Student: ___________________________________________________________________________

c3 Key

1. Company A has made an offer to purchase all of the outstanding shares of Company B for
$10 per share (the current market value of the shares). In response to Company A's offer,
the shareholders of Company B were given rights to purchase additional shares at $8 per
share. Which of the following tactics was employed by Company B to prevent Company A
from acquiring control of Company B?

A. Pac-man defence.

B. Selling the crown jewels.

C. Poison Pill.

D. Reverse-takeover.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #1
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
2. IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. On the
date of acquisition, UNI's assets included $2,000,000 of Inventory, and Land with a book
value of $120,000.UNI also had $1,400,000 in liabilities on that date. UNI's book values
were equal to their fair market values, with the exception of the company's Land, which
was estimated to have a fair market value which was $50,000 higher than its book value.

How much goodwill would be created by IOU's acquisition of UNI?

A. $30,000

B. $50,000

C. $80,000

D. Nil

Calculation and allocation of acquisition differential:

Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #2
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-11 Recognition of Goodwill
Topic: 03-16 Control Through Purchase of Shares
3. IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. On the
date of acquisition, UNI's assets included $2,000,000 of Inventory and Land with a Book
value of $120,000.UNI also had $1,400,000 in Liabilities on that date. UNI's book values
were equal to their fair market values, with the exception of the company's Land, which
was estimated to have a fair market value which was $50,000 higher than its book value.

Which of the following is the correct journal entry to record IOU's acquisition of UNI?

A. Debit Credit

Investment in UNI $800,000

Cash $800,000

B. Debit Credit

Inventory $2,000,000

Land $170,000

Goodwill $30,000

Liabilities $1,400,000

Cash $800,000

C. Debit Credit

Net Assets $800,000

Cash $800,000

D. No entry.

Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #3
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
4. IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. On the
date of acquisition, UNI's assets included $2,000,000 of Inventory, and Land with a Book
value of $120,000. UNI also had $1,400,000 in Liabilities on that date. UNI's book values
were equal to their fair market values, with the exception of the company's Land, which
was estimated to have a fair market value which was $50,000 higher than its book value.

Assuming that the acquisition was properly recorded at cost, which of the following journal
entries is required to prepare Consolidated Financial Statements the day following the
acquisition?

A. Debit Credit

Investment in UNI $800,000

Cash $800,000

B. Debit Credit

Inventory $2,000,000

Land $170,000

Goodwill $30,000

Liabilities $1,400,000

Investments in UNI $800,000

C. Debit Credit

Net Assets $800,000

Cash $800,000

D. No entry.

Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #4
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
5. IOU Inc. purchased all of the outstanding common shares of UNI Inc. for $800,000. On the
date of acquisition, UNI's assets included $2,000,000 of Inventory and Land with a Book
value of $120,000.UNI also had $1,400,000 in Liabilities on that date. UNI's book values
were equal to their fair market values, with the exception of the company's Land, which
was estimated to have a fair market value which was $50,000 higher than its book value.

Parent Company acquires Subsidiary Company's common shares for cash. On the date of
acquisition, Subsidiary had Goodwill of $100,000 on its books. Which of the following
statements regarding Subsidiary's Goodwill on the date of acquisition is correct?

A. Subsidiary's goodwill is considered as an identifiable asset and should therefore be

included in Parent Company's Acquisition Differential calculation.

B. Subsidiary's goodwill is considered as an identifiable asset and should therefore be

excluded from Parent Company's Acquisition Differential calculation.

C. Subsidiary's goodwill is not considered as an identifiable asset and should therefore be

excluded from Parent Company's Acquisition Differential calculation.

D. Subsidiary's goodwill is not considered as an identifiable asset and should therefore be

included in Parent Company's Acquisition Differential calculation.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #5
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
6. Which of the following would NOT be included in the acquisition cost?

A. Share issue costs.

B. Fair value of any shares issued.

C. Fair value of contingent consideration.

D. Fair value of assets transferred.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #6
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-09 Acquisition Cost

7. How should the acquisition cost of a Business Combination be allocated prior to preparing
Consolidated Financial Statements?

A. The acquisition cost should be allocated to the acquiree's book value.

B. The acquisition cost should be allocated to the acquired company's identifiable assets
and liabilities to bring them to their fair value.

C. The acquisition cost should be reflected as an increase in the acquirer's Investment (in
the subsidiary) account.

D. The treatment of the acquisition cost depends largely on the type of consideration given
by the acquirer.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #7
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-16 Control Through Purchase of Shares
8. During an acquisition, when should intangible assets NOT be recognized apart from
Goodwill?

A. The assets have been identified but not accounted for by the subsidiary.

B. The assets have been identified and accounted for by the subsidiary.

C. The assets can be sold, licensed or exchanged.

D. The assets have been accounted for by the subsidiary but have no Fair Value on the
date of acquisition.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #8
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares

9. Which of the following pertaining to Consolidated Financial Statements is correct?

A. The preparation of Consolidated Financial Statements means that the companies

involved cease to operate as separate legal entities.

B. The preparation of Consolidated Financial Statements is at the Parent Company's

discretion.

C. When one company has control over another, Consolidated Financial Statements must
be prepared for the combined entity.

D. Before preparing Consolidated Financial Statements, a subsidiary's Financial

Statements prior to the date of acquisition must be restated.

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Hilton - Chapter 03 #9
 Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares

10. Company Y purchases a controlling interest in Company Z on January 1, 2018. Which of

the following would appear as the Shareholders' Equity amount on Company Y's
Consolidated Balance Sheet on the date of acquisition?

A. Company Y's Shareholders' Equity.

B. The sum of the Shareholders' Equity of both companies.

C. Company Y's Shareholders' Equity as well as Company Y's proportional share of

Company Z's net assets at book value.

D. Company Y's Shareholders' Equity as well as Company Y's proportional share of

Company Z's net assets at fair market value.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #10
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
11. The process of preparing Consolidated Financial Statements involves the elimination of
inter-company transactions between a Parent Company and its subsidiary. Where would
these entries be recorded?

