Solutions and Test Bank Advanced Accounting 5th Edition

Chapter 2 Introduction to the Consolidation Process Learning Objectives – Coverage by question Multiple Choice Exercises LO1 – Explain the criteria and accounting for business combinations and (nonbusiness) asset acquisitions). 1 1 LO2 – Explain the guidelines for determining the existence of “control.” 2, 3, 13-16, LO3 – Explain the consolidation process on the date of acquisition when price equals book. 38, 39 LO4 – Explain the consolidation process on the date of acquisition when price exceeds book. 10, 17, 22-37, 40-41 2, 3, 5, 6 LO5 – Explain the measurement of identifiable assets acquired, liabilities assumed and goodwill in business combinations. 4, 5, 6, 7, 8, 9, 11, 12, 18-21, 35 4, 7 1 1 LO6 – Explain when deferred taxes are recorded in business combinations and the effect of deferred taxes on the recognition of business combinations. LO7 – Explain pushdown accounting. Problems 1 -4 Chapter 2: Introduction to the Consolidation Process Multiple Choice Multiple Choice – Theory 1. The main difference between a "basket purchase" of net assets and an acquisition of net assets that qualifies as a business is that: a. In an acquisition of net assets that qualifies as a business, all assets are valued at full fair value regardless of purchase price; while in a "basket purchase" of net assets the purchase price is allocated to the various assets. b. In a "basket purchase" of net assets, the assets are valued at fair value while in an acquisition of net assets that qualifies as a business, assets are recorded at book values. c. In an acquisition of net assets that qualifies as a business, the assets are not actually recorded on the investor's books. d. There is no difference in the accounting for the two types of transactions. Answer: a 2. All of the following are necessary to distinguish a business combination from a simple asset acquisition except: a. The entity has initiated planned activities. b. The entity has human and material resources, as well as intellectual property. c. The entity has begun to generate revenues. d. The entity will be able to obtain access to customers. Answer: c 3. When an investor is deemed to have "control" over an investee, GAAP requires presentation of consolidated financial statements. Which of the following would not be considered an indicator of control? a. The investor has majority interest in the investee. b. The investor owns 40% of the investee's stock and the rest is owned by the investee's founder. c. The investor owns 40% of the investee's stock and the rest is owned by a large number of small investors. d. Instead of owning stock, a company licenses technology to another company in an agreement allowing the licensor to appoint a majority of the licensee's board of directors. Answer: b 4. Acquisition-related costs incurred by the investor for services provided by outside accountants, as well as the investor's employees, are: a. Expensed immediately b. Expensed if indirect, but capitalized if direct c. Capitalized, subject to impairment testing, but not amortization d. Capitalized, subject to both amortization and impairment testing Answer: a 5. Stock issuance costs are: a. Treated the same as acquisition-related costs b. Debited to the Equity Investment account c. Credited to the Common Stock account d. Treated as a reduction in additional paid-in capital Answer: d 6. In-process research and development acquired in a business combination is: a. Expensed, consistent with the accounting treatment of a firm's own R & D expenditures b. Credited to The Equity Investment account c. Recorded as indefinite-lived intangible assets, subject to amortization d. Recorded as an indefinite-lived intangible asset, and annually tested for impairment Answer: d 7. Often, the investor or investee will adopt a restructuring plan to achieve certain synergies from the acquisition. Certain restructuring costs are required for implementation of such a plan. Which of the following statements correctly describes the GAAP treatment of such costs? a. A liability for restructuring costs expected to be incurred is included in the purchase price allocation at date of acquisition. b. If a restructuring plan is not already in place, the liability and related expense must be recognized subsequent to the acquisition. c. Costs that the investor is not legally obligated to incur may be accrued at the acquisition date or expensed as incurred. d. Recognizing a restructuring obligation at date of acquisition results in early recognition of expense. Answer: b 8. Accounting standards require that a portion of the cost of an acquired company be allocated to investee liabilities. However, often in the case of pre-existing contingent liabilities, the amounts may be unknown at the acquisition date. What are the general financial reporting requirements for the consolidated statements at date of acquisition? a. If the fair value of a pre-existing contingent liability is unknown, the liability should not be recognized. b. A contingent liability would not be recognized unless the loss was "probable." c. Contingencies meeting the "possible" threshold would be disclosed, not accrued. d. All of the above statements are true. Answer: d 9. Acquisition agreements sometimes include a provision requiring an increase in the cash price contingent upon investee's profits exceeding a specified level within a certain time period. Regarding the contingent consideration, acquisition accounting requires at acquisition date: a. b. c. d. Recognition of a liability in the amount expected to be ultimately paid Recognition of a liability at its fair value, resulting in an increase in goodwill No disclosure of the contingent consideration because of the high degree of uncertainty Recognition of a liability at its fair value, but with no effect on the purchase price Answer: b 10. Which of the following statements best describes how goodwill is measured? a. Acquisition price – Goodwill = Fair value of net tangible assets b. Acquisition price – Fair value of net tangible assets = Goodwill c. Acquisition price – Fair value of net tangible assets – Fair value of identifiable intangible assets = Goodwill. d. Acquisition price – Book value of net assets = Goodwill Answer: c 11. Which of the following statements is incorrect regarding the recognition of intangible assets in a business combination? a. Intangible assets arising from contractual or legal rights are recognized separately from goodwill. b. Intangibles that can be separated from the business and sold, rented or licensed are recognized separately from goodwill. c. Separately recognized intangibles are identified as either limited life or indefinite life intangibles. d. The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet. Answer: d 12. Current GAAP identifies three approaches to assigning values to assets acquired in a business combination. Which of the following is not a recognized valuation technique for allocating the acquisition price to specific assets? a. Market Approach b. Book Value Approach c. Cost Approach d. Income Approach Answer: b 13. Which of the following statements best describes the relationship between a parent and its consolidated subsidiary? a. In legal form they are separate, but in economic substance they are one. b. In legal form and economic substance they are one. c. In legal form they are one, but in economic substance they are separate. d. In legal form and economic substance they are separate. Answer: a 14. If Diane Company acquires all of the common stock of Balcony, Inc. Where will the entries necessary to arrive at consolidated balances appear? a. On Diane's books only b. On Balcony's books only c. On a worksheet only d. On the books of both the parent and the subsidiary Answer: c 15. Under what circumstances might consolidation of a majority owned investee not be appropriate? a. The investee is a U. K. company b. The investee is in bankruptcy c. The two companies are in different industries d. The two companies have different accounting periods Answer: b 16. Why is the consolidation process not just a matter of adding together the financial statements of the investor and the financial statements of the investee? a. Such a procedure would result in double counting of investee net assets. b. The subsidiary's stockholders' equity does not represent ownership by those outside the economic entity. c. The subsidiary’s net assets must be reported at fair value, regardless of the amounts recorded in the subsidiary’s accounting records. d. If the parent and subsidiary each has marketable securities accounted for as trading securities (i.e., fair value), the consolidated amount will be incorrect if simply added together without adjustment. Answer: d 17. Which of the following statements is true regarding the acquisition method of accounting for a business combination? a. Assets of the acquired company are recorded at book values. b. Assets of the acquired company are recorded at fair value, but only if the acquisition cost equals or exceeds fair value of the subsidiary's net assets. c. Assets of the acquired company are recorded at fair values regardless of the acquisition cost. d. Consulting costs related to the combination reduce additional paid-in capital. Answer: c