained earnings balance.
B. The goodwill balance and the consolidated retained earnings balance.
C. The goodwill balance and the non-controlling interest balance.
D. The investment in subsidiary balance and the non-controlling interest balance.

Gradable: automatic
38. If the non-controlling interest at acquisition is based on the fair value of the subsidiary's
identifiable net assets, which consolidation theory is being applied?
A. The proprietary theory.

B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.

Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
39. When the acquisition differential is calculated and allocated, what will the consequence
be of a "bargain purchase"?
A. The acquisition differential will always be negative.

B. The goodwill balance will always be negative.
C. The fair value of the assets will always have been overstated.
D. Both the acquisition differential and goodwill balances will always be negative.

Gradable: automatic
combination.
40. A business combination involves a contingent consideration. It is considered 70% probable
that a payment of $500,000 will become payable three years after the acquisition date.
Using a 7% discount rate, what liability should be recorded for the contingent
consideration on the acquisition date?
A. $285,704
B. $350,000
C. $408,149
D. $500,000
PV factor when n=3 and i=7% = 0.8162979.$500,000 x PV(n=3,i=7%) x 70%= $500,000 x

0.8162979 x 70%= $285,704.

Blooms: Application
Gradable: automatic
41. A business combination involves a contingent consideration. It is considered 70% probable

that a payment of $500,000 will become payable three years after the acquisition date.
Using a 7% discount rate, how much interest expense should be recorded on the liability
for the first year after acquisition?
A. $19,999
B. $24,500
C. $28,570
D. $35,000
PV factor when n=3 and i=7% = 0.8162979.$500,000 x PV(n=3,i=7%) x 70%= $500,000 x

0.8162979 x 70%= $285,704.Interest expense in first year = $285,704 x 7% = $19,999.

Blooms: Application
Gradable: automatic
42. A business combination involves a contingent consideration. As a result, two years after
the acquisition date, the acquirer was required to issue an additional 40,000 common
shares at a time when the fair value of the common shares was $4 per share. What effect
would this transaction have on the balance in the common shares account in the
consolidated financial statements on the date of acquisition?
A. It would increase by $160,000.

B. It would not change.
C. It would decrease by $160,000.
D. It is not possible to determine the effect from the information provided.

Gradable: automatic
43. In an inflationary economy, under which consolidation theory would total assets in the
consolidated balance sheet at the acquisition date be greatest?


Gradable: automatic
44. What value should be recorded as the fair value of a contingent consideration arising from
a business acquisition when it is classified as a liability?
A. The undiscounted maximum amount that could be paid.

B. The discounted present value of the maximum amount that could be paid.
C. The undiscounted probabilistic estimate of the amount to be paid.
D. The discounted probabilistic estimate of the amount to be paid.

Difficulty: Easy
Gradable: automatic
45. If a business combination occurs and the consideration paid exceeds the fair value of the
identifiable net assets of the subsidiary on the acquisition date and the parent acquires
less than 100% of the outstanding common shares of the subsidiary, which consolidation
method will result in the highest value for non-controlling interest on the acquisition
date?


Gradable: automatic
46. Keen Inc and Lax Inc had the following balance sheets on October 31, 2018:
Keen Inc Lax Inc Lax Inc

Cash $300,000 $ 80,000 $ 80,000
Accounts Receivable $ 60,000 $ 24,000 $ 24,000
Inventory $ 30,000 $ 54,000 $ 50,000
Trademark - $ 12,000 $ 16,000
Total Assets $700,000 $450,000
Accounts Payable $150,000 $200,000 $200,000
Bonds Payable $400,000 $120,000 $100,000
Common Shares $100,000 $ 60,000
Retained Earnings $ 50,000 $ 70,000
Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts
for its investment using the cost method, prepare (under the Entity Theory):
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the
acquisition date.
a)
Debit Credit
Investment in Lax Inc $100,000
Cash $100,000
b)
Common Shares $60,000

Retained Earnings $70,000
Plant and Equipment $20,000
Trademark $ 4,000
Bonds Payable $20,000
Goodwill $ 70,000
Inventory $ 4,000
Note: Negative Goodwill amount arises from this combination. Under IFRS the negative
Goodwill is treated as a gain on acquisition and is charged to net income (and then to
Retained Earnings) as follows:
Debit Credit
Goodwill $70,000
Gain on bargain purchase $70,000
Blooms: Application
Gradable: manual
47. Keen Inc and Lax Inc had the following balance sheets on October 31, 2018:

Cash $300,000 $ 80,000 $ 80,000
Inventory $ 30,000 $ 54,000 $ 50,000
Trademark - $ 12,000 $ 16,000
Total Assets $700,000 $450,000
Bonds Payable $400,000 $120,000 $100,000
Common Shares $100,000 $ 60,000
Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare (under
the Entity Theory):
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the
acquisition date.
a)
Debit Credit
Cash $240,000
b)
Common Shares $ 60,000

Retained Earnings $ 70,000
Plant and Equipment $ 20,000
Trademark $ 4,000
Bonds Payable $ 20,000
Goodwill $130,000
Non-Controlling Interest $ 60,000
Inventory $ 4,000
Blooms: Application
Gradable: manual
48. Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018:

Cash $300,000 $ 80,000 $ 80,000
Inventory $ 30,000 $ 54,000 $ 50,000
Trademark - $ 12,000 $ 16,000
Total Assets $700,000 $450,000
Bonds Payable $400,000 $120,000 $100,000
Common Shares $100,000 $ 60,000
Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare the
consolidated balance sheet on the date of acquisition under the Entity Theory.
Keen Inc.
Consolidated Balance Sheet
as at October 31, 2018
Cash $ 180,000
Accounts Receivable $84,000
Inventory $80,000
Plant and Equipment (net) $ 610,000
Trademark $16,000
Goodwill $30,000
Total Assets $1,000,000
Accounts Payable $ 350,000
Total Liabilities and Equity $1,000,000
Blooms: Application
Gradable: manual
Keen Inc. Lax Inc. Lax Inc.

Cash $300,000 $ 80,000 $ 80,000
Inventory $ 30,000 $ 54,000 $ 50,000
Trademark - $ 12,000 $ 16,000
Total Assets $700,000 $450,000
Bonds Payable $400,000 $120,000 $100,000
Common Shares $100,000 $ 60,000
Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the consolidated
balance sheet on the date of acquisition under the Entity Theory.
Keen Inc.
Cash $ 140,000
Accounts Receivable $84,000
Inventory $80,000
Plant and Equipment (net) $ 610,000
Trademark $16,000
Goodwill $ 130,000
Accounts Payable $ 350,000
Total Liabilities $ 850,000
Non-Controlling Interest $60,000

Shareholders' Equity $ 210,000
Blooms: Application
Gradable: manual
Keen Inc. Lax Inc. Lax Inc.

Cash $300,000 $ 80,000 $ 80,000
Inventory $ 30,000 $ 54,000 $ 50,000
Trademark - $ 12,000 $ 16,000
Total Assets $700,000 $450,000
Bonds Payable $400,000 $120,000 $100,000
Common Shares $100,000 $ 60,000
Assume that the following draft balance sheet was prepared by a co-worker subsequent to
Keen's 80% purchase of Lax Inc. for $240,000. Assuming this balance sheet is devoid of
technical errors, what can be concluded about the balance sheet below?
Keen Inc.
Consolidated Balance Sheet,
Cash $124,000
Accounts Receivable $ 79,200
Inventory $ 70,000
Plant and Equipment (net) $550,000
Trademark $ 12,800
Goodwill $104,000
Total Assets $940,000
Accounts Payable $310,000
Bonds Payable $480,000
Common Shares $100,000
Total Liabilities and Equity $940,000
This balance sheet was prepared using the Proprietary Theory. There is no non-controlling
interest (NCI) section on the balance sheet, and Keen's consolidated balance sheet
amounts (with the exception of the shareholders' equity section) include Keen's book
values and 80% of Lax's fair values.
Gradable: manual
51. Jean Inc and John Inc had the following balance sheets on August 31, 2018:
Jean Inc. John Inc. John Inc.

Cash $1,200,000 $300,000 $300,000
Inventory $ 240,000 $ 80,000 $ 60,000
Plant and Equipment (net) $ 860,000 $256,000 $300,000
Trademark - $ 20,000 $ 36,000
Total Assets $2,700,000 $720,000
Accounts Payable $1,500,000 $300,000 $300,000
Bonds Payable $ 600,000 $240,000 $210,000
Common Shares $ 500,000 $ 60,000
Total Liabilities and Equity $2,700,000 $720,000
On August 31, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for
$400,000.
Prepare Jean Inc's consolidated balance sheet on the date of acquisition using the
Proprietary Theory.
Jean Inc.
as at August 31, 2018
Cash $1,070,000
Inventory $ 294,000
Plant and Equipment (net) $1,130,000
Trademark $32,400
Goodwill $ 175,000
Accounts Payable $1,770,000
Blooms: Application
Gradable: manual
52. Jean and John Inc had the following balance sheets on August 31, 2018:
Jean Inc. John Inc. John Inc.

Cash $1,200,000 $300,000 $300,000
Inventory $ 240,000 $ 80,000 $ 60,000
Plant and Equipment (net) $ 860,000 $256,000 $300,000
Trademark - $ 20,000 $ 36,000
Total Assets $2,700,000 $720,000
Accounts Payable $1,500,000 $300,000 $300,000
Bonds Payable $ 600,000 $240,000 $210,000
Common Shares $ 500,000 $ 60,000
Total Liabilities and Equity $2,700,000 $720,000
On August 31, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for
$400,000.
Prepare Jean Inc.'s consolidated balance sheet on the date of acquisition using the Entity
Theory.
Jean Inc.
as at August 31, 2018
Cash $1,100,000
Inventory $ 300,000
Plant and Equipment (net) $1,160,000
Trademark $36,000
Goodwill $ 194,444
Accounts Payable $1,800,000
Total Liabilities $2,610,000
Non-Controlling Interest $44,444
Total Shareholders' Equity $ 644,444
· Note that Jean's imputed acquisition cost of acquiring 100% of John Inc. would be
$400,000/0.9 or $444,444 (rounded).
· Goodwill would be calculated as follows:
Imputed acquisition cost of 100% of John Inc: $444,444

Less: Fair Value of John's Net Assets: ($250,000)
Goodwill: $194,444
Non-Controlling Interest would be 10% of John Inc.'s fair values including Goodwill:
i.e. 10% * ($250,000 + $194,444) = $44,444.
Blooms: Application
Gradable: manual
53. Company A Inc. owns a controlling interest in Company B. which is located overseas.
Company A and B are in entirely different lines of business. Company A wishes to file a
request allowing it to not consolidate its financial statements with those of Company B.
Assuming that Company A is based in Canada, is this allowed? Explain.
Generally speaking, this practice is not allowed. IFRS requires that all subsidiaries be
consolidated, unless the subsidiary is subject to any long-term restrictions which prevent
it from transferring funds to the Parent, or if the nature of the Parent Company's control
over the subsidiary is temporary. IFRS describes control as the power to govern the
financial and operating policies of an enterprise so as to benefit from its activities.
Although Control is presumed to exist when a company owns more than 50% of the voting
shares of another, evidence of control may still exist without such a controlling interest.
It should be noted that some countries allow for exclusions for temporary control, non-
homogeneous subsidiaries, subsidiaries that are bankrupt or under reorganization or
subsidiaries that are immaterial in size. It should also be noted that the non-homogeneous
exclusion was used in the past, both in the United States and Canada.
N.B. The determination of control/significant influence, etc., is covered at length in
Chapters 2 and 3. However, its inclusion in this chapter is still, arguably, very relevant.
Gradable: manual
54. X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000
worth of common shares. An agreement was drawn whereby X Company would pay 10% of
any earnings in excess of $750,000 to Y's shareholders in the first year following the
acquisition. On that date, X's shares had a market value of $80 per share.
Required:
a) Assuming that Y's net income was $950,000, prepare any journal entries (for company
X) that you feel may be necessary to reflect Y's results under IFRS 3 Business
Combinations. Assume that on the acquisition date no provision was made for the
contingent consideration.
b) Assuming that the agreement called for Y's shareholders to be compensated for any
decline in X's share price, what journal entries would be required under IFRS 3, if the
market value of X's shares dropped to $64?
a)
Loss from Contingent Consideration $20,000

Cash $20,000
b)
Common shares-old shares $20,000

Common shares-new shares $20,000
Blooms: Application
Gradable: manual
55. Major Corporation issues 1,000,000 common shares for all of the outstanding common
shares of Minor Corporation on August 1, Year 1. The shares issued have a fair market
value of $40. In addition, the merger agreement provides that if the market price of Major's
shares is below $60 two years from the date of the merger, Major will issue additional
shares to the former shareholders of Minor Corporation in an amount that will compensate
them for their loss of value. On August 1, Year 3, the stock market price of major's shares
is $55. In accordance with their agreement, Major Corporation issues an additional
number of shares.
Required:
a) Prepare the journal entry to record the issuance of the shares.

b) Calculate the number of additional shares that Major Corporation will have to issue to
the former shareholders of Minor Corporation.
c) Prepare the journal entry to record the transaction under IFRS 3 Business
Combinations.
d) Are there any alternatives for recording the additional share issuance?
e) What would be the required disclosure for this series of events?
a)
Journal entry to record the issuance of shares

Investment in Minor $40,000,000
Common Shares $40,000,000
b) Additional shares (60,000,000/$55 - 1,000,000) = 90,909.09
c)
Common shares-old shares (90,909.09 * $55) $5,000,000

Common shares-new shares $5,000,000
d) A memorandum entry indicating that additional shares were issued for no

consideration.
e) Footnote disclosure for the amount and the reasons for the consideration and the
accounting treatment used.
Blooms: Application
Gradable: manual
56. There are a number of theories of how financial statements should be prepared for non-
wholly owned subsidiaries. Briefly discuss each theory and provide your reasoning to
support the theory that is being adopted under IFRSs.
There are four theories that have been put forward for the preparation of financial
statements under circumstances where the subsidiary is non-wholly owned and they are:
a) The Proprietary theory

b) The Parent Company theory
c) The Parent Company Extension theory
d) The Entity theory
The theory that was adopted under IFRS 3 Business Combinations was the Entity Theory.
The Entity Theory views the consolidated entity as having two distinct groups of
shareholders: the controlling shareholders and the non-controlling shareholders. All values
are reflected at fair value of the subsidiary's identifiable net assets with the balance
recorded as goodwill. The issue becomes one of determining the fair value of the fair value
of the subsidiary's identifiable assets and liabilities and the fair value of NCI. In addition,
the Entity Theory represents a departure from the historical cost basis that has been used
by accountants in the past as objective and verifiable. But the reality is that fair value of
each party constitutes their participation in the entity. And arguably with a transaction
having occurred in the shares of the subsidiary each of the participants should have their
participation re-valued at current market prices or valuations and not historical cost.
Gradable: manual
57. Discuss the disclosure requirements for long term investments including accounting
policies and non-controlling interest (NCI).
Companies should disclose their policies with regard to long-term investments. The
general presumptions regarding the factors that establish a control investment and noted
that these presumptions could be overcome in certain situations.
IFRS 3 Business Combinations requires that a reporting entity describe the basis for its
assessment and any significant assumptions or judgments when the reporting entity has
concluded that:
(a) it controls an entity whose activities are directed through voting shares even though
the reporting entity has less than half of that entity's voting shares, and
(b) it does not control an entity whose activities are directed through voting shares even
though the reporting entity is the dominant shareholder with voting rights.
IFRS 3 requires that a reporting entity disclose the following for each business
combination in which the acquirer holds less than 100% of the equity interests in the
acquiree at the acquisition date:
a) The amount of the NCI in the acquiree recognized at the acquisition date and the
measurement basis for that amount; and;
b) For each NCI in an acquiree measured at fair value, the valuation techniques and key
model inputs used for determining that value.
Gradable: manual
58. After the introduction of the entity method in Canada, many companies opted to value the
non-controlling interest in subsidiaries based on the fair value of the subsidiary's
identifiable net assets at the acquisition date instead of valuing the non-controlling
interest at its fair value. That is, they opted to use the parent company extension approach
rather than the entity method when preparing consolidated financial statements. What
motivation might preparers of consolidated financial statements have that would cause
them to have this preference?
Using the parent company extension approach results in total assets being lower (because
only the parent's share of the goodwill arising from the business acquisition is recorded).
In addition, only the parent's share of any goodwill impairment would be recorded in future
years. As a result, the net income would be the same or higher when the parent company
extension approach is used and the total assets is lower, so the return on assets would be
higher making the results look better than if the entity method had been applied.
Blooms: Analysis
Gradable: manual
59. Why might the fair value of the non-controlling interest in a subsidiary on the date that it
is acquired in a business combination not be proportionate to the price per share paid by
the parent company to acquire control? How do the IFRS recognize this?
Reasons why the fair value of the non-controlling interest might not be proportionate to
the price paid by the parent include:
· there may be synergies to the controlling interest that do not benefit the non-controlling
interest in the subsidiary;
· often a premium is paid to achieve control;
· the acquisition may have taken place at different prices in a series of purchases, not as a
single purchase on the acquisition date.
IFRS recognizes this by permitting both the entity method and the parent company
extension methods of valuing the non-controlling interest at acquisition. The standards
allow the NCI to be valued based either on its fair value or on the basis of the fair value of
the subsidiary's identifiable net assets at acquisition.
Gradable: manual
Chapter 4 Summary
Category # of Question
s
Accessibility: Keyboard Navigation 42
Blooms: Analysis 1
Blooms: Application 18
Blooms: Comprehension 15
Blooms: Knowledge 25
Difficulty: Difficult 1
Difficulty: Easy 27
Difficulty: Moderate 31
Gradable: automatic 45
Gradable: manual 14
Hilton - Chapter 04 60
Learning Objective: 04-01 Define non- 16

controlling interest and explain how it is measured on the consolidated balance sheet.
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory. 21
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory. 3
Learning Objective: 04- 5

04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business com
bination.
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity. 12
Learning Objective: 04-06 Analyze and interpret financial statements involving consideration of non- 3
wholly owned subsidiaries.
Topic: 04-01 Non-Wholly Owned Subsidiaries 10
Topic: 04-02 Consolidation Theories 16
Topic: 04-03 Entity Theory 21
Topic: 04-04 Example 1 Fair Value of Non-Controlling Interest as Evidenced by Market Trades 16
Topic: 04-05 Example 2 16
Topic: 04-06 Parent Company Extension Theory 4
Topic: 04-07 Bargain Purchases 3
Topic: 04-08 Negative Acquisition Differential 2
Topic: 04-09 Subsidiary with Goodwill 2
Topic: 04-10 Contingent Consideration 12
Topic: 04-11 Contingent Consideration Classified as a Liability 9
Topic: 04-12 Contingent Consideration Classified as Equity 5

Topic: 04-14 Analysis and Interpretation of Financial Statements 3
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CHAPTER 1
INTRODUCTION TO BUSINESS COMBINATIONS
SUMMARY OF ITEMS BY TOPIC
Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Economic Motivation for 1-11 64-73 133-138
Business Combinations
History of Business 12-20 74-82 139-142
Combinations
Legal Restrictions on 21-27 83-87 143-149
Takeovers 28-36 88-94
Control 37-38 95-96 150-151
Exchanges 39-45 97-104 152-153
Forms of Business 46-53 105-109 154
Combinations
Substance versus Form 54 116-123 128-130
Contingent Consideration 55-57 110 124-127 131-132 155
Taxes and Business 58-63 111-115 156-157
Combinations
True-False Statements
1. Internal expansion often takes longer than external expansion.
2. Internal expansion is less risky than external expansion.
3. Internal expansion is often slow because the entity must build new production facilities to
support new products or expanding sales.
4. The increase in the size of an entity resulting from a business combination would result
in a lower cost of capital.
5. External combinations may result in economies of scale.
6. External expansion does not increase the total supply of products in the market place.
7. Internal expansion does not increase the total supply of products in the market place.

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8. In a business combination, the investee takes control of the net assets of the investor.
9. All business combinations result in one entity taking control of the net assets of another
entity.
10. An acquisition of net assets result in one entity taking control of the net assets of another
entity while the acquisition of stock does not result in taking control of the net assets of
another entity.
11. The capital budgeting techniques used to determine whether to acquire another entity are
similar to the techniques used to evaluate purchases of equipment.
12. When two entities competing in the same industry combine, it is called a horizontal
13. Horizontal business combinations are likely to occur when management is attempting to
dominate a geographic segment of the market.
14. One way that a horizontal business combination can increase sales for an entity is to
expand into new product markets.
15. A vertical business combination generally involves companies attempting to improve the
efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.
16. When a retail clothing store purchases a competitor in another city, a vertical
combination has occurred.
17. A vertical combination is one where the entities have a potential buyer-seller relationship.
18. A business combination in which a supplier of raw materials is acquired is a

conglomerate combination.
19. A conglomerate combination is often undertaken to help increase income stability due to
diversifying the asset base of an entity.
20. Conglomerate combinations are easy for the government to challenge in court.
21. The purpose of the Sherman Act of 1890 was to make illegal any action that would
hinder free competition.
22. The Sherman Act requires the government to prove that trade has been restrained before
it can be used to break up a company.
23. The Sherman Act can prevent a business combination from occurring.
24. The Clayton Act can prevent a business combination from occurring.
25. The government does not have to be notified when a business combination is anticipated.

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26. The U.S. government opposes all business combinations because they are viewed as a
threat to competition.
27. The Federal Trade Commission assesses the impact of a proposed business combination
on industry concentration.
28. If negotiation between management groups leads to a mutually agreeable business

combination, the process is called a friendly takeover.
29. An offer by an acquirer to buy the stock of another company is commonly called a tender
offer.
30. A tender offer that is opposed by the acquiree management is called a hostile bid.
31. Greenmail exists when a company is encouraged to buy a potential acquiree.
32. 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.
33. The sale of the crown jewels defensive maneuver involves the sale of more assets than
does the scorched earth defense.
34. The fatman defensive maneuver involved the acquisition of assets by the potential
acquiree.
35. Golden parachutes give a bonus to all employees if the company is acquired.
36. The packman defensive maneuver is where a potential acquiree attempts to purchase the
acquirer.
37. A business combination occurs when one entity gains control over the net assets of
another entity.
38. The only way to attain control over the net assets of another entity is to purchase the net
assets.
39. In an acquisition where the acquirer pays cash for the acquiree assets, the book value of
the acquirer increases.
40. In an acquisition of assets for assets, the ownership structure of the acquiree does not
change.
41. In an acquisition of assets for assets, the ownership structure of the acquirer changes.
42. There is an increase in the total capitalization of an acquirer when the acquirer issues
stock for acquiree assets.

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43. In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
acquiree does not change.
44. In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders
become acquirer stockholders.
45. 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.
46. A business combination that occurs where only one of the original entities in existence
after the combination is called a statutory consolidation.
47. The acquiree entity is liquidated in a statutory merger.
48. For a business combination to qualify as a statutory consolidation, a new corporation

must be formed.
49. 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.
50. After completing a business combination in the form of a statutory merger or statutory
consolidation, there is only one legal entity in existence.
51. In a business combination accomplished as a stock acquisition normally two companies

exist after the combination.
52. A business combination accomplished as a stock acquisition must be accomplished with a

stock for stock exchange.
53. A stock acquisition is the only form of business combination that might require the
preparation of consolidated financial statements.
54. The substance of statutory mergers, statutory consolidations, and stock acquisitions is the
same if income tax considerations are ignored.
55. There are no uncertainties when two companies agree on a business combination.
56. When the acquisition price of an acquiree is contingent on acquiree future earnings, the
acquisition price may change?
57. When the acquisition price of an acquiree is contingent on the market value of the
acquirer stock, the acquisition price may change?
58. Business combinations can qualify as reorganizations (for tax purposes) regardless of
whether accomplished via the acquisition of assets or the acquisition of stock.

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59. For business combinations to qualify as reorganizations (for tax purposes), the acquiree
stockholders must receive voting common stock of the acquirer.
60. Only stock for stock exchanges can qualify as reorganizations for tax purposes.
61. When a statutory merger or statutory consolidation is used to accomplish a reorganization

(for tax purposes), the acquirer becomes liable for all known and contingent acquiree
liabilities.
62. There are different required levels of stock ownership in the acquiree for the three
different types of reorganizations for tax purposes.
63. One important benefit in a business combination is any net operating loss carryforward
that might exist and be available to the acquirer.
True-False Statement Solutions

1. T
2. F, Developing and marketing new products is often a difficulty and risky process.
3. T
4. F, All else being equal, the combined entity’s cost of capital may be higher or lower
depending on whether the acquired entity is heavily laden with debt or is relatively debt
free. Also, the amount of debt versus equity issued in the combination will affect the
resulting cost of capital.
5. T
6. T
7. F, Internal expansion results in a particular entity offering more products or the same
products to new consumers. Thus, the total supply of products increases.
8. F, The investor takes control of the net assets of the investee in a business combination.
9. T
10. F, Both the acquisition of the net assets and the acquisition of stock result in control of
the net assets of another entity. The stock acquired represents ownership in the net assets.
11. T
12. T
13. F, A horizontal combination occurs when management attempts to dominate an industry.
14. T
15. T
16. F, A vertical combination exists when an entity purchases another entity that could have a
buyer-seller relationship with the acquirer. The combination described here is a
horizontal combination.
17. T
18. F, A conglomerate combination is one where an unrelated or tangentially related business
is acquired. A vertical combination occurs when a supplier is acquired.
19. T
20. F, Conglomerate combinations are more difficult for the government to challenge in court
because they do not result in market domination in any particular market.
21. T
22. T

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23. F, The Sherman Act can only break up a company that has restrained free trade, it cannot
stop a business combination from creating a company.
24. T
25. F, The Hart-Scott Rodino amendment requires that the Antitrust Division and the Federal
Trade Commission be notified of anticipated business combinations.
26. F, The vast majority of combinations are not disallowed because they involve relatively
minor segments of competitive markets and, therefore, would not reduce or control
competition in any significant way.
27. T
28. T
29. T
30. T
31. F, Greenmail is the payment of a price above market value to acquire stock back from a
potential acquirer.
32. T
33. F, The sale of the crown jewels results when a target sells assets that would be
particularly valuable to the potential acquirer. The scorched earth defense results when a
target generally sells large amounts of assets without regard to the specific desirability to
the potential acquirer.
34. T
35. F, Golden parachutes are generally given only to top executives of the acquiree.
36. T
37. T
38. F, Control over the net assets of an entity can be accomplished by purchasing the net
assets or by purchasing the acquiree voting common stock that represents ownership of
the assets.
39. F, The amount of cash will always equal the net assets recorded by the acquirer. As a
result, the acquirer book value will not change due to an acquisition.
40. T
41. F, There is no exchange of stock in an asset for asset acquisition so there cannot be a
change in ownership structure of either entity.
42. T
43. T
44. F, The acquiree corporation becomes an acquirer stockholder, not the acquiree
stockholders.
45. T
46. F, A combination that results in one of the original entities in existence after the
combination is a statutory merger.
47. T
48. T
49. F, The combination results in the stockholders of one entity controlling the other entity.
The Retained Earnings of the entity acquiring control is carried forward to the newly
formed corporation.
50. T
51. T
52. F, The stock of the acquiree company must be purchased by the acquirer, but the value
transferred to the acquiree stockholders does not have to be in stock. Payment may be in
another asset or the issuance of debt.

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53. T
54. T
55. F, The consideration to be given by the acquirer is sometimes not completely known
because the consideration is based partially on acquiree future earnings or the market
value of acquirer debt or stock.
56. T
57. F, Any change in the number of shares of acquirer stock given returns the purchase price
to the agreed level. The adjustment is to stock and additional paid-in capital. The
investment account is unchanged.
58. T
59. F, The acquiree stockholders must continue to have an indirect ownership interest in the
acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect
ownership as well as voting common stock.
60. F, At least 50 percent of the consideration paid to the acquiree stockholders must be in
acquirer stock.
61. T
62. T
63. F, A net operating loss carryforward cannot be acquired. They are only available to the
acquirer if the combination qualifies as a nontaxable exchange.
Conceptual Multiple Choice Questions

64. Which of the following is not a form of internal business expansion?
a. Development of a new product
b. Construction of new production facility
c. Purchase of a competitor
d. Expanding the marketing effort into a new geographic area
65. Which can typically be accomplished more quickly?

a. Internal expansion
b. External expansion
c. Internal and external expansion would likely take the same amount of time
d. There is no general pattern regarding how long either would take
66. Which of the following is a reason that internal expansion is often a slow process?
a. A new distribution system must be developed
b. Demand for the product does not have to be developed
c. Existing production facilities are adequate to meet expanded sales
d. All of the above are reasons that internal expansion is a slow process
67. Which of the following is not an advantage of business combinations when compared to
internal expansion?
a. Combinations generally take longer to accomplish than internal expansion
b. The cost of capital may be reduced as a result of a combination due to increased
entity size
c. The entity may obtain a relatively greater market share
d. All of the above are advantages of business combinations

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68. Which of the following is a disadvantage of business combinations when compared to

internal expansion?
a. Combinations may provide an established, experienced management group
immediately
b. There are some tax advantages to combined corporation entities not available to
one corporation
c. There may be a guaranteed source of raw material or product markets when a
combination is effected
d. None of the above is a disadvantage of business combinations
internal expansion?
a. Combinations may lead to economies of scale
b. Combinations do not increase the total supply of goods available from the
industry
c. Diversification accomplished through combinations may provide a less volatile
income stream
d. All of the above are advantages of combinations
70. In a business combination, which of the following occurs?

a. The investee takes control of the investor
b. The investee and investor share control of each other
c. The investor takes control of the investee
d. Neither entity controls the other
71. Which of the following analysis techniques are commonly used when making business
combination decisions?
a. Cash flow budgeting
b. Internal rate of return
c. Net present value
d. All of the above techniques are commonly used
72. Which of the following is not a directly observable cash flow resulting from a business
combination?
a. Disposal of redundant facilities
b. Synergies resulting from sales of complementary products
c. Reduced fixed costs from eliminating duplicate operations
d. Savings due to increased coordination when one part of the new entity produces
inputs for another part of the new entity
73. Which of the following is a directly observable cash flow resulting from a business
combination?
a. Savings from production and marketing expertise
b. Acquisition of an established market share for products
c. Disposal of redundant facilities
d. A readily available supply of scarce inputs

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74. Which of the following types of business combinations typically occurs when
management is attempting to monopolize a particular industry?
75. 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
management is attempting to improve the efficiency of operations?
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.

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
management is attempting to diversify its investment?

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81. Management acquires a business in a tangentially related industry to the current business.
c. Mega combination
82. 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
a. Pure competition
b. Monopoly
c. Oligopoly
d. Free market
84. Which of the following is not true with regard to the Sherman Act of 1890?
a. It is the first legislation that restricts the ability to enter into business
combinations
b. Its basic purpose was to make acts that would hinder free competition illegal
c. The act required the government to show that trade had been restrained as a result
of a combination
d. The act could only be applied after a combination has occurred
85. Which of the following can be used to break up combined entities, but not to prevent the
business combination from occurring?
a. Clayton Act
b. Sherman Act
c. Hart-Scott Rodino amendment
d. All of the above can only break up entities that have already combined
86. Which of the following allows the government to prevent proposed business
combinations from occurring if the result of the combination would be the creation of a
monopoly or the lessening of competition?
a. Clayton Act
b. Sherman Act
87. When regulating business combinations the Federal Trade Commission does not assess
which of the following?
a. The impact of the combination on industry concentration
b. The impact of the combination on barriers to entry into the industry

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c. The impact of the combination on restriction of trade

d. The Federal Trade Commission assesses each of the above in regulating business
combinations
88. When an offer is made to acquire a company and the acquiree management supports the
offer, the offer is called which of the following?
b. Tender offer
c. Hostile takeover
89. The defensive maneuver where a company buys stock from a potential acquirer at a
premium over the market price is called which of the following?
a. White knight
b. Shark repellent
c. Greenmail
90. The defensive maneuver where a company seeks to be acquired by a company perceived
to be a better match than the company making an offer to buy the potential acquiree is
called which of the following?
a. Poison pill
b. White knight
d. Fatman defense
91. Which of the following is not a Kamikaze strategy?

c. Fatman defense
d. All of the above are Kamikaze strategies
acquiree sells desirable assets to reduce the company’s value?
c. Fatman defense
d. Greenmail
acquirer if a takeover is accomplished

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c. Packman defense
96. Control enables the acquiring entity to do which of the following?

a. Direct the use of the controlled entity’s assets by establishing capital and
operating budgets and policies
b. Enforce the budgets and policies by selecting, compensating, and terminating
those responsible for implementing decisions
c. Either a or b will illustrate control
d. Both a and b are required to illustrate control
a. Cash
b. Other assets
c. Liabilities
d. It is not possible to determine if there is a change in the acquiree ownership
structure
b. The acquiree stockholders become the acquirer stockholders
c. The acquirer and acquiree stockholders share ownership of the acquirer

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d. It is not possible to determine if there is a change in the acquirer ownership

structure
how does the value of the acquiree net assets change?
how does the ownership structure of the acquiree change?
structure
structure
c. Stock for stock
d. Either b or c
105. Which of the following forms of business combination is not subject to state laws
specific to business combinations?
b. Statutory merger
d. All three are subject to state laws
d. All of the above are true statements with regard to a statutory merger

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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
108. 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?
c. Zero
110. Which of the following contingencies may change the cost of an acquisition?
111. To qualify as a reorganization (for tax purposes), a business combination must be

structured as which of the following?
a. Statutory merger
b. Statutory consolidation
c. Stock acquisition
d. All of the above can qualify as reorganizations
112. To qualify as a reorganization (for tax purposes), a business combination must meet
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
113. Which of the following is not a feature of a Type A form of reorganization for tax
purposes?
a. The acquirer only has to give 50 percent of the consideration in stock
b. Stockholder approval of the acquiree stockholders is required but not the acquirer
stockholders

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c. All known and contingent acquiree liabilities become acquirer liabilities

d. The combination can be structured as a statutory merger or statutory
consolidation
114. Which of the following is not a feature of a Type C form of reorganization for tax
purposes?
a. The acquirer is not responsible for liabilities not expressly accepted as part of the
agreement
b. Acquirer voting common stock must be issued for 100 percent of the
consideration given
c. Approval by acquirer and acquiree stockholders is required
d. The acquiree must distribute the acquirer stock to its shareholders and terminate
operations
115. Which of the following is not a feature of a Type B form of reorganization for tax
purposes?
a. The acquirer takes possession of the acquiree assets
b. Acquirer voting common stock is exchanged for acquiree voting common stock
c. The acquirer must own at least 80 percent of acquiree stock
d. Acquisition of acquiree stock prior to the reorganization can result in denial of
nontaxable exchange status
Conceptual Multiple Choice Question Difficulty and Solutions

64. easy c
65. easy b
66. moderate a
67. easy a
68. easy d
69. easy d
70. easy c
71. easy d
72. moderate b
73. moderate c
74. easy a
75. easy c
76. moderate b
77. easy b
78. moderate d
79. easy c
80. easy c
81. easy b
82. moderate a
83. easy b
84. easy d
85. easy b
86. easy a
87. moderate d
88. easy a

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89. easy c
90. moderate b
91. moderate d
92. easy a
93. moderate c
94. difficult c
95. easy c
96. moderate d
97. easy d
98. moderate d
The change in acquiree net assets will depend on the acquisition price and book value of
the acquiree assets.
99. easy a
100. easy a
101. moderate d
102. moderate a
103. easy b
104. moderate c
105. easy a
106. easy c
107. easy c
108. moderate a
109. moderate d
110. easy a
111. moderate d
112. moderate d
113. difficult b
114. difficult c
115. difficult a
Computational Multiple Choice Questions

116. Dull and Sharp are the stockholders of Knives Unlimited and Safe and Cracker are the
owners of Quicky Locksmiths. Knives Unlimited purchases all of the assets of Quicky
Locksmiths by paying cash and issuing notes payable. Who are the stockholders of
Knives Unlimited immediately after the above transaction?
a. Dull and Sharp (100%)
b. Safe and Cracker (100%)
c. Dull and Sharp (50%) and Safe and Cracker (50%)
d. Dull and Sharp (50%) and Quicky Locksmiths (50%)
Quicky Locksmiths immediately after the above transaction?