A. On the Parent's books only.

B. On the Subsidiary's books.

C. The entries are not recorded in the books of either company. The entries are only made
on the working papers.

D. The effect of any inter-company transaction must be reflected on the books of both
companies.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #11
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
12. Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Parent Sub

Current Assets $ 60,000 $10,000

Fixed Assets (net) $100,000 $60,000

Total Assets $160,000 $70,000

Current Liabilities $ 42,000 $35,000

Bonds Payable $ 20,000 $12,000

Common Shares $ 90,000 $12,000

Retained Earnings $ 8,000 $11,000

Total Liabilities and Equity $160,000 $70,000

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash.
On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,
respectively. Assuming that Consolidated Financial Statements were prepared on that
date, answer the following:

The Current Assets of the combined entity should be valued at:

A. $70,000

B. $46,000

C. $114,000

D. $170,000

Consolidated current assets = $46,000 = Parent CV $60,000 - $40,000 (Cash paid by

Parent to Sub) + Sub CV $10,000 + acquisition differential $16,000 (FV $26,000 - CV
$10,000).OR Consolidated current assets = $46,000 = Parent CV $60,000 - $40,000 (Cash
paid by Parent to Sub) + Sub FV $26,000.

Blooms: Application
 Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #12
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
13. Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Parent Sub

Current Assets $ 60,000 $10,000

Fixed Assets (net) $100,000 $60,000

Total Assets $160,000 $70,000

Current Liabilities $ 42,000 $35,000

Bonds Payable $ 20,000 $12,000

Common Shares $ 90,000 $12,000

Retained Earnings $ 8,000 $11,000

Total Liabilities and Equity $160,000 $70,000

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash.
On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,
respectively. Assuming that Consolidated Financial Statements were prepared on that
date, answer the following:

The Fixed Assets of the combined entity should be valued at:

A. $70,000

B. $120,000

C. $154,000

D. $160,000

Consolidated fixed assets = $154,000 = Parent CV $100,000 + Sub CV $60,000 -

acquisition differential $6,000 (FV $54,000 - CV $60,000).OR Consolidated fixed assets =
$154,000 = Parent CV $100,000 + Sub FV $54,000.

Blooms: Application
Difficulty: Easy
 Gradable: automatic
Hilton - Chapter 03 #13
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
14. Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Parent Sub

Current Assets $ 60,000 $10,000

Fixed Assets (net) $100,000 $60,000

Total Assets $160,000 $70,000

Current Liabilities $ 42,000 $35,000

Bonds Payable $ 20,000 $12,000

Common Shares $ 90,000 $12,000

Retained Earnings $ 8,000 $11,000

Total Liabilities and Equity $160,000 $70,000

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash.
On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,
respectively. Assuming that Consolidated Financial Statements were prepared on that
date, answer the following:

The Goodwill arising from this Business Combination would be:

A. ($17,000)

B. $7,000

C. $17,000

D. $120,000

Calculation and allocation of acquisition differential:

Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #14
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
 Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
15. Parent and Sub Inc. had the following balance sheets on December 31, 2018:

Parent Sub

Current Assets $ 60,000 $10,000

Fixed Assets (net) $100,000 $60,000

Total Assets $160,000 $70,000

Current Liabilities $ 42,000 $35,000

Bonds Payable $ 20,000 $12,000

Common Shares $ 90,000 $12,000

Retained Earnings $ 8,000 $11,000

Total Liabilities and Equity $160,000 $70,000

On January 1, 2019 Parent purchased all of Sub Inc.'s Common Shares for $40,000 in cash.
On that date, Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,
respectively. Assuming that Consolidated Financial Statements were prepared on that
date, answer the following:

The Shareholders' Equity section of the Consolidated Balance Sheet would show what
amount?

A. $19,000

B. $90,000

C. $98,000

D. $121,000

On the date of consolidation, the shareholders equity on the consolidated financial

statements is equal to the shareholders equity of the parent. In this case, it is $98,000
($90,000 common shares + $8,000 retained earnings).

Blooms: Application
 Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #15
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares

16. IFRS 10 Consolidated Financial Statements outlines the requirements for identifying the
company that is the acquirer in a business combination when it's not clear who that is.
Which is NOT a consideration in determining which company is the acquirer?

A. If the means of payment is cash, which party is paying the cash.

B. Relative holdings of voting shares in the combined entity.

C. Voting rights of the respective parties after the combination of their businesses.

D. Any by-laws or provisions of the incorporation acts of each company that details the
manner in which a business combination will occur at law.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #16
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
17. The IASB standard (IFRS 3 Business Combinations) issued with respect to the treatment
of negative goodwill requires that:

A. it must be recognized in income immediately as an extraordinary item.

B. it must be recognized in income immediately.

C. it can be deferred and amortized over a maximum of 40 years.

D. it must be reflected as an increase in Liabilities and a Reduction in Capital for the

Parent Company.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #17
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-11 Recognition of Goodwill

18. How should intangible assets which are readily identifiable but not accurately measured
be accounted for?

A. They should be ignored since they can't be accurately measured.

B. They should be independently appraised and accounted for at their appraised value.

C. They should be included in Goodwill.

D. They should be accounted for at an amount deemed reasonable by management.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #18
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-09 Acquisition Cost
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-11 Recognition of Goodwill
19. Which of the following regarding the preparation of Consolidated Financial Statement is
correct?

A. Once the parent company prepares Consolidated Financial Statements, it no longer

needs to prepare financial statements for its own activities.

B. Only the subsidiaries are required to prepare Financial Statements.

C. Consolidated Financial Statements are required by the Parent Company for reporting
purposes only; each company must continue to prepare its own Financial Statements.

D. Consolidated Financial Statements are required only when both companies are publicly
traded.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #19
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
20. Assume that two companies wish to engage in a Business Combination involving a share
exchange. Once the share exchange is consummated, each shareholder group will have an
equal number of voting shares. Which of the following statements best describes the
course of action that must be taken under these circumstances?

A. No acquirer can be identified since no shareholder group has majority voting control, so
the share exchange must be annulled.

B. The company with the largest net assets (at fair market value) is deemed to be the
acquirer.

C. Other factors must be examined to determine which shareholder group is more

dominant.

D. The Boards of Directors of both companies must enter into discussions to agree on
which party will be the acquirer.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #20
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations

21. Company A makes a hostile take-over bid for control of Company B. In response, Company
B makes a counter-offer to purchase shares from Company A's shareholders. Which of the
following best describes Company B's response?

