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Revision chapter 1
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 firm can use which method of financing for an acquisition structured as either an
asset or stock acquisition?
A. Cash B. Issuing Debt
C. Issuing Stock D. Allof the above
4. The objectives of FASB 141R (Business Combinations) and FASB 160 (noncontrolling
Interests in Consolidated Financial Statements) are as follows:
A. To improve the relevance, comparibility, and transparency of financial information
related to Business combinations.
B. To eliminate the amortization of Goodwill.
C. To facilitate the convergence project of the FASB and the International Accounting
Standards Board.
D. A and b only
5. 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.
6. A merger between a supplier and a customer is a(n)
A. Friendly combination. B. Horizontal combination.
C. Unfriendly combination. D. Vertical combination.
7. When a business acquisition is financed using debt, the interest payments are tax
deductible and create
A. Operating synergy. B. International synergy.
C.Financial synergy. D. Diversification synergy.
8. The defense tactic that involves purchasing shares held by the would-be acquiring
company at a price substantially in excess of their fair value is called

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 A. Poison pill. B. Pac-man defense.
C. Greenmail. D. White knight.
9. The third period of business combinations started after World War II and is called
A. Horizontal integration. B. Merger mania.
C. Operating integration. D. Vertical integration.
10. A statutory ______________ results 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.
11. 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 a statutory
A. Acquisition. B. Combination.
C. Consolidation. D. Merger.
12. 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.
13. The difference between normal earnings and expected future earnings is
A. Average earnings. B. Excess earnings.
C. Ordinary earnings. D. Target earnings.
14. The first step in estimating goodwill in the excess earnings approach is to
A. Determine normal earnings. B. Identify a normal rate of return for similar firms.
C. Compute excess earnings. D. Estimate expected future earnings.
15. A potential offering price for a company is computed by adding the estimated goodwill
to the
A. Book value of the company’s net assets.
B. Book value of the company’s net identifiable assets.
C. Fair value of the company’s net assets.
D. Fair value of the company’s net identifiable assets.
16. Estimated goodwill is determined by computing the present value of the
a. average earnings. b. excess earnings.
c. expected future earnings. d. normal earnings.
17. 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.

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18. The parent company concept of consolidation represents the view that the primary purpose of
consolidated financial statements is:
a. to provide information relevant to the controlling stockholders.
b. to represent the view that the affiliated companies are a separate, identifiable economic entity.
c. to emphasis control of the whole by a single management.
d. to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and
losses.
19. Which of the following statements is correct?
a. Total elimination is consistent with the parent company concept.
b. Partial elimination is consistent with the economic unit concept.
c. Past accounting standards required the total elimination of unrealized intercompany profit
in assets acquired from affiliated companies.
d. none of these.
20. Under the parent company concept, consolidated net income __________ the consolidated net
income under the economic unit concept.
a. is the same as b. is higher than
c. is lower than d. can be higher or lower than
21. Under the economic unit concept, noncontrolling interest in net assets is treated as
a. a liability. b. an asset. c. stockholders' equity. d. an expense.
22. The parent company concept adjusts subsidiary net asset values for the
a. differences between cost and fair value.
b. differences between cost and book value.
c. total fair value implied by the price paid by the parent.
d. total cost implied by the price paid by the parent.
23. According to the economic unit concept, the primary purpose of consolidated financial statements
is to provide information that is relevant to
a. majority stockholders. b. minority stockholders.
c. creditors. d. both majority and minority stockholders.
24. Which of the following statements is correct?
a. The economic unit concept suggests partial elimination of unrealized intercompany profits.
b. The parent company concept suggests partial elimination of unrealized intercompany
profits.
c. The economic unit concept suggests no elimination of unrealized intercompany profits.
d. The parent company concept suggests total elimination of unrealized intercompany profits.
25. When following the parent company concept in the preparation of consolidated financial
statements, noncontrolling interest in combined income is considered a(n)
a. prorated share of the combined income.
b. addition to combined income to arrive at consolidated net income.
c. expense deducted from combined income to arrive at consolidated net income.
d. deduction from current assets in the balance sheet.
26. When following the economic unit concept in the preparation of consolidated financial
statements, the basis for valuing the noncontrolling interest in net assets is the

