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1

When a new entity is formed to effect a business combination, which of the following statements, if any, is/are correct?

I. A legal consolidation has occurred.
II. The new entity is always the acquirer in the business combination.

I only.
When a new entity is formed to effect a business combination, a legal consolidation has occurred (Statement I), but the new entity is not always the acquirer in the combination (Statement II). If the new entity transfers cash or other assets or incurs liabilities to effect the combination, the new entity is likely the acquirer, but if the new entity issues equity interest to effect the business combination, one of the pre-existing combining entities must be the acquirer.

2

Which one of the following is not a characteristic associated with the concept of a "business" for the purposes of ASC 805, "Business Combinations?"
A. Is an integrated set of activities and assets.
B. Uses inputs and processes.
C. Is intended to provide economic benefits to owners or others.
D. Must be in the form of a separate legal entity.

D. For the purposes of ASC 805, a business does not have to be in the form of a separate legal entity. Specifically, a business is an integrated set of activities and assets that is capable of being conducted and managed through the use of inputs and processes for the purpose of providing economic benefits to owners, members, or participants. The concept of a "business" for the purposes of ASC 805 does not have to be in the form of a separate legal entity. Under this definition, a "business" may be a group of assets (or net assets) that constitute a business (e.g., a line of business) and does not have to be in the form of a separate legal entity.

3

Which of the following statements concerning the acquisition date of a business combination is/are correct?

I. The acquisition date may be before the closing date.
II. The acquisition date may be on the closing date.
III. The acquisition date may be after the closing date.

All three statements are correct. The acquisition date may be before the closing date, on the closing date, or after the closing date, if by agreement or otherwise the acquirer gains control of the acquiree at an earlier or later date than the closing date.

4

Which of the following statements concerning the nature of an acquired business in a business combination is/are correct?

I. A business may be a group of assets.
II. A business may be a group of net assets.
III. A business may be a separate legal entity.

All three statements are correct. A business may be a group of assets (that constitute a business), a group of net assets (that constitute a business), or a separate legal entity (that is a business).

5

Which of the following are requirements of using the acquisition method of accounting for a business combination?

I. Determining the acquiring entity.
II. Determining the acquisition date of the business combination.
III. Determining the cost of the acquisition.

All 3. Determining the acquiring entity (Statement I), determining the acquisition date of the combination (Statement II), and determining the cost of the acquisition (Statement III), and other elements, are all requirements of the acquisition method of accounting for a business combination.

6

The requirements of ASC 805, "Business Combinations," apply to all of the following business combinations except for which one?
A. Combination between financial institutions.
B. The acquisition of a foreign entity by a U.S. entity.
C. Combination between not-for-profit organizations.
D. The acquisition of a group of assets that constitutes a business.

The requirements of ASC 805 do not apply to combinations between not-for-profit organizations (or to the formation of a joint venture, an acquisition of assets that do not constitute a business, a combination of entities under common control, or the acquisition of a for-profit entity by a not-for-profit organization).

7

Which of the following statements, if any, concerning the accounting for business combinations is/are correct?

I. All business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805, "Business Combinations."

II. The acquisition accounting requirements of ASC 805, "Business Combinations," are identical to those of IFRS #3, "Business Combinations."

Neither statement is correct. No business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805 (Statement I). That pronouncement specifically excludes certain combinations, including the formation of a joint venture, the acquisition of assets that do not constitute a business, a combination between entities under common control, a combination between not-for-profit organizations, and the acquisition of a for-profit entity by a not-for-profit organization. In addition, the requirements of ASC 805 are not identical to those of IFRS #3 (Statement II). Differences exist between the two pronouncements in the areas of scope; the definition of control; how fair value, contingencies, employee benefit obligations, non-controlling interest, and goodwill are measured; and disclosure requirements.

8

When using the acquisition method of accounting for a business combination, which of the following statements concerning the measurement period is/are correct?

I. It provides time for the acquiring entity to identify assets acquired and liabilities assumed that existed as of the acquisition date.
II. It provides time for the acquiring entity to determine the fair value of assets acquired and liabilities assumed that existed as of the acquisition date.
III. It should not exceed one year from the acquisition date.

