Theories in Business Combination With Answers in Explanation PDF

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GENERAL CONCEPTS (Theories questions for the evaluation process of the students)Business Combination *. The result of acquiring control of one or more enterprises by another enterprise or the uniting of interest of two or more enterprises. a. Business combinations. c. Merger.Business consolidation. ...

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GENERAL CONCEPTS (Theories questions for the evaluation process of the students) Business Combination *. The result of acquiring control of one or more enterprises by another enterprise or the uniting of interest of two or more enterprises. a. Business combinations. c. Merger. b. Business consolidation.

d. Pooling of interests.

RPCPA 0593)

1. When should a business combination be undertaken? A. When a positive net present value is generated to the shareholders of an acquiring firm. B. When the two firms are in the same line of business, but economies of scale cannot be attained by the acquiror. C. When two firms are in different lines of business, creating diversification. D. When cash will be paid for the acquired firm's stock. Gleim Merger 2. Which of the following is a combination involving the absorption of one firm by another? A. Merger. C. Proxy fight. B. Consolidation. D. Acquisition. Gleim 3. When firm B merges with firm C to create firm BC, what has occurred? A. A tender offer. C. An acquisition of stock. B. An acquisition of assets. D. A consolidation.

Gleim

*. A business combination whereby the company taking over the properties of other companies retains its identity and continues operations as a larger unit and the other companies are dissolved is known as a a. Consolidation. c. Pooling of interests. b. Merger. d. Quasi-reorganization. RPCPA 1086 4. A business combination may be legally structured as a merger, consolidation, an investment in stock, or a direct acquisition of assets. Which of the following describes a business combination that is legally structured as a merger? A. The surviving company is one of the two combining companies. B. The surviving company is neither of the two combining companies. C. An investor-investee relationship is established. D. A parent-subsidiary relationship is established Gleim 5. A business combination legally structured as a merger has one set of books and accounting records (the surviving company's) to account for the combined (consolidated) operations. On

the other hand, if the combination is accomplished by a stock investment, each of the combining companies continues to maintain its individual books and accounting records. For a stock investment, the books and accounting records of the consolidated organization are usually A. Maintained by the parent separately from the surviving company's books. B. Prepared in worksheet form each time consolidated statements are prepared. C. Maintained by each organization in the same manner that branch-home office accounting is accomplished. D. Maintained by the subsidiary corporation. Gleim 6. All of the following are true of mergers except A. Mergers are legally straightforward. B. Approval by shareholder vote of each firm involved in the merger is required. C. The acquiring firm maintains its name and identity in a merger. D. A merger may never result from a public offer to the shareholders of the target firm to buy its shares directly. Gleim Valuation of Business 7. The q ratio of a firm equals A. Market value of the firm's securities ÷ Replacement cost of its assets. B. Market value of the firm's securities ÷ Book value of its assets. C. Book value of its assets ÷ Market value of the firm's securities. D. Book value of its assets ÷ Market value of its assets.

Gleim

POOLING METHOD *. Stockholders of one company give up their stock in exchange for the stock of the other company, they continue to be stockholders, but now in the expanded entity. a. None of these. b. Leverage of trading on equity. c. Acquisition method of recording a combination. d. Pooling of interests. RPCPA 1084, 0598 8. What form of accounting is used when the assets of the acquired firm are added to the assets of the acquiring firm at book value after business combination? A. Consolidation. C. Purchase. B. Aggregation. D. Pooling. Gleim *. The method of accounting for business combination in which assets and liabilities of the separate entities are combined at their existing carrying values is called

a. Equity method. b. Pooling of interest.

c. Purchase method. d. Outright sale.