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118. Quietkey is owned by Johnson and Video Junction is owned by Housewald. Quietkey
issues new stock to acquire all of the net assets of Video Junction. Quietkey had 12,000
shares of stock outstanding before the acquisition and 16,000 shares outstanding after the
acquisition. Who is (are) the stockholder(s) of Quietkey immediately after the
transaction?
a. Johnson (100%)
b. Housewald (100%)
c. Johnson (75%) and Housewald (25%)
d. Johnson (75%) and Video Junction (25%)
acquisition. Who is (are) the stockholder(s) of Video Junction immediately after the
transaction?
a. Johnson (100%)
b. Housewald (100%)
120. Oxford Industries is owned by Stuart and Tom while Samson Gyms is owned by Hank
and Ruben. Oxford uses cash and notes to purchase all of the stock of Samson Gyms.
Who are the stockholders of Oxford Industries immediately after the acquisition?
a. Stuart and Tom (100%)
b. Hank and Ruben (100%)
c. Stuart and Tom (50%) and Hank and Ruben (50%)
d. Stuart and Tom (50%) and Samson Gyms (50%)
Who is (are) the stockholder(s) of Samson Gyms immediately after the acquisition?
c. Oxford Industries (100%)
d. Stuart and Tom (50%) and Hank and Ruben (50%)
122. Astronaut Aviation is owned by Roberto and Lou and Chill Air Conditioning is owned by
John and Phillip. Astronaut Aviation issues 3,000 new shares of stock to acquire all of
the outstanding stock of Chill Air Conditioning. Astronaut had 9,000 shares of stock
outstanding before the acquisition and 12,000 shares outstanding after the acquisition.
Who are the stockholders of Astronaut Aviation immediately after the acquisition?
a. Roberto and Lou (100%)
b. John and Phillip (100%)
c. Roberto and Lou (75%) and John and Phillip (25%)

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d. Roberto and Lou (75%) and Chill Air Conditioning (25%)
Who is (are) the stockholder(s) of Chill Air Conditioning immediately after the
acquisition?
d. Astronaut Aviation (100%)
124. Value Inc. is acquiring High Priced Industries in a stock swap. Each of High Priced’s
100,000 shares is to be exchanged for .75 shares of Value. The current estimated market
value of the two stocks is $10 for Value, an actively traded stock, and $8 for High Priced,
which is family-owned and not actively traded. The managers of High Priced have
negotiated an increased exchange ratio from .75 to .8 shares if return on equity is more
than a targeted value. Determine the investment amount that could be recognized by
Value based on High Prices (1) not meeting the return on equity target, and (2) meeting
the return on equity target.
a. $750,000; $640,000
b. $750,000; $800,000
c. $600,000; $640,000
d. $600,000; $800,000
125. Potters Petroleum is acquiring Deep Well Drilling in a stock swap. Each of Deep Well’s
250,000 shares is to be exchanged for 1.50 shares of Potters. The current market values
of the two stocks are $30 and $45 for Potters Petroleum and Deep Well, respectively.
The managers of Deep Well have negotiated an increased exchange ratio from 1.50 to
1.80 shares if return on assets is more than a targeted value. Assume that the market
value of Potters Petroleum is more objectively determinable in valuing the transaction.
Determine the investment amount that could be recognized by Potters based on Deep
Well (1) not meeting the return on assets target, and (2) meeting the return on assets
target.
a. $5,000,000; $13,500,000
b. $5,000,000; $22,500,000
c. $11,250,000; $13,500,000
d. $11,250,000; $20,250,000
126. Three Kings Games is in the process of combining with Jacks-or-Better Playing Card
Company. The business combination has been negotiated where each of Jacks’ 500,000
shares of stock (market value $42.50) will be exchanged for 1.7 shares of Three Kings
Games (market value $25). This exchange ratio will change if the per share market value
of Three Kings changes by more than 20 percent before the combination is completed.
For example, if the market price of Three Kings decreases 25 percent (from $25 to
$18.75), then the exchange ratio will increase 25 percent from 1.7 shares of Three Kings

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per share of Jacks’ to 2.125 shares (1.7 x 1.25). Determine the investment amount
recognized by Jacks-or-Better if Three Kings’ stock price decreases from $25 to $15.
a. $12,750,000
b. $16,612,500
c. $21,250,000
d. $35,416,667
recognized if Three Kings’ stock price increases from $25 to $40.
a. $7,812,500
b. $12,750,000
c. $21,250,000
d. $34,000,000
Computational Multiple Choice Question Difficulty and Solutions

116. easy a
117. easy b
118. moderate d
119. easy b
120. easy a
121. moderate c
122. moderate c
123. moderate d
124. difficult b
Target not met: 100,000 shares x .75 share x $10 = $750,000
Target met: 100,000 shares x .8 x $10 = $800,000
125. difficult c
Target not met: 250,000 shares x 1.50 share x $30 = $11,250,000
Target met: 250,000 shares x 1.8 x $30 = $13,500,000
126. moderate c
500,000 shares x 1.7 exchange ratio x $25 = $21,250,000
The investment value does not change as a result of a change in the share prices.
127. moderate c
Problems
128. (5 Points) easy
Columbia Manufacturing is owned by Louis and Brian. They recently concluded an
agreement to buy all of Bell Manufacturing, owned by Ken and Adam. Columbia will

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pay $500,000 in cash and assume $300,000 of Bell’s liabilities in exchange for total
ownership of Bell’s net assets. Identify the stockholders of each company immediately
after the above transaction is concluded.
Answer:
Louis and Brian will own 100 % of Columbia and Ken and Adam will own 100% of
Bell. An asset for asset acquisition does not change the owners of either company.
129. (Part a. 10 Points; Part b. 10 Points) moderate, moderate

The following two cases are independent. Identify the stockholders of each company and
the percentage ownership of each stockholder immediately after the transaction
described.
a. The owners of Baylor Incorporated acquire the net assets of Waco Company by
issuing 10,000 new shares of Baylor's stock. Baldwin and Rosco own all 40,000
shares of Baylor's stock prior to the transaction. Wilson and Montgomery own all
of Waco's stock prior to the transaction.
b. Lincoln Enterprises purchase all of Jefferson Corporation's common stock for
$5,000,000 in cash. Prior to this transaction, Ralph and Maureen are the
stockholders of Lincoln while David and Jennifer are the stockholders of
Jefferson. The total market value of Lincoln's and Jefferson's stock is estimated to
be $18,000,000 and $6,000,000, respectively immediately before the acquisition.
Answer:
a. Company Shareholders Percentage
Waco Wilson and Montgomery 100%
Baylor Baldwin and Rosco 40,000/50,000 = 80%
Waco 10,000/50,000 = 20%
b. Company Shareholders Percentage
Jefferson Lincoln 100%
Lincoln Ralph and Maureen 100%
130. (10 Points) moderate

John and Andy own all 120,000 outstanding shares of Southern Enterprises while Dan

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and Derek own all 25,000 shares of Northern Industries. An agreement was recently
reached whereby Southern Enterprises will issue 40,000 new shares of stock in exchange
for all 25,000 shares of Northern Industries. Identify the owners and their percentage
ownership of each company immediately after the transaction.
Answer:
Company Shareholders Percentage
Southern John and Andy 120,000/160,000 = 75%
Dan and Derek 40,000/160,000 = 25%
Northern Southern 100%

Johnstone Baby Supplies is in the process of acquiring Altez Baby Bottle Company.
Altez is a relatively new company and its income has fluctuated substantially from period
to period. Altez’s owners are concerned that they will not receive adequate compensation
for their stock because of this fluctuation. The current stock for stock exchange ratio
being considered is that each share of Altez stock, par value $1 and market value $15,
would be exchanged for .6 shares of Johnstone stock, par value $.50 and market value
$25. Currently 50,000 shares of Altez stock are outstanding. The owners of Altez have
proposed that the exchange ratio be increased from .6 to .75 share of Johnstone for each
share of Altez if the net income of Altez increases next year by more than 25 percent
above last year. Assuming the market prices of the stock do not change, determine the
amount of the investment account to be recorded on Johnstone’s books assuming that:
a. The net income increase does not occur
b. The net income increase does occur
Answer:
a. 50,000 shares x .6 x $25 = $750,000
b. 50,000 shares x .75 x $25 = $937,500

Management of McAfee and Montego are discussing a possible merger. The current
agreement is for McAfee to gain control of Montego by exchanging .75 of its shares for
each Montego share. McAfee stock is trading at $40 per share (near the top of its 52-
week range) while Montego is trading at $27. The concern is that the McAfee’s stock
price fluctuates significantly more than Montego’s stock price. Montego’s management
is willing to endorse the proposed merger if the agreement is modified to include the
clause that the exchange ratio will increase by .1 share for every $2 that McAfee’s stock
value falls below $40 at the exchange date. Montego’s management is unwilling to
accept a decrease in the exchange ratio if the stock price of McAfee increases. Montego
currently has 100,000 shares of stock outstanding. What is the amount of the investment
recognized by McAfee if its stock price:
a. Remains at $40
b. Decreases to $34
c. Increases to $44
Answer:
a. 100,000 shares x .75 x $3,000,000

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b. $3,000,000
c. $3,000,000
The investment does not change as a result of a change in the acquirer stock price.
The increase in the number of shares replaces the value that is lost due to the
decrease in the share price. The change in par value that must be recorded is
offset by an adjustment in the Additional Paid-in Capital account.
Short Answer Questions

133. Compare and contrast internal versus external business expansion.
Answer: Internal expansion results from changes within the entity. It is often the result
of an entity undertaking research and development activities that culminate in the
development and marketing of new products. It can also be the expansion of the company
geographically by entering new markets with existing products. External business expansion
occurs when two or more businesses join together and operate as one entity, or related entities,
under the direction and control of one management group. In general, internal expansion is
brought about by changes within an entity while the combining of two entities brings
about external expansion.
134. Internal expansion is viewed as often being a slower process than external expansion.
What are some of the reasons for this perception?
Answer: Internal expansion is often a slow process because the entity may have to
develop a distribution system, generate demand for its new product, and/or build new
production facilities to support new products or expanding sales.
135. Alice Baker and Kathy Reed are co-owners of a profitable local business. The owners
have decided that they have as much market share in the local market as they are likely to
attain. As a result, the owners are considering expanding their business geographically.
Alice wants to buy a company in a nearby town but Kathy is opposed to that strategy.
She indicates that there is no reason to buy someone else when we can buy a building and
set up operations in the other town. You have been asked to prepare a report for Alice
and Kathy explaining the advantages and disadvantages of external expansion. Prepare a
list of the topics that could be included in the report. A complete writing of the report is
not necessary.
Answer: Advantages will include more rapid expansion, established management, does
not increase total supply of goods, greater market share, positive reputation of existing
company. Disadvantages include defensive measures, negative reputation of existing
company, corporate culture clash.
136. You are a financial advisor to a local corporation. The three primary stockholders in the
corporation (Frank Phillips, Jim Wright, and Fred Bailey) are also the corporate officers.
The corporation is considering expanding. Frank is interested in expanding internally
while Jim favors expanding externally. Fred has no strong opinion on this issue. Frank
and Jim have been trying to influence Fred because he is the deciding vote on this issue.
Prepare a memo to Fred outlining some of the advantages of external expansion.

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Answer: Discussion may include the following:

1. Expansion can be achieved more rapidly through combinations. Alternatively, the
time necessary to construct a new facility, staff it and develop a market for the
output is comparatively long,
2. Combinations may provide an established, experienced management group
immediately,
3. Combinations may lead to economies of scale. For example, the same size sales
force or accounting staff may be able to service two corporate structures as well
as one,
4. The overall cost of capital may be reduced as a result of a combination because of
the increased size of the entity,
5. Federal income tax laws provide some advantages to certain combined corporate
entities that are not available to one corporation,
6. External expansion does not increase the total supply of goods available from that
industry, whereas internal expansion may increase supply beyond existing
demand levels,
7. Control over a greater market share may enable the combined entity to become a
price leader in the market,
8. For some combinations, the guaranteed raw material sources and product markets
provided by combinations provide a significant management advantage. In
addition, the profits at each level accrue to the combined entity, and
9. Diversification accomplished through combinations may provide a less volatile
income stream. This reduces the risk level of the entity that, in turn, lowers
borrowing rates.
137. Assume a company primarily produces and sells a single product. This company is
considering expanding geographically. Discuss the difference between internal and
external expansion with regard to the total industry supply of, and demand for, the
product sold by the expanding company.
Answer: Internal expansion results when a company increases its ability to produce
output by acquiring additional facilities resulting in an overall increase in the supply of
the product. External expansion results when a company attains control over the net
assets of another company. The total productive capacity of the industry does not change
because new productive assets are not added. The only change is in the ownership of
existing productive assets. Neither internal nor external expansion has an impact on
demand for the product.
138. Discuss the similarities between the analysis conducted when acquiring a new piece of
machinery and the analysis conducted when acquiring control over the net assets of
another company.
Answer: The decision by the acquirer to undertake such an investment will involve the
same type of analysis as is performed when deciding whether to make capital
expenditures for other assets. Managers of the acquiring entity may prepare budgets and
perform capital budgeting analysis using techniques such as net present value and
internal rate of return to determine whether the investment is in the best interest of the
acquirer. The difference between the purchase of an individual asset and the acquisition

lOMoARcPSD|6826800
of another entity is that projecting the future cash flows may be more involved for an
entity acquisition. When purchasing a piece of machinery, the relevant cash flows will be
such items as the change in the operating costs, the tax implications of differences in
depreciation, and the future salvage value of the machine. When considering the
acquisition of another entity, some of the cash flows that may need to be evaluated result
from the disposal of redundant facilities, reduction of fixed costs by eliminating duplicate
operations, and internal coordination of operations when one part of the new entity
produces input for another part of the new entity.
139. Sarah Clammers, a client, is reading newspaper articles on two of the companies in
which stock are held. Some of the terms used in the articles are horizontal combination
and vertical combination. Sarah understands the definition of horizontal and vertical but
does not know what the terms mean in this context. Prepare a brief memo to differentiate
these terms for Sarah.
Answer: A horizontal combination occurs when a company acquires a competitor in the

same industry. A vertical combination occurs when a company acquires an entity that
either provides production inputs or acquires the production output of the company.
140. You are making a presentation to a board of directors. Part of the presentation is a
discussion of a business combination as a means of expansion. One issue that has been
addressed is horizontal combinations. One board member has asked for a clarification of
the advantages of horizontal business combinations as compared to other forms of
business combinations. Prepare a response to this board member.
Answer: Horizontal combinations exist when an entity acquires a competitor. The result
of such a combination is an increase in market share. A horizontal combination may
result in greater control over the product’s selling price because of the increased market
share. This type of combination can also lead to economies of scale and a reduction in
the number of persons needed to supply some support activities. Other types of
combinations (vertical or conglomerate) may result in management being required to
oversee the activities of business in which they do not have expertise.
addressed is vertical combinations. One board member has asked for a clarification of
the advantages of vertical business combinations as compared to other forms of business
combinations. Prepare a response to this board member.
Answer: A vertical business combination occurs when an entity purchases a supplier of

inputs or a purchaser of outputs. This type of business combination helps the company to
improve the efficiency of operations. Management of the company has better control
over the products from acquisition of raw materials, through manufacturing and
distribution, to final sale to customers. Other types of business combinations (horizontal
and conglomerate) leave other entities in control of more aspects of production and
distribution.

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discussion of a business combination as a means of expansion. An issue that has been
addressed is conglomerate combinations. One board member has asked for a
clarification of the advantages of conglomerate business combinations as compared to
other forms of business combinations. Prepare a response to this board member.
Answer: A conglomerate form of business combination occurs when one entity acquires
a company in unrelated or tangentially related businesses. Conglomerate combinations
have two general advantages over other types of combinations (horizontal and vertical).
Conglomerate combinations help improve income stability provided by diversifying the
asset base of an entity. Another advantage is that it has been considerably more difficult
for the government to challenge a conglomerate business combination on the basis of
antitrust regulations.
143. Discuss the reason the Sherman Act was not sufficient to address the problems that exist
as a result of business combinations.
Answer: The Sherman Act of 1890 only permits the government to break up a company
after the government has proven that the company has restrained free trade. It does not
give the government the power to prevent the creation of a company that would endanger
free trade.
144. Discuss how the Clayton Act broadens the government’s ability to oversee business
combinations as compared to the Sherman Act.
Answer: The Clayton Act can prevent a business combination from taking place if the
anticipated result is a lessening of competition or the creation of a monopoly while the
Sherman Act only permits the government to break up a company after the government
has proven that the company restrained free trade.
145. The Wall Street Journal has articles almost daily in which business combinations are
announced. How can there be so many business combinations when the Federal Trade
Commission assesses the impact of proposed combinations on such issues as industry
concentration, barriers to entry, and restriction of trade?
Answer: The vast majority of combinations are not disallowed because they involve
relatively minor segments of competitive markets and, therefore, would not reduce or
control competition in any significant way.
146. Richard, a friend, was reading in the newspaper about an attempted takeover that did not
succeed. The reason given for the acquirer stopping the acquisition was that greenmail
was paid. Richard does not understand the meaning of the term greenmail. Prepare a
brief note to Richard explaining this concept.
Answer: Greenmail exists when the potential acquiree management buys acquiree stock
back from a potential acquirer for a price above the price paid by the potential acquirer.

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147. A poison pill is one maneuver an entity can employ to avoid a takeover attempt. Explain
how a poison pill can accomplish this objective and discuss the major potential problem
with undertaking this maneuver.
Answer: A poison pill involves the issuance of preferred stock that is convertible into
common stock of the unwanted acquirer allowing preferred stockholders to regain
control by converting into common stock. The problem is that it can deter friendly
acquirers as well as hostile acquirers.
148. Your company is attempting to take over another entity. One of the board members has
suggested that the target may attempt to sell the crown jewels or undertake a scorched
earth defense. Another board member is unaware of the meaning of these terms and has
requested your input. Prepare a brief memo outlining the similarities and differences
between the two concepts.
Answer: The sale of the crown jewels and the scorched earth defense both result in the
target company selling some of its assets. The difference is in the amount of assets sold
and how selective the target is in determining which assets to sell. The sale of the crown
jewels results when a target sells assets that would be particularly valuable to the
potential acquirer. The scorched earth defense results when a target generally sells large
amounts of assets without regard to the specific desirability to the potential acquirer. In
both instances, the target’s objective is to reduce its overall value thereby reducing the
potential acquirer interest.
149. Your company is in a takeover struggle with a larger company. Management has
determined that either a scorched earth defense or a fatman defense would most likely be
successful in thwarting the takeover attempt. The CEO has asked for your input.
Prepare a memo outlining the differences between the two measures.
Answer: The scorched earth defense involves a broad-based sale of assets. The proceeds
are distributed to stockholders reducing the potential acquiree value. The fatman defense
results in the acquisition of poorly performing assets. The potential acquiree value is
reduced due to the poor performance of the newly acquired assets.
150. You serve on the board of directors of a large company. A topic of discussion at a recent
meeting is the acquisition of another entity. One board member stated that the company
should purchase 49 percent of the other entity so we would not have to consolidate the
acquiree into our financial statements. Prepare a note to respond to the board member.
Answer: The control of another entity’s assets and operations is the determining factor in
deciding whether consolidated financial statements are required. Purchasing 49 percent
would likely result in control unless the other 51 percent is owned by one or a small
number of stockholders.
151. The Board of Directors of Mesa, Incorporated is discussing the acquisition of a

competitor. One board member is new and has asked for an explanation of the difference
between acquiring all the net assets and acquiring all the stock of the other company.
The CFO has asked you to respond to this question.

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Answer: From an economic perspective there is no difference between acquiring all of

the net assets and acquiring all of the stock. Mesa still has control over all the assets.
The difference that exists pertains to the preparation of the financial statements. If Mesa
acquires all the net assets, there is only one economic entity, so consolidation is not
needed. If Mesa acquires all the stock, there are two legal entities and the consolidation
process is used to prepare the financial statements. The financial statements will appear
the same regardless of the manner in which the other company is acquired.
152. Discuss how a business combination accomplished with an exchange of assets for assets
differs from an exchange of stock (acquirer) for assets (acquiree) from the perspective of
the acquirer. Then, discuss the differences from the acquiree perspective.
Answer: From the acquirer perspective, the asset for asset acquisition results in no
change to the net assets and liabilities although the composition of the assets will change.
The exchange of stock for assets results in an increase in acquirer’s net equity and assets.
From the acquiree perspective, there is a change in the assets owned. Subsequent to the
asset for asset exchange, the acquiree assets owned are likely cash or receivables but
subsequent to the stock for asset exchange the resulting asset owned is an investment in
the acquirer.
153. Jim and Fred are two managers in Clippers Corporation. They are discussing a
combination being planned. Jim states that the other entity (Heads R Us) is being taken
over by Clippers because Clippers’ stock is being issued for Heads R Us stock. Fred says
that he has been reading the paper, and it sounds to him as if Heads R Us is taking over
Clippers. In fact, Fred had an article on his desk that contained the following statement
by the board of directors of Heads R Us, “The synergy that exists between Clippers and
Heads R Us will make Clippers a welcome addition to our corporate family.” Jim and
Fred have asked you to clarify their confusion.
Answer: While the company issuing new shares is normally the acquirer, the stock issued
does not always determine the stockholder group that controls the consolidated entity
after a combination is completed. Control depends on the stock exchange ratio. The
party owning the greater portion of the outstanding stock after the combination is the
controlling entity. For example, if Clippers has 10,000 shares outstanding prior to the
combination, but has to issue 20,000 shares of voting common to the stockholders of
Heads R Us to complete the transaction, then the acquirer is Heads R Us.
154. Ken Sanders has been a classmate of yours for some time. He has come to you with this
question. “Any time a new corporate entity is formed, it begins with zero Retained
Earnings. Why is there a balance in Retained Earnings as soon as an corporate entity is
formed in a statutory consolidation?” Prepare a response to Ken’s question.
Answer: The establishment of a new corporate shell is a matter of legal form. In reality,
the larger corporation is taking control of the smaller corporation, so the Retained
Earnings of the larger corporation is carried forward to the new entity’s balance sheet.

lOMoARcPSD|6826800
155. Mary Brian is a board member for Big Hats, a company completing an acquisition. The
acquiree, Sombrero Incorporated, is being purchased with stock of Big Hats. The
agreement states that Big Hats will issue 5,000 additional shares of stock if Sombrero’s
income exceeds $2,000,000 for the most recent year. Mary has indicated that the
additional shares of stock would not significantly dilute the ownership of the current
stockholders and that it would have no impact on the acquisition price because the
purchase is being accomplished with a stock for stock swap. Do you agree with Mary?
Support your answer.
Answer: You should not agree with Mary. The additional number of shares of stock
issued is a result in a change in the perceived value of Sombrero because of its additional
contribution to consolidated net income. The total value of the stock being distributed is
not a result of a change in the value of the stock, it is a result of a change in the value of
the acquiree. Thus, the acquisition cost would increase.
156. Management has asked you to provide input on how to structure a business combination
so it will result in a tax deferred exchange. Prepare a memo indicating the three basic
criteria that must be met to accomplish this objective.
Answer: The answer will include the following:

1. The acquiree’s owners must continue to have an indirect ownership in the
acquiree.
2. The acquirer must continue acquiree business or employ a significant portion of
the acquiree net assets in an ongoing business.
3. The combination must occur for a valid business purpose.
157. When a business combination does not qualify as a tax deferred exchange, the acquirer is
not permitted to take advantage of the acquiree net operating loss carryforward. Given
that the two companies are now one company, why is the net operating loss carryforward
not transferred to the acquirer?
Answer: If the business combination does not qualify as a tax deferred exchange, the
acquirer has purchased the acquiree. It is not possible to purchase tax aspects of an
entity. As a result, an acquiree’s net operating loss carryforward does not transfer to the
acquirer in a combination that does not qualify as a tax deferred exchange.

CHAPTER 1
THEORIES | True or False
True 1. When two entities competing in the same industry combine, it is called a horizontal
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
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
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
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
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
False 15. The sale of the crown jewels defensive maneuver involves the sale of more assets than
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
True 25. In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
False 26. In an exchange of stock (acquirer) for assets (acquiree), the acquiree 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
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
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
False 42. One important benefit in a business combination is any net operating loss carryfoward
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
a. A supplier
b. A customer
c. A competitor
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
d. Either a. or c.

49. Which of the following types if business combinations typically occurs when management is
attempting to diversify its investment?
50. Management acquires a business in a tangentially related industry to the current business. What form
of business combination is accomplished?
c. Mega combination
51. One reason for conglomerate combinations is that management has become more aware that it helps
accomplish which of the following?
52. Business combinations that result in one dominant company in an industry are said to have formed
a. Pure competition
b. Monopoly
c. Oligopoly
d. Free market
b. Joining companies
c. Constituent companies
54. When an offer is made to acquire a company and the acquiree supports the offer, the offer is called
b. Tender offer
c. Hostile takeover
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
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
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
c. Poison Pill
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
c. Poison Pill
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?
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?
c. Issuance of convertible preferred stock that converts into common stock of the acquirer if
a takeover is accomplished
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?
c. Pacman defense
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)
b. hostile takeover
d. reverse takeover
a. Cash
b. Other assets
c. Liabilities
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
66. In an acquisition where there is an exchange of assets for assets, how does the ownership structure
of the acquiree change?
c. The acquirer and acquiree stockholders share ownership oi the acquires
67. In an acquisition where there an exchange of assets for assets, how does the ownership structure the
acquirer change?
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?
69. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how ownership
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?
71. Control over acquiree assets is attained in a business combination. Indirect control is attained in
which type of exchange?
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?
b. Statutory merger
73. Which of the following is not a true statement with regard toa statutory merger?
74. Which of the following is not true with regard to statutory consolidation form of business combination?
b. Control of the net assets of the combining entities must be acquired by the new entity
corporation
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?
c. Zero
76. Which of the following is not true with regard to a business combination accomplished in the form a
stock acquisition?
78. To qualify as o reorganization (for tax purposes), a business combination must meet which of the
following criteria?
b. The acquirer must continue the acquiree business or employ a significant portion of the acquiree
net assets in an ongoing business
d. All of the above criteria are required for a combination to qualify as a reorganization

b. Joint venture
d. A company's purchase of 80% of another company’s voting shares
combinations?
a. Purchase 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?
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
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?
b. The companies must ask the courts to decide which company is the acquirer.
a. Expensed
b. Capitalized as part of the cost of the shares
d. Deducted from shareholders' equity, net of related income tax benefits

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

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.
c. The business only has equity financing and has no debt financing.

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.
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?
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
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.

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.

a. Business combination in which only one of the two companies continues to exist
corporation
e. Legal proposal to acquire outstanding shares of the target’s stock

c. current replacement cost.
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.
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.

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.

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?
b. The common stockholders of Merton must receive common stock Of Stocum
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

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
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.
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
109. Under PFRS 3:

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?
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?
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. capitalized and amortized over a discretionary period.
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.
c. Amortized directly to retained earnings over a period not to exceed forty years.
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.
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)
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?
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?
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.
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.
d. A building.
121. Under PFRS 3 when is a gain recognized in consolidating financial information?

a. When any bargain purchase is created.
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?
a. Fair value S’s carrying amount
b. Fair value Fair value
c. S’s carrying amount Fair value

a. sum of the fair values assigned to intangible assets less liabilities assumed.
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:
b. information concerning contingent consideration including a description of the arrangements and
the range of outcomes.
d. a qualitative description of factors that make up the goodwill recognized.

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
b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price.
127. Which of the following income factors should not be factored into an estimation of goodwill?
BUSINESS COMBINATIONS- STATUTORY MERGERS AND STATUTORY
CONSOLIDATIONS
1. Statement 1 (S1): When two entities competing in the same industry combine, it is
called a horizontal business combination.
Statement 2 (S2): Horizontal business combinations are likely to occur when
management is attempting to dominate a geographic segment of the market.
2. Statement 1 (S1): One way that a horizontal business combination can increase
sales for an entity is to expand into new product markets.
Statement 2 (S2): A vertical business combination generally involves companies
attempting to improve the efficiency of operations by purchasing suppliers of inputs
or purchases of outputs.
3. Statement 1 (S1): When a retail clothing store purchases a competitor in another
city, a vertical combination has occurred.
Statement 2 (S2): A vertical combination is one where the entities have a potential
buyer- seller relationship.
4. Statement 1 (S1): A business combination in which a supplier or raw materials is
acquired is a conglomerate combination.
Statement 2 (S2): A conglomerate combination is often undertaken to help increase
income stability due to diversifying the asset base of an entity.
5. Statement 1 (S1): Conglomerate combinations are easy for the government to
challenge in court.
Statement 2 (S2): If negotiation between management groups leads to a mutually
agreeable business combination, the process is called a friendly takeover.
6. Statement 1 (S1): An offer by an acquirer to buy the stock of another company is
commonly called a tender offer.
Statement 2 (S2): A tender offer that is opposed by the acquire management is
called a hostile bid.
7. Statement 1 (S1): Greenmail exists when a company is encouraged to buy a
potential acquiree.
Statement 2 (S2): 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.
8. Statement 1 (S1): The sale of crown jewels defensive maneuver involves the sale of
more assets than does the scorched earth defense.
Statement 2 (S2): The fatman defensive maneuver involved the acquisition of assets
by the potential acquiree.
9. Statement 1 (S1): Golden parachutes give a bonus to all employees if the company
is acquired.
Statement 2 (S2): The pacman defensive maneuver is where a potential acquiree
attempts to purchase the acquirer.
10. Statement 1 (S1): A business combination occurs when one entity gains control
over the new assets of another entity.
Statement 2 (S2): The only way to attain control over the net assets of another entity
is to purchase the net assets.
11. Statement 1 (S1): In an acquisition where the acquirer pays cash for the acquiree
assets, the book value of the acquirer increases.
Statement 2 (S2): In an acquisition of assets for assets, the ownership structure of
the aquiree does not change.
12. Statement 1 (S1): In an acquisition of assets for assets, the ownership structure of
the acquirer changes.
Statement 2 (S2): There is an increase in the total capitalization of an acquirer when
the acquirer issues stock for acquiree assets.
13. Statement 1 (S1): In an exchange of stock (acquirer) for assets (acquiree), the
ownership structure of the acquiree does not change.
Statement 2 (S2): In an exchange of stock (acquirer) for assets (acquiree), the
acquiree stockholders become acquirer stockholders.
14. Statement 1 (S1): 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.
Statement 2 (S2): A business combination that occurs where only one of the original
entities in existence after the combination is called a statutory consolidation.
15. Statement 1 (S1): The acquiree entity is liquidated in a statutory merger.
Statement 2 (S2): For a business combination to qualify as a statutory consolidation,
a new corporation must be formed.
16. Statement 1 (S1): 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.
Statement 2 (S2): After completing a business combination in the form of a statutory
merger or statutory consolidation, there is only one legal entity in existence.
17. Statement 1 (S1): In a business combination accomplished as a stock acquisition
normally two companies exist after the combination.
Statement 2 (S2): A business combination accomplished as a stock acquisition must
be accomplished with a stock for stock exchange.
18. Statement 1 (S1): A stock acquisition is the only form of business combination that
might require the preparation of consolidated financial statements.
Statement 2 (S2): The substance of statutory mergers, statutory consolidations, and
stock acquisitions is the same if income tax considerations are ignored.
19. Statement 1 (S1): There are no uncertainties when two companies agree on a
Statement 2 (S2): When the acquisition price of an acquiree is contingent on
acquiree future earnings, the acquisition price may change
20. Statement 1 (S1): When the acquisition price of an acquiree is contingent on the
market value of the acquirer stock, the acquisition price may change
Statement 2 (S2): For business combinations to qualify as reorganizations (for tax
purposes), the acquiree stockholders must receive voting common stock of the
acquirer.
21. Statement 1 (S1): There are different required levels of stock ownership in the acquire for the
three different types of reorganizations for tax purposes.
Statement 2 (S2): One important benefit in a business combination is any net operating loss
carryforward that might exist and be available to the acquirer.
a. S1 -True; S2 - True c. S1- False; S2 - True

b. S1- True; S2 - False d. S1 - False; S2 - False
22
a. Horizontal Combination
b. Vertical Combination
23
a. A supplier
b. A customer
c. A Competitor
d. none of the above

a. Horizonal Combination
a. the acquire purchase the acquirer’s outputs

b. the acquire is a competitor of the acquirer
c. The acquire supplies raw materials to the acquirer
d. Either a or c

b. A combination where the two entities are competitors in the same industry.
c. A combination where the two entities gave a potential buyer/seller relationship
d. None of the above described a vertical combination
attempting to diversity its investment?
29. Management acquires a business in o tangentially related Industry to the current business.
c. Mega combination
30. 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
a. Pure competition
b.Monopoly
c. Oligopoly
d. Free market
b. Constituent companies
c. Joining companies
33. When an offer is made to acquire a company and the acquiree management supports
the offer, the offer is called which of the following?
C. Hostile takeover
b. Tender offer
34. The defensive maneuver where a company buýs stock from a potential acquirer at
premium over the market price is called which of the following
a. White knight
b. Shark repellent
c. Greenmail
35. The defensive maneuver where a company seeks to be acquired by a company
perceived to be a better match than the company making an offer to buy the potential
acquiree is called which of the following?
a. Poison pill
b. White knight
d. Pac-man defense
36. 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.
37. 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
C. Poison Pill
acquiree sells desirable assets to reduce the company's values

c. Pac-man defense
d. Greenmail

acquirer if a fakeover is accomplished


c. Pac-man defense
41. Able Ltd. offers to buy shares from existing shareholders of Wei Co. at a premium price. The
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) __________

b. hostile takeover
d. reverse takeover

a. Cash
b. Other assets
c. Liabilities


d. It is not possible to determine if ther is a change in the acquiree ownership structure

47. .How does the value of the acquiree net assets change?