All three statements are correct. The measurement period provides time for the acquiring entity to identify assets acquired and liabilities assumed (Statement I), to determine the fair value of those assets and liabilities (Statement II), both as of the acquisition date, and is limited to one year from the acquisition date (Statement III).

9

Company Z is formed to consolidate three preexisting entities: Companies W, X, and Y. Company Z pays cash to acquire the net assets of Company W and issues debt to acquire the net assets of Company X. Company Z acquires all of the stock of Company Y in the market for cash. Which one of the companies is most likely the acquirer in the business combination?
A. Company W.
B. Company X.
C. Company Y.
D. Company Z.

D. Because Company Z only paid cash and issued debt to effect the combination (no new equity was issued to effect the combination), Company Z is most likely the acquirer.

10

In which one of the following cases is Company A most likely to be the acquirer of Company B in a business combination?
A. Company A owns 80% of Company B's long-term debt.
B. Company A owns 40% of Company B's voting stock and 40% of Company C's voting stock, which owns 20% of Company B's voting stock.
C. Company A owns 35% of Company B's voting stock and 60% of Company C's voting stock, which owns 20% of Company B's voting stock.
D. Company A owns 40% of Company B's outstanding bonds and 20% of Company B's voting stock.

C. Generally, to be an acquirer, an entity must own, either directly or indirectly, more than 50% of the voting stock of another entity. In this case, Company A owns 35% of Company B directly and would control 20% indirectly, or a total of 55%. (Since Company A owns 60% of Company C, it has absolute control of C and could control C's 20% ownership of B.) Thus, Company A would control Company B and likely would be an acquirer in a business combination.

11

Which of the following is/are acceptable methods to account for a business combination?
I. Purchase Method
II. Acquisition Method
III. Pooling of interests Method

II only. Only the acquisition method is acceptable in accounting for a business combination. The purchase method and the pooling of interests method of accounting for a business combination are not acceptable methods. The pooling of interests method was eliminated in 2001 and the purchase method was changed to the acquisition method in 2008. Although the acquisition method is a variation of the purchase method, it has sufficiently different requirements that it is not identified as the "purchase method," but rather as the "acquisition method."

12

Which one of the following would be subject to the acquisition accounting requirements of ASC 805, "Business Combinations?"
A. Formation of a joint venture.
B. Acquisition of a manufacturing entity by a holding company.
C. Acquisition of a for-profit entity by a not-for-profit organization.
D. Combination of entities under common control.

B. The acquisition of a manufacturing entity by a holding company would be subject to the acquisition accounting requirements of ASC 805. The formation of a joint venture, the acquisition of assets that do not constitute a business, a combination between entities under common control, a combination between not-for-profit organizations, and the acquisition of a for-profit entity by a not-for-profit organization are the only combinations specifically excluded from the scope of ASC 805.

13

When a new entity is formed to effect a business combination, which of the following statements, if any, is/are correct?

I. A legal consolidation has occurred.
II. The new entity is always the acquirer in the business combination.

I only. When a new entity is formed to effect a business combination, a legal consolidation has occurred (Statement I), but the new entity is not always the acquirer in the combination (Statement II). If the new entity transfers cash or other assets or incurs liabilities to effect the combination, the new entity is likely the acquirer, but if the new entity issues equity interest to effect the business combination, one of the pre-existing combining entities must be the acquirer.

14

T/F: The measurement period for a business combination is always one-year long.

False.
It can be up to one year long

15

T/F: When a variable interest entity is acquired in a business combination, the primary beneficiary is the acquirer.

True

16

T/F: The acquisition method of accounting for a business combination is a variation of the purchase method of accounting.

True

17

T/F: If amounts for assets, liabilities, or other items to be recognized in a business combination are not known with certainty on the closing date of the combination, provisional amounts should be recorded.

True

18

T/F: The amount of goodwill recognized in a business combination may be adjusted during the measurement period of the combination.

True

19

T/F: Adjustments made during the measurement period to amounts of assets or liabilities that existed at the acquisition date of a business combination must be made to comparative information shown for statements issued since the acquisition date.

True

20

T/F: In a business combination carried out solely through the exchange of equity, the entity whose owners have the larger voting rights in the combined entity is likely the acquirer entity.