RPCPA 1079, 0586

9. Under accounting for consolidations, the pooling method is characterized by all of the following attributes except that the A. Assets and liabilities of the acquired company are recorded at book value for consolidation reporting purposes. B. Business combination expenses for acquiring a company under the pooling method are capitalized. C. Newly created goodwill, rather than goodwill that was already on the books of the subsidiary, is not recognized. D. Retained earnings of the acquired company are carried forward to the consolidated financial statements. CMA 0695 2-8 10. A supportive argument for the pooling of interests method of accounting for a business combination is that A. One company is clearly the dominant and continuing entity. B. Goodwill is generally a part of any acquisition. C. A portion of the total cost is assigned to individual assets acquired on the basis of their fair value. D. It was developed within the boundaries of the historical cost system and is compatible with it. RPCPA 0591, 1096, 0598 11. Which of the following statements is supportive of the pooling of interests method in accounting for a business combination? a. Bargaining between the parties is based on current values for assets and liabilities. b. Stockholder groups remain intact but combine. c. Goodwill is generally a part of any acquisition. d. A portion of the total cost is assigned to individual assets acquired on the basis of their fair value. AICPA 1193 T-13 12. Which of the following is a potential abuse that can arise when a business combination is accounted for as a pooling of interests? a. Assets of the investee may be overvalued when the price paid by the investor is allocated among specific assets. b. Liabilities may be undervalued when the price paid by the investor is allocated to the specific liabilities. c. An undue amount of cost may be assigned to goodwill, thus potentially allowing for an overstatement of pooled earnings.

d. Earnings of the pooled entity may be increased by only the combination and not as a result of efficient operations. AICPA 0580 T-14 23. Which of the following is not a characteristic of the pooling method of consolidation accounting? A. The subsidiary’s assets are revalued at their fair market values. B. No goodwill is recognized. C. The earnings for the subsidiary for the entire year are combined with the earnings of the parent regardless of the acquisition date. D. All of the above are characteristic of the pooling method. E. None of the above is a characteristic of the pooling method. Flamholtz & Diamond Criteria for Pooling 13. The 12 conditions established by the Accounting Principles Board (APB) that must be present in order to use the pooling accounting method for business combinations include all of the following except A. Each of the constituent companies is independent of the other companies. B. The constituent companies combine in a single transaction or in accordance with a specific plan within 1 year of initiating the plan. C. None of the constituent companies change the equity interest of their voting common stock either within 2 years of initiating the combination or between the date of initiation and consummation of the combination. D. The combined enterprise agrees to retire or acquire all of the common stock issued to effect the combination. CMA 0696 2-6 14. APB Opinion No. 16, Business Combinations, contains conditions that must be met in order for the pooling-of-interests method of accounting to be used. Which one of the following is not a condition that must be met to use the pooling-of-interests method to record a business combination? A. No constituent company may have more than a 10% ownership of the outstanding voting common stock of another constituent company. B. At least 90% of the combinee's outstanding voting common stock must be exchanged for the combiner's majority voting common stock. C. No additional capital stock must be contingently issuable to former shareholders of a combinee after a combination has been initiated. D. A majority of the officers of the combinee company must also be officers in the combined enterprise after the combination. CMA 1291 2-7