A. Pac-man defence.

B. Selling the crown jewels.

C. Poison pill.

D. Hostile defence.

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 Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #21
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations

22. One company is considering entering into a business combination with another. The
potential acquirer wishes to acquire the subsidiary's assets and liabilities but wishes to
prepare Consolidated Financial Statements using the fair market values of its own assets
and liabilities as well of those of its potential subsidiary. Can this be accomplished?
(Assume that each of the methods is allowable)

A. Yes, this is permissible under the Acquisition Method.

B. Yes, this is permissible under the Purchase Method under certain circumstances.

C. Yes, this is permissible under the New Entity Method is used.

D. No, this would not be possible under any circumstances.

The net assets of both the acquiring company and acquired company are reported at their
fair value under the new-entity method.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #22
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-25 New-Entity Method
23. 1234567 Inc. is contemplating a Business Combination with 7654321 Inc. One company is
incorporated under Federal law, the other under provincial law. Is a statutory
amalgamation permissible under these circumstances?

A. Yes, provided the combination is accounted for using the Acquisition Method.

B. Yes, provided the surviving corporation would have had control of the purchased
company.

C. No, a statutory amalgamation would not be possible, since one company is incorporated
under federal law and the other under provincial law.

D. Cannot be determined from the information given.

A variation of a business combination that can occur is a statutory amalgamation,

whereby, under the provisions of federal or provincial law, two or more companies
incorporated under the same Companies Act can combine and continue as a single entity.
The shareholders of the combining companies become shareholders of the surviving
company, and the non-surviving companies are wound up.

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Blooms: Knowledge
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 03 #23
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-02 Forms of Business Combinations
Topic: 03-06 Variations
24. Company A wishes to acquire control of Company B as cheaply as possible. For economic
reasons, a consultant recommended that Company A can do this through purchase of
assets, rather than purchase of shares. Which of the following statements regarding the
above scenario is correct?

A. Company A must purchase all of Company B's assets and liabilities.

B. Company A only needs to acquire control of Company B's net assets.

C. Company A only needs to acquire control of Company B's fixed assets.

D. The consideration given by Company A must exceed 50% of the fair market value of
Company B's net assets.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #24
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-02 Forms of Business Combinations
Topic: 03-03 Purchase of Assets or Net Assets
Topic: 03-04 Purchase of Shares
25. AInc. purchased 100% of B Inc.'s voting shares for cash. The Assets and Liabilities
reported in the Consolidated Balance Sheet of A Inc. prepared on the date of acquisition
will include:

A. the book value of A's assets and liabilities plus the book value of B's assets and
liabilities.

B. the fair market value of A's assets and liabilities plus the book value of B's assets and
liabilities.

C. the book value of A's assets and liabilities plus the fair market value of B's assets and
liabilities.

D. the fair market value of A's assets and liabilities plus the fair market value of B's assets
and liabilities.

The acquisition method is required for all business combinations. The consolidated
balance sheet reflects the acquiring company's net assets at carrying amount and the
acquired company's net assets at fair value.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #25
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-16 Control Through Purchase of Shares
26. Which of the following must be possible in order for a Business Combination to exist?

A. Control of a subsidiary's net assets.

B. Ownership of 100 % of a subsidiary's voting shares.

C. Ownership of all of a subsidiary's assets.

D. Ownership of all of a subsidiary's operating assets.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #26
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations

27. Company A has decided to purchase 100% of the voting shares of Company B for $100,000
cash on January 1, 2018. Immediately before the acquisition, A and B reported cash
balances of $300,000 and $150,000 respectively. If Consolidated Financial Statements
were prepared immediately following the acquisition, how much Cash would be reported
on A's consolidated balance sheet?

A. $250,000

B. $350,000

C. $450,000

D. $550,000

Consolidated cash = $350,000 = Parent CV $300,000 - cash paid for acquisition of B's
common shares $100,000 + Sub CV $150,000.

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Blooms: Application
Difficulty: Easy
 Gradable: automatic
Hilton - Chapter 03 #27
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
Topic: 03-19 The Direct Approach

28. AInc. is contemplating a Business combination with B Inc. However, A Inc.'s management
is uncertain as to whether it should purchase B's assets or a majority of B's voting shares.
The fair market values of B's assets far exceed their book values. A's management should
be advised that IN MOST CASES:

A. the purchase of B's shares would likely be the cheaper method of acquiring control.
However, it would be less advantageous to the consolidated entity from a Tax
standpoint.

B. the purchase of B's shares would likely be the cheaper method of acquiring control. It
would also be more advantageous to the consolidated entity from a Tax standpoint.

C. the purchase of B's shares would likely be the costlier method of acquiring control.
However, it would be more advantageous to the consolidated entity from a Tax
standpoint.

D. the purchase of B's shares would likely be the costlier method of acquiring control. It
would also be less advantageous to the consolidated entity from a Tax standpoint.

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Blooms: Comprehension
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 03 #28
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-02 Forms of Business Combinations
Topic: 03-03 Purchase of Assets or Net Assets
Topic: 03-04 Purchase of Shares
29. Which of the following statements is correct?

A. Companies may choose between the New Entity Method and the Acquisition Method
when accounting for business combinations.

B. The only acceptable method of accounting for business combinations is the New Entity
Method.

C. The only acceptable method of accounting for business combinations is the Acquisition
Method.

D. The New Entity Method can only be used when Cash is the sole consideration offered
by the acquirer in a business combination.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #29
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method

30. Which of the following is closest to IFRS 3 Business Combinations definition of control?

A. A company is deemed to have control over another only when it owns a majority of the
voting shares of another company.

B. A company is deemed to have control when it can elect a majority of the Board
members of another company.

C. Control is the power of one company to govern the financial and operating policies of an
entity so as to obtain the benefits of its activities.

D. Control exists only when a company has the continuing power to determine the
operating and financing policies of another company and attempts to exercise such
powers.