C. There is no changes in net assets
how does the ownership structure of the acquiree change

49. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree)

c Stock for stock
d. Either b or c
51. Which of the following forms of business combination is not subject to laws specific to
business combinations?

b. Statutory merger

d. All of the above one true statements with regard to a statutory merger

b control of the net assets of the combining entities must be acquired by the new
entity
c. The net assets of the combining entitles must be acquired with assets of the new
corporation
54. 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?

c. Zero
56. Which of the following contingencies may change the cost of an acquisition

57. To qualify as a reorganization (for tax purposes), a combination must meet


b. The acquirer must continue the acquiree business or employ a significant portion of
the acquiree net assets in an ongoing business
c. Combination must be for a valid business purpose
d. all of the above criteria are required for a combination to quality as a reorganization
b. Joint venture
d. A company's purchase of 80% of another company's voting shores
combinations?
a. Purchase method
60 . After an exchange or shares in a business combination, each group of shareholders held

50% of the voting right, which of the following factors should be considered in determining
the acquirer?

d. which company initiated the combination
61. 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
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 shares and Roo would prefer to sell its assets to Perez.
c. Both Perez and Roo would prefer Perez to purchase Roo's shares.
d. Both Perez and Roo would prefer Perez to purchase Roo's assets.
62. Perez Co. acquired Roo Co. in a business combination. Roo issued new shares to Perez's
a. Direct' exchange c. Hostile takeover

63. Perez Co. acquired Roo Co. in a business combination. Perez issued new shares to Roo's
a. Direct exchange c. Hostile takeover
64. Ho 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?
b. The companies must ask the courts to decide which company is the acquirer
a. Expensed
p. Capitalized as part of the cost of the shares
d. Deducted from shareholders equity, net of related income tax benefits
a. Expensed
67. How accounting fees for an acquisition should be treated?

68. 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 fo to continue the
business.
c. The business only has equity financing and hos no debt financing.
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.
a. Market-based c. Cost-based
b. Income-based d. Amortized cost
71. How should negative goodwill be shown on the consolidated financial státements of
the acquirer?

d. As a separate amount under shareholders' equity on the statement of financial
position
72. Roj 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 date
of acquisition. what is the proper treatment of Event's P80,000 of goodwill?
a. Event's goodwill ls 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 RG
PPD.
d. Event's goodwill is not an identifiable asset and should not be included as part or
Raj's PPD.

c. A Corp acquires 51% of B Corp's voting shares for P1,000,000 ín Cash.
d. A Corp acquires 51% of B Corp's voting shares for future considerations.

C. A takeover completed within one year of .he. initial tender offer.
d. A business combination in which only one company continues to exist as a legal
entity.
a. Business combination in which only one of the two companies continues to exist as
a legal corporation
e. Legal proposal to acquire outstanding shares of the target's stock

c. Current replacement cost.
77. In reference to the IASB disclosure requirements, which of the following is correct?
a. Information related to several minor acquisitions may not be combined.

a. firms are not required to disclose the business purpose for a combination
b. notes to the financial statements of an acquiring corporation must disclose that
c. the business combination was accounted for by the acquisition method.
d. "all of the above are correct.

b. amortized over 40 years or its useful life, whichever is longer.
c. amortized over 40 years or its useful life, whichever is shorter.
d. never amortized.
79. In reference to international accounting for goodwill, which of the following statements is
correct?
a. U.S. companies have complained that 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
c. The IA9B and the FASB are working to eliminate differences in accounting for business
equity combinations.
d. All of the above are correct
80. In recording acquisition costs, which of the following procedures is correct?
a. Registration costs are expensed, and nof charged against the fair value of the
securities issued.
a. In an asset acquisition, the books of the acquired company are 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.
a. Cash c. Stock
b. Debt d. Any of the above may be used
83. Slocum Corporation and Merton Company, both publicly owned companies, are
Planning a merger, with Slocum being the survivor. Which of the following is are requirement of
the merger?

b. The common stockholders of Merton must receive common stock of slocum
d. The boards of directors of both Slocum and Merton must approve the merger
84: PFRS 3 requires that all business combinations be accounted for using

85. 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

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.

d. each of the above is a required disclosure
87. When the acquisition price of an acquired firm is less than the fair value of the identifiable
net assets, all of the following are recorded at fair value except
a. Assumed liabilities.
b. Current assets.
c. Long-lived assets.
88. Under PFRS 3:

c. direct costs are to be capitalized and indirect costs are to be expense
d. indirect Costs are to be capitalized and direct costs are to be expensed
89. A business combination is accounted for properly as an acquisition. Which of the following
expenses related to effecting the business combination should enter into
determination of net income of the combined corporation for the period in which expenses are
incurred?
a. Yes Yes
b. Yes No
c. No Yes
d. No No
90. In a business combination, which of the following costs are assigned to the valuation of the
security?
consultinig fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No
91. Parental Company and Sub Company were combined in an 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 repot the amount as
a. paid-in capital.

b. capitalized and amortized over a discretionary period
d. charged to retained earnings when incured.
93. In a business combination accounted for as an acquisition, how should the excess of fair
value of net. assets acquired over the consideration paid be treated?
a. Amortized as a credit to income Over a period not fo exceed forty years.

c. Amortized directly to retained edrnings over a period not to exceed forty years.
94. If the value implied by the purchase price of an acquired company exceeds the fair
values of identifiable net assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder
as an ordinary gain.
d. allocated goodwill
95. 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 shares 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 will treat the issuance of the additional
shares as a (decrease in)
b. goodwill.
c. paid-in capital.
d. non-current liabilities of S Company assumed by P Company.
96. 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 all at once, at what time is the fair value of the assets and
liabilities of the acquired entity determined?

97. 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 c. Book value

b. Fair value d. Average value
98. What is the appropriate accounting treatment for the value assigned to in-process
research and development acquired in a business combination?

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.
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.

d. A building.
a. When any bargain purchase is treated.

d. When the amount of a bargain purchase exceeds the value of the applicable
expense(other than certain exceptions) held by the acquired company.
101. Company B acquired the net assets of company S in exchange for cash. The acquisition
price exceeds 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?

a. Fair Value S’s carrying amount
b. Fair Value Fair Value
c. S’s carrying amount Fair Value
a. sum of the fair values assigned to intangible assets less liabilities assumed
liabilities assumed
c. sum of the fair values assigned to intangibles acquired less liabilities
d. book value of an acquired company
103. When the acquisition of another company occurs, IASB recommends disclosing, all of
the
following EXCEPT
b. information concerning contingent consideration including a description of the and the
range of outcomes.
d. a qualitative description of factors that make up the goodwill recognized
a. exclusively by impairment testing

b. based upon the 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 minimum of 40 yrs
105. Acquisition costs such as the fees of accountants and lawyers that were necessary to
negotiate and consummate the purchase are
b. expensed if immaterial but capitalized and amortized it over 2% of the acquisition
price.
106. Which of the following income factors should not be factored into an estimation of
goodwill?
1. B 35. B 69. D
2. A 36. A 70. B
3. C 37. C 71. A
4. C 38. A 72. C
5. A 39. C 73. B
6. A 40. C 74. D
7. D 41. B 75. A
8. C 42. C 76. A
9. C 43. D 77. C
10. B 44. D 78. D
11. C 45. A 79. D
12. C 46. A 80. C
13. B 47. D 81. D
14. B 48. A 82. D
15. A 49. B 83. D
16. C 50. C 84. C
17. B 51. A 85. D
18. A 52. C 86. D
19. C 53. C 87. D
20. D 54. A 88. B
21. B 55. D 89. C
22. A 56. A 90. C
23. C 57. D 91. C
24. B 58. B 92. A
25. B 59. C 93. D
26. D 60. B 94. D
27. C 61. A 95. C
28. C 62. D 96. B
29. B 63. A 97. B
30. A 64. C 98. B
31. B 65. D 99. A
32. C 66. C 100.
33. A 67. A A
34. C 68. C
101.
B
102.
B
103.
C
104.
B
105.
C
106.
C
lOMoARcPSD|6826800
382235889 Test Bank Bank for Advanced Accounting 1 E by

Bline
Taxation (Bukidnon State University)
StuDocu is not sponsored or endorsed by any college or university

lOMoARcPSD|6826800
CHAPTER 1
INTRODUCTION TO BUSINESS COMBINATIONS
SUMMARY OF ITEMS BY TOPIC
Conceptual Computational
True- Multiple Multiple Short
False Choice Choice Problems Answer
Economic Motivation for 1-11 64-73 133-138
History of Business 12-20 74-82 139-142
Combinations
Legal Restrictions on 21-27 83-87 143-149
Takeovers 28-36 88-94
Control 37-38 95-96 150-151
Exchanges 39-45 97-104 152-153
Forms of Business 46-53 105-109 154
Combinations
Substance versus Form 54 116-123 128-130
Contingent Consideration 55-57 110 124-127 131-132 155
Taxes and Business 58-63 111-115 156-157
Combinations
True-False Statements
1. Internal expansion often takes longer than external expansion.
2. Internal expansion is less risky than external expansion.
3. Internal expansion is often slow because the entity must build new production facilities to
support new products or expanding sales.
4. The increase in the size of an entity resulting from a business combination would result
in a lower cost of capital.
5. External combinations may result in economies of scale.
6. External expansion does not increase the total supply of products in the market place.
7. Internal expansion does not increase the total supply of products in the market place.

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8. In a business combination, the investee takes control of the net assets of the investor.
9. All business combinations result in one entity taking control of the net assets of another
entity.
10. An acquisition of net assets result in one entity taking control of the net assets of another
entity while the acquisition of stock does not result in taking control of the net assets of
another entity.
11. The capital budgeting techniques used to determine whether to acquire another entity are
similar to the techniques used to evaluate purchases of equipment.
12. When two entities competing in the same industry combine, it is called a horizontal
13. Horizontal business combinations are likely to occur when management is attempting to
dominate a geographic segment of the market.
14. One way that a horizontal business combination can increase sales for an entity is to
15. A vertical business combination generally involves companies attempting to improve the
efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.
16. When a retail clothing store purchases a competitor in another city, a vertical
17. A vertical combination is one where the entities have a potential buyer-seller relationship.
18. A business combination in which a supplier of raw materials is acquired is a

19. A conglomerate combination is often undertaken to help increase income stability due to
diversifying the asset base of an entity.
20. Conglomerate combinations are easy for the government to challenge in court.
21. The purpose of the Sherman Act of 1890 was to make illegal any action that would
hinder free competition.
22. The Sherman Act requires the government to prove that trade has been restrained before
it can be used to break up a company.
23. The Sherman Act can prevent a business combination from occurring.
24. The Clayton Act can prevent a business combination from occurring.
25. The government does not have to be notified when a business combination is anticipated.

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26. The U.S. government opposes all business combinations because they are viewed as a
threat to competition.
27. The Federal Trade Commission assesses the impact of a proposed business combination
on industry concentration.
28. If negotiation between management groups leads to a mutually agreeable business

29. An offer by an acquirer to buy the stock of another company is commonly called a tender
offer.
30. A tender offer that is opposed by the acquiree management is called a hostile bid.
31. Greenmail exists when a company is encouraged to buy a potential acquiree.
32. A poison pill is the term used to describe the issuance of a special kind of convertible
33. The sale of the crown jewels defensive maneuver involves the sale of more assets than
34. The fatman defensive maneuver involved the acquisition of assets by the potential
acquiree.
35. Golden parachutes give a bonus to all employees if the company is acquired.
36. The packman defensive maneuver is where a potential acquiree attempts to purchase the
acquirer.
37. A business combination occurs when one entity gains control over the net assets of
another entity.
38. The only way to attain control over the net assets of another entity is to purchase the net
assets.
39. In an acquisition where the acquirer pays cash for the acquiree assets, the book value of
the acquirer increases.
40. In an acquisition of assets for assets, the ownership structure of the acquiree does not
change.
41. In an acquisition of assets for assets, the ownership structure of the acquirer changes.
42. There is an increase in the total capitalization of an acquirer when the acquirer issues

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43. In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the
44. In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders
45. 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.
46. A business combination that occurs where only one of the original entities in existence
after the combination is called a statutory consolidation.
47. The acquiree entity is liquidated in a statutory merger.
48. For a business combination to qualify as a statutory consolidation, a new corporation

must be formed.
49. 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.
50. After completing a business combination in the form of a statutory merger or statutory
consolidation, there is only one legal entity in existence.
51. In a business combination accomplished as a stock acquisition normally two companies

exist after the combination.
52. A business combination accomplished as a stock acquisition must be accomplished with a

stock for stock exchange.
53. A stock acquisition is the only form of business combination that might require the
54. The substance of statutory mergers, statutory consolidations, and stock acquisitions is the
same if income tax considerations are ignored.
55. There are no uncertainties when two companies agree on a business combination.
56. When the acquisition price of an acquiree is contingent on acquiree future earnings, the
57. When the acquisition price of an acquiree is contingent on the market value of the
acquirer stock, the acquisition price may change?
58. Business combinations can qualify as reorganizations (for tax purposes) regardless of
whether accomplished via the acquisition of assets or the acquisition of stock.

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59. For business combinations to qualify as reorganizations (for tax purposes), the acquiree
stockholders must receive voting common stock of the acquirer.
60. Only stock for stock exchanges can qualify as reorganizations for tax purposes.
61. When a statutory merger or statutory consolidation is used to accomplish a reorganization

(for tax purposes), the acquirer becomes liable for all known and contingent acquiree
liabilities.
62. There are different required levels of stock ownership in the acquiree for the three
63. One important benefit in a business combination is any net operating loss carryforward
True-False Statement Solutions

1. T
2. F, Developing and marketing new products is often a difficulty and risky process.
3. T
4. F, All else being equal, the combined entity’s cost of capital may be higher or lower
depending on whether the acquired entity is heavily laden with debt or is relatively debt
free. Also, the amount of debt versus equity issued in the combination will affect the
resulting cost of capital.
5. T
6. T
7. F, Internal expansion results in a particular entity offering more products or the same
products to new consumers. Thus, the total supply of products increases.
8. F, The investor takes control of the net assets of the investee in a business combination.
9. T
10. F, Both the acquisition of the net assets and the acquisition of stock result in control of
the net assets of another entity. The stock acquired represents ownership in the net assets.
11. T
12. T
13. F, A horizontal combination occurs when management attempts to dominate an industry.
14. T
15. T
16. F, A vertical combination exists when an entity purchases another entity that could have a
buyer-seller relationship with the acquirer. The combination described here is a
horizontal combination.
17. T
18. F, A conglomerate combination is one where an unrelated or tangentially related business
is acquired. A vertical combination occurs when a supplier is acquired.
19. T
20. F, Conglomerate combinations are more difficult for the government to challenge in court
because they do not result in market domination in any particular market.
21. T
22. T

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23. F, The Sherman Act can only break up a company that has restrained free trade, it cannot
stop a business combination from creating a company.
24. T
25. F, The Hart-Scott Rodino amendment requires that the Antitrust Division and the Federal
Trade Commission be notified of anticipated business combinations.
26. F, The vast majority of combinations are not disallowed because they involve relatively
minor segments of competitive markets and, therefore, would not reduce or control
competition in any significant way.
27. T
28. T
29. T
30. T
31. F, Greenmail is the payment of a price above market value to acquire stock back from a
potential acquirer.
32. T
33. F, The sale of the crown jewels results when a target sells assets that would be
particularly valuable to the potential acquirer. The scorched earth defense results when a
target generally sells large amounts of assets without regard to the specific desirability to
the potential acquirer.
34. T
35. F, Golden parachutes are generally given only to top executives of the acquiree.
36. T
37. T
38. F, Control over the net assets of an entity can be accomplished by purchasing the net
assets or by purchasing the acquiree voting common stock that represents ownership of
the assets.
39. F, The amount of cash will always equal the net assets recorded by the acquirer. As a
result, the acquirer book value will not change due to an acquisition.
40. T
41. F, There is no exchange of stock in an asset for asset acquisition so there cannot be a
change in ownership structure of either entity.
42. T
43. T
44. F, The acquiree corporation becomes an acquirer stockholder, not the acquiree
stockholders.
45. T
46. F, A combination that results in one of the original entities in existence after the
combination is a statutory merger.
47. T
48. T
49. F, The combination results in the stockholders of one entity controlling the other entity.
The Retained Earnings of the entity acquiring control is carried forward to the newly
formed corporation.
50. T
51. T
52. F, The stock of the acquiree company must be purchased by the acquirer, but the value
transferred to the acquiree stockholders does not have to be in stock. Payment may be in
another asset or the issuance of debt.

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53. T
54. T
55. F, The consideration to be given by the acquirer is sometimes not completely known
because the consideration is based partially on acquiree future earnings or the market
value of acquirer debt or stock.
56. T
57. F, Any change in the number of shares of acquirer stock given returns the purchase price
to the agreed level. The adjustment is to stock and additional paid-in capital. The
investment account is unchanged.
58. T
59. F, The acquiree stockholders must continue to have an indirect ownership interest in the
acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect
ownership as well as voting common stock.
60. F, At least 50 percent of the consideration paid to the acquiree stockholders must be in
acquirer stock.
61. T
62. T
63. F, A net operating loss carryforward cannot be acquired. They are only available to the
acquirer if the combination qualifies as a nontaxable exchange.
Conceptual Multiple Choice Questions

64. Which of the following is not a form of internal business expansion?
a. Development of a new product
b. Construction of new production facility
c. Purchase of a competitor
d. Expanding the marketing effort into a new geographic area
65. Which can typically be accomplished more quickly?

a. Internal expansion
b. External expansion
c. Internal and external expansion would likely take the same amount of time
d. There is no general pattern regarding how long either would take
66. Which of the following is a reason that internal expansion is often a slow process?
a. A new distribution system must be developed
b. Demand for the product does not have to be developed
c. Existing production facilities are adequate to meet expanded sales
d. All of the above are reasons that internal expansion is a slow process
internal expansion?
a. Combinations generally take longer to accomplish than internal expansion
b. The cost of capital may be reduced as a result of a combination due to increased
entity size
c. The entity may obtain a relatively greater market share
d. All of the above are advantages of business combinations

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68. Which of the following is a disadvantage of business combinations when compared to

internal expansion?
a. Combinations may provide an established, experienced management group
immediately
b. There are some tax advantages to combined corporation entities not available to
one corporation
c. There may be a guaranteed source of raw material or product markets when a
combination is effected
d. None of the above is a disadvantage of business combinations
internal expansion?
a. Combinations may lead to economies of scale
b. Combinations do not increase the total supply of goods available from the
industry
c. Diversification accomplished through combinations may provide a less volatile
income stream
d. All of the above are advantages of combinations
70. In a business combination, which of the following occurs?

a. The investee takes control of the investor
b. The investee and investor share control of each other
c. The investor takes control of the investee
d. Neither entity controls the other
71. Which of the following analysis techniques are commonly used when making business
combination decisions?
a. Cash flow budgeting
b. Internal rate of return
c. Net present value
d. All of the above techniques are commonly used
72. Which of the following is not a directly observable cash flow resulting from a business
combination?
a. Disposal of redundant facilities
b. Synergies resulting from sales of complementary products
c. Reduced fixed costs from eliminating duplicate operations
d. Savings due to increased coordination when one part of the new entity produces
inputs for another part of the new entity
73. Which of the following is a directly observable cash flow resulting from a business
combination?
a. Savings from production and marketing expertise
b. Acquisition of an established market share for products
c. Disposal of redundant facilities
d. A readily available supply of scarce inputs

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management is attempting to monopolize a particular industry?
75. Horizontal business combinations occur when one entity purchases which of the
following?
a. A supplier
b. A customer
c. A competitor
management is attempting to improve the efficiency of operations?
a. The acquiree purchases the acquirer’s outputs
d. Either a. or c.

management is attempting to diversify its investment?

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81. Management acquires a business in a tangentially related industry to the current business.
c. Mega combination
82. One reason for conglomerate combinations is that management has become more aware that it
helps accomplish which of the following?
a. Pure competition
b. Monopoly
c. Oligopoly
d. Free market
84. Which of the following is not true with regard to the Sherman Act of 1890?
a. It is the first legislation that restricts the ability to enter into business
combinations
b. Its basic purpose was to make acts that would hinder free competition illegal
c. The act required the government to show that trade had been restrained as a result
of a combination
d. The act could only be applied after a combination has occurred
85. Which of the following can be used to break up combined entities, but not to prevent the
business combination from occurring?
a. Clayton Act
b. Sherman Act
86. Which of the following allows the government to prevent proposed business
combinations from occurring if the result of the combination would be the creation of a
monopoly or the lessening of competition?
a. Clayton Act
b. Sherman Act
87. When regulating business combinations the Federal Trade Commission does not assess
a. The impact of the combination on industry concentration
b. The impact of the combination on barriers to entry into the industry

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c. The impact of the combination on restriction of trade

d. The Federal Trade Commission assesses each of the above in regulating business
combinations
88. When an offer is made to acquire a company and the acquiree management supports the
offer, the offer is called which of the following?
b. Tender offer
c. Hostile takeover
89. The defensive maneuver where a company buys stock from a potential acquirer at a
premium over the market price is called which of the following?
a. White knight
b. Shark repellent
c. Greenmail
90. The defensive maneuver where a company seeks to be acquired by a company perceived
to be a better match than the company making an offer to buy the potential acquiree is
called which of the following?
a. Poison pill
b. White knight
d. Fatman defense
91. Which of the following is not a Kamikaze strategy?

c. Fatman defense
d. All of the above are Kamikaze strategies
acquiree sells desirable assets to reduce the company’s value?
c. Fatman defense
d. Greenmail
acquirer if a takeover is accomplished

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c. Packman defense
96. Control enables the acquiring entity to do which of the following?

a. Direct the use of the controlled entity’s assets by establishing capital and
operating budgets and policies
b. Enforce the budgets and policies by selecting, compensating, and terminating
those responsible for implementing decisions
c. Either a or b will illustrate control
d. Both a and b are required to illustrate control
a. Cash
b. Other assets
c. Liabilities
structure
b. The acquiree stockholders become the acquirer stockholders
c. The acquirer and acquiree stockholders share ownership of the acquirer

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structure
how does the value of the acquiree net assets change?
how does the ownership structure of the acquiree change?
structure
structure
c. Stock for stock
d. Either b or c
105. Which of the following forms of business combination is not subject to state laws
specific to business combinations?
b. Statutory merger
d. All three are subject to state laws

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b. Control of the net assets of the combining entities must be acquired by the new
entity
corporation
108. 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?
c. Zero
111. To qualify as a reorganization (for tax purposes), a business combination must be

structured as which of the following?
a. Statutory merger
b. Statutory consolidation
c. Stock acquisition
d. All of the above can qualify as reorganizations
112. To qualify as a reorganization (for tax purposes), a business combination must meet
b. The acquirer must continue the acquiree business or employ a significant portion
of the acquiree net assets in an ongoing business
d. All of the above criteria are required for a combination to qualify as a
reorganization
113. Which of the following is not a feature of a Type A form of reorganization for tax
purposes?
a. The acquirer only has to give 50 percent of the consideration in stock
b. Stockholder approval of the acquiree stockholders is required but not the acquirer
stockholders

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c. All known and contingent acquiree liabilities become acquirer liabilities

d. The combination can be structured as a statutory merger or statutory
consolidation
114. Which of the following is not a feature of a Type C form of reorganization for tax
purposes?
a. The acquirer is not responsible for liabilities not expressly accepted as part of the
agreement
b. Acquirer voting common stock must be issued for 100 percent of the
consideration given
c. Approval by acquirer and acquiree stockholders is required
d. The acquiree must distribute the acquirer stock to its shareholders and terminate
operations
115. Which of the following is not a feature of a Type B form of reorganization for tax
purposes?
a. The acquirer takes possession of the acquiree assets
b. Acquirer voting common stock is exchanged for acquiree voting common stock
c. The acquirer must own at least 80 percent of acquiree stock
d. Acquisition of acquiree stock prior to the reorganization can result in denial of
nontaxable exchange status
Conceptual Multiple Choice Question Difficulty and Solutions

64. easy c
65. easy b
66. moderate a
67. easy a
68. easy d
69. easy d
70. easy c
71. easy d
72. moderate b
73. moderate c
74. easy a
75. easy c
76. moderate b
77. easy b
78. moderate d
79. easy c
80. easy c
81. easy b
82. moderate a
83. easy b
84. easy d
85. easy b
86. easy a
87. moderate d
88. easy a

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89. easy c
90. moderate b
91. moderate d
92. easy a
93. moderate c
94. difficult c
95. easy c
96. moderate d
97. easy d
98. moderate d
99. easy a
100. easy a
101. moderate d
102. moderate a
103. easy b
104. moderate c
105. easy a
106. easy c
107. easy c
108. moderate a
109. moderate d
110. easy a
111. moderate d
112. moderate d
113. difficult b
114. difficult c
115. difficult a
Computational Multiple Choice Questions

Knives Unlimited immediately after the above transaction?
Quicky Locksmiths immediately after the above transaction?

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acquisition. Who is (are) the stockholder(s) of Quietkey immediately after the
transaction?
a. Johnson (100%)
b. Housewald (100%)
acquisition. Who is (are) the stockholder(s) of Video Junction immediately after the
transaction?
a. Johnson (100%)
b. Housewald (100%)
Who are the stockholders of Oxford Industries immediately after the acquisition?
c. Stuart and Tom (50%) and Hank and Ruben (50%)
d. Stuart and Tom (50%) and Samson Gyms (50%)
Who is (are) the stockholder(s) of Samson Gyms immediately after the acquisition?
c. Oxford Industries (100%)
d. Stuart and Tom (50%) and Hank and Ruben (50%)
Who are the stockholders of Astronaut Aviation immediately after the acquisition?

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d. Roberto and Lou (75%) and Chill Air Conditioning (25%)
Who is (are) the stockholder(s) of Chill Air Conditioning immediately after the
acquisition?
d. Astronaut Aviation (100%)
124. Value Inc. is acquiring High Priced Industries in a stock swap. Each of High Priced’s
100,000 shares is to be exchanged for .75 shares of Value. The current estimated market
value of the two stocks is $10 for Value, an actively traded stock, and $8 for High Priced,
which is family-owned and not actively traded. The managers of High Priced have
negotiated an increased exchange ratio from .75 to .8 shares if return on equity is more
than a targeted value. Determine the investment amount that could be recognized by
Value based on High Prices (1) not meeting the return on equity target, and (2) meeting
the return on equity target.
a. $750,000; $640,000
b. $750,000; $800,000
c. $600,000; $640,000
d. $600,000; $800,000
125. Potters Petroleum is acquiring Deep Well Drilling in a stock swap. Each of Deep Well’s
250,000 shares is to be exchanged for 1.50 shares of Potters. The current market values
of the two stocks are $30 and $45 for Potters Petroleum and Deep Well, respectively.
The managers of Deep Well have negotiated an increased exchange ratio from 1.50 to
1.80 shares if return on assets is more than a targeted value. Assume that the market
value of Potters Petroleum is more objectively determinable in valuing the transaction.
Determine the investment amount that could be recognized by Potters based on Deep
Well (1) not meeting the return on assets target, and (2) meeting the return on assets
target.
a. $5,000,000; $13,500,000
b. $5,000,000; $22,500,000
c. $11,250,000; $13,500,000
d. $11,250,000; $20,250,000

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recognized by Jacks-or-Better if Three Kings’ stock price decreases from $25 to $15.
a. $12,750,000
b. $16,612,500
c. $21,250,000
d. $35,416,667
recognized if Three Kings’ stock price increases from $25 to $40.
a. $7,812,500
b. $12,750,000
c. $21,250,000
d. $34,000,000
Computational Multiple Choice Question Difficulty and Solutions

116. easy a
117. easy b
118. moderate d
119. easy b
120. easy a
121. moderate c
122. moderate c
123. moderate d
124. difficult b
Target not met: 100,000 shares x .75 share x $10 = $750,000
Target met: 100,000 shares x .8 x $10 = $800,000
125. difficult c
Target not met: 250,000 shares x 1.50 share x $30 = $11,250,000
Target met: 250,000 shares x 1.8 x $30 = $13,500,000
126. moderate c
127. moderate c
Problems
Columbia Manufacturing is owned by Louis and Brian. They recently concluded an
agreement to buy all of Bell Manufacturing, owned by Ken and Adam. Columbia will

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pay $500,000 in cash and assume $300,000 of Bell’s liabilities in exchange for total
ownership of Bell’s net assets. Identify the stockholders of each company immediately
after the above transaction is concluded.
Answer:
Louis and Brian will own 100 % of Columbia and Ken and Adam will own 100% of
Bell. An asset for asset acquisition does not change the owners of either company.
129. (Part a. 10 Points; Part b. 10 Points) moderate, moderate

The following two cases are independent. Identify the stockholders of each company and
the percentage ownership of each stockholder immediately after the transaction
described.
a. The owners of Baylor Incorporated acquire the net assets of Waco Company by
issuing 10,000 new shares of Baylor's stock. Baldwin and Rosco own all 40,000
shares of Baylor's stock prior to the transaction. Wilson and Montgomery own all
of Waco's stock prior to the transaction.
b. Lincoln Enterprises purchase all of Jefferson Corporation's common stock for
$5,000,000 in cash. Prior to this transaction, Ralph and Maureen are the
stockholders of Lincoln while David and Jennifer are the stockholders of
Jefferson. The total market value of Lincoln's and Jefferson's stock is estimated to
be $18,000,000 and $6,000,000, respectively immediately before the acquisition.
Answer:
a. Company Shareholders Percentage
Waco Wilson and Montgomery 100%
Baylor Baldwin and Rosco 40,000/50,000 = 80%
Waco 10,000/50,000 = 20%
b. Company Shareholders Percentage
Jefferson Lincoln 100%
Lincoln Ralph and Maureen 100%

John and Andy own all 120,000 outstanding shares of Southern Enterprises while Dan

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and Derek own all 25,000 shares of Northern Industries. An agreement was recently
reached whereby Southern Enterprises will issue 40,000 new shares of stock in exchange
for all 25,000 shares of Northern Industries. Identify the owners and their percentage
ownership of each company immediately after the transaction.
Answer:
Company Shareholders Percentage
Southern John and Andy 120,000/160,000 = 75%
Dan and Derek 40,000/160,000 = 25%
Northern Southern 100%

Johnstone Baby Supplies is in the process of acquiring Altez Baby Bottle Company.
Altez is a relatively new company and its income has fluctuated substantially from period
to period. Altez’s owners are concerned that they will not receive adequate compensation
for their stock because of this fluctuation. The current stock for stock exchange ratio
being considered is that each share of Altez stock, par value $1 and market value $15,
would be exchanged for .6 shares of Johnstone stock, par value $.50 and market value
$25. Currently 50,000 shares of Altez stock are outstanding. The owners of Altez have
proposed that the exchange ratio be increased from .6 to .75 share of Johnstone for each
share of Altez if the net income of Altez increases next year by more than 25 percent
above last year. Assuming the market prices of the stock do not change, determine the
amount of the investment account to be recorded on Johnstone’s books assuming that:
a. The net income increase does not occur
b. The net income increase does occur
Answer:
a. 50,000 shares x .6 x $25 = $750,000
b. 50,000 shares x .75 x $25 = $937,500

Management of McAfee and Montego are discussing a possible merger. The current
agreement is for McAfee to gain control of Montego by exchanging .75 of its shares for
each Montego share. McAfee stock is trading at $40 per share (near the top of its 52-
week range) while Montego is trading at $27. The concern is that the McAfee’s stock
price fluctuates significantly more than Montego’s stock price. Montego’s management
is willing to endorse the proposed merger if the agreement is modified to include the
clause that the exchange ratio will increase by .1 share for every $2 that McAfee’s stock
value falls below $40 at the exchange date. Montego’s management is unwilling to
accept a decrease in the exchange ratio if the stock price of McAfee increases. Montego
currently has 100,000 shares of stock outstanding. What is the amount of the investment
recognized by McAfee if its stock price:
a. Remains at $40
b. Decreases to $34
c. Increases to $44
Answer:
a. 100,000 shares x .75 x $3,000,000

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b. $3,000,000
c. $3,000,000
The investment does not change as a result of a change in the acquirer stock price.
The increase in the number of shares replaces the value that is lost due to the
decrease in the share price. The change in par value that must be recorded is
offset by an adjustment in the Additional Paid-in Capital account.
Short Answer Questions

133. Compare and contrast internal versus external business expansion.
Answer: Internal expansion results from changes within the entity. It is often the result
of an entity undertaking research and development activities that culminate in the
development and marketing of new products. It can also be the expansion of the company
geographically by entering new markets with existing products. External business expansion
occurs when two or more businesses join together and operate as one entity, or related entities,
under the direction and control of one management group. In general, internal expansion is
brought about by changes within an entity while the combining of two entities brings
about external expansion.
134. Internal expansion is viewed as often being a slower process than external expansion.
What are some of the reasons for this perception?
Answer: Internal expansion is often a slow process because the entity may have to
develop a distribution system, generate demand for its new product, and/or build new
production facilities to support new products or expanding sales.
135. Alice Baker and Kathy Reed are co-owners of a profitable local business. The owners
have decided that they have as much market share in the local market as they are likely to
attain. As a result, the owners are considering expanding their business geographically.
Alice wants to buy a company in a nearby town but Kathy is opposed to that strategy.
She indicates that there is no reason to buy someone else when we can buy a building and
set up operations in the other town. You have been asked to prepare a report for Alice
and Kathy explaining the advantages and disadvantages of external expansion. Prepare a
list of the topics that could be included in the report. A complete writing of the report is
not necessary.
Answer: Advantages will include more rapid expansion, established management, does
not increase total supply of goods, greater market share, positive reputation of existing
company. Disadvantages include defensive measures, negative reputation of existing
company, corporate culture clash.
136. You are a financial advisor to a local corporation. The three primary stockholders in the
corporation (Frank Phillips, Jim Wright, and Fred Bailey) are also the corporate officers.
The corporation is considering expanding. Frank is interested in expanding internally
while Jim favors expanding externally. Fred has no strong opinion on this issue. Frank
and Jim have been trying to influence Fred because he is the deciding vote on this issue.
Prepare a memo to Fred outlining some of the advantages of external expansion.

