ACC 401 Week 2 Quiz

ACC 401 Week 2 Quiz

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ACC 401 Week 2 Quiz - Strayer

Chapter 1

Introduction to Business Combinations and the Conceptual Framework

Multiple Choice

Stock given as consideration for a business combination is valued at
fair market value
par value
historical cost
None of the above

Which of the following situations best describes a business combination to be accounted for as a statutory merger?
Both companies in a combination continue to operate as separate, but related, legal entities.
Only one of the combining companies survives and the other loses its separate identity.
Two companies combine to form a new third company, and the original two companies are dissolved.
One company transfers assets to another company it has created.

A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
Cash
Issuing Debt
Issuing Stock
All of the above

The objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling Interests in Consolidated Financial Statements) are as follows:
to improve the relevance, comparibility, and transparency of financial information related to business combinations.
to eliminate the amortization of Goodwill.
to facilitate the convergence project of the FASB and the International Accounting Standards Board.
a and b only

A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n)
agreeable combination.
friendly combination.
hostile combination.
unfriendly combination.

A merger between a supplier and a customer is a(n)
friendly combination.
horizontal combination.
unfriendly combination.
vertical combination.

When a business acquisition is financed using debt, the interest payments are tax deductible and create
operating synergy.
international synergy.
financial synergy.
diversification synergy.

The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called
poison pill.
pac-man defense.
greenmail.
white knight.

The third period of business combinations started after World War II and is called
horizontal integration.
merger mania.
operating integration.
vertical integration.

A statutory ______________ results when one company acquires all the net assets of another company and the acquired company ceases to exist as a separate legal entity.
acquisition.
combination.
consolidation.
merger.

When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory
acquisition.
combination.
consolidation.
merger.

The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the
bonus.
goodwill.
implied offering price.
takeover premium.

The difference between normal earnings and expected future earnings is
average earnings.
excess earnings.
ordinary earnings.
target earnings.

The first step in estimating goodwill in the excess earnings approach is to
determine normal earnings.
identify a normal rate of return for similar firms.
compute excess earnings.
estimate expected future earnings.

A potential offering price for a company is computed by adding the estimated goodwill to the
book value of the company’s net assets.
book value of the company’s net identifiable assets.
fair value of the company’s net assets.
fair value of the company’s net identifiable assets.

Estimated goodwill is determined by computing the present value of the
average earnings.
excess earnings.
expected future earnings.
normal earnings.

Which of the following statements would not be a valid or logical reason for entering into a business combination?
to increase market share.
to avoid becoming a takeover target.
to reduce risk by acquiring established product lines.
the operating costs of the combined entity would be more than the sum of the separate entities.

The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
to provide information relevant to the controlling stockholders.
to represent the view that the affiliated companies are a separate, identifiable economic entity.
to emphasis control of the whole by a single management.
to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses.

Which of the following statements is correct?
Total elimination is consistent with the parent company concept.
Partial elimination is consistent with the economic unit concept.
Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.
none of these.

Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.
is the same as
is higher than
is lower than
can be higher or lower than

Under the economic unit concept, noncontrolling interest in net assets is treated as
a liability.
an asset.
stockholders' equity.
an expense.

The parent company concept adjusts subsidiary net asset values for the
differences between cost and fair value.
differences between cost and book value.
total fair value implied by the price paid by the parent.
total cost implied by the price paid by the parent.

According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to
majority stockholders.
minority stockholders.
creditors.
both majority and minority stockholders.

Which of the following statements is correct?
The economic unit concept suggests partial elimination of unrealized intercompany profits.
The parent company concept suggests partial elimination of unrealized intercompany profits.
The economic unit concept suggests no elimination of unrealized intercompany profits.
The parent company concept suggests total elimination of unrealized intercompany profits.

When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n)
prorated share of the combined income.
addition to combined income to arrive at consolidated net income.
expense deducted from combined income to arrive at consolidated net income.
deduction from current assets in the balance sheet.

When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the
book values of subsidiary assets and liabilities.
fair values of subsidiary assets and liabilities.
general price level adjusted values of subsidiary assets and liabilities.
fair values of parent company assets and liabilities.

The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the
parent company concept.
current practice concept.
historical cost company concept.
economic unit concept.

The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the
economic unit concept.
parent company concept.
current practice concept.
historical cost company concept.

The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the
economic unit concept.
current practice concept.
parent company concept.
historical cost company concept.

Problems

1-1 Perkins Company is considering the acquisition of Barkley, Inc. To assess the amount it might be willing to pay, Perkins makes the following computations and assumptions.