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Blooms: Knowledge
 Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #30
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations

31. XYZ Inc. owns 55% of DEF Inc.'s 100,000 outstanding voting shares. Another company,
GHI Inc., owns 40%, with the remaining shares being held by many individual investors.
GHI Inc. also owns $25,000,000 worth of DEF Inc.'s $1,000 par value bonds, each of which
is convertible to one voting share of DEF Inc. Which of the following statements regarding
the control of DEF Inc. is correct?

A. XYZ Inc. has control over DEF Inc. as it owns a majority of the latter's currently
outstanding voting shares.

B. XYZ Inc. does not have control over DEF Inc., as it cannot exercise control over DEF's
strategic operating, investing and Financing activities without the cooperation of GHI
Inc.

C. XYZ Inc. has de facto control over DEF Inc.

D. As long as GHI Inc. does not exercise its option to convert its bonds to voting shares,
XYZ Inc. has control over DEF Inc.

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Gradable: automatic
Hilton - Chapter 03 #31
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
32. AInc. purchases 100% of the voting shares of B Inc. on July 1, 2018. On that date, A Inc.
would be required to prepare which of the following statements?

A. No statement preparation is required.

B. A Consolidated Income Statement.

C. A Consolidated Balance Sheet.

D. A Consolidated Income Statement and a Consolidated Balance Sheet.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #32
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements

33. Company A owns 80% of the voting shares of Company B, which in turn owns 70% of the
shares of Company C. There are no outstanding conversion rights, warrants or options
which would enable holders of other instruments to acquire additional voting shares of any
of these companies. In this scenario, which of the following statements is TRUE?

A. Company A has no control over Company C because it does not own any shares of
Company C.

B. Company A has direct control over Company C.

C. Company A has indirect control over Company C.

D. Control cannot be determined from the information given.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #33
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
34. Zen Inc. owns 35% of Sun Inc.'s voting shares. Zen is by far the largest single shareholder
of Sun Inc.'s shares, with the rest of Sun's shares being very widely held by individual
investors. There was a very poor turnout at Sun Inc.'s recent annual meeting, enabling Zen
Inc. to elect the majority of Sun's Board of Directors. Does Zen control Sun under IFRS?

A. No, Zen does not control Sun because it cannot exercise control over Sun without the
cooperation of Sun's other shareholders.

B. Yes, Zen controls Sun because it is Sun's single largest shareholder group.

C. Yes, Zen is deemed to control Sun because it has elected a majority of Sun's Board
members and the other shareholders are not organized in such a way to actively
cooperate when they vote.

D. Zen could only control Sun if it owned 50% of Sun's voting shares.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #34
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
35. Which of the following statements is correct?

A. Under the New Entity Method, both of the company's net assets are recorded at their
fair market values for these assets on the date of acquisition.

B. Under the Acquisition Method, the acquirer company's net assets are recorded at the
price paid for the assets on the date of acquisition.

C. As of January 1st, 2011, the New Entity Method must be used to account for business
combinations where an acquirer can be identified.

D. The Acquisition Method is consistent with the historical cost principle while the New
Entity Method is not.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #35
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-25 New-Entity Method

36. How is negative goodwill treated under the acquisition method?

A. The acquiring company will report a gain on acquisition.

B. The acquiring company will report a loss on acquisition.

C. The negative goodwill will be included in other comprehensive income, as it is

essentially an unrealized gain.

D. The negative goodwill is prorated using the fair values of the acquired company's net
assets.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #36
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
 Topic: 03-11 Recognition of Goodwill

37. Under the new-entity method, which of the following statements is TRUE?

A. The net assets of the acquiring company remain at book value while those of the
acquired company are recorded at fair value.

B. The net assets of the acquiring company are recorded at fair value while those of the
acquired company are recorded at book value.

C. The net assets of both companies are recorded at fair market value.

D. The net assets of both companies are recorded at book value.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #37
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-25 New-Entity Method

38. Appendix A of IFRS 3provides an extensive list of what must be disclosed for each
Business Combination. Which of the following items is NOT included in that list?

A. The acquisition-date fair value of the total consideration given.

B. The amounts recognized as of the acquisition date for each major class of assets and
liabilities assumed.

C. Legal, contractual and regulatory restrictions and the carrying amount of the assets and
liabilities to which those restrictions apply.

D. The net assets of both companies at book value as disclosed in the financial
statements of each company prior to the business combination.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
 Hilton - Chapter 03 #38
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-01 Business Combinations
Topic: 03-15 Consolidated Financial Statements

39. A Corporation had net income of $50,000 in 2018 and $60,000 in 2019, excluding any
income from its investment in B Company. B Company had net income of $30,000 in 2018
and $40,000 in 2019. On January 1, 2019, A Corporation acquired all of the outstanding
common shares of B Company for a cash payment of $300,000. Assume that there was no
acquisition differential on this business combination. What net income would A
Corporation report for 2018 in its comparative consolidated financial statements at the
end of 2019?

A. $30,000

B. $50,000

C. $80,000

D. $100,000

Consolidated net income in 2018 = $50,000.

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Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #39
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-21 Other Consolidated Financial Statements in Year of Acquisition
40. A Corporation had net income of $50,000 in 2018 and $60,000 in 2019, excluding any
income from its investment in B Company. B Company had net income of $30,000 in 2018
and $40,000 in 2019. On January 1, 2019, A Corporation acquired all of the outstanding
common shares of B Company for a cash payment of $300,000. Assume that there was no
acquisition differential on this business combination. What net income would A
Corporation report for 2019 in its comparative consolidated financial statements at the
end of 2019?

A. $40,000

B. $60,000

C. $80,000

D. $100,000

Consolidated net income in 2019 = $100,000 = A Corporation's net income $60,000 + B

Company's net income $40,000.

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Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #40
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-21 Other Consolidated Financial Statements in Year of Acquisition
41. When are parent companies allowed to comprehensively revalue the assets and liabilities
of a subsidiary to their fair values at the acquisition date, following a business
combination?

A. When reporting under ASPE and there is a significant non-controlling interest.

B. When reporting under ASPE and there is an insignificant (or no) non-controlling
interest.

C. When reporting under IFRS and there is a significant non-controlling interest.

D. When reporting under IFRS and there is an insignificant (or no) non-controlling interest.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #41
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-23 Push-Down Accounting

42. Which of the following is required when preparing a consolidated balance sheet on the
date of the formation of a subsidiary by its parent company?