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Answer: Discussion may include the following:

1. Expansion can be achieved more rapidly through combinations. Alternatively, the
time necessary to construct a new facility, staff it and develop a market for the
output is comparatively long,
2. Combinations may provide an established, experienced management group
immediately,
3. Combinations may lead to economies of scale. For example, the same size sales
force or accounting staff may be able to service two corporate structures as well
as one,
4. The overall cost of capital may be reduced as a result of a combination because of
the increased size of the entity,
5. Federal income tax laws provide some advantages to certain combined corporate
entities that are not available to one corporation,
6. External expansion does not increase the total supply of goods available from that
industry, whereas internal expansion may increase supply beyond existing
demand levels,
7. Control over a greater market share may enable the combined entity to become a
price leader in the market,
8. For some combinations, the guaranteed raw material sources and product markets
provided by combinations provide a significant management advantage. In
addition, the profits at each level accrue to the combined entity, and
9. Diversification accomplished through combinations may provide a less volatile
income stream. This reduces the risk level of the entity that, in turn, lowers
borrowing rates.
137. Assume a company primarily produces and sells a single product. This company is
considering expanding geographically. Discuss the difference between internal and
external expansion with regard to the total industry supply of, and demand for, the
product sold by the expanding company.
Answer: Internal expansion results when a company increases its ability to produce
output by acquiring additional facilities resulting in an overall increase in the supply of
the product. External expansion results when a company attains control over the net
assets of another company. The total productive capacity of the industry does not change
because new productive assets are not added. The only change is in the ownership of
existing productive assets. Neither internal nor external expansion has an impact on
demand for the product.
138. Discuss the similarities between the analysis conducted when acquiring a new piece of
machinery and the analysis conducted when acquiring control over the net assets of
another company.
Answer: The decision by the acquirer to undertake such an investment will involve the
same type of analysis as is performed when deciding whether to make capital
expenditures for other assets. Managers of the acquiring entity may prepare budgets and
perform capital budgeting analysis using techniques such as net present value and
internal rate of return to determine whether the investment is in the best interest of the
acquirer. The difference between the purchase of an individual asset and the acquisition

lOMoARcPSD|6826800
of another entity is that projecting the future cash flows may be more involved for an
entity acquisition. When purchasing a piece of machinery, the relevant cash flows will be
such items as the change in the operating costs, the tax implications of differences in
depreciation, and the future salvage value of the machine. When considering the
acquisition of another entity, some of the cash flows that may need to be evaluated result
from the disposal of redundant facilities, reduction of fixed costs by eliminating duplicate
operations, and internal coordination of operations when one part of the new entity
produces input for another part of the new entity.
139. Sarah Clammers, a client, is reading newspaper articles on two of the companies in
which stock are held. Some of the terms used in the articles are horizontal combination
and vertical combination. Sarah understands the definition of horizontal and vertical but
does not know what the terms mean in this context. Prepare a brief memo to differentiate
these terms for Sarah.
Answer: A horizontal combination occurs when a company acquires a competitor in the

same industry. A vertical combination occurs when a company acquires an entity that
either provides production inputs or acquires the production output of the company.
addressed is horizontal combinations. One board member has asked for a clarification of
the advantages of horizontal business combinations as compared to other forms of
business combinations. Prepare a response to this board member.
Answer: Horizontal combinations exist when an entity acquires a competitor. The result
of such a combination is an increase in market share. A horizontal combination may
result in greater control over the product’s selling price because of the increased market
share. This type of combination can also lead to economies of scale and a reduction in
the number of persons needed to supply some support activities. Other types of
combinations (vertical or conglomerate) may result in management being required to
oversee the activities of business in which they do not have expertise.
addressed is vertical combinations. One board member has asked for a clarification of
the advantages of vertical business combinations as compared to other forms of business
combinations. Prepare a response to this board member.
Answer: A vertical business combination occurs when an entity purchases a supplier of

inputs or a purchaser of outputs. This type of business combination helps the company to
improve the efficiency of operations. Management of the company has better control
over the products from acquisition of raw materials, through manufacturing and
distribution, to final sale to customers. Other types of business combinations (horizontal
and conglomerate) leave other entities in control of more aspects of production and
distribution.

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discussion of a business combination as a means of expansion. An issue that has been
addressed is conglomerate combinations. One board member has asked for a
clarification of the advantages of conglomerate business combinations as compared to
other forms of business combinations. Prepare a response to this board member.
Answer: A conglomerate form of business combination occurs when one entity acquires
a company in unrelated or tangentially related businesses. Conglomerate combinations
have two general advantages over other types of combinations (horizontal and vertical).
Conglomerate combinations help improve income stability provided by diversifying the
asset base of an entity. Another advantage is that it has been considerably more difficult
for the government to challenge a conglomerate business combination on the basis of
antitrust regulations.
143. Discuss the reason the Sherman Act was not sufficient to address the problems that exist
as a result of business combinations.
Answer: The Sherman Act of 1890 only permits the government to break up a company
after the government has proven that the company has restrained free trade. It does not
give the government the power to prevent the creation of a company that would endanger
free trade.
144. Discuss how the Clayton Act broadens the government’s ability to oversee business
combinations as compared to the Sherman Act.
Answer: The Clayton Act can prevent a business combination from taking place if the
anticipated result is a lessening of competition or the creation of a monopoly while the
Sherman Act only permits the government to break up a company after the government
has proven that the company restrained free trade.
145. The Wall Street Journal has articles almost daily in which business combinations are
announced. How can there be so many business combinations when the Federal Trade
Commission assesses the impact of proposed combinations on such issues as industry
concentration, barriers to entry, and restriction of trade?
Answer: The vast majority of combinations are not disallowed because they involve
relatively minor segments of competitive markets and, therefore, would not reduce or
control competition in any significant way.
146. Richard, a friend, was reading in the newspaper about an attempted takeover that did not
succeed. The reason given for the acquirer stopping the acquisition was that greenmail
was paid. Richard does not understand the meaning of the term greenmail. Prepare a
brief note to Richard explaining this concept.
Answer: Greenmail exists when the potential acquiree management buys acquiree stock
back from a potential acquirer for a price above the price paid by the potential acquirer.

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147. A poison pill is one maneuver an entity can employ to avoid a takeover attempt. Explain
how a poison pill can accomplish this objective and discuss the major potential problem
with undertaking this maneuver.
Answer: A poison pill involves the issuance of preferred stock that is convertible into
common stock of the unwanted acquirer allowing preferred stockholders to regain
control by converting into common stock. The problem is that it can deter friendly
acquirers as well as hostile acquirers.
148. Your company is attempting to take over another entity. One of the board members has
suggested that the target may attempt to sell the crown jewels or undertake a scorched
earth defense. Another board member is unaware of the meaning of these terms and has
requested your input. Prepare a brief memo outlining the similarities and differences
between the two concepts.
Answer: The sale of the crown jewels and the scorched earth defense both result in the
target company selling some of its assets. The difference is in the amount of assets sold
and how selective the target is in determining which assets to sell. The sale of the crown
jewels results when a target sells assets that would be particularly valuable to the
potential acquirer. The scorched earth defense results when a target generally sells large
amounts of assets without regard to the specific desirability to the potential acquirer. In
both instances, the target’s objective is to reduce its overall value thereby reducing the
potential acquirer interest.
149. Your company is in a takeover struggle with a larger company. Management has
determined that either a scorched earth defense or a fatman defense would most likely be
successful in thwarting the takeover attempt. The CEO has asked for your input.
Prepare a memo outlining the differences between the two measures.
Answer: The scorched earth defense involves a broad-based sale of assets. The proceeds
are distributed to stockholders reducing the potential acquiree value. The fatman defense
results in the acquisition of poorly performing assets. The potential acquiree value is
reduced due to the poor performance of the newly acquired assets.
150. You serve on the board of directors of a large company. A topic of discussion at a recent
meeting is the acquisition of another entity. One board member stated that the company
should purchase 49 percent of the other entity so we would not have to consolidate the
acquiree into our financial statements. Prepare a note to respond to the board member.
Answer: The control of another entity’s assets and operations is the determining factor in
deciding whether consolidated financial statements are required. Purchasing 49 percent
would likely result in control unless the other 51 percent is owned by one or a small
number of stockholders.
151. The Board of Directors of Mesa, Incorporated is discussing the acquisition of a

competitor. One board member is new and has asked for an explanation of the difference
between acquiring all the net assets and acquiring all the stock of the other company.
The CFO has asked you to respond to this question.

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Answer: From an economic perspective there is no difference between acquiring all of

the net assets and acquiring all of the stock. Mesa still has control over all the assets.
The difference that exists pertains to the preparation of the financial statements. If Mesa
acquires all the net assets, there is only one economic entity, so consolidation is not
needed. If Mesa acquires all the stock, there are two legal entities and the consolidation
process is used to prepare the financial statements. The financial statements will appear
the same regardless of the manner in which the other company is acquired.
152. Discuss how a business combination accomplished with an exchange of assets for assets
differs from an exchange of stock (acquirer) for assets (acquiree) from the perspective of
the acquirer. Then, discuss the differences from the acquiree perspective.
Answer: From the acquirer perspective, the asset for asset acquisition results in no
change to the net assets and liabilities although the composition of the assets will change.
The exchange of stock for assets results in an increase in acquirer’s net equity and assets.
From the acquiree perspective, there is a change in the assets owned. Subsequent to the
asset for asset exchange, the acquiree assets owned are likely cash or receivables but
subsequent to the stock for asset exchange the resulting asset owned is an investment in
the acquirer.
153. Jim and Fred are two managers in Clippers Corporation. They are discussing a
combination being planned. Jim states that the other entity (Heads R Us) is being taken
over by Clippers because Clippers’ stock is being issued for Heads R Us stock. Fred says
that he has been reading the paper, and it sounds to him as if Heads R Us is taking over
Clippers. In fact, Fred had an article on his desk that contained the following statement
by the board of directors of Heads R Us, “The synergy that exists between Clippers and
Heads R Us will make Clippers a welcome addition to our corporate family.” Jim and
Fred have asked you to clarify their confusion.
Answer: While the company issuing new shares is normally the acquirer, the stock issued
does not always determine the stockholder group that controls the consolidated entity
after a combination is completed. Control depends on the stock exchange ratio. The
party owning the greater portion of the outstanding stock after the combination is the
controlling entity. For example, if Clippers has 10,000 shares outstanding prior to the
combination, but has to issue 20,000 shares of voting common to the stockholders of
Heads R Us to complete the transaction, then the acquirer is Heads R Us.
154. Ken Sanders has been a classmate of yours for some time. He has come to you with this
question. “Any time a new corporate entity is formed, it begins with zero Retained
Earnings. Why is there a balance in Retained Earnings as soon as an corporate entity is
formed in a statutory consolidation?” Prepare a response to Ken’s question.
Answer: The establishment of a new corporate shell is a matter of legal form. In reality,
the larger corporation is taking control of the smaller corporation, so the Retained
Earnings of the larger corporation is carried forward to the new entity’s balance sheet.

lOMoARcPSD|6826800
155. Mary Brian is a board member for Big Hats, a company completing an acquisition. The
acquiree, Sombrero Incorporated, is being purchased with stock of Big Hats. The
agreement states that Big Hats will issue 5,000 additional shares of stock if Sombrero’s
income exceeds $2,000,000 for the most recent year. Mary has indicated that the
additional shares of stock would not significantly dilute the ownership of the current
stockholders and that it would have no impact on the acquisition price because the
purchase is being accomplished with a stock for stock swap. Do you agree with Mary?
Support your answer.
Answer: You should not agree with Mary. The additional number of shares of stock
issued is a result in a change in the perceived value of Sombrero because of its additional
contribution to consolidated net income. The total value of the stock being distributed is
not a result of a change in the value of the stock, it is a result of a change in the value of
the acquiree. Thus, the acquisition cost would increase.
156. Management has asked you to provide input on how to structure a business combination
so it will result in a tax deferred exchange. Prepare a memo indicating the three basic
criteria that must be met to accomplish this objective.
Answer: The answer will include the following:

1. The acquiree’s owners must continue to have an indirect ownership in the
acquiree.
2. The acquirer must continue acquiree business or employ a significant portion of
the acquiree net assets in an ongoing business.
3. The combination must occur for a valid business purpose.
157. When a business combination does not qualify as a tax deferred exchange, the acquirer is
not permitted to take advantage of the acquiree net operating loss carryforward. Given
that the two companies are now one company, why is the net operating loss carryforward
not transferred to the acquirer?
Answer: If the business combination does not qualify as a tax deferred exchange, the
acquirer has purchased the acquiree. It is not possible to purchase tax aspects of an
entity. As a result, an acquiree’s net operating loss carryforward does not transfer to the
acquirer in a combination that does not qualify as a tax deferred exchange.

Chapter 5
Consolidated Financial Statements with
Less than 100% Ownership
Learning Objectives – Coverage by question

Multiple Choice Exercises Problems
LO1 – Explain consolidation on the 7, 17, 20-23,

date of acquisition – majority- 3 4
owned subsidiary. 29, 31
LO2 – Explain allocation of profit to

controlling and noncontrolling 1, 3, 18, 24,
interests and consolidation
28, 30, 31, 1, 2, 4-6 1-3
subsequent to the date of
acquisition – majority-owned 37-39
subsidiary.
LO3 – Explain intercompany profit

elimination in consolidated
financial statements in the 10-16 6 1, 2
presence of noncontrolling
interests.
LO4 – Become aware of differences in

consolidations allowed under
International Financial
Reporting standards.
LO5 – Explain the computation of

earnings per share for 32, 33
consolidated companies.
LO6 – Explain the effects on

consolidated financial 2, 4-6, 8, 9, 19,
statements of changes in the
ownership percentage of a 26, 27, 34-36
subsidiary.
©Cambridge Business Publishers, 2014

Test Bank, Chapter 5 5-1
Chapter 5: Consolidated Financial Statements with Less than 100%
Ownership
Multiple Choice
Multiple Choice – Theory
Topic: Goodwill Impairment Allocation

LO: 2
1. Allocation of goodwill impairment losses to the parent and the noncontrolling interests should be
based on:
a. Relative interests of parent and noncontrolling interests in the carrying value of goodwill
b. Parent and noncontrolling interests relative ownership percentages in the subsidiary
c. The entire impairment loss is reported on the parent company’s books only
Answer: a
Topic: Subsidiary Net Income

LO: 6
2. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the
a. Income from subsidiary is not recognized until there is an entire year of consolidated
operations.
b. Income from subsidiary is recognized from date of acquisition to year-end.
c. Excess cost over acquisition value is recognized at the beginning of the fiscal year.
d. No goodwill can be recognized.
e. Income from subsidiary is recognized for the entire year.
Answer: b
Topic: Consolidated Balance Sheet

LO: 2
3. When preparing a consolidated balance sheet, the noncontrolling interest amount must be
presented:
a. It is not disclosed on the balance sheet
b. As a part of liabilities
c. As a part of stockholders' equity
d. In the notes to financial statements
Answer: c

5-2 Advanced Accounting, 2nd Edition
Topic: Changes in Ownership Occurring During the Fiscal Year
LO: 6
4. When one company buys a controlling interest in another company on April 1 (assuming a
calendar year). How should the pre-acquisition subsidiary revenues and expenses be disclosed
in the consolidated balances for the year of acquisition?
a. It is combined with parent company income statement balances
b. It is disclosed in consolidated retained earnings
c. Only post-acquisition revenues and expenses are included in consolidated totals.
d. Only post-acquisition revenues and expenses are included in consolidated totals on the
financial statements, however, the revenue and earnings of the combined entity for the
current reporting period as though the acquisition date for all business combinations that
occurred during the year had been as of the beginning of the annual reporting period are
included in supplemental pro forma information.
Answer: d
Topic: Sale of common Stock by the Subsidiary to Outside Parties

LO: 6
5. How does a parent corporation account for the sale of a portion of an investment in a subsidiary?
a. If control is maintained after the sale, then the difference between the sales proceeds and the
book value is an adjustment to the parent's owners' equity (APIC).
b. Sale proceeds are included as a part of consolidated revenues.
c. It is only footnoted.
d. Reported as a gain only if the equity method is used.
Answer: a
Topic: Deconsolidation of a Subsidiary

LO: 6
6. When accounting for the deconsolidation of a subsidiary (parent loses control)
a. The parent recognizes a gain or loss on the deconsolidation.
b. The parent recognizes the would be gain or loss as a part of APIC.
c. The parent’s common shares are adjusted to reflect the new amount of outstanding shares.
d. Deconsolidation is only required when the parent company maintains control.
Answer: a
Topic: Goodwill Impairment Apportionment

LO: 1
7. Which of the following does not affect the computation of the noncontrolling interest in the net
assets of a partially owned subsidiary?
a. Dividends declared by the subsidiary
b. Impairment of goodwill recognized in the business combination
c. Depreciation and amortization of differences between current fair values and carrying
amounts of the subsidiary's identifiable net assets on the date of the business combination
d. All of the above answers are correct
Answer: d

Topic: Accounting for an Acquisition on the Date When Control Is Achieved
LO: 6
8. At the acquisition date, the date on which the investor company gains control of the investee
company, which of the following occur(s)?
a. All of the Equity Investments made by the investor in the investee must be revalued.
b. Any gains or losses as a result of the revaluation should be recognized currently in income.
c. Goodwill is measured (this only occurs on the date that the parent obtains control of the
investee).
d. All of the above answers are correct.
Answer: d
Topic: Required Disclosure for Noncontrolling Interest

LO: 6
9. When accounting for a noncontrolling interest, a parent company must disclose in the notes to the
consolidated financial statements:
a. A separate schedule that shows the effects of any changes in a parent’s ownership in the
subsidiary.
b. The nature of the parent’s continuing involvement with the subsidiary or entity acquiring the
group of assets after it has been discontinued.
c. Whether the transaction that resulted in the deconsolidation was with a related party.
Answer: d
Topic: Intercompany Profit Elimination

LO: 3
10. Deferred profit on intercompany asset sales:
a. Is always 100% eliminated
b. Is eliminated only on upstream sales
c. Is accounted only by the noncontrolling interests
d. Is not considered as part of consolidating elimination entries
Answer: a

LO: 3
11. On November 8, 2013, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The
land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination,
when is the gain on the sale of the land realized?
a. Proportionately over a designated period of years
b. When Wood Co. sells the land to a third party
c. No gain can be recognized
d. As Wood uses the land
Answer: b

LO: 3
12. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 2013. Which of
the following would be a debit entry in the consolidated worksheet for 2013?
a. Retained earnings
b. Cost of goods sold
c. Inventory
d. Additional paid-in capital
Answer: b

LO: 3
the following would be a credit entry in the consolidated worksheet for 2014?
c. Inventory
Answer: c

LO: 3
the following would be debited in the consolidated worksheet for 2014?
c. Inventory
d. Investment Cruz Company
Answer: a

LO: 3
15. Baijan Company sells inventory to its subsidiary, Cruz Company, at a profit during 2013. If Baijan
uses the equity method to account for its investment in Cruz, which of the following choices would
be a debit entry in the consolidated worksheet for 2014?
c. Inventory
d. Investment in Cruz Company
Answer: d

LO: 3
16. What is the impact on the non-controlling interest of a subsidiary when there are downstream
transfers of inventory between the parent and subsidiary companies?
a. A pro rata portion of deferred gain or loss is recognized in the income statement
b. Any resulting gain or loss is reported (in total) in the current period income statement
c. Any cash received is reported in Accumulated Other Comprehensive Income
d. None
Answer: d
Multiple Choice – Computational
Topic: Goodwill Accounting

LO: 1
17. Porter Co. acquired 80% of the common stock of Kriz Corp. for $700,000. The fair value of Kriz's
net assets was $800,000 and the book value was $725,000. The non-controlling interest shares
of Kriz Corp. are not actively traded. Determine the total amount of goodwill to be recognized.
a. $125,000
b. $75,000
c. $-0-
d. $60,000
e. $85,000
Answer: b
Topic: Allocation of Profit to Noncontrolling Interests

LO: 2
18. Montrose Co. owns 80% of the voting common stock of Concord Corp. During 2014, Concord
had revenues of $3,600,000 and expenses of $3,000,000. The amortization of excess cost
allocations totaled $160,000 in 2014. The non-controlling interest's share of the earnings of
Concord Corp. should be?
a. $88,000
b. $120,000
c. $84,000
d. $80,000
e. $66,000
Answer: a
Topic: Sale of Common Stock by the Subsidiary to Outside Parties

LO: 6
19. On January 1, 2013, Company P owns 100% of Company S that reports a Stockholders’ Equity of
$500,000 and 20,000 shares of $1 par value common stock outstanding. This acquisition was
made at book value. During the year, Company S sells 10,000 of its shares to outsiders for $30
per share. What is the amount that must be reported in Company P’s Equity Investment Account
at December 31, 2013?
a. $650,000
b. $795,000
c. $520,000
d. $-0-
Answer: c

The following information pertains to questions 20 - 25.
On January 1, 2014, Woody Company acquires 80% of the outstanding common stock of Buzz, for a
purchase price of $785,000. It was determined that the fair market value of the noncontrolling interest in
the subsidiary is $190,000. The book value of the Buzz’s stockholders’ equity on the date of acquisition is
$500,000 and its fair market value of identifiable tangible and intangible assets is $900,000. The excess
fair market value over book value is allocated $200,000 to equipment with a remaining useful life of 10
years, and $200,000 to a patent with a remaining useful life of 8 years.
Topic: Acquisition Accounting Premium

LO: 1
20. The journal entry (on Woody’s books) to recognize the acquisition date AAP assets and allocate
the ownership interest in those assets to the parent and noncontrolling interests (entry A)
includes:
a. Equity investment, credit, $400,000
b. Noncontrolling interest, credit, $100,000
c. Buzz retained earnings, debit, $332,500
d. Noncontrolling interest, credit, $90,000
Answer: d

LO: 1
21. What is the acquisition accounting premium (AAP)?
a. $475,000
b. $375,000
c. $400,000
d. $425,000
Answer: a
Topic: Goodwill
LO: 1
22. Buzz’s property, plant and equipment balance is undervalued by $500,000. Woody has assigned
a useful life of 50 years. Determine the total goodwill to be recognized at acquisition date.
a. $125,000
b. $80,000
c. $75,000
d. None of the above answers is correct
Answer: c

LO: 1
23. What portion of the AAP should be assigned to noncontrolling interest?
a. $90,000
b. $75,000
c. $-0-
d. $100,000
Answer: a

Topic: Allocating Profit to Controlling Interest
LO: 2
24. Assume that during the year ended December 31, 2014, Buzz reports net income of $210,000
and pays dividends of $21,000. Determine the December 31, 2014 ending balance in Woody
Company’s equity investment account. (Hint: Do not overlook the effect of amortization AAP
assets).
a. $794,500
b. $785,000
c. $860,600
d. $824,600
Answer: d
Topic: Allocating Profit to Noncontrolling Interest

LO: 2
25. Given the information in the previous question, determine the December 31, 2014 amount of the
noncontrolling interest.
a. $190,000
b. $199,900
c. $211,000
d. $208,900
Answer: b
Topic: Accounting for an Acquisition Achieved in Stages

LO: 6
26. Assume that Seiden Company gains control of Rimco, its subsidiary, with the purchase of a 40%
interest paid in cash. The Equity Investment account reports a balance of $75,000 on the
acquisition date and represents a 30% interest in Rimco. The total value of Rimco on the
acquisition date is $300,000 (assume no premium for control). The journal entry to record the
acquisition includes:
a. Cash, credit, $300,000
b. Gain on revaluation of Rimco, credit, $15,000
c. Loss on revaluation of Rimco, debit, $15,000
Answer: b
Topic: Sale of Equity investment by the Investor

LO: 6
27. Simi Company sells 40% of the shares it owns in Milburn Company for $300,000. The Equity
Investment relating to these shares is $275,000 on the date of sale. The journal entry to record
the sale assuming Simi keeps control over Milburn includes:
a. APIC, credit, $22,500
b. Equity investment, credit, $300,000
c. APIC, credit, $25,000
d. APIC, debit, $25,000
Answer: c

The following information pertains to questions 28 and 29.
Assume that, on January 1, 2013, a P Company acquired an 80% interest in its subsidiary for a purchase
price that was $250,000 over the book value of the S Company’s Stockholders’ Equity on the acquisition
date. The parent allocated the excess to the following [A] assets:
[A] Asset Initial Fair Value Useful Life (years)

PPE, net $ 50,000 10
Customer List 75,000 10
Goodwill 125000 Indefinite
$250,000
P Company and S Company report the following financial statements at December 31, 2017:
Income Statement
Parent Subsidiary
Sales $ 7,330,000 $ 935,250
Cost of goods sold (5,131,000) (561,150)
Gross Profit 2,199,000 374,100
Equity income 92,248
Operating expenses (1,392,700) (243,165)
Net income $ 898,548 $ 130,935
Statement of Retained Earnings

Parent Subsidiary
BOY Retained Earnings $3,682,592 $483,213
Net income 898,548 130,935
Dividends (199,159) (19,641)
EOY Retained Earnings $4,381,981 $594,507
Balance Sheet
Parent Subsidiary
Assets:
Cash $ 411,313 $ 65,756
Accounts receivable 938,240 216,978
Inventory 1,422,020 278,705
Equity Investment 1,378,423
PPE, net 5,374,356 640,335
$9,524,352 $1,201,773
Liabilities and Stockholders’ Equity:

Current Liabilities $1,053,321 $ 216,978
Long-term Liabilities 2,000,000 500,000
Common Stock 1,198,455 62,350
APIC 890,595 77,938
Retained Earnings 4,381,981 594,507
$9,524,352 $1,201,773

Topic: Allocation of Profit to Controlling Interest
LO: 2
28. Based on the given financial statements, the computation of the equity income of $92,248
reported by the parent includes a deduction for:
a. Amount attributed to depreciation and amortization, $35,000
b. Amount attributed to noncontrolling interest, $21,187
c. Dividends declared and paid by S Company, $25,000
d. Goodwill amortization, $20,000
Answer: b
Topic: Apportionment of Goodwill in the Presence of Noncontrolling Interests

LO: 1
29. The EOY Equity Investment balance of $1,378,423 (4 years subsequent to the acquisition)
includes:
a. Dividends of $247,400
b. Goodwill allocation of $200,000
c. Goodwill allocation of $125,000
d. BOY [A] assets excluding Goodwill, $200,000
Answer: c
The following information pertain to questions 30 and 31
Assume the following facts relating to an 80% owned subsidiary company:
BOY Stockholders’ Equity $600,000

BOY AAP assets 50,000
Net income of subsidiary (not including [A] asset depreciation
and amortization) 125,000
AAP assets depreciation and amortization expense 20,000
Dividends declared and paid to noncontrolling shareholders 2,500
Topic: Allocation of Profit to Noncontrolling Interests

LO: 2
30. What is the net income attributable to noncontrolling interests for the year?
a. $20,000
b. $25,000
c. $26,000
d. $21,000
Answer: d
Topic: Accounting for Noncontrolling Interests

LO: 1, 2
31. What is the amount reported as noncontrolling equity at the end of the year?
a. $151,000
b. $148,500
c. $120,000
d. $153,500
Answer: b
The following information pertain to questions 32 and 33
Assume the following facts are about a parent and its 70% owned subsidiary company:
Parent Subsidiary
Net income $100,000 $60,000
Common shares outstanding 20,000 14,000

(20,000 = 70% owned by parent)
Convertible Preferred Stock Dividends = $10,000

Convertible into 5,000
shares of common stock
Convertible Bonds Interest expense after tax

= $8,000
Convertible into 2,500 shares
of common stock
Topic: Consolidated Earnings per Share

LO: 5
32. What is the basic earnings per share?
a. $2.89
b. $6.60
c. $6.80
d. $2.90
Answer: b
Topic: Consolidated Earnings per Share

LO: 5
33. What is the diluted earnings per share?
a. $5.55
b. $6.58
c. $6.00
Answer: d
Topic: Sale of Common Stock by the Subsidiary to Outside Parties

LO: 6
34. Assume that a Shearer Company owns 100% of Skeran Corporation. Skeran reports a
Stockholders’ Equity of $250,000. The Equity investment was acquired at book value (i.e., no [A]
assets). Skeran sells a 10% interest to outsiders for $75,000. The entry made by Shearer as a
result of the sale of stock by Skeran includes:
a. APIC credit, $25,000
b. APIC credit, $42,500
c. APIC credit, $75,000
d. APIC credit, $125,000
Answer: b

The following information pertains to questions 35 and 36:
Murphy Company increased its ownership in Lander Company from 80% to 90% by the purchase of
additional shares of the Lander’s outstanding stock from noncontrolling shareholders for a purchase price
of $100,000. The noncontrolling interest reports a balance of $400,000 on that date.
Topic: Additional Purchase of Stock

LO: 6
35. The journal entry by Murphy to record the purchase includes:
a. Equity investment debit, $200,000
b. Equity investment debit, $100,000
c. Equity investment debit, $400,000
d. Equity investment debit, $300,000
Answer: a
Topic: Additional Purchase of Stock

LO: 6
36. The journal entry by Murphy to record the purchase includes:
a. APIC credit, $400,000
b. APIC credit, $100,000
c. APIC credit, $200,000
d. Cash credit, $200,000
Answer: b
Topic: Allocation of Profit

LO: 2
37. Beck Company is a wholly-owned subsidiary company which reports sales of $250,000 and net
income of $50,000 for the calendar year in which it is acquired on July 1st. What amount of sales
and net income are includable in consolidated income statement in the year of acquisition
assuming that sales and net income are earned evenly over the year?
a. Sales $125,000; Net income $25,000
b. Sales $100,000; Net income $20,000
c. Sales $75,000; Net income $12,500
d. Answer cannot be determined based on the given information
Answer: a

Topic: Allocation of Profit to Noncontrolling Interest
LO: 2
38. Taylor Co. owns 70% of the voting common stock of Meehan Corp. During 2014, Meehan had
revenues of $1,250,000 and expenses of $1,000,000. The amortization of excess cost
allocations totaled $30,000 in 2014. The non-controlling interest's share of the earnings of
Meehan Corp. is calculated to be:
a. $75,000
b. $66,000
c. $84,000
d. $80,000
Answer: b
Topic: Allocation of Profit to Controlling Interest

LO: 2
39. Taylor Co. owns 70% of the voting common stock of Meehan Corp. During 2014, Meehan had
revenues of $1,250,000 and expenses of $1,000,000. The amortization of excess cost
allocations totaled $30,000 in 2014. What is the net effect of the inclusion of Meehan on
consolidated net income for 2014?
a. $154,000
b. $175,000
c. $250,000
d. $220,000
Answer: a

Exercises
Topic: Interpretation of Noncontrolling Interest Footnote

LO: 2
1. Connections Company reports the following table in the footnotes to its 2013 annual report
(dollars in millions, except per share amounts, and shares in thousands):
Years ended Dec. 31, 2013 2012 2011

Noncontrolling Interest
Balance at beginning of year 37,499 32,566 28,610
Net income attributable to non controlling interest 7,007 6,455 5,353
Other comprehensive income (loss) 403 (330) 305
Total comprehensive income 7,410 6,125 5,658
(1,402
Distributions and other (1,548) (1,492) )
Balance at end of year 43,361 37,199 32,866
Required:
a. Describe where the noncontrolling ending balance, 2013, should be reported in the financial
statement(s) Connections Company.
b. Prepare the journal entry to recognize the Net Income attributable to noncontrolling interest.
c. Is the journal entry in “b” recorded in the books of the parent or subsidiary? How is this
amount determined?
Answer:
a. The ending balance for noncontrolling interests equity is reported in the stockholders’ equity
section of the consolidated balance sheet.
b. Net income attributable to noncontrolling interest 7,007

Noncontrolling interest 7,007
c. This is our [C] consolidation journal entry and it is not recorded in the books of either the
parent or the subsidiary. We must first adjust the subsidiary income for its proportionate
share of the amortization expense related to AAP assets and any deferred profit on upstream
inventory sales.

