Business Combination Theories

(EXERCISE):
1. A business merger differs from a business consolidation because

a. a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entities.
b. a consolidation dissolves all but one of the prior entities, but a merger dissolves all of the prior entities.
c. a merger is created when two entities join, but a consolidation is created when more than two entities join.
d. a consolidation is created when two entities join, but a merger is created when more than two entities join.
2. Following the accounting concept of a business combination, 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.
3. In a business combination, which of the following will occur?
a. All identifiable assets and liabilities are recorded at fair value at the date of acquisition.
b. All identifiable assets and liabilities are recorded at book value at the date of acquisition.
c. Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of the net assets
acquired.
d. None of the above is correct.
4. Under the provisions of IASB Statement No. 141R, in a business combination, when the fair value of identifiable
net assets acquired 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 difference 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. The difference is allocated first to reduce proportionately (according to market value) no-current assets, and
any negative remainder is classified as an extraordinary gain.
d. The difference 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.
5. 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.
(QUIZ):
1. Stock given as consideration for a business combination is valued at
a. fair market value
b. par value
c. historical cost
d. None of the above
2. Which of the following situations best describes a business combination to be accounted for as a statutory
merger?
a. Both companies in a combination continue to operate as separate, but related, legal entities.
b. Only one of the combining companies survives and the other loses its separate identity.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created
3. A business combination in which the boards of directors of the potential combining companies negotiate
mutually agreeable terms is a(n)
a. agreeable combination.
b. friendly combination.
c. hostile combination.
d. unfriendly combination
4. A merger between a supplier and a customer is a(n)
a. friendly combination.
b. horizontal combination.
c. unfriendly combination.
d. vertical combination
5. A statutory result when one company acquires all the net assets of another company and the acquired company
ceases to exist as a separate legal entity.
a. acquisition.
b. combination.
c. consolidation.
d. merger
6. 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 statutory
a. acquisition.
b. combination.
c. consolidation.
d. merger.
7. The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the
a. bonus.
b. goodwill.
c. implied offering price.
d. takeover premium.
8. Which of the following statements would not be a valid or logical reason for entering into a business
combination?
a. to increase market share.
b. to avoid becoming a takeover target.
c. to reduce risk by acquiring established product lines.
d. the operating costs of the combined entity would be more than the sum of the separate entities.
9. Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch will treat the
$50,000 as
a. an expense for the current year.
b. a prior period adjustment to retained earnings.
c. additional cost to investment of Slope on the consolidated balance sheet.
d. a reduction in additional paid-in capital.
10. Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire shares of Seurat
Company in an all-stock transaction. Picasso paid the investment bankers $35,000 and 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 to additional paid-in capital.

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(EXERCISE):

1. A business merger differs from a business consolidation because

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