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 a. book values of subsidiary assets and liabilities.
b. fair values of subsidiary assets and liabilities.
c. general price level adjusted values of subsidiary assets and liabilities.
d. fair values of parent company assets and liabilities.
27. The view that consolidated financial statements represent those of a single economic entity with
several classes of stockholder interest is consistent with the
a. parent company concept. b. current practice concept.
c. historical cost company concept. d. economic unit concept.
28. The view that the noncontrolling interest in income reflects the noncontrolling stockholders'
allocated share of consolidated income is consistent with the
a. economic unit concept. b. parent company concept.
c. current practice concept. d. historical cost company concept.
29. The view that only the parent company's share of the unrealized intercompany profit recognized
by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated
financial statements is consistent with the
a. economic unit concept. b. current practice concept.
c. parent company concept. d. historical cost company concept.

Extra Question

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 Solution

Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about
Beta:

Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash
gains of $67,000 and nonrecurring cash losses of $48,000. Alpha Company expects a return on its
investment of 15%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings
to estimate its offering price, and that it estimates the total valuation of Beta to be equal to the
present value of cash-based earnings (rather than excess earnings) discounted over five years.

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(Goodwill is then computed as the amount implied by the excess of the total valuation over the
identifiable net as sets valuation.)
Required:
A. Compute (a) an offering price based on the information above that Alpha might be willing to pay, and
(b) the amount of goodwill included in that price.
B. Compute the amount of goodwill actually recorded, assuming the negotiations result in a final
purchase price of $625,000 cash.

Passion Company is trying to decide whether or not to acquire Desiree Inc. The following bal ance sheet
for Desiree Inc. provides information about book values. Estimated market values are also listed, based
upon Passion Company’s appraisals

Passion Company expects that Desiree will earn approximately $150,000 per year in net in come over
the next five years. This income is higher than the 12% annual return on tangible assets considered to
be the industry “norm.”
Required:

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 A. Compute an estimation of goodwill based on the information above that Passion might be willing
to pay (include in its purchase price), under each of the following additional as sumptions:
(1) Passion is willing to pay for excess earnings for an expected life of five years
(undis counted).
(2) Passion is willing to pay for excess earnings for an expected life of five years, which should
be capitalized at the industry normal rate of return.
(3) Excess earnings are expected to last indefinitely, but Passion demands a higher rate of
return of 20% because of the risk involved.
B. Comment on the relative merits of the three alternatives in part (A) above.
C. Determine the amount of goodwill to be recorded on the books if Passion pays $800,000

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 Revision chapter 2
1. SFAS 141R requires that all business combinations be accounted for using
a. the pooling of interests method.
b. the acquisition method.
c. either the acquisition or the pooling of interests methods.
d. neither the acquisition nor the pooling of interests methods.
2. Under the acquisition method, if the fair values of identifiable net assets exceed the value
implied by the purchase Pratt of the acquired company, the excess should be
a. accounted for as goodwill.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce current assets and classify any remainder as an extraordinary gain.
d. allocated to reduce any previously recorded goodwill and classify any remainder as
an ordinary gain.
3. In a period in which an impairment loss occurs, SFAS No. 142 requires each of the
following note disclosures except
a. a description of the facts and circumstances leading to the impairment.
b. the amount of goodwill by reporting segment.
c. the method of determining the fair value of the reporting unit.
d. the amounts of any adjustments made to impairment estimates from earlier periods, if
significant.
4. Once a reporting unit is determined to have a fair value below its carrying value, the
goodwill impairment loss is computed by comparing the
a. fair value of the reporting unit and the fair value of the identifiable net assets.
b. carrying value of the goodwill to its implied fair value.
c. fair value of the reporting unit to its carrying amount (goodwill included).
d. carrying value of the reporting unit to the fair value of the identifiable net assets.
5. SFAS 141R requires that the acquirer disclose each of the following for each material
business combination except the
a. name and a description of the acquiree.
b. percentage of voting equity instruments acquired.
c. fair value of the consideration transferred.
d. Each of the above is a required disclosure
6. In a leveraged buyout, the portion of the net assets of the new corporation provided by
the management group is recorded at
a. appraisal value. b. book value. c. fair value. d. lower of cost or market.
7. When the acquisition price of an acquired firm is less than the fair value of the
identifiable net assets, all of the following are recorded at fair value except