Topic: Preparing a Consolidated Income Statement
LO: 2
2. Preston Company purchased an 80% interest in Maricel Company five years ago with no AAP
(i.e., purchased at book value). Each reports the following income statement for the current year:
Income Statement
Preston Maricel
Sales $4,500,000 $750,000

Gross Profit 1,000,000 300,000
Operating expenses (950,000) (195,000)
Net income $ 134,000 $105,000
Required:
a. Compute the equity income of $84,000 reported by the Preston Company.
b. Prepare the consolidated income statement for the current year.
Answer:
a. $105,000 x 80% = $84,000
b.
Consolidated Income Statement
Sales $5,250,000
Cost of goods sold (3,950,000)
Gross profit 1,300,000
Operating expenses (1,145,000)
Net income 155,000
Net income attributable to noncontrolling interests (21,000)
Net income attributable to the parent $ 134,000

Topic: Consolidation on Date of Acquisition
LO: 1
3. Masterson Company acquires a 80% interest in its subsidiary for a purchase price of $620,800.
The excess of the purchase price over the book value of the subsidiary’s Stockholders’ Equity is
allocated to a building (in PPE, net) that the parent believes is worth $50,000 more than its book
value, an unrecorded Patent that the parent valued at $100,000, and Goodwill of $150,000, 80%
of which is allocated to the parent.
The parent and the subsidiary report the following balance sheets on the acquisition date:
Masterson Subsidiary Masterson Subsidiary
Cash $ 920,753 $107,576 Current Liabilities $ 814,779 $165,648

Accounts receivable 725,760 165,648 Long-term Liabilities 3,379,200 238,000
Inventory 1,099,980 212,772 Common Stock 927,045 47,600
Equity Investment 620,800 APIC 688,905 59,500
PPE, net 5,291,244 393,652 Retained Earnings 2,848,608 368,900
$8,658,537 $879,648 $8,658,537 $879,648
Required: Prepare the consolidation journal entries on the acquisition date.
Answer:
[E] Common stock (S) - @BOY 47,600
APIC (S) - @BOY 59,500
Retained earnings (S) @BOY 368,900
Equity investment - @BOY 380,800
Noncontrolling interest (@BOY) 95,200
Eliminates the beginning balance in SE(S) by eliminating the BV portion of the beginning
investment account.
[A] PPE, net - @BOY (100% AAP) 50,000

Patent, net @BOY (100% AAP) 100,000
GW @ BOY (100% AAP) 150,000
Equity investment - @BOY ( AAP) 240,000
Noncontrolling Interest 60,000
Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests by
eliminating the remaining investment account and establishing the BOY AAP for nci%.

Topic: Consolidation Subsequent to Date of Acquisition
LO: 2
4. Assume that, on January 1, 2014, Lander Company acquired a 90% interest in Brinkman
Company for a purchase price that was $300,000 over the book value of the subsidiary’s
Stockholders’ Equity on the acquisition date. Lander allocated the excess to the following [A]
assets:

PPE $100,000 20
Patent 50,000 10
Customer List 25,000 10
Goodwill 125,000 Indefinite
$300,000
90% of if the Goodwill is allocated to the parent. Lander and Brinkman report the following
financial statements December 31, 2017:
Income Statement
Lander Brinkman
Sales $8,520,000 $2,223,000
Cost of goods sold (5,964,000) (1,333,800)
Gross Profit 2,556,000 889,200
Net income $1,206,048 $ 311,220

Lander Brinkman
BOY Retained Earnings $4,280,448 $1,148,550
Net income 1,206,048 311,220
Dividends (210,950) (46,684)
Ending Retained Earnings $5,275,546 $1,413,086
Balance Sheet
Lander Brinkman
Assets:
Cash $ 550,526 $ 562,068
Accounts receivable 1,090,560 515,736
Inventory 1,652, 880 662,454
Equity Investment 1,796,882
PPE, net 6,246,864 1,522,014
$11,337,712 $3,262,272
Current Liabilities $ 1,224,324 $ 515,736
Long-term Liabilities 2,409,642 1,000,000
Common Stock 1,393,020 148,200
APIC 1,035,180 185,250
Retained Earnings 5,275,546 1,413,086
$11,337,712 $3,262,272
Required:
a. Compute the EOY noncontrolling interest equity balance.
b. Prepare the consolidation journal entries.
continued next page

Answer:
a
. Beg. Bal Noncontrolling interests equity:
Stockholders' equity $148,200 (10%)
[A] Assets 26,250 (10%)
[C] Income 29,872
Dividends (4,668)
End Bal NCI $199,654
b.
[C
] Equity income 268,848
Consol. NI attributable to NCI 29,872
Dividends 46,684
Equity investment 226,832
Eliminates the change in the investment account of AAP adjusted changes in SE(S).
[E
] Common stock (S) - @BOY 148,200
APIC (S) - @BOY 185,250
Retained earnings (S) @BOY 1,148,550
Equity investment - @BOY 1,333,800
Eliminates p% of the beginning balance in SE(S) by eliminating the BV portion of the
beginning investment account.
[A] PPE, net - @BOY (100% AAP) 85,000

Customer list, net @BOY (100% AAP) 17,500
GW @ BOY (100% AAP) 125,000
Allocates beginning-of-year 100% AAP to the controlling and noncontrolling interests
by eliminating the remaining investment account and establishing the BOY AAP for
nci%.
[D
] Operating expenses (for 100% AAP amort) 12,500
PPE, net (for 100% AAP amort) 5,000
Patent, net (for 100% AAP amort) 5,000
Customer list, net (for 100% AAP amort) 2,500
[I
Not applicable in this problem
]

Topic: Consolidation Subsequent to Date of Acquisition
LO: 2
5. Assume that, on January 1, 2013, Arthur Company acquires a 60% interest in Gustav Company
for a purchase price that was $300,000 over the book value of the Gustav’s Stockholders’ Equity
on the acquisition date. Arthur allocated the excess to the following [A] assets:

Patent 200,000 10
$300,000
The parent and the subsidiary report the following financial statements at December 31, 2019:
Income Statement
Arthur Gustav
Sales $4,000,000 $1,350,000
Gross Profit 1,200,000 540,000
Net income $ 541,400 $ 189,000

Arthur Gustav
Net income 541,400 189,000
Dividends (128,560) (28,350)
Balance Sheet
Arthur Gustav
Assets:
Cash $ 553,060 $ 34,050
Inventory 776,000 402,300
Equity Investment 732,390
PPE, net 2,932,800 924,300
$5,506,250 $1,673,850
Current Liabilities $ 574,800 313,200
Common Stock 654,000 90,000
APIC 486,000 112,500
$5,506,250 $1,673,850
Required: Prepare the following consolidation journal entries.

a. To eliminate the beginning balances in SE(S)
b. To Allocate beginning-of-year AAP to the controlling and noncontrolling interest
c. To record amortization of patent
continued next page

Answer:
a.
[E] Common Stock (S) - @BOY 90,000
APIC (S) - @BOY 112,500
Retained Earnings (S) @BOY 697,500
Equity Investment - @BOY 540,000
Eliminates the beginning balance in SE(S) by eliminating the BV portion of the
beginning investment account
b.
[A] Patent, net @BOY (100% AAP) 80,000
GW @ BOY (100% AAP) 100,000
nci%.
c.
[D
Operating expenses (for 100% AAP amort) 20,000
]
[I
Not applicable in this problem
]

Topic: Consolidation Subsequent to Date of Acquisition – Upstream Intercompany Inventory Sale
LO: 2, 3
6. On January 1, 2014, Baldwin Company acquired a 80% interest in Knapp Company for a
purchase price that was $125,000 over the book value of the Knapp’s Stockholders’ Equity on the
acquisition date. Baldwin allocated the excess to the following [A] assets:

PPE, net 50,000 20
Patent 75,000 15
$125,000
Knapp sells inventory to Baldwin (upstream) which includes that inventory in products that it,
ultimately, sells to customers outside of the controlled group. You have compiled the following
data for the years ending 2016 and 2017:
2016 2017
Transfer price for inventory sale $62,675 $85,300
Cost of goods sold (45,175) (65,300)
Gross profit $17,500 $20,000
% inventory remaining 20% 30%
Gross profit deferred $ 3,500 $ 6,000
EOY Receivable/Payable $22,500 $25,000
The inventory not remaining at the end of the year has been sold outside of the controlled group.
Income Statement
Baldwin Knapp
Sales $3,270,000 $312,375
Gross Profit 981,000 124,950
Equity investment income 26,986
Net income $ 386,686 $ 43,733

Baldwin Knapp
Net income 386,686 43,733
Dividends (123,600) (4,374)
continued next page

Balance Sheet
Baldwin Knapp
Assets:
Cash $ 229,410 $ 12,585
Inventory 334,161 93,088
PPE, net 3,051,564 165,859
$4,287,389 $344,003

Current Liabilities $ 469,899 $ 87,000
Long-term Liabilities 744,184 0
APIC 397,305 31,250
$4,004,587 $344,003
Required:
a. Compute the EOY noncontrolling interest equity balance
b. Prepare the consolidation journal entries.
continued next page

Answer:
a
Stockholders' equity $ 43,529 ($161,394 + $25,000 + $31,250) x 20%
Deferred gain (700) ($3,500 x 20%)
[A] Assets 20,500 ($125,000 – 3 x $7,500) x 20%
Income, net of amort. of AAP 6,747 ($41,233 - $7,500) x 20%
Dividends (875) $4,374 x 20%
EOY Noncontrolling Interests $69,201
b.
[C
] Equity income 26,986
Consol. NI attributable to NCI 6,747
Dividends 4,374
Equity investment 23,487
Eliminates the change in the investment account of AAP adjusted changes in SE(S).
[E] Common stock (S) - @BOY 25,000

APIC (S) - @BOY 31,250
Retained earnings (S) @BOY 161,394
Equity investment - @BOY 174,115
Eliminates the beginning balance in SE(S) by eliminating the BV portion of the
beginning investment account.
[A] PPE, net - @BOY (100% AAP) 42,500

GW @ BOY (100% AAP) ---
nci%.
[D
] Operating expenses (for 100% AAP amort.) 7,500
PPE, net (for 100% AAP amort) 2,500
Recognition of dep and amort of AAP assets.
[Icogs
] Equity investment 2,800
Noncontrolling interest @ BOY 700
Cost of goods sold 3,500

Recognition of deferred gain on inventory sale and proration between parent and
subsidiary.
continued next page

[Isales
] Sales 85,300
Cost of goods sold 85,300
Elimination of 100% of all intercompany transactions.
[Icogs
] Cost of goods sold 6,000
Inventory 6,000
Deferral of gross profit on this year inventory sales.
[Isales
] Accounts payable 25,000
Accounts receivable 25,000
Elimination of intercompany receivable and payable.

Problems
Topic: Consolidation Subsequent to Date of Acquisition – Upstream Intercompany Inventory Sale

LO: 2, 3
1. In January 1, 2013, Cameron Company acquired an 80% interest in Talisman Company for a
purchase price that was $275,000 over the book value of Talisman’s Stockholders’ Equity on the
acquisition date. The Cameron allocated the excess to the following [A] assets:

Patent 150,000 10
$275,000
Talisman sells inventory to Cameron (upstream) which includes that inventory in products that it
(Cameron), ultimately, sells to customers outside of the controlled group. You have compiled the
following data as of 2018 and 2019:
2018 2019
Transfer price for inventory sale $ 335,500 $ 366,500

Gross profit $ 28,000 $ 40,000
EOY Receivable/Payable $ 45,000 $ 50,000
Cameron and the Talisman report the following financial statements at December 31, 2019:
Income Statement
Cameron Talisman
Sales $ 6,770,000 $ 1,259,250
Cost of goods sold (4,739,000) (-755,550)
Gross Profit 2,031,000 503,700
Net income $ 911,836 $ 176,295

Cameron Talisman
Net income 911,836 176,295
Dividends (199,210) (17,630)
continued next page

Balance Sheet
Cameron Talisman
Assets:
Cash $ 795,240 $ 348,393
Inventory 1,313,380 375,257
PPE, net 6,317,764 694,267
$10,216,276 $1,710,062

Common Stock 1,106,895 83,950
APIC 822,555 104,938
$10,216,276 $1,710,062
Required:
a. Compute the EOY noncontrolling interest equity balance.
b. Prepare the consolidation spreadsheet on the acquisition date.
Answer:
a
Stockholders' equity $167,900 ($650,613 + $83,950 + $104,938) x 20%
(1,400
Deferred gain ) ($7,000 x 20%)
[A] Assets 37,000 [$275,000 – (6 x $15,000)] x 20%
[C) NCI Income 30,859 ($176,295 - $15,000 - $1,400) x 20%
(3,526
Dividends (20%) ) $17,630 x 20%
Ending Balance Noncontrolling
Interests $230,833
b.
Consolidated
Income
Statement
Cameron Talisman Dr Cr
Sales $6,770,000 $1,259,250 [Isales] $366,500 7,662,750
$366,50
Cost of goods sold [Icogs] 14,000 [Isales] 0
(4,739,000) (755,550) [Icogs] 7,000 (5,135,050)
Gross Profit 2,031,000 503,700 2,527,700
Equity income 123,436 [C] 123,436 0
Operating expenses (1,242,600) (327,405) [D] 15,000 (1,585,005)

Net income 911,836 176,295 942,695

Consol. NI attributable to NCI _________ _________ [C] 30,859 (30,859)
Consol. NI attributable to parent $ 911,836 $ 176,295 $ 911,836
continued next page

BOY retained earnings $3,401,248 $650,613 [E] 650,613 $3,401,248
Net income 911,836 176,295 911,836
[C
Dividends (199,210) (17,630) ] 17,630 (199,210)
Ending retained earnings
$4,113,874 $809,278 $4,113,874
Consolidated
Balance Sheet
Cameron Talisman Dr Cr
Balance Sheet
Assets:
Cash $ 795,240 348,393 $ 1,143,633
Accounts receivable 866,560 292,146 [Ipay] 50,000 1,108,706
Inventory 1,313,380 375,257 [Icogs] 14,000 1,674,637
Equity investment 923,332 [Icogs] 5,600 [C] 109,332 0
[E] 671,600
[A] 148,000
PPE, net 6,317,764 694,267 7,012,031
Patent [A] 60,000 [D] 15,000 45,000
Goodwill __________ _________ [A] 125,000 __ _125,000
$10,216,276 $1,710,062 $11,109,005
Liabilities and stockholders’ equity:

Current liabilities $ 972,849 $ 292,146 [Ipay] 50,000 $ 1,214,995
Long-term liabilities 3,200,103 419,750 3,619,853
Common stock 1,106,895 83,950 [E] 83,950 1,106,895
APIC 822,555 104,938 [E] 104,938 822,555
Retained earnings 4,113,874 809,278 4,113,874
Noncontrolling interest [C] 27,333 230,833
[Icogs] 1,400 [E] 167,900
__________ _________
_ _ [A] 37,000 ___________
$1,710,06 1,631,29
$10,216,276 ∑ ∑ 1,631,295 $11,109,005
2 5

Topic: Consolidation Subsequent to Date of Acquisition – Downstream Intercompany Inventory
Sale
LO: 2, 3
2. Assume that, on January 1, 2014, a parent company acquired a 70% interest in its subsidiary for
a purchase price that was $125,000 over the book value of the subsidiary’s Stockholders’ Equity
on the acquisition date. The parent allocated the excess to the following [A] asset:

PPE 125,000 20
Assume that the parent sells inventory to the subsidiary (downstream) which includes that
inventory in products that it, ultimately, sells to customers outside of the controlled group. You
have compiled the following data as of 2015 and 2016:
2015 2016
Transfer price for inventory sale $97,280 $133,400
Gross profit $24,500 $28,000
EOY Receivable/Payable $10,000 $ 5,000
Income Statement
Parent Subsidiary
Sales $5,430,000 $638,650
Gross Profit 1,629,000 338,500
Net income $ 735,155 $208,435

Parent Subsidiary
Net income 735,155 208,435
Dividends (136,291) (7,004)
continued next page

Balance Sheet
Parent Subsidiary
Assets:
Cash $ 607,551 $ 276,803
Inventory 1,053,420 149,075
PPE, net 5,067,276 275,805
$7,857,939 $817,740

APIC 659,745 41,688
$7,857,939 $817,740
Required:
a. Compute the EOY Equity Investment balance of $434,652 (4 years subsequent to the
acquisition).
b. Compute the EOY noncontrolling interest equity balance.
c. Prepare the consolidation spreadsheet.
Answer:
a
Equity Investment
.
BOY book value of stockholders’ equity $233,450 ($258,463 + $33,350 + $41,688) x 70%
BOY [A] assets ex GW 74,375 [$125,000 – (3 x $6,250)] x 70%
BOY deferred profit (6,125) 100% since downstream
Equity Income [C] 137,855 ($208,435 - $6,250) x 70% - $9,800 + $6,125
Dividends (70%) (4,902) $7,004 x 70%
EOY Equity Investment $434,652
b
Stockholders' equity $100,050 ($258,463 + $33,350 + $41,688) x 30%
[A] Assets 31,875 [$125,000 – (3 x $6,250)] x 30%
Income [C] 60,656 ($208,435 - $6,250) X 30%
Dividends (30%) (2,101) $7,004 x 30%

Ending Balance Noncontrolling
Interests $190,479
continued next page

c.
Consolidated
Parent Subsidiary Dr Cr
Income Statement
Sales $5,430,000 $638,650 [Isales] $133,400 $5,935,250

Cost of goods sold [Icogs] 9,800 [Isales] $133,400
(3,801,000) (300,150) [Icogs] 6,125 (3,971,425)

Gross profit 1,629,000 338,500 1,963,825
Equity income 137,855 [C] 137,855 0
Operating expenses (1,031,700) (130,065) [D] 6,250 (1,168,015)

Net income 735,155 208,435 795,810
Consol. NI attributable
to NCI [C] 60,656 (60,656)
Consol. NI attributable
to parent 735,155 $ 208,435 735,155

BOY Retained
earnings $2,728,032 $258,463 [E] 258,463 $2,728,032
Net income 735,155 208,435 735,155
Dividends (136,291) (7,004) [C] 7,004 (136,291)
End. Retained earnings $3,326,896 $459,894 $3,326,896
Balance Sheet
Assets:
Cash $ 607,551 $ 276,803 $884,354
Accounts receivable 695,040 116,058 [Ipay] 15,000 796,098
Inventory 1,053,420 149,075 [Icogs] 9,800 1,192,695
Equity investment 434,652 [Icogs] $6,125 [C] 132,952 0
[E] 233,450
[A] 74,375
PPE, net 5,067,276 275,805 [A] 106,250 [D] 6,250 5,443,081
$7,857,939 $817,740 $8,316,226

Current liabilities $ 780,291 $116,058 [Ipay] 15,000 $ 881,349
Common stock 887,805 33,350 [E] 33,350 887,805
APIC 659,745 41,688 [E] 41,688 659,745
Retained earnings 3,326,896 459,894 3,326,896
Noncontrolling interest [C] 58,555 190,480
100,0
[E] 50
31,8
_________ _________ [A] 75 _________
$7,857,939 $817,740 ∑ 808,836 ∑ 808,836 $8,316,226

Topic: Consolidation on Date of Acquisition
LO: 2
3. Company X acquires a 70% interest in Company Y for a purchase price of $403,900. The fair
market value of Company Y is $577,000 on the acquisition date. The excess of the purchase
price over the book value of Company X’s Stockholders’ Equity is allocated to an unrecorded
Customer List that the parent values at $150,000 and the remainder to Goodwill in the amount of
$100,000, 70% of which is allocated to the parent.
The parent and the subsidiary report the following balance sheets on the acquisition date:
Company Company Company

Company X
Y X Y
$ $
Cash $ 73,902 Current Liabilities $ 113,796
655,383 1,346,469
Accounts Long-term
1,199,360 113,796 4,096,100 163,500
receivable Liabilities
Inventory 1,817,780 146,169 Common Stock 1,531,995 32,700
Equity Investment 403,900 APIC 1,138,455 40,875
4,707,48
PPE, net 8,744,084 270,429 Retained Earnings 253,425
8
$13,820,50 $12,820,50
$604,296 $604,296
7 7
Required: Prepare the consolidation spreadsheet on the acquisition date.
Answer:
Company Company Consolidate
X Y Dr Cr d
Assets:
$
Cash 655,383 $ 73,902 729,285
Accounts receivable 1,199,360 113,796 1,313,156
Inventory 1,817,780 146,169 1,963,949
[E
Equity investment 403,900 ] 228,900 0
[A
] 175,000
PPE, net 8,744,084 270,429 9,014,513
[A
Customer list ] 150,000 150,000
_________ ________ [A
Goodwill _ _ ] 100,000 100,000
$12,820,50 $13,270,90
7 $604,296 3

$ $ $
Current liabilities 1,346,469 113,796 1,460,265
[E
Common stock 1,531,995 32,700 ] 32,700 1,531,995
[E
APIC 1,138,455 40,875 ] 40,875 1,138,455
Retained earnings 4,707,488 253,425 [E 253,425 4,707,488

]
[E
Noncontrolling interest ] 98,100 173,100
_________ ________ [A _________
_ _ ] 75,000 _
$12,820,50 $13,270,90
$604,296 ∑ 577,000 ∑ 577,000
7 3

Topic: Determination of Goodwill
LO: 1
4. Thing Company acquired 65% of Label Corp. for $1,300,000. The total fair value of Label's net
Stockholders’ Equity was $1,750,000. The book value of Label’s building and equipment were
undervalued by $60,000. Each asset had a ten-year useful life. The book value of Label’s other
assets and liabilities, were equal to fair value.
Required: Determine the amount of goodwill associated with Thing's purchase of Label.
Answer:
Implied value $ 2,000,000 ($1,300,000 / 0.65)
Fair value (Label’s) (1,750,000)
Goodwill $ 250,000

CHAPTER 1: THEORIES
TRUE OR FALSE
1. When two entities competing in the same industry combine, it is called a horizontal business combination.
TRUE
2. Horizontal business combinations are likely to occur when management is attempting to dominate a
geographic segment of the market. FALSE
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. TRUE
5. When a retail clothing store purchases a competitor in city, a vertical combination has occurred. FALSE
6. A vertical combination is one where the entities have a potential buyer-seller relationship. TRUE
7. A business combination in which a supplier of raw materials is acquired is a conglomerate combination.