15. To report a business combination as a pooling of interests, the minimum amount of an investee’s common stock that must be acquired during the combination period in exchange for the investor’s common stock is a. 51 percent. c. 90 percent. b. 80 percent. d. 100 percent. AICPA 0590 T-32 Pooling Accounting – Valuation 16. When a parent corporation acquires a new subsidiary and the pooling of interests method is used to account for the combination, the retained earnings balance of the combined entity immediately after acquisition is normally equal to A. The retained earnings balance of the parent company immediately prior to the acquisition. B. The sum of the retained earnings balances of the combining companies. C. The sum of the retained earnings balances of the combining companies plus the amount of the goodwill originating from the business combination. D. The retained earnings balance of the parent company immediately prior to acquisition plus the amount of goodwill originating from the business combination. CIA 0591 IV-42 Pooling Accounting – Implementation *. A business combination accounted for by the pooling of interest method a. Records direct acquisition costs as part of the cost of investment. b. Reports results of operations only for the period in which the combination occurs. c. After the combination, carries the balance sheet amounts at fair market value. d. Reports results of operations for the period in which the combination occurs as though the enterprises had been combined at the beginning of the period. RPCPA 1097 *. Companies A and B, both calendar combine on July 1, 19x0. The combination is properly accounted for as a pooling of interest. How should the results of operations be reported for the year ended December 31, 19x0? a. Combined from July 1 to December 31 and disclosed for the separate companies from January 1 to June 30. b. Combined from July 1 to December 31 and disclosed for the separate companies for the entire year. c. Combined for the entire year and disclosed for the separate companies from January 1 to June 30. RPCPA 0580 d. Combined for the entire year and disclosed for the separate companies for the entire year. 17. A business combination is accounted for properly as a pooling of interests. 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? AICPA, Adapted A. B. C. D. Fees of Finders and Consultants Yes Yes No No Registration Fees Yes No No Yes 18. A business combination is accounted for as a pooling of interests. Costs of furnishing information to stockholders related to effecting the business combination should be a. Deducted directly from retained earnings of the combined corporation. b. Deducted in determining net income of the combined corporation for the period in which the costs were incurred. c. Capitalized but not amortized. AICPA 1191 T-12 d. Capitalized and subsequently amortized over a period not exceeding forty years. 19. The business combination of Pollin – the issuing company – and the Brie Corp. was consummated on March 14. At the initiation date, Pollin held 2,000 shares of Brie. If the combination were accounted for as a pooling of interests, the 2,000 shares of Brie held by Pollin would be accounted for as a. Retired stock. b. 2,000 shares of treasury stock. c. (2,000 divided by the exchange rate) shares of treasury stock. d. (2,000 times the exchange rate) shares of treasury stock. AICPA 0573 I-6 20. On September 30, 1991, Payne, Inc. exchanged some of its shares for all of the common stock of Salem, Inc. in a business combination accounted for as a pooling of interests. Salem continued as a wholly owned subsidiary of Payne. How should Salem’s January 1, 1991, retained earnings and income for January 1 to September 30 be reported in 1991 consolidated statements? AICPA 1192 T-35 1/1/91 Retained Earnings Income for 1/1 to 9/30/91 a. Added to consolidated retained earnings. Added to consolidated income b. Added to consolidated retained earnings. Excluded from consolidated income c. Added to consolidated additional paid-in capital Added to consolidated income d. Added to consolidated additional paid-in capital Excluded from consolidated income PURCHASE METHOD 21. Which form of accounting for a business combination must result in recognition of goodwill when the amount paid exceeds the fair value of the identifiable net assets? A. Consolidation. C. Purchase. B. Aggregation. D. Pooling. Gleim

22. For the past several years, M.F.S. Company has invested in the common stock of Annabelle Company. M.F.S. currently owns approximately 13% of the total of Annabelle's outstanding voting common stock. Recently, managements of the two companies have discussed a possible combination of the two entities. If they do decide to combine, the resulting combination should be accounted for as a A. Pooling of interests. C. Part purchase, part pooling. B. Purchase. D. Joint venture. Gleim *. Investments in net assets of the acquired company require cash outlay which directly reduced the combined capital of the acquiring company or that funds used are financed with freshly borrowed funds. a. Pooling of interest. b. Leverage or trading on equity. c. Acquisition method of recording a combination. d. None of the above.

RPCPA 1084

*. The acquisition of some or all the stock held by minority stockholders of a subsidiary – whether acquired by the parent, the subsidiary itself, or another affiliate shall be accounted for by the a. Pooling of interests method. b. None of these. c. Purchase method. d. Purchase method rather than by the pooling of interests method. RPCPA 0598 23. For the past several years, Mozza Co. has invested in the common stock of Chedd Co. Mozza currently owns approximately 13% of the total of Chedd’s outstanding voting common stock. Recently, managements of the two companies have discussed a possible combination of the two entities. If they do decide to combine, the resulting combination should be accounted for as a a. Pooling of interests. c. Part purchase, part pooling. b. Purchase. d. Joint venture. Gleim 24. Which of the following conditions would cause a business combination to be accounted for by the purchase method? a. The combined corporation intends to dispose of duplicate facilities within one year of the combination. b. Cash is to be used to acquire 2% of the outstanding stock of one of the combining companies.