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 a. Assumed liabilities. b. Current assets.
c. Long-lived assets. d. Each of the above is recorded at fair value.
8. Under SFAS 141R,
a. both direct and indirect costs are to be capitalized.
b. both direct and indirect costs are to be expensed.
c. direct costs are to be capitalized and indirect costs are to be expensed.
d. indirect costs are to be capitalized and direct costs are to be expensed.
11. Par Company and Sub Company were combined in an acquisition transaction. Par was able
to acquire Sub at a bargain Pratt. The sum of the fair values of identifiable assets acquired
less the fair value of liabilities assumed exceeded the cost to Par. After eliminating
previously recorded goodwill, there was still some "negative goodwill." Proper accounting
treatment by Par is to report the amount as
a. paid-in capital. b. a deferred credit, which is amortized.
c. an ordinary gain. d. an extraordinary gain.
12. With an acquisition, direct and indirect expenses are
a. expensed in the period incurred.
b. capitalized and amortized over a discretionary period.
c. considered a part of the total cost of the acquired company.
d. charged to retained earnings when incurred.
13. In a business combination accounted for as an acquisition, how should the excess of fair
value of net assets acquired over the consideration paid be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recorded as an ordinary gain.
14. P Corporation issued 10,000 shares of common stock with a fair value of $25 per share
for all the outstanding common stock of S Company in a business combination properly
accounted for as an acquisition. The fair value of S Company's net assets on that date was
$220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a
fair value of $50,000 to the former stockholders of S Company as an earnings contingency.
Assuming that the contingency is expected to be met, the $50,000 fair value of the
additional shares to be issued should be treated as a(n)
a. decrease in noncurrent liabilities of S Company that were assumed by P Company.
b. decrease in consolidated retained earnings.
c. increase in consolidated goodwill.
d. decrease in consolidated other contributed capital.

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15. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding
common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The
book values and fair values of Shaw's assets and liabilities on February 5 were as follows

What is the amount of goodwill resulting from the business combination?

a. $-0-. b. $475,000. c. $85,000. d. $390,000.
16. P Company purchased the net assets of S Company for $225,000. On the date of P's
purchase, S Company had no investments in marketable securities and $30,000 (book and fair
value) of liabilities. The fair values of S Company's assets, when acquired, were Current
assets $ 120,000 Noncurrent assets 180,000 Total $300,000 How should the $45,000
difference between the fair value of the net assets acquired ($270,000) and the
consideration paid ($225,000) be accounted for by P Company?
a. The noncurrent assets should be recorded at $ 135,000.
b. The $45,000 difference should be credited to retained earnings.
c. The current assets should be recorded at $102,000, and the noncurrent assets should
be recorded at $153,000.
d. An ordinary gain of $45,000 should be recorded.
17. If the value implied by the purchase price of an acquired company exceeds the fair
values of identifiable net assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder as an
ordinary gain.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce long-lived assets.
d. accounted for as goodwill.
18. P Co. issued 5,000 shares of its common stock, valued at $200,000, to the former
shareholders of S Company two years after S Company was acquired in an all-stock
transaction. The additional shares were issued because P Company agreed to issue additional
shares of common stock if the average post combination earnings over the next two years
exceeded $500,000. P Company will treat the issuance of the additional shares as a
(decrease in)
a. consolidated retained earnings. b. consolidated goodwill.
c. consolidated paid-in capital. d. non-current liabilities of S Company by P Company.