FALSE
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. TRUE
10. If negotiation between management groups leads to a mutually agreeable business combination, the process
is called a friendly takeover. 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. TRUE
13. Greenmail exists when a company is encouraged to buy a potential acquiree. 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. FALSE
16. The fatman defensive maneuver involved the acquisition of assets by the potential acquiree. TRUE
17. Golden parachutes give a bonus to all employees if the company is acquired. FALSE
18. The packman defensive maneuver is where a potential acquire attempts to purchase the acquirer. TRUE
19. A business combination occurs when one entity gains control over the net assets of another entity. TRUE
20. The only way to attain control over the net assets of another entity is to purchase the net assets. FALSE
21. In an acquisition where the acquirer pays cash for the acquiree assets, the book value of the acquirer
increases. FALSE
22. In an acquisition of assets for assets, the ownership structure of the acquiree does not change. TRUE
23. In an acquisition of assets for assets, the ownership structure of the acquirer changes. FALSE
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. TRUE
26. In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders become acquirer
stockholders. FALSE
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. TRUE
28. A business combination that occurs where only one of the original entities in existence after the combinations
called a statutory consolidation. FALSE
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. TRUE
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. FALSE
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. TRUE
34. A business combination accomplished as a stock acquisition must be accomplished with a stock for stock
exchange. FALSE
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. TRUE
37. There are no uncertainties when two companies agree on a business combination. FALSE
38. When the acquisition price of an acquiree is contingent on acquiree future earnings, the acquisition price may
change? TRUE
39. When the acquisition price of an acquiree is contingent on the market value of the acquirer stock, the
acquisition price may change? FALSE
40. For business combinations to qualify as reorganizations (for tax purposes), the acquiree Stockholders must
receive voting common stock of the acquired. FALSE
41. There are different required levels of stock ownership in the acquiree for the three different types of
reorganizations for tax purposes. TRUE
42. One important benefit in a business combination is any net operating loss carry forward that might exist and
be available to the acquirer. FALSE
MULTIPLE CHOICE
43. Which of the following types of business combinations typically occurs when management is tempting to
monopolize a particular industry? HORIZONTAL COMBINATION
44. Horizontal business combinations occur when one entity purchases which of the following? A COMPETITOR
45. Horizontal business combinations help sales increase by all but which of the following? TAKING CONTROL
OF A DISTRIBUTION SYSTEM
46. Which of the following types of business combinations typically occurs when management is attempting to
improve the efficiency of operations? VERTICAL COMBINATION
47. A vertical combination occurs when one entity acquires another entity which has the following
characteristic(s)? EITHER A OR C (The acquiree purchases the acquirer's outputs; The acquiree supplies
raw materials to the acquirer.)
48. Which of the following is a vertical combination? A COMBINATION WHERE THE TWO ENTITIES HAVE A
POTENTIAL BUYER/SELLER RELATIONSHIP
49. Which of the following types of business combinations typically occurs when management is attempting to
diversify its investment? CONGLOMERATE COMBINATION
50. Management acquires a business in a tangentially related industry to the current business. What form of
business combination is accomplished? CONGLOMERATE COMBINATION
51. One reason for conglomerate combinations is that management has become more aware that it helps
accomplish which of the following? IT HELPS INCREASE INCOME STABILITY PROVIDED BY DIVERSIFYING
THE ASSET BASE OF AN ENTITY
52. Business combinations that result in one dominant company in an industry are said to have formed which of
the following? MONOPOLY
53. The business enterprises that enter into a business combination are termed the: CONSTITUENT COMPANIES
54. When an offer is made to acquire a company and the acquiree management supports the offer, the offer is
called which of the following? FRIENDLY TAKEOVER
55. The defensive maneuver where a company buys stock from a potential acquirer at a premium over the
market price is called which of the following? GREENMAIL
56. The defensive maneuver where a company seeks to be acquired by a company perceived to be a better match
than the company making an offer to buy the potential acquiree is called which of the following? WHITE
KNIGHT
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? PACMAN 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? POISON PILL
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? SALE OF THE CROWN JEWELS
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? ISSUANCE OF CONVERTIBLE PREFFERED STOCK THAT
CONVERTS INTO COMMON STOCK OF THE ACQUIRER IF A TAKEOVER IS ACCOMPLISHED.
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? PACMAN
DEFENSE
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 shdreholders know that they do not approve of
this. This is an example of a(n)? HOSTILE TAKEOVER
63. Control over an acquiree can be attained through which of the following? EITHER ACQUISITION OF THE
ACQUIREE ASSETS OR STOCK
64. In an acquisition of assets, the acquirer must give up which of the following? 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? 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? THERE IS NO CHANGE IN THE ACQUIREE OWNERSHIP STRUCTURE
67. In an acquisition where there is an exchange of assets for assets, how does the ownership structure of the
acquirer change? THERE IS NO CHANGE IN THE ACQUIRER 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? THE NET ASSETS MAY INCREASE, DECREASE OR REMAIN THE SAME
ownership structure of the acquiree change? THERE IS NO CHANGE IN THE ACQUUREE OWNERSHIP
STRUCTURE
ownership structure of the acquirer change? THE ACQUIREE COMPANY BECOMES A STOCKHOLDER OF
THE ACQUIRER
71. Control over acquiree assets is attained in a business combination. Indirect control is attained in which type
of exchange? STOCK FOR STOCK
72. Which of the following forms of business combination is not subject to laws specific to business
combinations? ASSET FOR ASSET ACQUISITION
73. Which of the following is not a true statement with regard to a statutory merger? THE NAME OF THE NEW
ENTITY IS NOT THE SAME AS EITHER OF THE ENTITIES
74. Which of the following is not true with regard to the statutory consolidation form of business
combination? THE NET ASSETS OF THE COMBINING ENTITIES MUST BE ACQUIRED WITH ASSETS OF
THE NEW CORPORATION
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? THE ACQUIRER RETAINED EARNINGS
ACCOUNT BALANCE
76. Which of the following is not true with regard to a business combination accomplished in the form of a stock
acquisition? ALL OF THE ABOVE STATEMENTS ARE TRUE
77. Which of the following contingencies may change the cost of an acquisition? FUTURE ACQUIREE EARNINGS
78. To qualify as a reorganization (for tax purposes), a business must meet which of the following criteria? ALL
OF THE ABOVE CRITERIA ARE REQUIRED FOR A COMBINATION TO QUALIFY AS REORGANIZATION
79. Which of the following is not a business combination? JOINT VENTURE
80. Under PFRS 3, Business Combinations, which method must be used to account for business combinations?
ACQUISITION METHOD
81. After an exchange of shares in a business combination, each group of shareholders held 50% of the voting
rights. Which of the following factors should be considered in determining the acquirer? COMPOSITION OF
THE BOARD OF DIRECTORS
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? PEREZ
WOULD PREFER TO PURCHASE ROO'S ASSETS AND ROO WOULD PREFER TO SELL ITS SHARES TO
PEREZ.
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? REVERSE TAKEOVER
84. Perez Co. acquired Roo Co. in a business combination. Perez issued new shares to Roo's shareholders in
exchange for their outstanding shares. What type of share exchange is this? HOSTILE TAKEOVER
85. Ha Ltd. and Hee Ltd. exchanged shares in a business combination. After the s are exchange, each company
held the same number of voting shares. Which of the following statements is true? A NUMBER OF FACTORS
MUST BE CONSIDERED TO DETERMINE WHICH COMPANY IS THE ACQUIRER
86. How should the transaction costs of issuing shares in an acquisition be recognized? DEDUCTED FROM
SHAREHOLDERS' EQUITY, NET RELATED INCOME TAX BENEFITS
87. How should the cost of issuing debt in an acquisition be recognized? DEDUCTED FROM THE VALUE OF THE
DEBT
88. How should accounting fees for an acquisition be treated? EXPENSED IN THE PERIOD OF ACQUISITION
89. Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase? THE
BUSINESS ONLY HAS EQUITY FINANCING AND HAS NO DEBT FINANCING
90. Which of the following statements about a bargain purchase is true? 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? INCOME-BASED
92. How should negative goodwill be shown on the consolidated financial statements of the acquirer? AS A GAIN
ON THE STATEMENT OF COMPREHENSIVE INCOME
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? 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 CORP ENTERS INTO A
JOINT VENTURE WITH B CORP
95. What is a statutory merger? A BUSINESS COMBINATION WHICH ONLY ONE COMPANY CONTINUES TO
EXIST AS A LEGAL ENTITY
96. Statutory merger is a(n)? BUSINESS COMBINATION WHICH ONLY ONE OF THE TWO CONPANIES
CONTINUES TO EXIST AS A LEGAL CORPORATION
97. Liabilities assumed in an acquisition will be valued at the? ESTIMATED FAIR VALUE
98. In reference to the IASB disclosure requirements, which of the following is correct? NOTES TO FINANCIAL
STATEMENTS OF AN ACQUIRING CORPORATION MUST BE DISCLOSED THAT THE BUSINESS
COMBINATION WAS ACCOUNTED FOR BY THE ACQUISITION METHOD.
99. Goodwill arising from business combination is: NEVER AMORTIZED
100. In reference to international accounting for goodwill, which of the following statements is correct?
ALL OF THE ABOVE ARE CORRECT
101. In recording acquisition costs, which of the following procedures is correct? CONSULTUNG FEES ARE
EXPENSED
102. Which one of the following statements is incorrect? 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? ANY OF THE ABOVED
MAY USED
104. Slocum Corporation and Merton Company, both publicly owned companies, are planning a merger,
with Slocum being the survivor. Which of the following is a requirement of the merger? THE BOARD OF
DIRECTORS BOTH SLOCUM AND MERTON MUST APPROVE THE MERGER
105. PFRS 3 requires that all business combinations be accounted for using? EITHER THE ACQUISITION
OR 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? ALLOCATED TO REDUCE ANY
PREVIOUSLY RECORDED GOODWILL ON THE SELLER'S BOOKS AND CLASSIFY ANY REMAINDER AS AN
ORDINARY GAIN
combination except the? EACH OF THE ABOVE IS A REQUIRED DISCLOSURE
108. When the acquisition price of an acquired firm is less than the fair value of the identifiable net assets,
all of the following are recorded at fair value except? EACH OF THE ABOVE IS RECORDED AT FAIR VALUE
109. Under PFRS 3: BOTH DIRECT AND INDIRECT COSTS ARE TO BE EXPENSED
110. A business combination is accounted for properly as 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? NO, YES
111. In a business combination, which of the following costs are assigned to the valuation of the security?
NO, YES
112. Parental Company and Sub Company were combined in an 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? AN
ORDINARY GAIN
113. With an acquisition, direct and indirect expenses are? EXPENSED IN THE PERIOD INCURRED
114. In a business combination accounted for as an acquisition, how should the excess of fair value of net
assets acquired over the consideration paid be treated? RECORDED AS AN ORDINARY GAIN
115. If the value implied by the purchase price of an acquired company exceeds the fair values of
identifiable net assets, the excess should be? ALLOCATED GOODWILL
116. P Co. issued 5,000 shares of its common stock, valued at P200,000, to the former shareholders of
Company two years after S Company was acquired in an all-stock transaction. The additional shares 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 will treat the issuance of the additional
shares as a (decrease in)? PAID-IN CAPITAL
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 all at
once, at what time is the fair value of the assets and liabilities of the acquired entity determined? THE DATE
THE ACQUIRER OBTAINS CONTROL OF THE ACQUIREE
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? FAIR VALUE
119. What is the appropriate accounting treatment for the value assigned to in-process research and
development acquired in a business combination? 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? AN INTANGIBLE ASSET UNDER THE CONTRACTUAL-LEGAL
CRITERION.
121. Under PFRS 3, when is a gain recognized in consolidating financial information? WHEN ANY
BARGAIN PURCHASE IS CREATED
122. Company B acquired the net assets of Company S in exchange for cash. The acquisition price 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 FAIR
VALUE Long-Term Debt FAIR VALUE
123. Goodwill represents the excess cost of an acquisition over the? SUM OF THE FAIR VALUES
ASSIGNED TO TANGIBLE AND IDENTIFIABLE INTANGIBLE ASSETS ACQUIRED LESS LIABILITIES
ASSUMED.
124. When an acquisition of another company occurs, IASB recommends disclosing all of the following
EXCEPT: RESULTS OF OPERATIONS FOR THE CURRENT PERIOD IF BOTH COMPANIES HAD REMAINED
SEPARATE
125. Separately identified intangible assets are accounted for by amortizing: BASED UPON A PATTERN
THAT REFLECTS THE BENEFITS CONVEYED BY THE ASSET
126. Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and
consummate the purchase are? EXPENSED IN THE PERIOD OF THE PURCHASE
127. Which of the following income factors should not be factored into an estimation of goodwill?
EXTRAORDINARY ITEMS
CHAPTER 2
CHAPTER 3
1. An Investor adjusts the investment account for the amortization of any difference between coast and book value under
the FAIR VALUE MODEL
2. Goodwill is: GENERALLY SMALLER FOR SMALL COMPANIES AND INCREASES IN AMOUNT AS THE COMPANIES
ACQUIRED INCREASE IN SIZE.
3. Under the cost method, the workpaper entry to establish reciprocity. CREDITS-RETAINED EARNINGS P-COMPANY
4. Under the cost method, the investment account is reduced when NONE OF THESE
5. The parent company records its share of a subsidiary’s income by NONE OF THESE
6. In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the COST MODEL
7. A parent company received dividends in excess of the parent company’s share of the subsidiary’s earnings subsequent
to the date of the investment. How will the parent company’s investment account be affected by those dividends
under each of the following accounting methods? NO EFFECT (Cost Method and FV Method)
8. Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent
company’s INCOME FROM INDEPENDENT OPERATIONS PLUS SUBSIDIARY’S INCOME RESULTING FROM
TRANSACTIONS WITHOUTSIDE PARTIES.
9. In preparation of a consolidated statements workpaper, dividend income recognized by a parent company for
dividends distributed by its subsidiary is ELIMINATED
10. In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from
operating activities, the amount of the non-controlling interest is consolidated income: COMBINED WITH THE
CONTROLLING INTEREST IN CONSOLIDATED NET INCOME
11. A parent company uses the partial equity method to account for an investment in common stock of its subsidiary. A
portion of the dividends received this year were n excess of the parent company’s share of the subsidiary’s earnings
subsequent to the date of the investment. The mount of dividend income that should be reported in the parent
company’s separate income statement should be THE PORTION OF THE DIVIDENDS RECEIVED THIS YEAR THAT WERE
IN EXCESS OF THE PARENTS’S SHARE OF SUBSIDIARY’S EARNINGS SUBSEQUENT TO THE DATE OF INVESTMENT.
12. Which one of the following describes a difference in how the equity method is applied under GAAP than under IFRS?
IFRS REQUIRES UNIFORMACCOUNTING POLICIES, WHERE GAAP DOES NOT.
13. When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is
accounted for as GOODWILL
14. Under which set of circumstances would it not be appropriate to assume the value the non-controlling shares is the
same as the controlling shares? ACTIVE MARKET PRICES FOR SHARES NOT OBTAINED BY THE IMPLY A DIFFERENT
VALUE
15. When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the
workpaper entry to allocate the difference between implied and book value includes a 3. CREDIT TO DIFFERENCE
BETWEEN INPLIED AND BOOK VALUE
16. If the fair value of the subsidiary’s identifiable net assets exceeds both the book value and the value implied by the
purchase price, the workpaper entry to eliminate the investment account DEBITS DIFFERENCE BETWEEN IMPLIED AND
BOOK VALUE
17. The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible
is recorded 3. ON THE CONSOLIDATED STATEMENTS WORKPAPER
18. The excess o fair value implied value must be allocated to reduce proportionally tef ai values initially assigned to NONE
OF THE ABOVE
19. The SEC requires the use of push down accounting when the ownership change is greater than 95%
20. A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the
retained earnings and non-controlling interest balances in the parent company’s consolidated balance sheet? NO
EFFECT ON TETAINED EARNINGS AND A DECREASE IN NON-CONTROLLING INTEREST
21. In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets
acquired over implied vale be treated? RECOGNIZED AS AN ORDINARY GAIN IN THE YEAR OF ACQUISITION
22. Goodwill represents the excess of the implied value of an acquired company over the AGGREGATE FAIR VALUES OF
IDENTIFIABLE ASSETS LESS LIABILITIES ASSUMED.
23. In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years
subsequent to acquisition with an elimination entry whenever: IT DOES NOT REFLECT THE QUITY METHOD
24. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the COST
MODEL AND FAIR VALUE OPTION/MODEL
25. What is the effect if an unconsolidated subsidiary is accounted for by the equity method, but consolidated statements
are being prepared for the parent company and other subsidiaries? THE CONSOLIDATED RETAINED EARNINGS WILL
BE THE SAME AS IF THE SUBSIDIRY HAD BEEN INLUDED IN THE CONSOLIDATION.
26. Which of the following statements applying to the use of the equity method versus the cost method is true? THE
METHOD USED HAS NO IGNIFICANCE TO CONSOLIDATED STATEMENTS.
27. In consolidated financial statements, it is expected that: NET INCOME EQUALS THE SUM OF TH INCOMEDISTRIBTED
TO THE CONTROLLING INTEREST AND THE IINIICOME DISTRIBUTED TO THE NON-CONTROLLING INTEREST.
28. How is the portion of consolidated earnings to be assigned to non-controlling interest in consolidated financial
statements determined? THE AMOUNT OF THE SUBSIDIARY’S EARNINGS IS MULTIPLIED BY THE NON-
CONTROLLING’S PERCENTAGE OWNERSHIP AND IS ADJUSTED FOR THE EXCESS COST AMORTIZATION APPLICABLE TO
THE NCI.
29. Alpha purchased an 80% interest in Beta on June 30,20x4. Both Alpha’s and Beta’s reporting periods end December 31.
Which of the following represents the controlling interest in consolidated net income for 20x4? 100% of Alpha’s
January 1 – December 31 income plus 80% of Beta’s July 1 - December 31 income.
30. In a mid-year purchase when the subsidiary’s books are not closed until the end of the year, the purchased income
account contains the parent’s share of the SUBSDIARY’S INCOME EARNED FROM THE BEGINNING OF THE YEAR TO
THE DAT OF ACQUISITION
31. What is a basic premise of the acquisition method regarding accounting for a non-controlling interest? A SUBSIDIARY
IS AN INDIVISIBLE PART OF A BUSINESS COMBINATION ANDSHOULD BEINCLUDED IN ITS ETIRELY REGARDLESS OF
THE DEGREE OF OWNERSHIP.
32. JJ Company acquired 85% of R Company on April 1. On its December 31, consolidated income statement, how should JJ
account for MR’s revenues and expenses that occurred before April 1. EXCLUDED 100 PERCENT OF THE PRE-
ACQUISITION REVENUES AND 100 PERCENT OF THE PRE—ACQUISITION EXENSES FROM THEIR RESPECTIVE
CONSOLIDATED TOTALS.
33. A parent buys 32 percent of a subsidiary in one year and then buyers an additional 40 percent in the next year. In a
step acquisition of this type, the original 32 percent acquisition should be ADJUSTED TO FAIRVALUE AT THE DATE OF
THE SECOND ACQUISITION WITH A RESULTING GAIN ORLOSS RECORDED.
34. C.
35. If AA Company acquires 80 percent of the stock of BB Company on January 1, 20x2, immediately after the acquisition:
CONSOLIDATED RETAINED EARNINGS AND AA COMPANY RETAINED EARNINGS WILL BE THE SAME
36. Which of the following statements is correct? TOTAL ASSETS REPORTED BY THE PARENT GENERALLY WILL BE LESS
THAN TOTAL ASSETS REPORTED ON THE CONSOLIDATED BALANCE SHEET
37. Which of the following statements is correct? CONSOLIDATED RETAINED EARNINGS DO NOT INCLUDE THE NON-
CONTROLLING INTREST’S CLAIM ON THE SUBSIDIARY RETAINED EARNINGS.
38. How is the portion of consolidated earnings to be assigned to the non-controlling interest in the consolidated financial
statements determined? THE SUBSIDIARY’S NET INCOME IS EXTENDED TO THE NON-CONTROLLING INTEREST.
39. Under push down accounting, the work paper entry to eliminate the investment account includes a CREDIT TO
REVALUATION CAPITAL
40. Which of the following observations is NOT consistent with the use of push-down accounting? ELIMINATING ENTRIES
RELATED TO THE DIFFERENTIAL ARE NEEEDED IN THE WORKPAPERS
41. Which companies employ push-down accounting: THE CONSOLIDATED FINANCIAL STATEMENTS WILL APPESR
EXACTLY AS IF PUSH-DOWN ACCOUNTING HAD NOT BEEN USED.
42. Which of the following statements is false regarding push-down accounting? PUSH-OWN ACCOUNTING MUST BE
APPLIED FOR COMBINATIONS UNDER A POOLING OF INTEREST
43. When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary
reports income less than dividends pad, what entry would be made for a consolidated worksheet? RETAINED
EARNINGS (DEBIT) INVESTMENT IN SUBSIDIARY (CREDIT)
CHAPTER 4: ELIMINATION OF UNREALIZED PROFIT ON INTERCOMPANY SALES OF INVENTORY
1. Inventory sales from a parent to one of its subsidiaries are referred to as downstream sales. TRUE
2. Under current GAAP, intercompany transactions are to be recorded in separate general ledger accounts. FALSE
3. Under current GAAP, elimination by rearrangement is mandatory. FALSE
4. For the income statement, reciprocal account balances do not exist for all types of intercompany transactions.
TRUE
5. The intercompany sales account is an example of an account that would always have a reciprocal balance. FALSE
6. All intercompany transactions generally are related-party transactions. TRUE
7. All related-party transactions are intercompany transactions. FALSE
8. Intercompany transactions can occur between an investor company and a company in which the
investor owns 25% of the investee's outstanding common stock. FALSE
9. The term intercompany transaction generally is restricted to control situations. TRUE
10. Intercompany transactions are eliminated in consolidation because they are related-party
transactions. FALSE
11. Because all intercompany transactions are eliminated in consolidation, the use of improper or unfair transfer
prices has no consequences for consolidated reporting purposes. TRUE
12. Intercompany inventory transfers at cost need not be eliminated in consolidation. FALSE
13. Downstream intercompany inventory transfers at cost to a 100%-owned subsidiary need not be
eliminated in consolidation. FALSE
14. The concept of profit on intercompany transactions to be deferred for consolidated reporting purposes is gross
profit. TRUE
15. If intercompany profit is deferred for consolidated reporting purposes, then any income taxes recorded on that
profit must also be deferred for consolidated reporting purposes. TRUE
16. When a noncontrolling interest exists, intercompany sales on downstream intercompany inventory transfers need
not be eliminated for consolidated reporting purposes. FALSE
17. When a noncontrolling interest exists, intercompany sales on downstream intercompany inventory transfers need
be eliminated only to the extent of the non-controlling interest ownership percentage—not 100%. FALSE
18. Fractional elimination is not allowed under current GAAP. TRUE
19. Under current GAAP, the amount of intercompany profit or loss to be deferred for consolidated reporting
purposes is not affected by the existence of a noncontrolling interest. TRUE
20. If an intercompany inventory transfer occurs in 20x5 and all this inventory is not resold to an outside, third party
until 20x6, the intercompany sale is eliminated in consolidation in 20x6—not 20x5. FALSE
21. If an Intercompany inventory transfer occurs in late 20x5 and all this inventory is not resold to an outside, third
party until 20x6, the intercompany sale is eliminated in consolidation in 20x5—not 20x6. TRUE
22. If an intercompany inventory transfer occurs in late 20x5 and all this inventory is not resold to an outside, third
party until 20x6, the intercompany sale is eliminated in consolidation in 20x5 and 20x6. FALSE
23. Intercompany inventory transfers cannot be
a. Bonafide transactions d. Related-party transactions
b. Arm’s-length transactions e. None of the above
c. Related-party transactions
24. Which of the following statements is the correct reason for eliminating intercompany transactions for
consolidated reporting purposes?
a. Intercompany transactions are related-party transactions.
b. From the perspective of either of the individual companies, intercompany transactions are not
bonafide transactions.
c. It is often impractical and in many cases impossible to determine whether the transfer prices
approximate prices that could have been obtained with outside, independent parties.
d. The parent company could manipulate the intercompany transfer prices in a manner that is not
equitable to the subsidiary.
e. None of the above.
25. Which of the following statements is true?
a. All intercompany transactions are related-party transactions.
b. All related-party transactions are intercompany transactions.
c. An unsupportable, artificially high or low Intercompany transfer price with an overseas unit
cannot have any impact on the consolidated financial statements because all intercompany
transactions are eliminated in consolidation.
d. For income tax-reporting purposes, transfer prices need not be comparable to sales to outside,
third parties.
26. In consolidation, which of the following intercompany transactions need not be undone?
a. Intercompany management charges.
b. Intercompany lease income and expense.
c. Intercompany dividend income (when the parent uses the cost method).
d. intercompany equipment transfers involving a gain or loss.
f.
27. Which of the following accounts need not be eliminated in consolidation?
a. Intercompany Sales. d. Long-term Intercompany Receivables.
b. Intercompany Cost of Sales. e. None of the above.

c. Intercompany Interest Expense
28. Which of the following accounts would not require reconciliation or adjustment to a reciprocal
balance prior to beginning the consolidation process?
a. Intercompany Receivables. c. Intercompany Sales
b. Intercompany Interest Income. d. Intercompany Management Fee Income.
29. Which of the following accounts would require reconciliation or adjustment to a reciprocal balance
prior to beginning the consolidation process?
a. Intercompany Dividend Income (when the parent uses the cost method).
b. Intercompany Sales
c. Intercompany Cost of Sales
d. Long-term Intercompany Payable
30. Intercompany accounts that are to have reciprocal balances but are not currently in agreement are adjusted
a. Before the consolidation process.
b. During the consolidation process.
c. After the consolidation process.
d. Not before, during, or after the consolidation process.
31. In consolidation, the most efficient way to eliminate intercompany accounts that are to have reciprocal balances is
to use
a. Elimination by proxy. d. Elimination by reciprocity.
b. Elimination by rearrangement. e. None of the above.
c. Elimination by default.
32. Which of the following statements is true?
a. Elimination by rearrangement is mandatory under current GAAP.
b. Intercompany inventory transfers at cost do not have to be eliminated.
c. If an intercompany inventory transfer is made in late 20x4 but the inventory is not resold to an outside, third party
until 20x5, the intercompany inventory sale must also be eliminated in 20X5.
d. Downstream intercompany inventory sales do not have to be eliminated if the subsidiary is 100% owned.
33. For which of the following accounts would it be inappropriate to use elimination by rearrangement?
a. Intercompany Operating Lease Income. d. Intercompany Notes Payable.
b. Intercompany Cost of Sales. e. None of the above.

c. Intercompany Interest Income.
34. An intercompany inventory transfer above cost occurred in 20x5. At 12/31/x5, a portion of the transferred
inventory remained unsold. Which of the following accounts would not require adjustment or elimination in
consolidation at the end of 20x5?
a. Intercompany Cost of Sales. c. Inventory e. none of the above
b. Intercompany Sales. d. Sales
35. In 20x5, an intercompany inventory transfer above cost occurred. In 20x6, all this inventory was resold to an
outside party. Which of the following accounts would require adjustment or elimination in consolidation at
12/31/x6?
a. Cost of Sales. c. Intercompany Sales e. none of the above
b. Intercompany Cost of Sales. d. Inventory
36. In 20x5, Palex sold inventory costing P45,000 to its 100%-owned subsidiary, Salex, for P70,000. By 12/31/X5, Salex
had resold all this inventory for P100,000. Which of the following accounts would have to be eliminated in
consolidation at 12/31/x5?
Intercompany Sales Intercompany Cost of Sales
a. Yes Yes
b. No No
c. Yes No
d. No Yes
37. In 20x5, Palco sold inventory costing P70,000 to its 100%-owned subsidiary, Salco, for P110.000. At 12/31/X5,
P33,000 of this inventory was reported in Salco's balance sheet. In 20x6, Salco resold this inventory for P55,000.
Which of the following accounts is eliminated in consolidation at 12/31/x6 as a result of the above transactions?
Intercompany Sales Intercompany Cost of Sales
a. Yes Yes
b. No No
c. Yes No
d. No Yes
38. In 20x6, Puzco resold for P70,000 inventory that it had acquired from its 100%-owned subsidiary, Suzco, in 20x5 for
P50,000. Suzco’s cost was P36,000. In consolidation at the end of 20x6, which of the following accounts is credited
on the worksheet?
a. Intercompany Cost of Sales. c. intercompany Sales. e. None of the above
b. Equity in Net Income of Subsidiary. d. Inventory
39. At 12/31/X6, Pozak reported P80,000 of intercompany-acquired inventory in its balance sheet. This inventory was
acquired in 20x5—not 20x6—from its 100%-owned subsidiary, Sozak. Sozak's cost was P60,000. Which of the
following accounts is credited in consolidation at 12/31 /x6?
a. Cost of Sales. c. Intercompany Sales. e. None of the above
b. Intercompany cost of sales d. Inventory

40. Sales from one subsidiary to another are called
a. downstream sales c. inter subsidiary sales
b. upstream sales d. horizontal sales
41. Non-controlling interest in consolidated income is never affected by
a. upstream sales c. Non-controlling interest is affected by all sales.
b. downstream sales d. None of the above
42. Failure to eliminate intercompany sales would result in an overstatement of consolidated
a. net income c. cost of sales
b. gross profit d. all of these
43. The non-controlling interest's share of the selling affiliate’s profit on intercompany soles
is considered to be realized under
a. partial elimination. c. 100% elimination.
b. total elimination. d. d. both total and 100% elimination.
44. The work paper entry in the year of sale to eliminate unrealized intercompany profit in ending
inventory includes a
a. credit to Ending Inventory (Cost of Sales) c. debit to Ending Inventory (Cost

of Sales)
b. credit to Sales d. debit to Inventory- Balance

Sheet
45. 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2013.
Under the partial equity method, the work paper entry in 2014 to recognize the intercompany
profit in beginning inventory realized during 2014 includes a debit to
a. Retained Earnings – P
b. Non-controlling interest
c. Cost of Sales
d. both Retained Earnings- P and Non-controlling Interest
46. The non-controlling interest in consolidated income when the selling affiliate is an 80% owned
subsidiary is calculated by multiplying the non-controlling minority delete minority
ownership percentage by the subsidiary’s reported net income
a. plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
b. plus realized profit in ending inventory less realized profit in beginning inventory.
c. less unrealized profit in ending inventory plus realized profit in beginning inventory.
d. less realized profit in ending inventory plus realized profit in beginning inventory.
47. In determining controlling interest in consolidated income in the consolidated financial
statements, unrealized intercompany profit on inventory acquired by a parent from its
subsidiary should:
a. not be eliminated.
b. be eliminated in full.
c. be eliminated to the extent of the parent company’s controlling interest in the subsidiary.
d. be eliminated to the extent of the non-controlling interest in the subsidiary.
48. The material sale of inventory items by a parent company to an affiliated company:
a. enters the consolidated revenue computation only if the transfer was the
result of arm's length bargaining.
b. affects consolidated net income under a periodic inventory system but not
under a perpetual inventory system.
c. does not result in consolidated income until the merchandise is sold to outside parties.
d. does not require a working paper adjustment if the merchandise was transferred at cost.
49. A parent company regularly sells merchandise to its 80%-owned subsidiary.
Which of the following statements describes the computation of non-controlling
interest income?
a. the subsidiary's net income times 20%.
b. (the subsidiary’s net income x 20%) + unrealized profits in the beginning
inventory - unrealized profits in the ending inventory.
c. (the subsidiary's net income + unrealized profits in the beginning inventory -
unrealized profits in the ending inventory) x 20%.
d. (the subsidiary's net income + unrealized profits in the ending inventory -
unrealized profits in the beginning inventory) x 20%.
50. The amount of intercompany profit eliminated is the same under total elimination and partial
elimination in the case of
1. upstream sales where the selling affiliate is a less than wholly owned subsidiary.
2. all downstream sales.
3. horizontal sales where the selling affiliate is a wholly
owned subsidiary. a. 1. c. 3.
b. 2. d. both 2 and 3.
51. Polly, Inc. owns 80% of Saffron, Inc. During 20x4, Polly sold goods with a 40% gross profit to
Saffron. Saffron sold all of these goods in 20x4. For 20x4 consolidated financial statements, how
should the summation of Polly and Saffron income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the Intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.
52. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 20x1,
Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods
jn Viel's ending inventory. However, some of the intercompany purchases from Schiff had not yet
been paid. Which of the following amounts will be incorrect in the consolidated statements if no
adjustments are made?
a. inventory, accounts payable, net income
b. inventory, sales, cost of goods sold, accounts receivables
c. Sales, cost of goods sold, accounts receivable, accounts payable.
d. accounts receivable, accounts payable
53. The material sale of inventory items by a parent company to an affiliated company
a. enters the consolidated revenue computation only if the transfer was the result of arm's length
bargaining.
b. affects consolidated net income under a periodic inventory system but not under a perpetual
inventory system.
c. does not result in consolidated income until the merchandise is sold to outside entities.
54. Williard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits
Petty's 20X1 year- end inventory exceed the unrealized profits in its 20x2 year-end inventory, 20x2
combined
a. cost of sales will be less than consolidated cost of sales in 20x2.
b. gross profit will be greater than consolidated gross profit in 20x2.
c. sales will be less than consolidated sales in 20x2.
d. cost of sales will be greater than consolidated cost of sales in 20x2.
55. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials
from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw
materials from outside suppliers and the same price as Reynolds sells the materials to unrelated
customers. In preparing consolidated statements for Reynolds Company and Subsidiary Sally
Corporation.
a. the intercompany transactions can be ignored because the transfer price represents arm's length
bargaining.
b. any unrealized profit from intercompany sales remaining in Reynolds' ending inventory must
be offset against the unrealized profit in Reynolds’ beginning inventory.
c. any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in
its entirety.
d. eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory
is eliminated.
56. The material sale of inventory items by a parent company to an affiliated company
a. enters the consolidated revenue computation only if the transfer was the result of arm's length
bargaining.
b. affects consolidated net income under a periodic inventory system but not under a perpetual
inventory system.
c. does not result in consolidated income until the merchandise is sold to outside parties.
57. Honeyeater Corporation owns a 40% interest in Nectar Company, acquired several years ago at a
cost equal to book value and fair value. Nectar sells merchandise to Honeyeater for the first time in
20x5. In computing income from the investee for 20x5 under the equity method, Honeyeater uses
which equation?
a. 40% of Nectar's income less 100% of the unrealized profit in Honeyeater’s ending inventory.
b. 40% of Nectar's income plus 100% of the unrealized profit in Honeyeater’s ending inventory.
c. 40% of Nectar's income less 40% of the unrealized profit in Honeyeater's ending inventory.
d. 40% of Nectar's income plus 40% of the unrealized profit in Honeyeater's ending inventory.
58. In situations where there are routine inventory sales between parent companies and
subsidiaries, when preparing the consolidation statements, which of the following line items is
indifferent to the sales being either upstream or downstream?
a. Consolidated retained earnings. c. Non-controlling interest expense.
b. Consolidated gross profit. d. Consolidated net income.
59. The consolidation procedures for intercompany sales are similar for upstream and downstream
sales
a. if the merchandise is transferred at cost.
b. under a periodic inventory system but not under a perpetual inventory system.
c. if the merchandise is immediately sold to outside parties.
d. when the subsidiary is 100% owned.
60. Which of the following describes the impact on consolidated financial statements of
upstream and downstream transfers?
a. No difference exists in consolidated financial statements between upstream and downstream

transfers.
b. Downstream transfers affect the computation of the non-controlling interest's share of
subsidiary's income but upstream transfers do not.
c. Upstream transfers affect the computation of the non-controlling interest's share of the
subsidiary's income but downstream transfers do not.
d. Downstream transfers can be ignored because the parent company makes them.
61. Subsidiary’s income be adjusted for intercompany transfers?
a. The subsidiary's reported income is adjusted for the impact of upstream transfers prior to
computing the non- controlling interest's allocation.
b. The subsidiary’s reported income is adjusted for the impact of all transfers prior to the computing
the non-controlling
interest’s allocation.
c. The subsidiary’s reported income is not adjusted for the impact of transfers prior to computing
the non-controlling interest's allocation.
d. The subsidiary s reported income is adjusted for the impact of downstream transfers prior to
computing the non- controlling interest’s allocation.
62. A parent company regularly sells merchandise to its 70%-owned subsidiary. Which of the
following statements describes the computation of minority interest income?
a. The subsidiary's net income times 30%.
b. (The subsidiary’s net income x 30%) + unrealized profits in the beginning inventory – unrealized
profits in the ending inventory.
c. (The subsidiary's net income + unrealized profits in the beginning inventory - unrealized
profits in the ending inventory) x 30%.
d. (The subsidiary's net income + unrealized profits in the ending inventory - unrealized
profits in the beginning inventory) X 30%.
Use the following information for questions 63 to 66:
Strickland Company sells inventory to its parent, Carter Company, at a profit during 20x4.
63. With regard to the intercompany sale, which of the following choices would be a debit entry
in the consolidated worksheet for 20x4?
a. Retained earnings d. Investment Strickland Company
b. Cost of goods sold e. Additional paid-in capital
c. Inventory
64. With regard to the intercompany sale, which of the following choices would be a credit entry
b. Cost of goods sold e. Additional paid-in capital.
c. Inventory
c. Inventory
c. Inventory
Use the following information for questions 67 to 70: .
Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 20x4. Walsh uses
the equity method to account for its investment in Fisher.
a. Retained earnings d. Investment Fisher Company
b. Cost of goods sold c. Additional paid-in capital
c. Inventory
c. Inventory
c. Inventory
70. With regard to the Intercompany sale, which of the following choices would be a
credit entry in the consolidated worksheet for 20x5?
b. Cost of goods sold c. Additional paid-in capital
c. Inventory
71. In 20x5, Polex sold Inventory costing P100,000 to tits 100%-owned subsidiary, Solex, for
P150,000. At the end of 20x5, Solex reported P6O.OOO of intercompany-acquired inventory in
its balance sheet. What is the unrealized intercompany profit at 12/31/05?
a. P16,000 c. P40,000 e. None of the above
b. P20,000 d. P50,000
72. In 20x5, Palco sold inventory costing P70,000 to its 100%-owned subsidiary, Salco, for
P110,000. At 12/31/x5, P33,000 of this inventory was reported in Salco's balance sheet. In 20x6,
Salco resold this inventory for P55,000. How much intercompany profit was realized in 20x6—not
20x5?
b. P21,000 d. P34,000
73. In 20x5, Punco sold inventory costing P60,000 to its 100%-owned subsidiary, Sunco, for
P100,000. At 12/31/x5, P20,000 of this inventory was reported in Sunco's balance sheet. In 20x6,
Sunco resold this inventory for P30,000. What is the unrealized intercompany profit at 12/31/x5?
b. P10,000 d. P30,000
74. In 20x5, Pimco sold inventory costing P45,000 to its 100%-owned subsidiary, Simco, for P75,000.
At 12/31/X5, P15,000 of this inventory was reported in Simco's balance sheet. In 20x6, Simco resold
this inventory for P25,000. What is the unrealized intercompany profit at 12/31/x5?
b.P10,000 d. P20,000
75. ln 20x6, Semco resold for P40,000 inventory that it had acquired in 20x5 from its parent
company, Pemco, for P32,000. Pemco's cost was P25,000. In consolidation at the end of 20x6,
which of the following accounts is credited in consolidation?
a. Intercompany Cost of Soles for P32,000. c. Cost of Sales for P7,000 e. None of the above
b. Inventory for P32,000. d. Cost of Sales for P8,000
76. In early 20x5, Pye sold inventory costing P33,000 to its 100%-owned subsidiary, Slyce, for
P44,000. At 12/31/X5, Slyce made a lower-of-cost-or-market adjustment of P6,000 for this
inventory, all of which was still on hand. What amount is reported for this inventory in the
12/31/x5 consolidated balance sheet?
b. P27,000 d. P38,000
77. In 20x6, Panex sold inventory costing P100,000 to its 75%-owned subsidiary, Sanex, for P150,000.
At 12/31/X6, Sanex reported P60,000 of intercompany-acquired inventory in its balance sheet. The
amount by which the 20x6 consolidated net income that accrues to the controlling interest will be
lower as a result of this being an intercompany transaction is

b. P15,000 d. P37,500
78. In 20x6, Pulco acquired inventory from its 75%-owned subsidiary, Sulco, for P250 000. Sulco's
cost was P200,000. At 12/31/X6, Pulco reported P40,000 of intercompany-acquired inventory in its
balance sheet. The amount by which the 2006 consolidated net income that accrues to the
controlling will be lower as a result of this being an intercompany transaction is
b. P8,000 d. P40,000
79. In its consolidated 20x6 financial statements, Pozak recognized P37,000 of intercompany profit
relating to upstream inventory sales from its 75%-owned subsidiary (Sozak). Of this amount, P7,000
pertained to intercompany profit deferred at 12/31/0x5. During 20x6, downstream intercompany
sales totaled P100,000 (Pozak's cost was P60,000). What amount was credited to Inventory in
consolidation at 12/31/X6? (Hint: Prepare the analysis of unrealized profit for the 2006 transfers-this
is possible from the information given.)
a. P0 c. P10,000 e. None of the above
b. P7,000 d. P30,000
80. In 20x6, Semco resold for P55,000 inventory that it had acquired in 20x5 from its parent,
Pemco, for P30,000. Pemco’s cost was P40,000. Which account is credited in consolidation at
12/31/x6?
a. Intercompany Cost of Sales for P40,000 c. Cost of Sales for P10,000 e. None of the
above
b. Inventory for P10,000 d. Cost of Sales for P15,000
CHAPTER 5- Theories
1. In reference to the downstream or upstream sale of depreciable assets, which of the following
statements is correct?
Gains and losses appear in the parent-company accounts in the year of sale and must be
eliminated by the parent company determining its investment income under the equity
method of accounting.
2. In the year, a subsidiary sells land to its parent company at a gain, a workpaper entry is made
debiting:
Gain on Sale of Land
3. In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company
at a gain, the non-controlling interest in consolidated income is computed by multiplying the
non-controlling interest percentage by the subsidiary’s reported net income
Plus intercompany gain considered realized in the current period.
4. Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year
of the intercompany sale, a workpaper entry is made under the cost method debiting:
Retained Earnings-P
Non-controlling interest
Equipment
5. P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 20x4, S
sold equipment to P for an amount greater than the equipment’s book value but less than its
original cost. The equipment should be reported on the December 31, 20x4 consolidated
balance sheet at:
P’s original cost less S’s recorded gain
6. In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the non-
controlling interest in consolidated income is calculated by multiplying the non-controlling
interest percentage by the subsidiary’s reported net income
Minus the net amount of unrealized gain on the intercompany sale
7. The amount of the adjustment to the non-controlling interest in consolidated net assets is equal
to the non-controlling interest’s percentage of the
Realized intercompany gain at the beginning of the period
8. In years subsequent to the upstream intercompany sale of non-depreciable assets, the

necessary consolidated workpaper entry under the cost method is to debit the
Non-controlling interest and Retained Earnings (Parent) accounts and credit the non-
depreciable asset.
9. When preparing consolidated financial statement workpapers, unrealized intercompany gains,

as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent
of ownership between parent and subsidiary only when the selling affiliate is
The parent and the subsidiary is less than wholly owned
10. Gain or loss resulting from an intercompany sale of equipment between a parent and a
subsidiary is
Considered to be unrealized in the consolidated statements until the equipment is sold to a
third party
11. WW Company own 80 percent of FF Company’s outstanding common stock. On December 31,
20x9, FF sold equipment to WW at a price in excess of FF’s carrying amount, but less than its
original cost. On a consolidated balance sheet at December 31, 20x9, the carrying amount of the
equipment should be reported at:
WW’s original cost less FF’s recorded gain
12. J Company acquired all of K Company’s outstanding common stock in exchange for cash. The
acquisition price exceeds the fair value of net assets required. How should J Company determine
the amounts to be reported for the plant and equipment and long-term debt acquired from K
Company?
Plant & Equipment Long-term Debt
Fair Value K’s carrying amount
13. PP Inc. owns 100 percent of SS Inc. On January 1, 20x2, PP sold delivery equipment to SS at a
gain. PP had owned the equipment for two years and used a five-year straight-line depreciation
rate with no residual value. SS is using a three-year straight-line depreciation rate with no
residual value for the equipment. In the consolidated income statement, SS’s recorded
depreciation expense on the equipment for 20x2 will be decreased by:
100 percent of the gain on the sale
14. Included in a working paper elimination (in journal entry format) for intercompany sales of
merchandise was a debit to Minority Interest in Net Assets of Subsidiary. This debit indicates
that:
A wholly owned subsidiary sold merchandise to a partially owned subsidiary
15. From a consolidated point of view, the intercompany gain on a parent company’s sale of a
depreciable plant asset to the subsidiary is realized when:
Some other transaction or event takes place
16. In the measurement of minority interest in net income of a partially owned subsidiary, the credit
for Depreciation Expense-Parent in the working paper elimination (in journal entry format
) for intercompany gain in a depreciable plant asset is attributed to net income of:
The subsidiary
17. The working paper elimination (in journal entry format) for a second year of intercompany sales
made at a markup over subsidiary cost by a partially owned subsidiary to the parent company
includes:
A debit to Retained Earnings- Subsidiary
18. Which of the following is not an effect of a working paper elimination for intercompany sales of
merchandise by a parent company to a subsidiary?
It eliminates the overstatement of the Subsidiary’s Sales ledger account balance.
19. If a gain on an intercompany transaction is attributable to a partially owned subsidiary, working

