18 Free Test Bank for Advanced Accounting 10th Edition by Beams

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A business combination occurs when a company acquires an equity interest in another entity and has

•  a. at least 20% ownership in the entity.
•  b. more than 50% ownership in the entity.
•  c. 100% ownership in the entity.
•  d. control over the entity, irrespective of the percentage owned.

Picasso Co. issued 10,000 shares of its $1 par common stock, valued at $400,000, to acquire shares of Bull Company in an all-stock transaction. Picasso paid the investment bankers $35,000. Picasso will treat the investment banker fee as:

•  a. an expense for the current year.
•  b. a prior period adjustment to Retained Earnings.
•  c. additional goodwill on the consolidated balance sheet.
•  d. a reduction in paid-in capital.

In a merger, which of the following will occur?

•  a. A merger occurs when one corporation takes over the operations of another business entity, and the acquired entity is dissolved.
•  b. None of the business entities will be dissolved.
•  c. The acquired assets will be recorded at book value by the acquiring entity.
•  d. None of the above is correct.

According to FASB Statement 141, which one of the following items may not be accounted for as an intangible asset apart from goodwill?

•  a. A production backlog.
•  b. A talented employee workforce.
•  c. Noncontractual customer relationships.
•  d. Employment contracts.

Goodwill arising from a 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.

With respect to goodwill, an impairment

•  a. will be amortized over the remaining useful life.
•  b. is a two-step process which analyzes each business unit of the entity.
•  c. is a one-step process considering the entire firm.
•  d. occurs when asset values are adjusted to fair value in a purchase.

Michangelo Co. paid $100,000 in fees to its accountants and lawyers in acquiring Florence Company. Michangelo will treat the $100,000 as

•  a. an expense for the current year.
•  b. a prior period adjustment to retained earnings.
•  c. additional cost to investment of Florence on the consolidated balance sheet.
•  d. a reduction in paid-in capital.

In Statement 142, which of the following methods does the FASB consider the best indicators of fair values in the evaluation of goodwill impairment?

•  a. Senior executive’s estimates.
•  b. Financial analyst forecasts.
•  c. Market value.
•  d. The present value of future cash flows discounted at the firm’s cost of capital.

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

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

According to FASB 141, 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.

In reference to the FASB disclosure requirements, which of the following is correct?

•  a. Information related to several minor acquisitions may not be combined.
•  b. Firms are not required to disclose the business purpose for a combination
•  c. Notes to the financial statements of an acquiring corporation must disclose that the business combination was accounted for by the acquisition method.
•  d. All of the above are correct.

Which of the following is a reason why a company would expand through a combination, rather than by building new facilities?

•  a. A combination might provide cost advantages.
•  b. A combination might provide fewer operating delays.
•  c. A combination might provide easier access to intangible assets.
•  d. All of the above are possible reasons that a company might choose a combination.

FASB favors consolidation of two entities when

•  a. one acquires less than 20% equity ownership of the other.
•  b. one company’s ownership interest in another gives it control of the acquired company, yet the acquiring company does not have a majority ownership in the acquired. Typically, this is in the 20%-50% interest range.
•  c. one acquires two thirds equity ownership in the other.
•  d. one gains control over the entity, irrespective of the equity percentage owned.

A business combination in which a new corporation is created and two or more existing corporations are combined into the newly created corporation is called a

•  a. merger.
•  b. purchase transaction.
•  c. pooling-of-interests.
•  d. consolidation.

Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value exceeds the investment cost, which of the following statements is correct?

•  a. A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.
•  b. the value is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit.
•  c. it is allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain.
•  d. It is allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit.

Durer Inc acquired Sea Corporation in a business combination and Sea Corp went out of existence. Sea Corp developed a patent listed as an asset on Sea Corp’s books at the patent office filing cost. In recording the combination

•  a. fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp.
•  b. Sea Corp’s prior expenses to develop the patent are recorded as an asset by Durer at purchase.
•  c. the patent is recorded as an asset at fair market value.
•  d. the patent's market value increases goodwill.