True

21

T/F: For purposes of the acquisition method of accounting for a business combination, a business uses inputs and processes to provide economic benefits to owners or others.

True

22

T/F: A new liability incurred during the measurement period for a business combination will be recognized as an element of the combination.

False.
??

23

An obligation of an acquirer to pay contingent consideration to the former owners of an acquired entity in a business combination can be recognized as which of the following?
I. A Liability
II. An Equity Item

Both. An obligation to pay contingent consideration in a business combination may be recognized by the acquirer as either a liability or as an equity item, depending on the nature of the obligation under the provisions of FASB #150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."

24

Which one of the following, incurred by an acquiring entity in carrying out a business combination, would not be included in the cost of an acquired entity?
A. Cash paid as consideration in the combination.
B. Fair value of liabilities incurred in the combination.
C. Cost of legal fees to carry out the combination.
D. Fair value of contingent consideration at the acquisition date.

C. Cost of legal fees (and other direct costs) to carry out the combination would not be included in the cost of an acquired business but would be expensed in the period incurred.

25

In which one of the following cases will a non-cash asset transferred as consideration in a business combination be measured at carrying value, not at fair value?
A. The asset transferred is a non-monetary asset.
B. The asset transferred is a non-depreciable asset.
C. The asset transferred remains under the control of the acquiring entity.
D. The asset transferred has a fair value less than the carrying value.

C. When the transferred asset remains under the control of the acquiring entity, the asset is transferred at carrying value, not fair value; for example, when the acquirer transfers a non-cash asset (e.g., land) as consideration and the asset remains with the acquiree, over which the acquirer has control. Otherwise, all assets (and liabilities and equity) transferred as consideration in a business combination are measured at fair value, not carrying value.

26

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be
A. Allocated on a pro rata basis to the nonmonetary assets acquired.
B. Capitalized as part of goodwill and tested annually for impairment.
C. Capitalized as an other asset and amortized over five years.
D. Expensed as incurred in the current period.

D. This question implies that the acquisition is a business combination. The costs associated with a business combination are expensed as incurred.

27

The terms of a business combination can provide that former shareholders of the acquired firm may receive additional compensation based on post-combination earnings or post-combination market share price. Would additional compensation based on such earnings or market price be considered an additional cost of the business combination?

No, neither. Additional compensation to former shareholders of an acquired entity based on either post-combination earnings or post-combination share price would not be recognized as changes in the cost of the business combination. Changes in the fair value of contingent consideration resulting from occurrences after the acquisition date, including meeting earnings targets and reaching a specified share price, are not measurement period adjustments and do not enter into the cost of a business combination.

28

A business combination is accounted for using the acquisition method. Which of the following should be deducted in determining the combined corporation's net income for the current period?
I. Direct Costs Of Acquisition
II. General Expenses Related to Acquisition

Both. Acquisition-related costs incurred to carry out a business combination, including both direct costs of acquisition (e.g., finders' fees; legal, accounting, and consulting fees; etc.) and general expenses related to an acquisition (e.g., cost of acquisition department), are expensed when incurred and enter into the determination of income for the period.

29

Which of the following statements concerning the acquisition of a business is/are correct?

I. Most consideration transferred to effect a business combination should be measured at fair value.
II. Contingent consideration should be included in the cost of an acquired business at fair value existing on the acquisition date.
III. The cost of carrying out a business combination should be included in the cost of an acquired business.

I and II. Most consideration used to effect a business combination should be measured at fair value (Statement I). The only exception is when the consideration transferred remains under the control of the acquirer. Contingent consideration should be included in the cost of an acquired business at fair value as of the acquisition date (Statement II). The cost of carrying out a business combination should not be included in the cost of an acquired business (Statement III); most such costs should be expensed.

30

Changes in the fair value of contingent consideration transferred in a business combination resulting from occurrences after the acquisition date should be recognized as a gain or loss in the current income when the contingent consideration is classified as
I. An Asset or a Liability
II. An Equity Item

I only. Changes in the fair value of contingent consideration resulting from occurrences that occur after the acquisition date are recognized as gains or losses when the contingent consideration is classified as an asset or a liability. Contingent considerations classified as equity are not re-measured, and no gain or loss is recognized. The change in fair value of equity items is recognized as an adjustment within equity.