A. The assets and liabilities of the subsidiary must be revalued to fair value.

B. The goodwill from the business combination must be calculated.

C. The parent's investment account must be eliminated against the subsidiary's share
capital.

D. The parent's investment account must be eliminated against the subsidiary's retained
earnings.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #42
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
 Topic: 03-24 Subsidiary Formed by Parent

43. Company A makes an offer to purchase all of the shares of Company B from Company B's
shareholders. The board of directors of Company B does not feel that the offer is adequate
and seeks out another purchaser who might offer more for the shares. This defence to the
takeover is referred as:

A. Poison pill.

B. Pac-man defence.

C. White knight.

D. Selling the crown jewels.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #43
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations

44. Which of the following is NOT required for an investor to have control over an investee?

A. The investor must have power over the investee.

B. The investor must have exposure to variable returns from the investment.

C. The investor must be able to use its power to affect the amount of its returns.

D. The investor must currently own a majority of the voting shares of the investee.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #44
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
45. In general, which of the following statements about the income tax implications of the
form of a business combination is true?

A. An acquisition of shares is generally better for the acquirer but worse for the seller.

B. An acquisition of net assets is generally better for the acquirer but worse for the seller.

C. An acquisition of shares is generally better for both the acquirer and the seller.

D. An acquisition of net assets is generally better for both the acquirer and the seller.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #45
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-02 Forms of Business Combinations
Topic: 03-03 Purchase of Assets or Net Assets
Topic: 03-04 Purchase of Shares

46. Which of the following is NOT considered to be part of the acquisition cost of a
subsidiary?

A. Any cash paid to the seller.

B. The fair value of any contingent consideration.

C. The present value of any debt issued by the acquirer to the seller.

D. The cost of issuing shares as part of the consideration.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #46
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-09 Acquisition Cost
47. Which of the following is NOT considered to be part of the acquisition cost of a
subsidiary?

A. The fair value of any assets transferred to the seller.

B. The fair value of any shares issued.

C. Due diligence fees paid to accountants, consultants and/or lawyers.

D. The fair value of any contingent considerations.

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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #47
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Topic: 03-09 Acquisition Cost

48. Which of the following conditions need NOT be met before a parent company is not
required to present consolidated financial statements for external reporting purposes?

A. Its ultimate or any intermediate parent company produces financial statements

available for public use and comply with IFRS.

B. It does not have any debt or equity instruments traded in a public market.

C. It has not filed, nor is in the process of filing, financial statements with a regulatory
organization for the purposes of a public offering.

D. It is a wholly-owned subsidiary of another entity and its other owner have not been
informed about the parent not presenting consolidated financial statement.

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Difficulty: Easy
Gradable: automatic
Hilton - Chapter 03 #48
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-15 Consolidated Financial Statements
49. On December 31, 2018, A Company has capital assets with a cost of $250,000 and
accumulated depreciation of $150,000 and B Company has capital assets with a cost of
$180,000 and accumulated depreciation of $80,000. B Company's capital assets have a fair
value of $200,000 on that date. If Company A acquires Company B on January 1, 2019, and
prepares a consolidated balance sheet on that date, at what values should the capital
assets appear on that balance sheet (using the net method)?

A. Cost of $430,000 and accumulated depreciation of $230,000.

B. Cost of $450,000 and accumulated depreciation of $150,000.

C. Cost of $610,000 and accumulated depreciation of $310,000.

D. Cost of $630,000 and accumulated depreciation of $230,000.

Consolidated capital assets (cost) = $450,000 = Parent CV $250,000 + Sub FV

$200,000.ANDConsolidated capital assets (accumulated depreciation) = $150,000 =
Parent CV $150,000 + Sub FV $0.

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Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 03 #49
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-20 Reporting Depreciable Assets
50. On April 1, 2018, the balance sheets of Optimum Inc. and Electra Inc. were as follows:

Optimum Inc Electra Inc

Cash and Short-Term Securities $380,000 $ 20,000

Inventory $ 50,000 $ 10,000

Plant and Equipment (net) $320,000 $120,000

Total Assets $750,000 $150,000

Current Liabilities $ 75,000 $ 15,000

Bonds Payable $100,000 $ 30,000

Common Shares $150,000 $ 55,000

Retained Earnings $425,000 $ 50,000

Total Liabilities and Equity $750,000 $150,000

On that date, the fair values of Electra's Assets and Liabilities were as follows:

Short-Term Securities $ 32,000

Inventory $ 5,000

Plant and Equipment (net) $150,000

Current Liabilities $ 15,000

Bonds Payable $ 28,000

On April 1, 2018, Optimum issued 5,000 new common shares with a market value of $50.00
per share as consideration for Electra's net assets. Prior to the issue, Optimum had 10,000
outstanding common shares.

Required:
a) Calculate the amount of Goodwill arising from this combination.
b) Prepare the journal entry to record Optimum's acquisition of Electra's assets.
c) Prepare Optimum's Consolidated Balance Sheet immediately following its acquisition of
Electra's assets.
d) Prepare Electra's Balance Sheet following the acquisition.

a)

Purchase Price: $250,000

Less: Fair value of Net Assets Acquired: $144,000

Goodwill: $106,000

b)

Cash & Short-Term Securities $32,000

Inventory $5,000

Plant & Equipment (net) $150,000

Current Liabilities $15,000

Bonds Payable $28,000

Goodwill $106,000

Common Shares $250,000

c)
OPTIMUM INC.
Consolidated Balance Sheet
as at April 1, 2018

ASSETS:
Cash & Short-Term Securities $ 412,000

Inventory $ 55,000

Plant & Equipment (net) $ 470,000

Goodwill $ 106,000

Total Assets $1,043,000

LIABILITIES:

Current Liabilities $ 90,000

Bonds Payable $ 128,000

Total Liabilities $ 218,000

Shareholders' Equity

Common Shares $ 400,000

Retained Earnings $ 425,000

Total Shareholders' Equity $ 825,000

Total Liabilities and Shareholders' Equity $1,043,000

d)
ELECTRA INC.
Balance Sheet
as at April 1, 2018

ASSETS:

Investment in Optimum Inc. $250,000

TOTAL ASSETS $250,000

Shareholders' Equity:
Common Shares $ 55,000

Retained Earnings $195,000

Total Shareholders' Equity $250,000

Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #50
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-12 Control Through Purchase of Net Assets
51. Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc.
for $300,000 in Cash on May 1, 2018. On the date, the balance sheets of each of these
companies were as follows:

Sonic Inc Jackson Inc

Cash and Short-Term Securities $750,000 $30,000

Inventory $60,000 $20,000

Plant and Equipment (net) $280,000 $140,000

Total Assets $1,090,000 $190,000

Current Liabilities $150,000 $25,000

Bonds Payable $120,000 $30,000

Common Shares $120,000 $70,000

Retained Earnings $700,000 $65,000

Total Liabilities and Equity $1,090,000 $190,000

On that date, the fair values of Jackson's assets and liabilities were as follows:

Cash and Short-Term Securities $40,000

Inventory $15,000

Plant and Equipment (net) $250,000

Current Liabilities $25,000

Bonds Payable $25,000

Sonic's Book Values approximated their Fair Values on that date.

Required:
a) Calculate the amount of Goodwill arising from this combination.
b) Prepare the journal entry to record Sonic's acquisition of Jackson's Shares.
c) Prepare Sonic's Consolidated Balance Sheet immediately following its acquisition of
Jackson's assets.
a)

Purchase Price: $300,000

Less: Fair value of Net Assets Acquired: $255,000

Goodwill: $ 45,000

b)

Investment in Jackson Inc. $300,000

Cash $300,000

c)
SONIC INC.
Consolidated Balance Sheet
as at May 1, 2018

ASSETS
Cash & Short-Term Securities $ 490,000

Inventory $ 75,000

Plant & Equipment (net) $ 530,000

Goodwill $ 45,000

Total Assets $1,140,000

LIABILITIES

Current Liabilities $ 175,000

Bonds Payable $ 145,000

Total Liabilities $ 320,000

Shareholders' Equity

Common Shares $ 120,000

Retained Earnings $ 700,000

Total Shareholders' Equity $ 820,000

Total Liabilities and Shareholders' Equity $1,140,000

Note that Sonic's Fair Values are not relevant to the Answer.

Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #51
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
52. ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in
Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as
follows:

ABC123 Inc DEF456 Inc

Cash and Short-Term Securities $900,000 $200,000

Inventory $ 50,000 $120,000

Plant and Equipment (net) $350,000 $150,000

Goodwill $- $ 80,000

Total Assets $1,300,000 $550,000

Current Liabilities $ 180,000 $160,000

Bonds Payable $ 400,000 $100,000

Common Shares $ 500,000 $200,000

Retained Earnings $ 220,000 $ 90,000

Total Liabilities and Equity $1,300,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows:

Cash and Short-Term Securities $200,000

Inventory $ 90,000

Plant and Equipment (net) $250,000

Current Liabilities $160,000

Bonds Payable $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had
trademarks with a fair market value of $100,000 which had not been accounted for. In
turn, ABC123's fair market values were equal to their book values with the exception of
the Company's Inventory and Plant and Equipment, which were said to have Fair Market
Values of $30,000 and $480,000, respectively.
Based on the information provided:

a) Calculate the amount of Goodwill arising from this combination.

b) Prepare the journal entry to record ABC123's acquisition of DEF456's shares.
c) Prepare ABC123's Consolidated Balance Sheet immediately following its acquisition of
DEF123's voting shares.

a)

Purchase Price: $400,000

Less: Fair value of Net Assets Acquired: $392,000

Goodwill: $ 8,000

(DEF456'S identifiable assets exclude its own Goodwill but include the trademark
valued at $100,000)

b)

Investment in DEF456 Inc. $400,000

Cash $400,000

c)
ABC123 INC. Consolidated Balance Sheet,
as at July 1, 2018

ASSETS
Cash & Short-Term Securities $ 700,000

Inventory $ 140,000

Plant & Equipment (net) $ 600,000

Trademark $ 100,000

Goodwill $ 8,000

Total Assets $1,548,000

LIABILITIES

Current Liabilities $ 340,000

Bonds Payable $ 488,000

Total Liabilities $ 828,000

Shareholders' Equity
Common Shares $ 500,000

Retained Earnings $ 220,000

Total Shareholders' Equity $ 720,000

Total Liabilities and Shareholders' Equity $1,548,000

Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #52
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-11 Recognition of Goodwill
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
53. ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in
Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as
follows:

ABC123 Inc DEF456 Inc

Cash and Short-Term Securities $900,000 $200,000

Inventory $ 50,000 $120,000

Plant and Equipment (net) $350,000 $150,000

Goodwill $- $ 80,000

Total Assets $1,300,000 $550,000

Current Liabilities $ 180,000 $160,000

Bonds Payable $ 400,000 $100,000

Common Shares $ 500,000 $200,000

Retained Earnings $ 220,000 $ 90,000

Total Liabilities and Equity $1,300,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows:

Cash and Short-Term Securities $200,000

Inventory $ 90,000

Plant and Equipment (net) $250,000

Current Liabilities $160,000

Bonds Payable $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had
trademarks with a fair market value of $100,000 which had not been accounted for. In
turn, ABC123's fair market values were equal to their book values with the exception of
the Company's Inventory and Plant and Equipment, which were said to have Fair Market
Values of $30,000 and $480,000, respectively.
Assume that both companies would be wound up and a new company called ABCDEF Inc.
was created in its place. Prepare the Balance Sheet to reflect this occurrence as at July 1,
2018. The new entity would have10,000 voting shares issued to the current shareholders
for a total market value of $1,222,000.