paper eliminations (in journal entry format) for accounting periods subsequent to the period of
the intercompany transaction will include a debit to Minority Interest in Net Assets of Subsidiary
unless the gain arose from:
An acquisition of outstanding bonds in the open market
20. The gross profit on an intercompany sale of merchandise costing P500,000 at a gross margin
rate of 16 2/3% based on selling price is:
P100,000
21. Is the non-controlling interest in net income of a partially owned subsidiary affected by:
Elimination of depreciation attributable to intercompany gain on machinery acquired by parent
from subsidiary? YES
Elimination of intercompany gain on land sold by parent to subsidiary? NO
22. A working paper elimination to remove an intercompany profit or gain is not relevant for an
intercompany:
Acquisition of an affiliate’s outstanding bonds payable in the open market
23. Blue Company owns 70 percent of Black Company’s outstanding common stock. On December
31, 20x4, Black sold equipment to Blue at a price in excess of Black’s carrying amount but less
than its original cost. On a consolidated balance sheet at December 31, 20x4, the carrying
amount of the equipment should be reported at:
Blue’s original cost less Black’s recorded gain
24. A parent and its 80 percent owned subsidiary have made several intercompany sales of
noncurrent assets during the part two years. The amount of income assigned to the non-
controlling interest for the second year should include the noncontrolling interest’s share of
gains:
Realized in the second year from upstream sales made in both years
25. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues
to hold the land at the end of the year. The amount to be reported as consolidated net income
for the year should equal:
The parent’s separate operating income, plus the subsidiary’s net income, minus the
intercompany gain
26. A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary
continues to hold the land at the end of the year. The amount to be reported as consolidates net
income for the year should equal:
The parent’s separate operating income, plus the intercompany loss, plus the subsidiary’s net
income
27. Any intercompany gain or loss on a downstream sale of land should be recognized in
consolidated net income:
III. In the year the subsidiary sells the land to an unrelated party
28. On November 8, 20x4, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land
cost P61,500 and was sold to Wood for P89,000. From the perspective of the combination, when
is the gain on the sale of the land realized?
When Wood Co. sells the land to a third party
29. Parent sold land to its subsidiary for a gain in 20x4. The subsidiary sold the land externally for a
gain in 20x7. Which of the following statement is true?
No gain will be reported on the 2010 consolidated income statement
30. An intercompany sale took place whereby the transfer price exceeded the book value of a
depreciable asset. Which statement is true for the year following the sale?
A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer
when the parent uses the equity method
31. Which of the following statements is true concerning an intercompany transfer of a depreciable
asset?
Non-controlling interest in subsidiary’s net income is affected only when the transfer is
upstream.
CHAPTER 2
1. At the date of an acquisition which is not a bargain purchase, the acquisition method Consolidate all
subsidiary assets and liabilities at fair value
2. Lisa co. paid cash for all of the voting stock of Victoria Corp. Victoria will continue to exist as a separate
corporation. Entries for the consolidation of Lisa and Victoria would be recorded in
A worksheet
3. What is the primary accounting difference between accounting for when the subsidiary is dissolved and
when the subsidiary retains Its incorporation?
If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting
records of the acquiring company.
4. A company is not required to consolidate a subsidiary in which it holds more than 50% of the voting stock
when the subsidiary is in bankruptcy
5. Which one of the following is a characteristic of a business combination that should be accounted for as
an acquisition? the transactions established an acquisition fair value basis for the company being
acquired.
6. Which of the following is the best theoretical justification for consolidated financial statements?
In form the companies are separate, in substance they are one entity.
7. what is the appropriate accounting treatment for the value assigned to in-process research and
development acquired in a business combination? Capitalized as an asset
8. 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 statement, the acquiring firm should report the
value assigned to the lease contract as
An intangible asset under the contractual- legal criterion
9. W company obtains all of the outstanding stock of JJ, inc. In a consolidation prepared immediately after
the takeover, at what value will jj inventory be consolidated?
At the acquisition-date fair value.
When the amount of a bargain purchase exceeds the value of the applicable liability held by the
acquired company.
11. What is push-down accounting? a subsidiary’s regarding of the fair value allocations as well as
subsequent amortization
12. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next
year. In a step acquisition of acquisition of this type, the original 32 percent acquisition should be
Adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded.
13. If A company acquires 80 percent of the stock of B company on January 1, 20x2, immediately after the
acquisition. consolidated retained earnings and AA company retained earnings will be the same
14. Which of the following statement is correct?
Total assets reported by the parent generally will be less than total assets reported on the consolidated
balance sheet
15. Which of the following statement is correct?
Consolidated retained earnings do not include the non-controlling interest’s claim on the subsidiary’s
retained earnings
16. What is the theoretically preferred method of presenting a non-controlling interest in a consolidated
balance sheet? As a separate item within the stockholders’ equity section
17. Presenting consolidated financial statements this year when statements of individual companies were
presented last year is an accounting change that should be reported by restating the financial
statements of all prior periods presented
18. A subsidiary, a acquired for cash in a business combination, owned equipment with a market value in
excess of book value as of the date of combination. A consolidated balance sheet prepared immediately
after the acquisition would threat this excess as
Plant and equipment
19. Goodwill is reported when the fair value of the acquiree is greater than the fair value of the net
identifiable assets acquired.
20. Consolidated financial statements are designed to provide the results of operation cash flow, and the
balance sheet as if the parent and subsidiary were a single entity
21. Consolidated financial statements are appropriate even without a majority ownership if which of the
following exists the parent company has the right to appoint a majority of the members of the
subsidiary’s board of directors through a large minority voting interest
22. The IASB has recommended that a parent corporation should consolidate the financial statements of the
subsidiary into its financial statements when it exercises control over the Subsidiary, even without
majority ownerships. In which if the following situations would control not be evident?
Access to subsidiary assets is available to all stockholders
23. The goal of the consolidation process is for asset acquisition and 100% stock acquisitions to result in the
same balance sheet
24. A subsidiary was acquired for cash in a business combination on December 31,20x4. The purchase price
with a fair value in excess of the book value as of the date of the combination. A consolidated balance
sheet prepared on December 31,20x1, would
report the excess of the fair value over the book value of the equipment as part pf the plant and
equipment account
25. The investment in a subsidiary should be recorded on the parent’s books at the
Fair value of the consideration given
26. Which of the following cost of a business combinations can be included in the value charged to paid-in-
capital in excess of par? Stock issue cost if stock is issued as consideration
27. When a company purchase another company that has existing goodwill and the transaction is accounted
for as a stock acquisition, the goodwill should be treated in the following manner.
Goodwill is not recorded until all assets are stated at full fair value
28. The sec requires the use of push-down accounting in some specific situations. Push-down accounting
results in reflecting fair values on the subsidiary’s separate account.
29. A majority-owned subsidiary that is in legal reorganizations should normally be accounted for using
the cost method
30. Under the acquisition method, indirect cost relating to acquisitions should be
Expensed as incurred
31. Eliminating entries are made to cancel the effects of intercompany transactions and are made on the
Workpaper only
32. One reason a parent company may pay an amount less than the book value of the subsidiary’s stock
acquired is the existence of unrecorded contingent liabilities
33. In a business combination accounted for as an acquisition, registration costs related to common stock
issued by the parent company are
Deducted from other contributed capital
34. On the consolidated balance sheet; consolidated stockholder’s equity is
Equal to the parent’s stockholder’s equity
35. Majority-owned subsidiaries should be excluded from the consolidated statements when
Any of these circumstances exist
36. Under the economic entity concepts, consolidated financial statements are intended primarily for the
benefit of the all of the above
37. Reasons a parent company may pay more than a book value for the subsidiary company’s stock include all
of the following except stockholder’s equity may be overvalued
38. What is the method of presentation required by PFRS 10 of non-controlling interest on a consolidated
balance sheet? As a part of stockholder’s equity
39. Which of the following is a limitation of consolidated financial statements?
consolidated statements of highly diversified companies cannot be compared with industry standards
40. When a company purchases another company that has existing goodwill and the transactions is
accounted for as a stock acquisition, the goodwill should be treated in the following manner.
Goodwill is not recorded until all assets are stated at full fair value.
41. The use of push-down accounting is some specific situations. Push-down accounting results in
Reflecting fair values on the subsidiary’s separate accounts.
42. What is push-down accounting? a subsidiary’s recording of the fair value allocations as well as
subsequent amortization.
43. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next
year. In a step acquisition of this type, the original 32 percent acquisition should be adjusted to fair value
at the date of the second acquisition with a resulting gain or loss recorded
44. A newly acquired subsidiary has pre-existing goodwill on its books. The parent company’s consolidated
balance sheet will not show any value for the subsidiary’s pre-existing goodwill.
45. What is push-down accounting? a subsidiary’s recording of the fair value allocations as well as
subsequent amortization.
46. The main evidence of control for purposes of consolidated financial statements involves
Having decision-making ability that is not shared with others
47. In which of the following cases would consolidation be inappropriate? the subsidiary is in bankruptcy
48. The primary beneficiary of a variable interest entity (VIE) must consolidate the VIE into its financial
statements whenever the total equity at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties.
49. If an entity is not considered a VIE, the determination of consolidation is based on whether one of the
entities in the consolidated group directly or indirectly has controlling financial interest
50. PFRS defines control as the power to govern the entity’s financial and operating policies as to obtain
benefits from its activities.
51. Consolidated financial statements are designed to provide the results of operations, cash flow, and the
balance sheet as if the parent and subsidiary were a single entity.
52. Consolidated financial statements are appropriate even without a majority ownership if which of the
following exist. The parent company has the right to appoint a majority of the members of the
subsidiary’s board of directors through a large minority voting interest.
53. IASB has recommended that a parent corporation should consolidate the financial statements of the
subsidiary into its financial statement when it exercises control over the subsidiary, even without majority
ownership. In which of the following situations would control not be evident?
54. The goal of the consolidation process is for assets acquisition and 100% stock acquisitions to result in the
same balance sheet.
55. A subsidiary was acquired for cash in a business combination on December 31,20x1. The purchase price
exceeded the fair value of identifiable net assets. The acquired company owned equipment balance sheet
prepared on December 31,20x1, would
Report the excess of the fair value over the book value of the equipment as part of the plant and
Equipment account.
56. The investment in a subsidiary should be recorded on the parent books at the
Fair value of the consideration given.
57. Which of the following costs of a business combination can be included in the value charged to paid-in-
capital in excess of par?
Stock issue costs if stock is issued as consideration
1.T he purchase price of an entity includes:
a.the book value of the subsidiary’ shareholder equity and acquisition differential.
b.The book value of the subsidiary’s shareholder equity and goodwill.
c.the fair market value of the subsidiary’s shareholder equity and the purchase price
discrepancy.
d.the fair market value of the subsidiary’s net assets.
2. On the date acquisition, consolidated shareholder equity is equal to:
a.the sum of the parent and subsidiary’s shareholder equities.

b.the sum of the parents shareholder equity its pro rata shareof subsidiary’s shareholder equity
on the date of acquisition.
c.the parent’s shareholder equity.
d.the subsidiary’s shareholder equity.
3.On the date of acquisition , the parent’s investment (in subsidiary of fair market) is:
a.revalued to fair market value.
b.replaced with 100% of the assets and liabilities of the subsidiary fair market value.
c.replaced with 100% of the assets and liabilities of the subsidiary of the book value.
d.replaced with parent’s pro rata share of the assets and liabilities of the subsidiary of fair
market value.
4.Under “push-down” accounting, a subsidiary’s assets and liabilities are revalued using :
a.fair market values.
b.Lower of Cost and Market principles.
c.the parents’s acquisition cost.
d.the net assets value.
5.When the parent forms a new subsidiary.

a.there should be no acquisition differential.
b.a gain or loss will usually arise.
c.push down accounting rules must be followed.
d.it should not be included in the company’s consolidated financial statements as thios would
effectively be double-counting.
6.Any negative goodwill arising on the date of acquisition.

a.is recognized as a gain on the date of acquisition.
b.is prorated among the parent company’s identifiable net assets.
c.should be amortized over a predetermined period)
d.is recognized as a loss on the date of acquisition.
7.A company owning a majority (but less than 100%) of another’s voting shares on the date of
acquisition should account for its subsidiary
.
a.by including only its share of the fair market values of the subsidiary’s net assets.
b.by including its share of the book values of the subsidiary’s net asset.
c.by including 100%of the fair market values of the subsidiary’s net assets.
d. by including 100% of the fair market values of the subsidiary’s net asset and accounting for
any unowned portion of the subsidiary’s voting shares using the Non-Controlling Interest
account.
8.HRN Enterprises Inc purchase 80% of gthe outstanding voting shares of the NHR Inc on January
1, 20x9. On that date,
a.HRN’s Non-Controlling Interest account will include 20% of the fair value of NHR’s net
asssets.
b.HRN’s Non-Controlling Interest account will include 20% of the book value of NHR’s net
assets.
c. HRN’s Non-Controlling Interest account will include 20% ofof the acquisition of
differential on the date of acquisition.
d. HRN’s Non-Controlling Interest account will include 20% of any unallocated portion of the
acquisition differential on the Date of Acquisition.
10. The calculation of Goodwill and Non-Controlling Interest under the Entity Theory is derived.
a. by using an imputed acquisition cost , which would be the presumed cost of acquiring
100% of the outstanding voting shares of the subsidiary.
b. by using the acquisition cost.
c. by using the actual acquisition cost less any uncontrolled portion of the subsidiary’s net
asset at fair market value.
d. . by using the actual acquisition cost less any uncontrolled portion of the subsidiary’s net
asset at book value.
11.One weakness assiociated with the Entity Theory is that
a.it is inconsistent with Historical Cost Principle.

b.Non-Controlling Interest is computed using the fair market values of the subsidiary’s net
assets.
c. Non-Controlling Interest is computed using the book values of the subsidiary’s net assets
d.the presumed acquisition cost may be unrealistic when the parent purchases significantly
less than 100%of the subsidiary’s voting shares, or voting control achieved incrementally.
13.On the date formation of a 100% owned subsidiary by the parent:

a.it is possible to prepare consolidated finNXIl statements that include all the assets and
liabilities of the subsidiary.
b.consolidated financial statementsassre difficult to prepare because the assets and liabilities of
the subsidiary.
c.consolidation requires the elimination of the parent’s investment account against the
subsidiaries share capital.
d.none of the above is applicable.
14.Contingent consideration should be valued at
a.the fair value of the consideration on the date of acquisition.

b.the book value of the consideration at the date of acquisition.
c.the acquirer’s pro-rata shares of the subsidiary’s net assets at book value of the date of
acquisition.
d. acquirer’s pro-rata shares of the subsidiary’s net assets at fair value at the date of
acquisition.
15.Contingent considereation will be classified as a liability when
a.it will be paid in the form of additional equity.

b.it will be paid in the form of cash or another asset.
c.the form of payment will be determined at a future date.
d.the acquirer decides the appropriate time to make payment.
16.Consolidated financial statements consist of
a. a balance sheet, a statement of a comprehensive income e, a statement of changes in

equity, a cash flow statement and accompanying notes.
b. a balance sheet, a statement of income , a statement of changes sin financial position ,
and a statement of retainedearnings.
c. a balance sheet, income statements and a statement of retained earnings.
d. a balanced sheet , a statement of comprehensive and non comprehensive income and any
other statements that will provide useful information to the users of financial statement.
17.If a subsidiary’s goodwill is reasosnably measurable on the date of acquisition , which

consolidation theory should the parent company apply other January 1, 2009
a.Proprietory Theory
b.Parent Company Theory.
c.Parent Company Extension
d.Entity Theory
18. A negative acquisition differential
a.is always equal to megative goodwill.

b.is equal to ngetive goodwill when the fair values of subsidiary’s identifiable net assets are
equal to their book values.
c.implies that the parent company may have overpaid for its acquisition.
d.cannot occur under the acquisition method)
19.Under the Cost Method,
a. the parent’s investment in the subsidiary is recorded at cost,a nd never changed
thereafter.
b. the parent records the pro rata shares of the subsidiary’spost- acquisition income as an
increase to the investment account and reduces the investment account with its sharae of the
dividends declaredby the subsidiary.
C .the parent records its pro rata share of theof the subsidiary’s cumulative earnings as an
increase to the investment account and reduces the investment account with its share of the
dividends declared by the subsidiary.
D .the parent’s investment in the subsidiary is recorded at Cost and reduces by an excess
dividendsreceived from the subsidiary.
20. Under the Equity Method,

a.the parent’s investment in the subsidiary is recorded at Cost , and never changed thereafter.
b.the parent record its pro rata share of the subsidiary’s post-acquisition income as an
increase to the investment account and reduces the investment account with its share of the
dividends declared by the subsidiary.
c.the parent record its pro rata share of the subsidiary’s cumulative earnings as an increase to
the investment account and reduces the investment account with its share of the dividends declared
by the subsidiary.
d.the parent investment in the subsidiary Is recorded at cost and reduced by any excess
dividendsreceived from the subsidiary.
21. Consolidated Net Income would be:

a. higher if the parent chooses to use Equity Method rather than the Cost method.
b. higher if the parent chooses to use Equity method rather than the Cost method, provided
that the subsidiary showed a profit.
c. lower if the parent chooses to use Equity method rather than the Cost method
d. the same under both the Cost and Equity method.
22. Consolidated Net Income is equal to

a. the sum of the net income of both the parent and its subsidiaries.
b. the sum of the net income of both the parent and its subsidiaries less any inter company.
C .the parents net incomeexcluding any incomearising from its investment in the
subsidiary.
d. the parents net incomeexcluding any incomearising from its investment in the
subsidiary, plus the parent’s shareof the net income of the subsidiary less the amortization of the
acquisition differential.
23.Consolidated Retained earnings include:
a.Consilidated net income less any dividends declared by either the parents or the
subsididary.
b. Consilidated net income less any dividends declared by the the parents only.
c.the parent’s net income plusits share of the subsidiary’s income less any dividendsdeclared
by either the parent or the subsidiary.
d.the parent’s net income less any dividends declared by parents.
24.A company sells inventory to its subsidiary, B company at a mark –up of 20% ob cost. Of what
significance is this transaction, should Awish to prepare Consolidated Financial Statements? The
inventory is still in B’s warehouse at year end.
a.This is not significant. Any inter-company profits are eliminated during the consolidation
process.
b.A’s net income will be under-stated.
c.B’s income will beover-stated.
d.There will be unrealized profitsib inventory which will only be realized once B sellsthis
inventory to outsiders.
25. Which of the following adjustments(if only) to Retained Earningsis necessary for the
preparation of the Consolidated Balanced Sheet?
a.Under both the Cost and Equity method, the parent must record its share of its Subsidiary
Income.
b.Under both the Cost and Equity method, the parent must record its share of its Subsidiary
Income lessany dividends received from the subsidiary.
c.No adjustment is required under either the Cost or the Equity methods.
d.No adjustment is requiredif the parent has been using thw Equity method.
26. Any excessof fair value over book value attributable to land on the date of acquisition is to be
a.allocated to other identifiableassets.
b.Capitalized and amortized.
c.charged to Retained Earnings on the date of acquisition.
d.taken into income when the Land is sold.
27. Consolidated Shareholder Equity

a.includes any Non-Controlling interest
b.is equal to the sum of the shareholder Equity Sections of both the parents and the
subsidiary.
c.is equal to that of the parent company under the Equity Method.
d.is higher under the Equity Method when the subsidiary does not declare dividends.
28,Assuming the subsidiary showed a profit for the past year , the elimination entry required to
removed a subsidiary’s income from the parent’s books prior to the preparation of Consolidated
Financial Statements would be:
Debit
Credit
a.Investment income – Parent xx
xx
Retained Earnings – Parent
b.Investment Income – Parent xx
xx
Investment in Subsidiary
c. Investment Income – Parent xx
xx
Acquisition differential
d. Investment Income – Parent xx
xx
/investment Income - Parent
29. The elimination entry required to remove any dividends received from a subsidiary prior to the
preparation of Consolidated Financial Statements would be
Debit
Credit
a.Investment income – Parent xx
xx
Retained Earnings – Parent
b.Investment Income – Parent xx
xx
Investment in Subsidiary
c. Investment Income – Parent xx
xx
Acquisition differential
d. Investment Income – Parent xx
xx
/investment Income - Parent
30.Intercompany profits on sales of inventory are only realized
a.once the seller receives payment for the sale.

b.once the inventory has been sold to outsider.
c.when the inventory has been received by the purchaser.
d.when theinventory has been shipped to the purchaser.
31. How would any management fees charged by a Parent Company to its Subsidiary be accounted
for during the Consolidation process?
a. The Parent Company would only record its pro- rata share of any management revenues.
b. The Parent Company's profit on the rendering of management services would be charged to
retained earnings.
c. Both the Parent's management fees and the subsidiary's related expense
would be eliminated when preparing Consolidated Financial Statements.
d. No special accounting treatment is required, since this would have no effect on Consolidated
Net Income.
32. Which of the following statements best describes the required accounting treatment with
respect to income taxes on intercompany profits?
a. These taxes can be ignored since an increase in income tax expense for one company is offset by
an equivalent reduction in Income Tax expense for the other.
b. They would be recognized as assets for the purchasing entity and liabilities for the selling entity.
c. They would be recognized as liabilities for the purchasing entity and assets for the selling entity.
d. They would be charged to retained earnings during the preparation of Financial Statements.
33. Any goodwill on the subsidiary's company's books on the date of acquisition:
a. must be revalued
b. must be eliminated
c. must be recorded as a loss on acquisition
d. must be subject to an impairment
34. When are profits from intercompany land sales realized?
a. They are realized only when sold to outsiders.

b. They are realized once legal ownership of the land has been transfered.
c. They are realized when consideration has been received for the land.
d. They are realized when an agreement is signed with respect to ownership of the
land
35. Under which of the following theories is the elimination of ALL intercompany profits called
for?
a. The Ownership Theory.

b. The Entity Theory.
c. The Proprietary Theory.
d. The Parent Theory.
36. Which of the following theories views non-controlling Interest and the controlling shareholders
as being two distinct shareholder groups ?
a. The Ownership Theory

b. The Entity Theory.
c. The Proprietary Theory
d. The Parent Theory.
37. Under which of the following Consolidation Theories would the elimination of the Parent's
share of any intercompany profits be required for the preparation of Consolidated Financial
Statements?
a. The Ownership Theory.

b. The Entity Theory
c. The Proprietary Theory.
d. The Parent Theory
38. Which of the following theories does NOT acknowledge the existence of a non-controlling
interest in the consolidated financial Statements?
A .The Ownership Theory.

B.The Entity Theory.
C. The Proprietary Theory.
D. The Parent Theory.
39. Which of the following is not an intercompany transaction?

a. The parent company acquires inventory from the subsidiary
b. The subsidiary purchases a machine from another subsidiary
c. The parent purchases inventory from a supplier
d. The subsidiary purchases the parent's bond payable from an independent investor
40. The parent acquires inventory from a subsidiary. On whose financial records is this
intercompany transaction recorded?
a. The books of the subsidiary only because the subsidiary made the sale and the consolidated
financial statements are prepared for the parent company stockholders
b. The books of the parent only because the parent knows the subsidiary's identity so the parent
knows it is an intercompany transaction
c. Neither the parent nor the subsidiary would record the transaction because it is an intercompany
transaction
d. The parent and the subsidiary both record the transaction and it is eliminated during the
consolidation process
41. The sole of inventory from the parent to the subsidiary is called what type of transaction?
a. Downstream intercompany transaction

b. Upstream intercompany transaction
c. Lateral intercompany transaction
d. Realized intercompany transaction
42. The sale of equipment from the subsidiary to the parent is called what type of transaction?

43. The purchase of a subsidiary's bond payable from an independent investor by another
subsidiary is called what type of transaction?

44. When there is an intercompany transaction, how much of any profit or loss created as a result
of the transaction is eliminated during the consolidation process?
a. None of the profit or loss is eliminated

b. All of the profit or loss is eliminated
c. Parent's ownership interest in the profit or loss is eliminated
d. It is not possible to determine how much of the profit or loss is eliminated without knowing
whether the transaction is upstream or downstream
45. In the period of an intercompany asset transaction, the consolidated balance sheet will present
what amount in the asset account?
a. The purchase price by the new owner

b. The purchase price by the original owner
c. The purchase price by the original owner plus the parent's ownership percentage of the gain or
loss on the sale recognized at the time or the intercompany transaction
d. The purchase price by the original owner plus the non-controlling interests' percentage of the
gain or loss on the sale recognized ot the time of the intercompany transaction
46. What amount of gain or loss from the intercompany sale of plant assets is included in the
Consolidated income statement?
a. The entire gain or loss is recognized

b The parent's ownership interest in the gain or loss is recognized
c. The seller's portion of the gain or loss is recognized
d. There is no gain or loss recognized
47. When an intercompany inventory transaction occurs at a price greater than cost, what account
on the purchaser's financial records is initially affected because of the gross profit on the sale?
a. Sales
b. Cost of Goods Sold
c. Gross profit
d. Inventory
48. When the Non-Controlling Interest's share of the subsidiary's goodwill is not reliably
determined the method used to prepare consolidated financial statements is:
a. the Entity Theory.

b. the Proprietary Theory
c. the Non-Controlling Interest Revaluation Theory.
d. the Parent Company Extension theory.
49. The focus of the Consolidated Financial Statements on the shareholders of the parent company
is characteristic of:

b. the Proprietary Theory.
c. the Parent Company Theory.
d. both the Parent Company theory and the Proprietary Theory.
50. Non-Controlling Interest is presented in the Shareholders' Equity section of the Balance Sheet
under

b. the Proprietary Theory.
c. the Parent Company Theory.
d. both the Parent Company Theory and the Proprietary Theory.
51. In years subsequent to acquisition of a subsidiary the Equity Investment account, when
investor uses the equity method, includes the following components except:
a. Investee's reported income
b. Dividends paid by the investor
c. Amortization
d. Dividends paid by the investee
52. If the accountant fails to record on the consolidation worksheet, amortization related to an
undervalued truck:
a. The subsidiary's net income will be overstated

b. The parent's net income will be unaffected
c. Consolidated net income will be overstated
d. The parent's net income will be understated
53. Amortization related to overvalued equipment:
a. Increases consolidated net income

b. Increases the parent's reported net income under the equity method
c. Increases consolidated expenses
d. Both a and b are correct
54. Which of the following is the correct entry on a parent's books to recognize amortization of a
previously unrecorded patent acquired in a business combination?
a. Equity Income XX
Equity Investment XX
b. Amortization Expense XX
Equity Investment XX
c. Amortization Expense XX
Patent XX
d. Equity Investment XX
Equity Income XX
55. If a parent uses the equity method in years subsequent to the acquisition year, the amount
debited to Retained Earnings in the consolidation entries is the subsidiary's Retained Earnings
balance:
a. At beginning of the current year

b. At date of acquisition
c. At end of the current year
d. At beginning of the preceding year
56. Under the equity method, dividends declared by a subsidiary are accounted for by the parent
as:
a. Dividend revenue
b. Decrease in Equity Investment
c. Decrease in Equity Investment, but only if it is a liquidating dividend
d. Increase in Equity Income
57. If the fair value of a reporting unit with goodwill fails below its book value, which of the
a. No additional impairment testing is required.

b. A goodwill impairment loss is recognized for the excess of book value over fair value of the
reporting unit.
c. There is a potential impairment loss for the amount that the book value of the goodwill exceeds
its implied fair value.
d. Goodwill is removed from the consolidated balance sheet.
58. Consolidated net income always equals the combined revenues of the parent and subsidiary
minus the combined expenses of the two companies:
a. Minus net debits in the income statement consolidation entries

b. Minus net credits in the income statement consolidation entries
c. Plus net debits in the income statement consolidation entries
d. When the subsidiary is 100% owned by the parent
59. Which of the following statements is not true when the parent uses a method other than the
equity method?
a. The consolidated statements will be different.

b. A worksheet entry will be needed to convert to the equity method from the other method.
c. Some consolidation entries will be different.
d. The balance in Equity Investment will not change in proportion to changes in subsidiary's
stockholders' equity.
60. Goodwill is required to be tested for impairment:
a. Only when the overall economy is bad

b. Only when there is new competition
c. Every year
d. Only when there has been a series of operating losses
61. If impaired goodwill subsequently regains its value :
a. It can be written up to its new value

b. The loss recovery cannot be recognized
c. It can be written up, but only to its original value
d. The company may choose whether or not to recognize the recovery
62. During 20x5. Major Company sold merchandise to its 100%-owned subsidiary, Minor
Company. During that year, all of the merchandise was resold to outside customers. If no
consolidation entries are made, which of the following will be incorrect in consolidated
statements?
a. Inventory, net income

b. Inventory, sales, cost of goods sold
c. Sales, cost of goods sold
d. All accounts will be correct because the goods were quickly resold to customers.
63. If Cloggins Co. sold equipment with a six year life at a gain of P12,000 to Prosey Enterprises,
its subsidiary, in the consolidated statements, the gain will:
a. Never be recognized
b. Be recognized over the six-year period
c. Be recognized immediately
d. Be recognized when the asset is resold to outsiders
64. What is a purpose of the consolidation entry regarding the inter-company sale of land?
a. To make consolidated net income the same as it would have been had the sale not occurred
b. To make consolidated net income less than it would have been had the sale not occurred
c. To make consolidated net income greater thot it would have been had the sale not occurred
d. To adjust the Land account with no effect on consolidated net income
65. If unrealized inter-company profits in ending inventory exceed unrealized inter-company

profits in beginning inventory, what will be the effect of the consolidation entries to eliminate
unrealized inter-company inventory profits?
a. Equity income will be increased

b. Consolidated Sales will be decreased
c. Consolidated ending inventory will be increased
d. Consolidated cost of goods sold wll be increased
66. Roxanne, inc.. sells a machine to Granite Company, its subsidiary at a $10,000 gain. The
machine was classified as property, plant and equipment on Roxanne's books and also will be
classified as such on Granite's books. The consolidation entry(s) to eliminate the inter-company
transaction at year-end will not include :
a. A debit to Gain on Sale of Equipment

b. A credit to Gain on Sale of Equipment
c. A debit to Equipment
d. A Credit to Depreciation Expense
67. In the case of an intercompany sale of land, a consolidation entry is prepared in the period or
periods:
a. Of the sale of the land only

b. Of both the sale of the land and the following periods
c. After the sale of the land only
d. Neither the period of the sale nor the following periods
68. In five case of an intercompany sale of land, which of the following is not a true statement?
a. A gain or loss on sale should not be recorded on the seller's books.