31

T/F: The costs of issuing debt and equity securities by an acquirer to effect a business combination should be capitalized as part of the cost of the acquired business.

False.
The costs to issue the debt or equity securities would NOT be included in the capitalization as part of the cost of the acquired business.

32

T/F: Costs incurred in carrying out a business combination should be included as part of the cost of the acquired business.

False.
Costs are expensed in the period incurred.

33

T/F: If a non-cash asset is transferred as consideration in a business combination, generally the asset must be transferred at its carrying value.

False.
Generally it is transferred at FV.

34

T/F: An entity can be the acquirer in a business combination even if other parties own 100% of the equity interest in the acquired entity.

True

35

T/F: If an acquirer exchanges its employee stock options for the stock options held by the acquiree's employees, the exchange should be treated as a new award.

True

36

T/F: In order to be an acquirer in a business combination, an entity must transfer consideration to the acquiree or its owners.

False.
They don't Have to transfer any consideration.

37

T/F: Additional consideration paid to former shareholders of an acquired entity based on post-combination earnings is treated as part of the cost of the acquired entity.

False.
The additional consideration would more than likely not occur within the measurement period and therefore can not be included in the cost of acquiring the entity.

38

T/F: In a business combination, whether an exchange of share-based employee awards for pre-combination services is capitalized or expensed depends on whether or not the acquirer was obligated to make the exchange.

True

39

T/F: If a non-cash asset is transferred as consideration in a business combination, but the asset remains under the control of the acquirer, the asset should be transferred at carrying value.

True

40

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco's plants and relocate its employees. Which one of the following is the amount of liability that Lazer should recognize in recording the business combination?
A. $- 0 - (no liability)
B. $150,000
C. $170,000
D. $200,000

B. Lazer will recognize $150,000 in liabilities, the fair value of the amount acquired from Tipco. The $20,000 legal and accounting fees will be expensed as cost of carrying out the combination. The expected cost of closing one of Tipco's plants and relocating its employees will not be recognized until there is an actual liability.

41

On May 1, 2008, Hico, Inc. acquired 20% of the voting securities of Lowco, Inc. for $400,000 cash. The investment did not give Hico significant influence over Lowco and was classified as an available-for-sale investment. On July 1, 2009, Hico acquired the remaining 80% of Lowco's voting securities for $1,800,000 cash. At that time, Hico's original 20% investment in Lowco had a carrying value and a fair value of $450,000. Which one of the following is the amount of gain that Hico should recognize in July, 2009 net income as a result of the effect of the business combination on Hico's original investment in Lowco?

$50,000
Because the original investment was treated as available-for-sale, between May 1, 2008, and July 1, 2009, it would have been adjusted to fair value ($450,000) and the increase recognized in other comprehensive income (not in net income). The cumulative entries would have been DR: Investment $50,000 and CR: Unrecognized Gain/Other Comprehensive Income $50,000. In connection with the combination, the $50,000 unrecognized gain in Accumulated Other Comprehensive Income would be reclassified and recognized as a gain in net income of the period. The $450,000 carrying amount/fair value of the original investment would be included as part of the total consideration used in acquiring Lowco.

42

Which one of the following payments by an acquirer in a business combination is most likely to be a part of the cost in recording a business combination transaction?
A. Payment by the acquirer to settle a trade payable due to the acquired entity.
B. Payment by the acquirer to the acquiree's management personnel to remain with the firm for one year following the business combination.
C. Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree.
D. Payment by the acquirer to reimburse the acquiree for cost it incurred in carrying out the business combination.

C. Payment for a valid patent, even though not previously recognized by the acquiree, most likely would be a part of the business combination transaction. Since costs of developing a patentable item are expensed when incurred, the acquiree may not have recognized any asset associated with the patent, but the acquirer should record the patent acquired in a business combination at fair value.

43

Which of the following kinds of intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity?
I. Future benefits that derive from legal rights
II. Future benefits that can be separately sold

Both. Intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity if they either have future benefits that arise from contractual or legal rights (e.g., trademarks, copyrights, franchise agreements, etc.) or are capable of being separately sold, transferred, licensed, rented, or exchanged (e.g., customer lists, databases, etc.).