A. Barkley, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Barkley, Inc.

B. Barkley, Inc.'s pretax incomes for the years 2009 through 2011 were $470,000, $570,000, and $370,000, respectively. Perkins believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings:

Depreciation on Buildings (each year) 380,000

Depreciation on Equipment (each year) 30,000

Extraordinary Loss (year 2011) 130,000

Salary Expense (each year) 170,000

C. The normal rate of return on net assets for the industry is 15%.

Required:

A. Assume that Perkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Barkley, Inc. Indicate how much of the price consists of goodwill.

B. Assume that Perkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Barkley, Inc. Indicate how much of the price consists of goodwill.

1-2 Pierce Company is trying to decide whether to acquire Hager Inc. The following balance sheet for Hager Inc. provides information about book values. Estimated market values are also listed, based upon Pierce Company's appraisals.

Hager Inc. Hager Inc.

Book Values Market Values

Current Assets $ 450,000 $ 450,000

Property, Plant & Equipment (net) 1,140,000 1,300,000

Total Assets $1,590,000 $1,750,000

Total Liabilities $700,000 $700,000

Common Stock, $10 par value 280,000

Retained Earnings 610,000

Total Liabilities and Equities $1,590,000

Pierce Company expects that Hager will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm."

Required:

A. Compute an estimation of goodwill based on the information above that Pierce might be willing to pay (include in its purchase price), under each of the following additional assumptions:

(1) Pierce is willing to pay for excess earnings for an expected life of 4 years (undiscounted).

(2) Pierce is willing to pay for excess earnings for an expected life of 4 years, which should be capitalized at the industry normal rate of return.

(3) Excess earnings are expected to last indefinitely, but Pierce demands a higher rate of return of 20% because of the risk involved.

B. Determine the amount of goodwill to be recorded on the books if Pierce pays $1,300,000 cash and assumes Hager's liabilities.

1-3 Pope Company acquired an 80% interest in the common stock of Simon Company for $1,540,000 on July 1, 2011. Simon Company's stockholders' equity on that date consisted of:

Common stock $800,000

Other contributed capital 400,000

Retained earnings 330,000

Required:

Compute the total noncontrolling interest to be reported in the consolidated balance sheet assuming the:

(1) parent company concept.

(2) economic unit concept.

1-4 The following balances were taken from the records of S Company:

Common stock (1/1/11 and 12/31/11) $720,000

Retained earnings 1/1/11 $160,000

Net income for 2011 180,000

Dividends declared in 2011 (40,000)

Retained earnings, 12/31/11 300,000

Total stockholders' equity on 12/31/11 $1,020,000

P Company purchased 75% of S Company's common stock on January 1, 2011 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2011 of ten years.

Required:

A. Compute the difference between cost/(implied) and book value applying:

1. Parent company theory.

2. Economic unit theory.

B. Assuming the economic unit theory:

1. Compute noncontrolling interest in consolidated income for 2011.

2. Compute noncontrolling interest in net assets on December 31, 2011.

Chapter 2

Accounting for Business Combinations

Multiple Choice

1. SFAS 141R 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.

neither the acquisition nor the pooling of interests methods.

2. Under the acquisition method, if the fair values of identifiable net assets exceed the value implied by the purchase Pratt 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 and classify any remainder as an ordinary gain.

3. In a period in which an impairment loss occurs, SFAS No. 142 requires each of the following note disclosures except

a. a description of the facts and circumstances leading to the impairment.

b. the amount of goodwill by reporting segment.

c. the method of determining the fair value of the reporting unit.

d. the amounts of any adjustments made to impairment estimates from earlier periods, if significant.

4. Once a reporting unit is determined to have a fair value below its carrying value, the goodwill impairment loss is computed by comparing the

a. fair value of the reporting unit and the fair value of the identifiable net assets.

b. carrying value of the goodwill to its implied fair value.

c. fair value of the reporting unit to its carrying amount (goodwill included).

d. carrying value of the reporting unit to the fair value of the identifiable net assets.

5. SFAS 141R requires that the acquirer disclose each of the following for each material business combination except the

a. name and a description of the acquiree.

b. percentage of voting equity instruments acquired.

c. fair value of the consideration transferred.

d. Each of the above is a required disclosure

6. In a leveraged buyout, the portion of the net assets of the new corporation provided by the management group is recorded at

a. appraisal value.

b. book value.

c. fair value.

d. lower of cost or market.

7. 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.

8. Under SFAS 141R,

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 expensed.

d. indirect costs are to be capitalized and direct costs are to be expensed.

9. 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?

Security Overhead allocated

issue costs to the merger

a. Yes Yes

b. Yes No

c. No Yes

d. No No

10. In a business combination, which of the following costs are assigned to the valuation of the security?

Professional or Security

consulting fees issue costs

a. Yes Yes

b. Yes No

c. No Yes

d. No No