b. In the consolidation worksheet, the Land account is reduced by the amount of a gain
c. GAAP requires the deferral of any gain or loss.
d. The gain or loss on sale will be realized when the land is re-sold to an outside
entity.
69. One of the effects of eliminating intercompany profit from ending inventory is to :
a. Reduce cost of goods sold

b. Increase cost of goods sold
c. Reduce sales revenue
d. Increase gross profit
70. Intercompany gains on sale of land are deferred:
a. Until the consolidated entity is sold

b. Over the period that the land produces revenue
c. In perpetuity
d. Until the land is sold
71. When an inter-company gain on sale of land is finally realized by sale of the land to an
outsider, the consolidated gain on sale will equal:
a. The sum of the recorded gain on sale to the outsider and the deferred gain
b. The difference between the recorded gain on sale to the outsider and the
deferred gain
c. The deferred gain
d. The gain recorded by the affiliate that resold the asset to the outsider
72. The consolidation entry to realize a loss from an intercompany sale of a building would
include:
a. A debit to Accumulated Depreciation
b. A credit to Depreciation Expense
c. A debit to Building
d. A debit to Depreciation Expense
73. If a seller makes an intercompany sale of equipment at a gain, retained earnings is reduced in
the consolidation entries. Why does the amount of the adjustment change from year to year?
a. Because the Equipment account balance is reduced with passage of time
b. Because a portion of the gain is realized each year
c. Because Accumulated Depreciation and Equipment are reduced by different
amounts each year
d. Because the gain is not realized until the asset is sold
74. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the
a. Income from subsidiary is not recognized until there is an entire year of
consolidated operations.
b. Income from subsidiary is recognized from date of acquisition to year-end.
c. Excess cost over acquisition value is recognized at the beginning of the fiscal
year.
d. No goodwill can be recognized.
e. Income from subsidiary is recognized for the entire year.
75. When preparing a consolidated balance sheet, the noncontrolling interest amount must be
presented:
a. It is not disclosed on the balance sheet
b. As a part of liabilities
c. As a part of stockholders’ equity
d. In the notes to financial statements
76. When one company buys a controlling interest in another company on April 1(assuming a
calendar year). How should the pre-acquisition subsidiary revenues and expenses be disclosed in
the consolidated balances for the year of acquisition?
a. It is combined with parent company income statement balances
b. It is disclosed in consolidated retained earnings
c. Only post-acquisition revenues and expenses are included in consolidated
totals.
d. Only post-acquisition revenues and expenses are included in consolidated
totals on the financial statements, however, the revenue and earnings of the
combined entity for the current reporting period as though the acquisition date
for all business combinations that occurred during the year had been as of the beginning of the
annual reporting period are included in supplemental pro
forma information.
77. How does a parent corporation account for the sale of a portion of an investment in a
subsidiary?
a. lf control is maintained after the sale, then the difference between the sales
proceeds and the book value is an adjustment to the parent's owners' equity
(APIC).
b. Sale proceeds are included as a part of consolidated revenues.
c. It is only footnoted.
d. Reported as a gain only if the equity method is used.
78. When accounting for the deconsolidation of a subsidiary (parent loses control)
a. The parent recognizes a gain or loss on the deconsolidation.
b. The parent recognizes the would be gain or loss as a part of APlC.
c. The parent's common shares are adjusted to reflect the new amount of
outstanding shares.
d. Deconsolidation is only required when the parent company maintains control.
79. Which of the following does not affect the computation of the noncontrolling interest in the net
assets of a partially owned subsidiary?
a. Dividends declared by the subsidiary
b. Impairment of goodwill recognized in the business combination
c. Depreciation and amortization of differences between current fair values and carrying amounts
of the subsidiary's identifiable net assets on the date of the
business combination
d. All of the above answers are correct
80. When consolidating the balance sheets of a parent and its subsidiary at the date of acquisition,
consolidation eliminating entries
a. Remove the full balance of the parent's investment account and the subsidiary's equity accounts.
b. Remove the book value of the parent's investment account, the subsidiary's capital stock
accounts, and revalue the subsidiary's tangible assets to fair value.
c. Remove the subsidiary's equity accounts and revalue the subsidiary's assets and liabilities to fair
value.
d. Remove the full balance of the parent's investment account and the subsidiary's equity accounts,
and adjust the subsidiary's assets and liabilities to fair value at the date of acquisition.
81. Which account balance is always reported at the same amount on the parent's balance sheet and
on the consolidated balance sheet of the parent and its subsidiary?
a. Cash and receivables
b. Long-term debt
c. Accumulated other comprehensive income
d. Equity method investments
82. Which statement is true concerning IFRS reporting for business combinations?
a. IFRS requires capitalization of contractual or separable intangibles.
b. IFRS does not allow capitalization of in-process R&D.
c. IFRS does not allow recognition of earnouts.
d. IFRS allows consolidation of investments with significant influence.
83. Which one of the following accounts of an acquired company will not appear on a consolidated
balance sheet?
a. Intangible assets
b. Bond discount
c. Additional paid-in capital
d. Investments in marketable securities
84. Which statement is true regarding consolidation eliminations at the date of acquisition?
a. Elimination R never credits the subsidiary's assets.
b. If the subsidiary has net accumulated other comprehensive losses, elimination E debits the
subsidiary's AOCI.
c. If the subsidiary's debt is undervalued, elimination R will create more goodwill.
d. Elimination E always debits the subsidiary's retained earnings balance.
85. Which one of the following balances appears on consolidated financial statements?
a. Goodwill previously reported on the subsidiary's books
b. Investment in subsidiary, reported on the parent's books
C. Dividends, reported on the subsidiary's books
d. Plant assets, reported on the subsidiary's books
86. ABC acquires 49.99% of the voting stock of XYZ. From the viewpoint of readers of the
financial statements, the most important factor ABC should consider when deciding whether or not
to consolidate XYZ on its financial statements is
a. ABCs percentage ownership of XYZ's stock.
b. whether consolidation will make it harder for ABC to borrow money.
c. whether ABC follows IFRS or U.S. GAAP.
d. whether ABC Controls the performance of XYZ
87. According to IFRS, the financial statements of two legal entities should be presented on a
consolidated basis if:
a. One company owns a majority of the voting stock of the other company
b. One company has decision making control over the other company
c. One company is a major supplier of the other company
d. One company is a spinoff of the other company
88. At the date of acquisition, the fair value of a subsidiary's net assets is negative, the book value
of its equity is positive, and the parent issues stock with a positive fair value to acquire the
subsidiary's stock. Which statement is true?
a. The parent reports a gain on acquisition.
b. Consolidation eliminating entry E will debit the parent's investment account.
c. Goodwill is greater than the fair value of the stock issued by the parent.
d. The parent cannot consolidate the subsidiary.
89. At the date of acquisition, the fair value of a subsidiary's identifiable net assets is P100, its
reported liabilities exceed its reported assets by $500,and the parent issues stock with a fair value
of P150 to acquire the subsidiary's stock. Which statement is true?
a. The parent reports a gain on acquisition.
b. Consolidation eliminating entry E debits the investment account for P500.
c. Consolidation eliminating entry R debits goodwill for P250.
d. Consolidation eliminating entry R debits the subsidiary's identifiable net assets for P400.
90. At the acquisition date, the date on which the investor company gains control of the investee
company, which of the following occur(s)?
a. All of the Equity Investments made by the investor in the investee must be
revalued.
b. Any gains or losses as a result of the revaluation should be recognized currently
in income.
c. Goodwill is measured (this only occurs on the date that the parent obtains
control of the investee).
91. When accounting for a noncontrolling interest, a parent company must disclose in the notes to
the consolidated financial statements:
a. A separate schedule that shows the effects of any changes in a parent's
ownership in the subsidiary.
b. The nature of the parent's continuing involvement with the subsidiary or entity
acquiring the group of assets after it has been discontinued.
c. Whether the transaction that resulted in the deconsolidation was with a related
party.
92. Deferred profit on intercompany asset sales:

a. Is always 100%eliminated
b. ls eliminated only on upstream sales
c. is accounted only by the noncontrolling interests
d. Is not considered as part of consolidating elimination entries
93. On November 8,20x3,Power Corp sold land to Wood Co., its wholly owned subsidiary. The
land cost P61,500 and was sold to Wood for $89,000. From the perspective of the combination,
when is the gain on the sale of the land realized?
a. Proportionately over a designated period of years
b. When Wood Co. sells the land to a third party
c. No gain can be recognized
d. As Wood uses the land
94. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 20x3. Which of
the following would be a debit entry in the consolidated worksheet for 20x3?
c. Inventory
95. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 2014, Which of
the following would be a credit entry in the consolidated worksheet for 2014?
c. Inventory
96. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 20x3. Which of
the following would be debited in the consolidated worksheet for 20x4?
c. Inventory
d. Investment Cruz Company
97. Baijan Company sells inventory to its subsidiary, Cruz Company, at a profit during 20x3. lf
Baijan uses the equity method to account for its investment in Cruz, which of the following
choices would be a debit entry in the consolidated worksheet for 20x4?
c. Inventory
d. Investment in Cruz Company
98. What is the impact on the non-controlling interest of a subsidiary when there are downstream
transfers of inventory between the parent and subsidiary companies?
a. A pro rata portion of deferred gain or loss is recognized in the income statement
b. Any resulting gain or loss is reported (in total) in the current period income
statement
c. Any cash received is reported in Accumulated Other Comprehensive Income
d. None
99. Why does the intercompany sale of a building require subsequent adjustments to depreciation
expense?
a. Because the buyer is using a different depreciation method
b. Because the buyer has changed the estimated useful life
c. Because immediately after the sale, the balance in accumulated depreciation
on the buyer's books is ZERO
d. Because the book value of the building is the same for the seller and the buyer
100. How much intercompany inventory profit should be eliminated from ending inventory in the
consolidation process?
a. Net profit on total inter-company sales during the year
b. Gross profit on total inter-company sales during the year
c. Gross profit on goods sold to outside parties during the year
d. Gross profit on goods remaining in buyer's inventory at year-end
101. On consolidated financial statements, where does the parent's equity in the net income of the
subsidiary account appear?
a. On the consolidated income statement, as an deduction from income.
b. On the consolidated income statement, as a revenue.
c. On the consolidated balance sheet, as an equity.
d. Doesn't appear on the consolidated financial statements.
102. What is "value-in-use," as applied in reporting intangibles using IFRS?

a. Amortized cost.
b. The difference between market value and book value.
c. The present value of future expected cash flows.
d. The sum of future expected cash flows.
103. On consolidated financial statements, where does the subsidiary's accumulated other
comprehensive
income balance appear?
a. On the consolidated income statement, as a revenue.
b. On the consolidated statement of comprehensive income, as other
comprehensive income.
c. On the consolidated balance sheet, as an equity account.
104. If the parent company uses the complete equity method when accounting for its wholly-
owned subsidiary on its own books,
a. the subsidiary's separately reported income equals total consolidated income
to the parent.
b. the parent's separately reported income plus the subsidiary's separately
reported income equals total consolidated income.
c. the parent's separately reported income equals the subsidiary's ending retained
earnings balance.
d. the parent's separately reported income equals consolidated income.
105. A division's goodwill is not impaired, per IFRS, if

a. the fair value of the division is less than the book value of the division.
b. the fair value of the division is more than the book value of the division.
c. the fair value of the identifiable net assets of the division is less than the fair
value of the division.
d. the fair value of the identifiable net assets of the division is more than the fair
value of the division.
106. When the parent uses the cost method, eliminating entry (A) adjusts the parent's balance sheet
accounts to the amounts reported using the complete equity method. Which of the parent's
accounts must be adjusted?
a. ldentifiable intangibles, goodwill, and investment in subsidiary
b. Goodwill and retained earnings, beginning of year
c. Dividend income and investment in subsidiary
d. Investment in subsidiary and retained earnings, beginning of year
107. Goodwill impairment losses, if significant, must be reported on a company's income

statement
a. after income from continuing operations.
b. as part of other comprehensive income.
c. as a separate line item in operating expenses.
d. as a component of selling and administrative expenses.
108. Goodwill acquired in a merger must be allocated to business units before it can be rested for
impairment. How are these "business units" defined?
a. The choice of business units is at the discretion of management.
b. The business units are defined geographically.
c. The business units are defined by product line.
d. The business units are the reportable units used for segment reporting.
109. A parent company sells land to its subsidiary in 2011 at an amount above its original cost. In
20x4, three years later, the subsidiary sells the land to an outside developer. In the 20x4
consolidation working paper, the elimination of this transaction will result in a(n)
a. decrease in land.
b. increase in retained earnings.
c. increase in gain on sale of land.
d. decrease in gain on sale of land.
110. On a worksheet prepared to consolidate the financial statements of a parent and subsidiary,
eliminating entries made to remove intercompany gains on upstream sales of land sold in prior
years will affect which account?
a. Investment in subsidiary
b. Beginning retained earnings
c. Equity in net income of the subsidiary
d. Gain on sales of land
111. Which statement is true regarding intercompany sales of merchandise?

a. If the parent sells merchandise to the subsidiary, the total gross margin on the sale must be
eliminated in the consolidation working paper
b. If the subsidiary sells merchandise to the parent, the total gross margin On the sale must be
eliminated in the consolidation working paper.
c. If the parent sells merchandise to the subsidiary, the non-controlling interest must be
reduced by its share of unrealized profits remaining in the subsidiary's ending inventory.
d. d. If the subsidiary sells merchandise to the parent, the non-controlling interest must be
increased by its share of realized profits in the parent's beginning inventory.
112 A parent sells merchandise to a subsidiary at a markup over its cost. The subsidiary has sold all
of this merchandise by year-end, which of the following working paper eliminating entries are
needed to consolidate the financial statements of the parent and subsidiary at year-end, concerning
the intercompany sales of merchandise?
a. Debit sales, credit cost of goods sold for the sales value of the merchandise sold by the
parent,
b. Debit sales, credit cost of goods sold for the sales value of the merchandise sold by the
parent, and also debit cost of goods sold and credit ending inventory for the unrealized
profit included in the subsidiary's ending inventory
c. C. Debit investment in Subsidiary, credit ending inventory for the unrealized profit
included in the subsidiary's ending inventory. .
d. No elimination entries are required.
113. Which statement is false regarding intercompany sales of property between a parent and a
subsidiary?
a. If depreciable property with a 5-year life is sold by the subsidiary to the parent during 20x4
at a gain, and the parent still holds the property, there is no need to adjust the non-
controlling interest in the subsidiary's income for 20x5.
b. If land is sold by the parent to the subsidiary during 20x3 at a gain, and then the subsidiary
sells the land to an outside party during 20x4, no eliminating entries are required for the
land in 20x5
c. If land is sold by the subsidiary to the parent during 20x4 at a gain, there is no need to
adjust the non-controlling interest in the subsidiary’s income for 20x5
d. If depreciable property is sold by the parent to the subsidiary during 20x4 at a gain, there is
no need to adjust the non-controlling interest in the subsidiary’s income for 20x5.
114. Which of the following is most likely to be classified as an indefinite life intangible asset?
a. favorable leasehold
b. production backlog
c. in-process research and development
d. developed technology
115. When the parent uses the cost method, eliminating entry:
a. debits the parent's investment account and credits the subsidiary's dividends.
b. debits the parent's dividend income and credits the subsidiary's dividends.
c. debits the subsidiary's dividends and credits the parent's dividend income.
d. debits the parent's equity in net income account and credits the subsidiary’s dividend
income.
116. On consolidated financial statements, where does the parent's equity in the net income of the
subsidiary account appear?
a. On the consolidated income statement, as a deduction from income.
b. On the consolidated income statement, as a revenue.
c. On the consolidated balance sheet, as an equity.
117. Which statement is true concerning IFRS for intangibles?

a. Intangibles may be marked to market only if they are traded in an active market.
b. Increases in market value of intangibles reported using the revaluation model are reported
in income.
c. Amortization expense on intangibles reported using the revaluation model is reported in
other comprehensive income.
d. Amortization expense on intangibles reported using the revaluation model is no t
118. On consolidated financial statements, where does the subsidiary’s accumulated other
comprehensive income balance appear?
a. On the consolidated income statement, as a revenue.
b. On the consolidated statement of comprehensive income, as other comprehensive income.
c. On the consolidated balance sheet, as an equity account
1. A 30. B 59. A 89 B
2. C 31. C 60. C 90 D
3. B 32. C 61. B 91 D
4. C 33. A 62. C 92 A
93 B
5. A 34. A 63. B
94 B
6. A 35. A 64. A
95 C
7. D 36. A 65. C 96 A
8. B 37. C 66. B 97 D
9. B 38. C 67. B 98 D
10. A 39. C 68. A 99 C
11. D 40. D 69. B 100 D
12. B 41. A 70. D 101 D
13. C 42. B 102 C
71 A 103 D
14. A 43. C
72 D 104 D
15. B 44. A
73 B 105 B
16. A 45. A 74 B 106 D
17. B 46. D 75 C 107 C
18. B 47. D 76 D 108 D
19. D 48. D 77 A 109 C
20. B 49. D 78 A 110 B
21. D 50. A 79 D
22. D 51. D 80 D 111. D
23. C 52. C 81 C 112. A
82 A 113. A
24. D 53. D 114. C
83 C
25. D 54. A 115. B
84 C
26. D 55. A 116. D
85 D
27. C 56. B 86 D 117. A
28. B 57. C 87 B
118. D
29. C 58. A 88 C
CHAPTER 9
1. Which of the following statements is not correct?

a. Joint arrangements may be entered into to manage risks involved in a project.
b. Joint arrangements may be entered into to provide the parties with access to new technology
or new markets.
c. Joint arrangements require investors to have equal interests in the joint arrangement.
d. The key feature of a joint arrangement is that the parties involved have joint control over. the
decision making in relation to the joint arrangement.
2. The Particular relationship between parties that signifies the existence of a joint arrangement is:
a. significant influence by one party over the other party;
b. control over the operating policies of one party by another party;
c. shared influence by two parties over the activities of another party;
d. joint control by the parties over the activities of an operation.
3. The matters generally dealt with in a joint arrangement contract include the:
I II III IV
- activity, duration and reporting obligations Yes Yes Yes Yes
- capital contribution of the ventures Yes Yes Yes No
- sharing of the output, expenses or results No Yes Yes Yes
- voting rights of the ventures No No Yes No
a. I
b. II
c. III
d. IV
4. PFRS I Joint Arrangements provides that joint control exists where:

a. no single party is in a position to control the activity unilaterally;
b. the decisions in areas essential to the goals of the joint arrangement do not require the
consent of the parties;
c. no one party may be appointed as the manager of the joint arrangement;
d. one party alone has power to control the strategic operating decisions of the joint
arrangement.
5. Which of the following is correct?

a. All joint arrangements which are not structured through a separate vehicle are classified as
joint ventures;
b. For a joint venture, the rights pertain to the rights and obligations associated with individual
assets and liabilities, whereas with a joint operation, the rights and obligations pertain to the
net assets.
c. In considering the legal form of the separate vehicle if the legal form establishes rights
to individual assets and obligations, the arrangement is a joint operation. If the legal
form establishes rights to the net assets of the arrangement, then the arrangement is a
joint venture.
d. Where the joint operators have designed the joint arrangement so that its activities primarily
aim to provide the parties with an output it will be classified as a joint venture.
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6. Which of the following statements is not true in relation to joint control?
a. each party must have an equal interest for joint control to exist
b. joint control exists only where there is contractually agreed sharing of control
c. entities over which a party has joint control are accounted for in accordance with PFRS 11
Joint Arrangements
d. joint control requires the unanimous consent of the parties sharing control
7. In relation to the supply of a service to a joint operation by one of the joint operators, which of the
following statements is correct?
a. a joint operator can recognize 100% of the earned through the supply of services to the joint
operation;
b. a joint operator is entitled to recognize a profit from the supply of services 'to itself;
c. a joint operator cannot earn a profit on supplying services to itself;
d. a joint operator is not able to recognize, the service revenue or service cost for the services
supplied to the joint operation.
8. PetroTex shares the use, in equal measure, of an oil pipeline with four other oil companies. The
joint operation states that the maintenance of the pipeline will also be shared on an equal basis by
all five parties. This pipeline project is considered as a:
a. Joint Operation
b. Joint Venture
c. Business Combination
d. Statutory consolidation
9. In relation to No. 8, PetroTex also has a joint arrangement with two other companies to share
control of Antonio Oil. The arrangement states that all three companies have an equal say in the
running of Antonio Oil. None of the three partners is able -to dominate the strategic and operation
activities of project is considered as a:
a. Joint Operation
b. Joint Venture
10. A joint arrangement has three parties in which A owns 50% voting rights, while B Owns 30% and
C owns voting rights in the arrangement. The terms of the contract among the parties A, g and C
state that at minimum 75% of the voting rights are needed to exercise the control over the
arrangement. This joint arrangement is:
a. Joint operation
b. Joint Venture
11. An arrangement is established by two parties and each party owns 50% voting rights of the
arrangement and the terms of the contract require that at minimum 51% voting rights are needed
to exercise the control over the arrangement.
a. Joint Control
b. No Joint Control
d. Statutory Consolidation
12. A joint arrangement is established by three parties in which A owns 50% voting among rights
while B and C each own 25% of voting rights of that arrangement. The terms of the contract
among A, B and C state that a minimum of 75% voting rights are needed to exercise the control
over the arrangement. This joint arrangement is:
a. Joint Control
b. No Joint Control
d. Statutory Consolidation
13. Two parties established a joint arrangement in the form of an incorporated separate legal entity.
Each party to the arrangement owns 50% voting rights of the incorporated entity. The
incorporation results in the separation of the joint owners from this entity and this reflects that the
assets and liabilities held in the jointly control entity are the assets and liabilities of the
incorporated entity. In such a case, the parties to the entity have the right to the net assets of the
entity; therefore it will be treated as:
a. Joint Operation
b. Joint Venture
c. Associate
d. Subsidiary
14. A and B decide to enter into a joint arrangement to produce a new product. A Undertakes one
manufacturing process and B undertakes the other. A and B have agreed that decisions regarding
the joint operation will be made unanimously and that each will bear their own expenses and take
an agreed share of the sales revenue from the product.
a. Joint Operation
b. Joint Venture
c. Associate
d. Subsidiary
15. For the purposes of equity accounting for an investment in an associate, it is presumed that the
investor has significant influence over the other entity where the investor holds:
a. between 1% and 5% of the voting power of the investee;
b. between 5% and 10% of the voting power of the investee.
c. 20% or more of the voting power of the investee,'
d. 50% or more of the voting power of the investee;
16. The following are regarded as factors indicating the existence of significant influence over another
entity:
I II III IV
- representation on the board of directors Yes Yes Yes Yes
- participation in decisions about dividends No Yes Yes Yes
- interchange of managerial personnel No No No Yes
- ability to control the investee's operating policies No Yes No No
a. I
b. II
c. III
d. IV
17. For the purposes of equity accounting, significant influence is regarded as the power of an
investor to:
a. control the financial and operating policies of an associate;
b. participate in the financial and operating policy decisions of an investee;
c. participate in the day-to-day management of a joint venture interest;
d. dominate the financing decisions of an entity.
18. Which of the following statements is correct?

a. All joint arrangements are accounted for Under PAS 28.
b. Joint arrangements classified as joint ventures are accounted for under PFRS 11.
c. Joint arrangements classified as joint ventures are accounted for under PAS 28.
d. Joint arrangements classified as joint operations are accounted for under PAS 28.
19. For the Purposes of equity accounting for an investment in an associate, it is presumed that the
investor has significant influence over the other entity where the investor holds:
a. between 1% and 5% of the voting power of the investee;
b. between 5% and 10% of the voting power of the investee,
c. 20% or more of the voting power of the investee;
d. 50% or more of the voting power of the investee;
20. When disclosing information about Investments in Associates, PAS 20 Investments In Associates
and Joint Ventures, requires separate disclosure of which of the following?
I. Shares in associates in the statement of financial position.
II. Share of profit or loss of associates, in the statement, of profit or loss and other
comprehensive income.
III. Share of any discontinuing operations, in the statement of changes in equity.
IV. Shares of changes recognized directly in the associate's equity, in the statement of
changes in equity„
a. I, Il, Ill and IV
b. l, Il and IV only
c. Il, Il and IV only
d. l, Il and Ill only
21. When eliminating any unrealized profit' arising when a joint operator provides services to a joint
operation the profit is eliminated against:
a. the investment in the joint operation;
b. retained earnings;
c. work in progress, finished goods and other inventory related accounts;
d. cost of goods sold.
22. Bosch Co. received a cash dividend from a common •stock investment. Should Bosch report an
increase in the investment account if it accounts for the investment under the fair value method or
the equity method?
a. Fair value method, NO; Equity method, NO
b. Fair value method, YES; Equity method, YES
c. Fair value method, YES; Equity method, NO
d. Fair value method, NO; Equity method, YES
23. PFRS requires joint ventures to be reported as
a. equity method investments.
b. trading securities.
c. equity method or proportionately consolidated investments.
d. available-for-sale securities.
Items 24 to 27 are based on the following data:

ABC Company uses the equity method to report its investment in 25% of the stock of XYZ Company.
Its original investment cost exceeded 25% of the book value of XYZ by a large amount. ABC is
computing equity in net income of XYZ for the current year, which is five years after the acquisition.
Which situation below requires ABC to adjust the equity in net income number for write-offs of the
difference between investment cost and XYZ's book value?
24. Attribute the difference to

a. goodwill.
b. brand names with indefinite life.
c. databases with a 3-year life.
d. plant assets with a 20-year life.
25. Impairment losses on equity method investments are

a. not reported.
b. reported in other comprehensive income.
c. reported as a direct adjustment to beginning retained earnings.
d. reported on the income statement.
26. Equity in net income is affected by all but which one of these items related to the investee?
a. impairments of indefinite life intangibles of the investee
b. markup on inventory sold by the investee to the investor
c. markup on inventory sold by the investor to the investee
d. amortization of previously unreported intangibles of the investee
27. Which of the following statements is true concerning proportionate consolidation for joint
ventures?
a. It is allowed under U.S. GAAP but not under PFRS.
b. It was abolished under PFRS for most joint ventures, as of 2013.
c. It is allowed for separate reporting of the joint venture's financial statements.
d. It is a way to avoid reporting the joint venture's leverage oh the investors balance sheet.
28. An investor who owns 30% of the common stock of an investee is most likely to exercise
significant influence requiring use of the equity method when:
a. The investor and investee sign an agreement under which the investor surrenders significant
rights
b. The investor tries and fails to obtain representation on the investee's board directors
c. Tries and fails to obtain financial information from the investee
d. The second largest investor owns only 1% of the investee’s outstanding stock
29. Where an acquisition in an associate results in an excess the excess is accounted for in the year
of acquisition as follows:
a. as a credit against the investment in associate account.
b. as a credit against the share of associate profit account.
c. as a debit against the share of associates retained earnings.
d. no adjustment is required due to the single line method of accounting followed under the
equity method.
30. An investor uses the equity methods to account for an investment in common stock. After the date
of acquisition, the equity investment account of the investor is:
a. Not affected by its share of the earnings or losses of the investee.
b. Not affected by its share of the earnings of the investee but is decreased by its share of the
losses of the investee.
c. Increased by its share of the earnings of the investee but is not affected by its share of the
investee’s losses.
d. Increased by its share of the earnings of the investee and is decreased by its share of
the investee’s losses.
31. Richard uses the equity method to account for its investment in Plains on January 1. On the date
of acquisition, Plains’ land and buildings were undervalued on its balance sheet. How do these
excesses of fair values over book values affect Richard’s Equity Income from Plains?
a. Building, Decrease; Land, Decrease
b. Building, Decrease; Land, No Effect
c. Building, Increase; Land, Increase
d. Building, Increase; Land, No Effect
32. On January 1, Wolf purchased 15% of Fieldman’s common stock. On August 1, it purchased
another 30% of Fieldman’s common stock. During October, Fieldman declared and paid a cash
dividend on its common stock. How much income from Fieldman should Wolf report on its income
statement?
a. 15% of Fieldman’s income for January 1 to July 31, plus 45% of Fieldman’s income for the
remainder of the year.
b. 45% of Fieldman’s income from August 1 to December 31 only.
c. 40% of Fieldman’s income
d. The amount of dividends received from Fieldman.
If a 30% acquisition is made at book, value, what will be the relationship between the Equity
Investment account and the investee’s stockholders’ equity?
a. There is no particular relationship.
b. The Equity Investment account will remain at original cost even as the investee’s
stockholders’ equity increases.
c. The Equity Investment account balance will equal 30% of investee stockholders' equity
throughout the life of the investment.
d. The Equity Investment account balance will equal 30% of investee's stockholders' equity at
date of acquisition, but the relationship will change as the investee reports income and
dividends.
If a 30% acquisition is made at a price above book value due to an undervalued patent, what will be
the relationship between the Equity Investment account and the investee’s stockholders’ equity?
a. There is no particular relationship.
b. The Equity Investment account will remain at original cost even as the investee’s
stockholders’ equity increases.
c. The Equity Investment account balance will equal 30% of investee stockholders' equity
throughout the life of the investment.
d. The Equity Investment account balance will equal 30% of investee's stockholders' equity at
date of acquisition, plus the unamortized cost of the patent.
In the case of an equity method investment for which there is a change in market value:
a. Unrealized gains are reported in the income statement, but unrealized losses are not reported
b. Unrealized gains and losses are reported on the balance sheet only
c. Unrealized gains and losses are recognized in other comprehensive income
d. No gains are recognized in income until the investment is sold
33. If an investor sells merchandise to an investee and the investee resells all of the items to outside
parties in the same period, what equity method entry is required?
a. The entire gross profit is deferred with a debit to Equity Income and credit to Equity
Investment.
b. No equity method entry is required since the gross profit is realized.
c. The entire gross profit is deferred with a credit to Equity Income and Debit to Equity
Investment
d. The investor's percentage of the gross profit is deferred with a debit to Equity Income.
34. When the Equity Investment balance is reduced to zero as investee incurs losses:
a. The investment remains at zero until the investment is sold
b. The investment remains at zero until profits have eliminated the unrealized loss
c. The investor must change to the fair value method
d. Additional investment losses will result in a credit balance in Equity Investment
35. When an investor can no longer exert significant influence over the investee, it must change to
the fair value method. What is the required accounting treatment on investor's books?
a. A prior period adjustment is recorded to bring retained earnings to what it would have
been if the new method had been used in the past.
b. The book value on the date of change becomes the "cost" of the investment.
c. The investment will be adjusted to its fair value.
d. Both b and c are required.
36. The primary beneficiary of a variable interest enterprise:

a. Must include the assets, liabilities, and results of the variable interest enterprise in its
consolidated financial statements.
b. Can simply record income on a cash basis when dividends are received or income accrued,
c. Only recognizes a gain or loss on the sale of its interest in the variable interest enterprise.
d. Only includes the results of the variable interest enterprise if it has in excess of 50% of the
voting share capital of the variable interest enterprise.
37. The primary beneficiary of the variable interest entity controls the resources of and will obtain the
future benefits from the variable interest entity:
a. Those resources meet the definition of an asset and should be included on the consolidated
balance sheet of the primary beneficiary.
b. A review of the legal documentation which established the variable interest entity will
assist us in determining who the beneficial owners of the variable interest entity are.
c. Because the primary beneficiary normally has no voting control of the entity the question of
future benefits is irrelevant.
d. None of the above applies.
38. According to GAAP, what is the key feature of a joint arrangement?

a. One venturer has a controlling interest in the joint arrangement.
b. More than one venturer has a controlling interest in the joint arrangement
c. Joint control, namely, no one venturer can unilaterally control the venture regardless of the
size of the equity contribution.
d. The two largest equity contributors will have joint control over the venture.
Under PFRS 10, when can a venturer recognize a portion of the gain on a contribution of assets to a
joint operation?
a. When the venturer has transferred the significant rights and rewards of ownership to the joint
arrangement.
b. When the legal documentation is signed and payment has been made by the joint
arrangement to the venturer for the asset received.
c. When the asset is put in use by the joint arrangement.
d. When the asset is sold by the joint arrangement to an arm’s length third party.
39. Under PFRS how are unrealized gains and losses on non-monetary assets contributed to jointly
controlled operations recorded assuming that they gain or loss meets the revenue recognition
tests under PFRS 15;
a. The amounts are included in deferred gains or losses,
b. The gain or loss must be eliminated against the underlying assets as a contra account.
c. No gain or loss can be recognized until the asset is put into use and the asset is generating
d. The gain or loss should be recorded immediately as other comprehensive income and
transferred to operating income as the non-monetary asset is put into service.
40. The equity method of accounting for an investment in an associate includes the following steps:
I II III IV
Recognise the initial investment at cost Yes Yes No No
Recognise the initial investment at fair value Yes No Yes No
Reduce the carrying amount by any distributions No Yes No Yes
Adjust the carrying amount by the investor’s No Yes Yes No
a. I
b. II
c. III
d. IV
41. When goodwill is acquired by an investor in an associate, the amortisation of goodwill is:
a. spread evenly across the useful life of the investment;
b. not permitted;
c. included in the determination of the investor's share of the associate's profit or loss;
d. included in the revaluation of the investment.
42. Adjustments made for the purpose of calculating the incremental adjustment to the share of profit
of an associate are:
a. recognised in the books of the investor;
b. recognised in the books of the investee;
c. notional adjustments and not included in the books of the investee;
d. relate to realised transactions and so are recognised directly by the investee.
43. If an associate incurs losses the investor is required to:

a. ignore the losses for the purposes of equity accounting adjustments;
b. recognise losses only to the point where the carrying amount is equal to the initial investment;
c. recognise losses to the point where the carrying amount of the investment is zero;
d. reclassify the investment as a current asset.
44. Where an investor has discontinued the use of the equity method because the associate has
incurred losses it must disclose the:
a. unrecognised share of current period and cumulative losses of the associate;
b. reason why it has discontinued the method;
c. accounting policy it has adopted in place of the equity method;
d. effect on the statement of changes in equity if it had continued to use the method.
45. Investments in associates accounted for using the equity method are presented in the statement
of financial position amongst:
a. Equity
b. Non-current liabilities
c. Current assets
d. Non-current assets
46. When eliminating any unrealised profit arising when a joint operator provides services to a joint
operation the profit is eliminated against:
a. the investment in the joint operation;
b. retained earnings;
c. work in progress, finished goods and other inventory related accounts;
d. cost of goods sold.
47. When a joint operator is accounting for an interest in joint operation it is required to recognise all
of the following in its financial statements:
I II III IV
The assets that it controls Yes Yes Yes Yes
The liabilities that it incurs Yes Yes No No
Its share of income from the scale of goods by the joint operation Yes No Yes No
The excess that it incurs Yes No No No
a. I
b. II
c. III
d. IV
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BUSINESS COMBINATIONS- STATUTORY MERGERS AND STATUTORY

a. S1 -True; S2 - True c. S1- False; S2 - True

a. Entering new product markets

a. the acquire purchase the acquirer’s outputs

27. Which of the following is a vertical combination?

a. A combination where the two entities are unrelated

a. Sale of the crown jewels

a. Staggering board of director terms

40. Defensive maneuvers can be internal to the potential acquiree (management or

a. Residency requirement for board members

a. open market purchase

a. Acquisition of the acquiree assets

a. The net assets increase

a. There is no change in the acquiree ownership structure

a. There is no change in the acquirer ownership structure

a. The net assets increase

a. There is no change in the acquiree ownership structure

a. There is no change in the acquiree ownership structure

a. Asset for asset acquisition

a. One entity continues to exist

a. A new corporation must be formed

a. The acquirer Retained Earnings account balance

a. Future acquiree earnings

57. To qualify as a reorganization (for tax purposes), a combination must meet

a. Acquiree stockholders continue an indirect ownership interest in the acquiree

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

60 . After an exchange or shares in a business combination, each group of shareholders held

a. Head office location

a. Direct' exchange c. Hostile takeover

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

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

69. 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

a. As a gain on the statement of comprehensive income

a. Event's goodwill ls an identifiable asset and should be included as part of Raj’s

a. A Corp purchases the net assets of B Corp.

74. What is a statutory merger?

a. A merger approved by the Securities and Exchange Commission.

75. A statutory merger is a(n)

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

a. estimated fair value.

a. Information related to several minor acquisitions may not be combined.

78. Goodwill arising from business combination is:

a. charged to Retained Earnings after the acquisition is completed.

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

81. Which one of the following statements is incorrect?

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

a. The Securities and Exchange Commission must approve the merger

a. The pooling of interests method.

a. accounted for as goodwill.

a. name and a description of the acquiree acquired.

88. Under PFRS 3:

a. both direct and indirect costs are to be capitalized.

92. With an acquisition, direct and indirect expenses are

a. expensed in the period incurred.

a. Amortized as a credit to income Over a period not fo exceed forty years.

a. the date the interest in the acquiree was acquired.

a. Carrying value c. Book value

a. Expense upon acquisition.

a. An intangible asset under the contractual- legal criterion.

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

a. When any bargain purchase is treated.

Plant and Equipment Long-Term Debt

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