44

Generally, which of the following items acquired in a business combination should be measured at fair value?
I. Identifiable Assets Acquired
II. Liabilities Assumed
III. Non-controlling Interest

All 3. Generally, identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree are measured at fair value. A few exceptions exist for selected assets and liabilities.

45

Which one of the following items acquired in a business combination is least likely to require that the acquirer reconsider the acquiree's classification?
A. An investment classified as held-to-maturity by the acquiree.
B. An investment classified as held-for-trading by the acquiree.
C. A lease classified as a sales-type capital lease by the acquiree.
D. A derivative instrument used for speculative purposes by the acquiree.

C. In a business combination, an acquirer that obtains a lease contract should continue to classify the contract as established at the inception of the contract. The classification of a lease contract is established at the inception of the lease and would not change as a result of a transfer of ownership in a business combination.

46

Which of the following statements, if any, concerning a non-controlling interest in an acquiree is/are correct?

I. The value assigned to a non-controlling interest in an acquiree should be based on the proportional share of that interest in the net assets of the acquiree.
II. The fair value per share of the non-controlling interest in an acquiree must be the same as the fair value per share of the controlling (acquirer) interest.

Neither. The value assigned to a non-controlling interest in an acquiree would not be based simply on the proportional share of that interest in the net assets of the acquiree (Statement I), but rather on the separately determined fair value of the non-controlling interest. The fair value per share of the non-controlling interest in an acquiree does not have to be the same as the fair value per share of the controlling interest (Statement II), because there is likely to be a premium in value associated with having control of an entity that the non-controlling interest would not enjoy.

47

Which of the following contingencies that exist on the acquisition date should be recognized by the acquirer in a business combination?

I. A contractual contingency to provide warranty services to prior customers of the acquiree.
II. An outstanding lawsuit against the acquiree for which an expert legal authority believes there is a 20% probability that the suit will be successful.

I only. Contractual contingencies (contingencies related to existing contracts) are recognized by the acquirer and measured at fair value. Non-contractual contingencies (contingencies that do not result from an existing contract), including lawsuits, are recognized only if it is more likely than not that the contingency will give rise to a liability (or an asset). A probability of 20% that the suit will be lost is not more likely than not, and the lawsuit would not be recognized.

48

T/F: Use of the acquisition method to account for a business combination requires the acquirer to identify assets acquired, liabilities assumed, and non-controlling interest in the acquired business.

True

49

T/F: An indemnification provision in a business combination agreement limits the acquirer's liability associated with specific assets or liabilities.

True

50

T/F: Benefits expected to arise following a business combination that can be estimated at the acquisition date should be recognized as assets in recording the combination.

False.
Rights or obligations that do not exist at the date of acquisition, even if expected to exist in the future, are not recognized as assets or liabilities acquired.

51

T/F: Rights granted by an acquirer to an acquiree prior to a business combination, which the acquirer reacquires as part of a business combination, should be written-off in connection with the acquisition transaction.

False.
In order to qualify as part of the business combination, the assets and liabilities must be part of what the acquirer and acquire exchanged in the business combination, not the subject matter of any separate transaction.

52

T/F: An investment classified as held-to-maturity by an acquiree must retain that classification when it is recognized by the acquirer in a business combination.

False.
Investments in debt and equity securities as being held-to-maturity, trading or available-for-sale are examples of items that need classification or designation.

53

T/F: Goodwill existing on the books of the acquired entity will be recognized as an asset by the acquirer.

False.
Good will on the books of the acquired entity prior to a business combination would not be recognized by the acquirer in recording the combination. Any goodwill attributable to the acquire would be separately determined by the acquirer.

54

T/F: Long-term assets acquired in a business combination, which the acquirer classifies as held-for-sale at the acquisition date, should be measured at fair value.

False.
Assets held for sale are required to be measured at fair value less cost to dispose.

55

T/F: The fair value per share of the non-controlling interest in an acquiree may be different than the fair value per share of the acquirer in that acquiree.

True

56

T/F: Existing GAAP accounting requirements apply to an acquiree's interperiod income tax items and employee benefit arrangements which are acquired in a business combination.

True

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