ABCDEF INC Balance Sheet,

as at July 1, 2018

ASSETS
Cash & Short-Term Securities $1,100,000

Inventory $ 120,000

Plant & Equipment (net) $ 730,000

Trademark $ 100,000

Total Assets $2,050,000

LIABILITIES

Current Liabilities $ 340,000

Bonds Payable $ 488,000

Total Liabilities $ 828,000

Shareholders' Equity
Common Shares $1,222,000

Retained Earnings -

Total Shareholders' Equity $1,222,000

Total Liabilities and Shareholders' Equity $2,050,000

Blooms: Application
Difficulty: Difficult
Gradable: manual
Hilton - Chapter 03 #53
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-15 Consolidated Financial Statements
54. ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in
Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as
follows:

ABC123 Inc DEF456 Inc

Cash and Short-Term Securities $900,000 $200,000

Inventory $ 50,000 $120,000

Plant and Equipment (net) $350,000 $150,000

Goodwill $- $ 80,000

Total Assets $1,300,000 $550,000

Current Liabilities $ 180,000 $160,000

Bonds Payable $ 400,000 $100,000

Common Shares $ 500,000 $200,000

Retained Earnings $ 220,000 $ 90,000

Total Liabilities and Equity $1,300,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows:

Cash and Short-Term Securities $200,000

Inventory $ 90,000

Plant and Equipment (net) $250,000

Current Liabilities $160,000

Bonds Payable $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had
trademarks with a fair market value of $100,000 which had not been accounted for. In
turn, ABC123's fair market values were equal to their book values with the exception of
the Company's Inventory and Plant and Equipment, which were said to have Fair Market
Values of $30,000 and $480,000, respectively.
Prepare any disclosure required for ABC123 Inc. under IFRS. Assume DEF456 produces
high-end loudspeakers for touring musicians.

On July 1, 20128, ABC123 purchased 100% of the outstanding voting shares of DEF456
INC, a manufacturer of high-end speaker cabinets for touring musicians, for $400,000 in
Cash. There were no borrowings or sales between the companies prior to the acquisition
date. The excess of the purchase price over the fair values of DEF456's assets and
liabilities was allocated as follows:

Inventory ($30,000)

Plant & Equipment (net) $100,000

Bonds Payable $ 12,000

Trademark $100,000

Goodwill $ 8,000

Acquisition of DEF456

Pre-Acquisition Carry Cost Recognized Values at Acquisition

Cash & Short-Term Securities $200,000 $200,000

Inventory 120,000 90,000

Plant & Equipment (net) 150,000 250,000

Trademark 0 100,000

Current Liabilities (160,000) (160,000)

Bonds Payable (100,000) ( 88,000)

Goodwill 80,000 8,000

Net identifiable assets and liabilities $290,000 $400,000

Consideration paid $400,000

Blooms: Application
Difficulty: Moderate
 Gradable: manual
Hilton - Chapter 03 #54
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-11 Recognition of Goodwill
Topic: 03-16 Control Through Purchase of Shares
55. ABC123 Inc has decided to purchase 100% the voting shares of DEF456 for $400,000 in
Cash on July 1, 2018. On the date, the balance sheets of each of these companies were as
follows:

ABC123 Inc DEF456 Inc

Cash and Short-Term Securities $900,000 $200,000

Inventory $ 50,000 $120,000

Plant and Equipment (net) $350,000 $150,000

Goodwill $- $ 80,000

Total Assets $1,300,000 $550,000

Current Liabilities $ 180,000 $160,000

Bonds Payable $ 400,000 $100,000

Common Shares $ 500,000 $200,000

Retained Earnings $ 220,000 $ 90,000

Total Liabilities and Equity $1,300,000 $550,000

On that date, the fair values of DEF456 Assets and Liabilities were as follows:

Cash and Short-Term Securities $200,000

Inventory $ 90,000

Plant and Equipment (net) $250,000

Current Liabilities $160,000

Bonds Payable $ 88,000

In addition to the above, an independent appraiser deemed that DEF456 Inc. had
trademarks with a fair market value of $100,000 which had not been accounted for. In
turn, ABC123's fair market values were equal to their book values with the exception of
the Company's Inventory and Plant and Equipment, which were said to have Fair Market
Values of $30,000 and $480,000, respectively.
Assuming that DEF456's Plant and Equipment was worth $400,000. Calculate the goodwill
arising from this business combination and state how it would be shown in the
consolidated balance sheet on the acquisition date.

The new Purchase Price discrepancy would be calculated as follows:

a)

Purchase Price: $400,000

Less: Fair value of Net Assets Acquired: $542,000

Goodwill: ($142,000)

Note that DEF456' s identifiable assets include a trademark worth $100,000 but exclude
the company's Goodwill. Because the purchase price is below the fair market values of
DEF456's identifiable assets, we have negative Goodwill. This negative goodwill should be
allocated to reduce the value of the subsidiary's goodwill to zero and to record any
remaining amount as a gain.

Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #55
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-11 Recognition of Goodwill
Topic: 03-16 Control Through Purchase of Shares
56. Assume that X Inc. wishes to enter into a Business Combination with Y Inc. on January 1,
2017. X is unsure whether it should purchase Y's assets or liabilities or whether it should
purchase all of Y's outstanding voting shares. X and Y are incorporated in different
jurisdictions. On January 1, Y Inc was estimated to have various intangibles estimated to
be worth a total of $1,000,000. Of this amount, $250,000 can be attributable to a
Trademark owned by Y.

Required:
In the absence of any other figures, prepare a brief report explaining anything that would
be of interest the Board of Directors of X Inc.

Report to the Board of Directors of X Inc:

In order for a Business Combination to exist, an acquirer must be identified. In most cases
it would be cheaper for X to acquire control of Y's assets through a Share Purchase than it
would be to purchase the assets outright, since X would only to purchase a majority of Y's
voting shares. However, if the Fair Value of Y's Net Assets exceeds its book values, a
purchase of assets instead of shares would be more advantageous to X from a Tax
standpoint, as its deduction for capital cost allowance (CCA) would then be based on Fair
Market Values, which are higher than its book values. The fact that both corporations lie in
different jurisdictions precludes a Statutory Amalgamation. When consolidated Financial
Statements are prepared, Y Inc's Trademark would appear at its fair value of $250,000.
Although the company has other intangibles, because they are not readily identifiable,
their values would be attributed to Goodwill.
After January 1, 2011 (or sooner if IFRS 3 had been adopted earlier), IFRS 3 requires that
the acquisition method be used to account for all business combinations. Under this
method, the company reports the identifiable net assets being acquired at the fair value of
these net assets regardless of the amount paid for these net assets. When the purchase
price is greater than the fair value of the identifiable net assets, the excess is reported as
goodwill similar to the purchase method. When the purchase price is less than the fair
 value of identifiable net assets, the identifiable net assets are still reported at fair value
and the deficiency in purchase price is reported as a gain on the purchase. The practice is
not consistent with the historical cost principle, where assets are reported at the amount
paid for the assets. This is, however, the general trend in accounting.