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19. In a business combination in which the total fair value of the identifiable assets acquired
over liabilities assumed is greater than the consideration paid, the excess fair value is:
a. classified as an extraordinary gain.
b. allocated first to eliminate any previously recorded goodwill, and any remaining
excess over the consideration paid is classified as an ordinary gain.
c. allocated first to reduce proportionately non-current assets then to non-monetary
current assets, and any remaining excess over cost is classified as a deferred credit.
d. allocated first to reduce proportionately non-current, depreciable assets to zero, and
any remaining excess over cost is classified as a deferred credit.
20. The first step in determining goodwill impairment involves comparing the
a. implied value of a reporting unit to its carrying amount (goodwill excluded).
b. fair value of a reporting unit to its carrying amount (goodwill excluded).
c. implied value of a reporting unit to its carrying amount (goodwill included).
d. fair value of a reporting unit to its carrying amount (goodwill included).
21. If an impairment loss is recorded on previously recognized goodwill due to the transitional
goodwill impairment test, the loss should be treated as a(n):
a. loss from a change in accounting principles. b. extraordinary loss
c. loss from continuing operations. d. loss from discontinuing operations.
22. P Company acquires all of the voting stock of S Company for $930,000 cash. The book
values of S Company‘s assets are $800,000, but the fair values are $840,000 because land
has a fair value above its book value. Goodwill from the combination is computed as:
a. $130,000. b. $90,000. c. $40,000. d. $0.
23. Under SFAS 141R, what value of the assets and liabilities are reflected in the financial
statements on the acquisition date of a business combination?
a. Carrying value b. Fair value c. Book value d. Average value
Pratt Company issued 24,000 shares of its $20 par value common stock for the net assets of
Sele Company in business combination under which Sele Company will be merged into Pratt
Company. On the date of the combination, Pratt Company common stock had a fair value of $30
per share. Balance sheets for Pratt Company and Sele Company immediately prior to the
combination were as follows:

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24. If the business combination is treated as an acquisition and Sele Company‘s net assets
have a fair value of $686,400, Pratt Company‘s balance sheet immediately after the
combination will include goodwill of
a. $30,600. b. $38,400. c. $33,600. d. $56,400.
25. If the business combination is treated as an acquisition and the fair value of Sele
Company‘s current assets is $270,000, its plant and equipment is $726,000, and its liabilities
are $168,000, Pratt Company‘s financial statements immediately after the combination will
include
a. Negative goodwill of $108,000. b. Plant and equipment of $2,451,000.
c. Plant and equipment of $2,343,000. d. An ordinary gain of $108,000.
26. On May 1, 2011, the Phil Company paid $1,200,000 for 80% of the outstanding common
stock of Sage Corporation in a transaction properly accounted for as an acquisition. The
recorded assets and liabilities of Sage Corporation on May 1, 2011, follow: Cash $100,000
Inventory 200,000 Property & equipment (Net of accumulated depreciation) 800,000
Liabilities (160,000) On May 1, 2011, it was determined that the inventory of Sage had a
fair value of $220,000 and the property and equipment (net) has a fair value of $1,200,000.
What is the amount of goodwill resulting from the business combination?
a. $0. b. $112,000. c. $140,000. d. $28,000.
Posch Company issued 12,000 shares of its $20 par value common stock for the net assets of Sato
Company in a business combination under which Sato Company will be merged into Posch Company.
On the date of the combination, Posch Company common stock had a fair value of $30 per share.
Balance sheets for Posch Company and Sato Company immediately prior to the combination were as

