FAR 39 - Intro to Business Combinations Flashcards Preview

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Flashcards in FAR 39 - Intro to Business Combinations Deck (15):
1

Topco owns 60% of the voting common stock of Midco and 40% of the voting common stock of Botco. Topco wishes to gain control of Botco by having Midco buy shares of Botco's voting stock. Which one of the following minimum levels of ownership of Botco must Midco have in order for Topco to have controlling interest of Botco's voting stock?
A. 11%
B. 17%
C. 26%
D. 50+%

A. In order for Topco to gain control of Botco, it must own, either directly or indirectly, more than 50% of Botco's voting stock. Since it directly owns 40% of Botco's voting stock, it must acquire control over 10+% more. Also, since Topco owns 60% of Midco, it controls Midco. Therefore, if Midco acquires 11% of Botco, Topco will be able to exercise 51% of Botco's voting stock - 40% directly and 11% indirectly through its control of Midco.

2

A business combination can occur when an entity acquires:
Control of Another Entity
A Group of Assets

Yes, yes
For accounting purposes, a business combination can occur either when one entity acquires controlling interest in the voting securities of another entity or when an entity acquires a group of assets that constitutes a business from another entity.

3

If, as a result of gaining control of another entity, the acquiring entity recognizes an investment in the acquired entity on its books, which of the following legal forms of business combination could have occurred?
A. Merger
B. Consolidation
C. Acquisition

C. only.
In an acquisition, the acquiring entity recognizes (debits) on its books as an investment in the acquired entity, but in a merger and in a consolidation, the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity, not an investment in the acquired entity. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities, with the acquired entity a subsidiary of the acquiring entity. In a merger and in a consolidation, at least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity.

4

In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity?
A. Merger
B. Consolidation
C. Acquisition

A and B.
In a merger and in a consolidation, the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity, but in an acquisition, the assets and liabilities of the acquired entity remain on the books of the acquired entity. In a merger and in a consolidation, at least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities.

5

For business combinations, which one of the following statements correctly reflects the determination of the accounts and amounts for the entry to record the combination?
A. Legal form determines both the entry accounts and entry amounts.
B. Legal form determines the entry accounts; accounting method determines entry amounts.
C. Legal form determines entry amounts; accounting method determines entry accounts.
D. Accounting method determines both the entry accounts and entry amounts.

B. The legal form of a business combination determines the entry accounts (i.e., which accounts to debit and/or credit), and the accounting method (acquisition method) determines the amounts at which the entries will be made (i.e., fair value).

6

In which of the following legal forms of business combination are two or more entities combined into one new entity?
A. Merger
B. Consolidation
C. Acquisition

B. Only a legal consolidation results from the combination of two or more existing entities into one new entity. In a merger, one preexisting entity is combined into another preexisting entity; no new entity is formed. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities; no new entity is formed.

7

Which one of the following is not a legal form of business combination?
A. Consolidation.
B. Merger.
C. Pooling of interests.
D. Acquisition.

C. A pooling of interests is not one of the three legal forms of business combinations, which are: (1) merger, (2) consolidation, and (3) acquisition. A pooling of interests is a method of accounting for a business combination, but under GAAP, it cannot be used after June 30, 2001.

8

T/F: The legal form of a business combination will influence the correct accounting for the combination.

True

9

T/F: The "acquisition method" of accounting for a business combination was formerly called the "purchase method."

True

10

T/F: One entity can gain control of another entity through direct and/or indirect ownership of that entity.

True

11

T/F: When the acquisition method of accounting is used, if a business combination occurs during a fiscal year, the acquirer's operating results for the entire fiscal year enters into the determination of consolidated net income for that year.

True

12

T/F: At the date of a business combination accounted for as an acquisition, the income of the combined entities will be the same as the income of the acquirer.

True

13

T/F: If all else is equal, a business combination in the form of a legal merger will result in greater net income for the year of the combination than if the combination had been a legal acquisition.

False.
As a merger, the entities become one.
As an acquisition, the operating results up to the date of combination enter into determination of consolidated net income as of the date of the combination.
Therefore, it could depend on the date of the combination to determine if one would have a greater NI over the other.

14

T/F: Only the acquisition method can be used currently to record a business combination.

True

15

T/F: A business combination can be accomplished by one entity making an investment in the debt securities of another entity.

False.
In purchase of common stock, not debt securities

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