c. After the combination is consummated, one of the combining companies will be a subsidiary of another combining company. d. Before the combination is consummated, one of the combining companies holds 15% of the outstanding stock of another of the combining companies. AICPA 1192 T-32 25. Under accounting for consolidations, the purchase method is characterized by all of the following attributes except that the A. Assets and liabilities are recorded at fair value or the purchase price of the acquired company, whichever is less. B. Excess of the purchase price over the fair value of identifiable assets and liabilities is recorded as goodwill. C. Goodwill of the acquired company is always carried forward to the balance sheet of the consolidated entity. D. Fair value of the shares issued by the acquiring company is added to the paid-in capital of the consolidated entity. CMA 0695 2-7 26. Which of the following is a true statement about the accounting treatment of business combinations? A. The excess amount paid over the book value of the target's assets is added to retained earnings under the pooling method. B. The purchase method results in higher taxes on the transaction. C. The purchase method is preferable to the pooling method because it eliminates any minority interest. D. Purchase accounting results in a write-up of the assets of the acquired firm when their book value is less than fair value. Gleim Criteria for Purchase Method Purchase Accounting – Valuation 27. A common mistake in valuing the firm to be acquired in a business combination is A. Using market values in the valuation. B. Including incremental cash flows in the valuation. C. Using the acquiring firm's discount rate when valuing the incremental cash flows. D. Including all related transaction costs associated with an acquisition.

Gleim

28. The appropriate discount rate to use in valuing a business combination is the A. Combined firm's cost of debt. B. Acquiring firm's weighted average cost of capital. C. Acquiring firm's cost of equity. D. Combined firm's cost of equity.

Gleim

29. In a business combination that is accounted for as a purchase and does not create negative goodwill, the acquiring company records the assets of the acquired company at the A. Original cost. B. Original cost minus accumulated depreciation. C. Fair market value. D. Book value. CMA 0697 2-21 30. In a business combination that is accounted for as a purchase and does not create negative goodwill, the assets of the acquired company are to be recorded on the books of the acquiring company at A. Original cost minus accumulated depreciation. B. Fair value. C. Replacement cost. D. Book value. CMA 1292 2-9 52. Which of the following most accurately describes the position taken by current generally accepted accounting principles? a. Both pooling of interests and the purchase method are still permitted under certain circumstances. b. The purchase method results in the assets of the acquired company being recognized on the acquiring company's balance sheet at their fair value at the date of acquisition. c. Goodwill may arise as a result of a business acquisition accounted for as a pooling of interests. S,S&S d. The purchase method requires a business acquisition transaction to be structured to meet twelve very specific criteria required by generally accepted accounting principles. Direct Costs of Combination *. The acquisition of some or all the stock held by minority stockholders of a subsidiary – whether acquired by the parent, the subsidiary itself, or another affiliate shall be accounted for by the a. Pooling of interests method. b. None of these. c. Purchase method. d. Purchase method rather than by the pooling of interests method. RPCPA 0598 *. The costs of registering equity securities to be issued by the acquiring company in a business combination accounted for as a purchase are a (an) a. Expense of the combined company for the period in which the costs were incurred. b. Reduction of the otherwise determinable fair value of the securities.

c. Direct addition to stockholders’ equity of the combined company. d. Addition to goodwill.

RPCPA 0590

31. A business combination is accounted for properly as a purchase. Direct costs of combination, other than registration and issuance costs of equity securities, should be a. Capitalized as a deferred charge and amortized. b. Deducted directly from the retained earnings of the combined corporation. c. Deducted in determining the net income of the combined corporation for the period in which the costs were incurred. d. Included in the acquisition cost to be allocated to identifiable assets according to their fair values. AICPA 0595 F-53 32. PDC Corp. acquired 100% of the outstanding common stock of Sea Corp. in a purchase transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general guidelines for assigning amounts to the inventories acquired provide for a. Raw materials to be valued at original cost. b. Work in process to be valued at the estimated selling prices of finished goods, less both costs to complete and costs to disposal. c. Finished goods to be valued at replacement cost. d. Finished goods to be valued at estimated selling ...