27. If the business combination is treated as an acquisition and Sato Company‘s net assets
have a fair value of $343,200, Posch Company‘s balance sheet immediately after the
combination will include goodwill of
a. $15,300. b. $19,200. c. $16,800. d. $28,200.
28. If the business combination is treated as an acquisition and the fair value of Sato
Company‘s current assets is $135,000, its plant and equipment is $363,000, and its liabilities
are $84,000, Posch Company‘s financial statements immediately after the combination will
include

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 a. Negative goodwill of $54,000. b. Plant and equipment of $1,226,000.
c. Plant and equipment of $1,172,000. d. An ordinary gain of $54,000.
29. Following its acquisition of the net assets of Sandy Company, Potter Company assigned
goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill will be reported for this
division if its fair value is determined to be $200,000?
a. $0 b. $60,000 c. $30,000 d. $10,000
30. The fair value of net identifiable assets exclusive of goodwill of a reporting unit of X
Company is $300,000. On X Company's books, the carrying value of this reporting unit's net
assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit is
$335,000, what amount of goodwill impairment will be recognized for this unit?
a. $0 b. $10,000 c. $25,000 d. $35,000
31. The fair value of net identifiable assets of a reporting unit exclusive of goodwill of Y
Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's
books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the
unit is $10,000, what would be the fair value of the reporting unit?
a. $320,000 b. $310,000 c. $270,000 d. $290,000

Extra question
Price Company issued 8,000 shares of its $20 par value common stock for the net assets of Sims
Company in a business combination under which Sims Company will be merged into Price Company.
On the date of the combination, Price Company common stock had a fair value of $30 per share.
Balance sheets for Price Company and Sims Company immediately prior to the combination were:

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 1. If the business combination is treated as a purchase and Sims Company’s net assets
have a fair value of $228,800, Price Company’s balance sheet immediately after the
combina tion will include goodwill of
(a) $10,200. (b) $12,800. (c) $11,200. (d) $18,800.
2. If the business combination is treated as a purchase and the fair value of Sims
Company’s current assets is $90,000, its plant and equipment is $242,000, and its
liabilities are $56,000, Price Company’s balance sheet immediately after the combination
will include
(a) Negative goodwill of $36,000. (b) Plant and equipment of $817,000.
(c) Gain of $36,000. (d) Goodwill of $36,000.
2. The balance sheets of Petrello Company and Sanchez Company as of January 1, 2011, are
pre sented below. On that date, after an extended period of negotiation, the two companies
agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common
stock for all the outstanding shares of Sanchez Company in the ratio of share of Petrello for each
share of Sanchez. Market values of the shares were agreed on as Petrello, $48; Sanchez, $24.
The fair values of Sanchez Company’s assets and liabilities are equal to their book values with the
exception of plant and equipment, which has an estimated fair value of $720,000.

Based on the preceding information, what amount of goodwill will be reported:

a. 120000 b. 300000 c. 250000 d. 260000

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4 P Company acquired the assets and assumed the liabilities of S Company on January 1, 2010, for
$510,000 when S Company’s balance sheet was as follows:

Fair values of S Company’s assets and liabilities were equal to their book values except for the following:
1. Inventory has a fair value of $126,000.
2. Land has a fair value of $198,000.
3. The bonds pay interest semiannually on June 30 and December 31. The current yield rate on bonds of
similar risk is 8%. Principle factor 0.6246 and interest factor 9.38507
Based on the preceding information, what amount of goodwill will be reported:
a. 137000 b. 137,450 c. 154740 d. 147860

Pritano Company acquired all the net assets of Succo Company on December 31, 2010, for
$2,160,000 cash. The balance sheet of Succo Company immediately prior to the acquisition showed:

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 As part of the negotiations, Pritano agreed to pay the stockholders of Succo $144,000 cash if the
postcombination earnings of Pritano averaged $2,160,000 or more per year over the next two years.

Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on
January 1, 2011, paying $720,000 cash. Senn Company’s December 31, 2010, balance sheet,
reflecting both book values and fair values, showed:

As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company
$100,000 cash if the postcombination earnings of the combined company (Pham) reached certain levels
during 2011 and 2012.

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