Blooms: Application
Blooms: Comprehension
Difficulty: Difficult
Gradable: manual
Hilton - Chapter 03 #56
Learning Objective: 03-02 Describe the basic forms for achieving a business combination.
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Topic: 03-02 Forms of Business Combinations
Topic: 03-03 Purchase of Assets or Net Assets
Topic: 03-04 Purchase of Shares
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method

57. Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1st, 2017,
Firm Inc. would like to purchase all of the voting shares of its main competitor, N-CORP
Inc. Briefly discuss the purported accounting implications of this transaction.

Given that Firm Inc is a wholly owned subsidiary of Company Inc, its acquisition of N-
CORP would have to meet with Company Inc.'s approval. In effect, any shares of N-CORP
acquired by Firm Inc. would be controlled by Company Inc. Such a purchase would
constitute a Business Combination, and Company Inc. would have to prepare consolidated
financial statements including both Firm Inc. and N-CORP.

Blooms: Comprehension
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #57
Learning Objective: 03-01 Define a business combination and evaluate relevant factors to determine whether control exists in a business
acquisition.
Topic: 03-01 Business Combinations
58. Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on
July 1, 2018. On the date, the balance sheets of each of these companies were as follows:

Telecom Inc Intron Inc

Cash and Short-Term Securities $920,000 $200,000

Inventory $150,000 $ 20,000

Plant and Equipment (net) $330,000 $180,000

Total Assets $1,400,000 $400,000

Current Liabilities $420,000 $ 90,000

Bonds Payable $700,000 $200,000

Common Shares $180,000 $ 60,000

Retained Earnings $100,000 $ 50,000

Total Liabilities and Equity $1,400,000 $400,000

On that date, the fair values of Intron's assets and liabilities were as follows:

Cash/Short-Term Securities $200,000

Inventory $ 15,000

Plant and Equipment (net) $250,000

Current Liabilities $ 90,000

Bonds Payable $210,000

Required:
Based on the information provided, answer the following:

a) Prepare the journal entry to record the purchases Intron's shares.

b) Prepare the required journal entry prior to the preparation of the Consolidated Financial
Statements.
a)

Investment in Intron Inc. $300,000

Cash $300,000

b)

Cash & Short-Term Securities $200,000

Inventory $ 15,000

Plant & Equipment (net) $250,000

Current Liabilities $ 90,000

Bonds Payable $210,000

Goodwill $135,000

Investment in Intron Inc. $300,000

Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #58
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-11 Recognition of Goodwill
Topic: 03-16 Control Through Purchase of Shares
59. Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on
July 1, 2018. On the date, the balance sheets of each of these companies were as follows:

Telecom Inc Intron Inc

Cash and Short-Term Securities $920,000 $200,000

Inventory $150,000 $ 20,000

Plant and Equipment (net) $330,000 $180,000

Total Assets $1,400,000 $400,000

Current Liabilities $420,000 $ 90,000

Bonds Payable $700,000 $200,000

Common Shares $180,000 $ 60,000

Retained Earnings $100,000 $ 50,000

Total Liabilities and Equity $1,400,000 $400,000

On that date, the fair values of Intron's assets and liabilities were as follows:

Cash/Short-Term Securities $200,000

Inventory $ 15,000

Plant and Equipment (net) $250,000

Current Liabilities $ 90,000

Bonds Payable $210,000

Required:
Assume that Intron's assets and liabilities were purchased instead of its shares for
$300,000. Prepare the journal entry to record this purchase.

Cash & Short-Term Securities $200,000

Inventory $ 15,000

Plant & Equipment (net) $250,000

Current Liabilities $ 90,000

Bonds Payable $210,000

Goodwill $135,000

Cash $300,000

Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #59
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-11 Recognition of Goodwill
Topic: 03-16 Control Through Purchase of Shares
60. Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on
July 1, 2018. On the date, the balance sheets of each of these companies were as follows:

Telecom Inc Intron Inc

Cash and Short-Term Securities $920,000 $200,000

Inventory $150,000 $ 20,000

Plant and Equipment (net) $330,000 $180,000

Total Assets $1,400,000 $400,000

Current Liabilities $420,000 $ 90,000

Bonds Payable $700,000 $200,000

Common Shares $180,000 $ 60,000

Retained Earnings $100,000 $ 50,000

Total Liabilities and Equity $1,400,000 $400,000

On that date, the fair values of Intron's assets and liabilities were as follows:

Cash/Short-Term Securities $200,000

Inventory $ 15,000

Plant and Equipment (net) $250,000

Current Liabilities $ 90,000

Bonds Payable $210,000

Assume that two days after the acquisition, the Goodwill was put to an impairment test,
after which it was decided that its true value was $70,000.

Required:
Prepare the necessary journal entry to write-down the goodwill as well as another
Consolidated Balance Sheet to reflect the new Goodwill amount.
Journal Entry:

Loss due to Impairment of Goodwill (to Retained Earnings) $65,000

Goodwill $65,000

Telecom Inc,
Consolidated Balance Sheet
as at July 3, 2018

ASSETS
Cash & Short-Term Securities $ 820,000

Inventory $ 165,000

Plant & Equipment (net) $ 580,000

Goodwill $70,000

Total Assets $1,635,000

LIABILITIES

Current Liabilities $ 510,000

Bonds Payable $ 910,000

Total Liabilities $1,420,000

Shareholders' Equity
Common Shares $ 180,000

Retained Earnings $35,000

Total Shareholders' Equity $ 215,000

Total Liabilities and Shareholders' Equity $1,635,000

Blooms: Application
Blooms: Comprehension
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 03 #60
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-11 Recognition of Goodwill
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
Topic: 03-20 Reporting Depreciable Assets
61. Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd)
("GEH") in 2018. The Vice President, Finance of GWM has asked you, the manager in
charge of this year's audit, whether or not GWM has to prepare consolidated financial
statements for the year ended December 31, 2018. GWM has about fifteen wholly owned
subsidiaries and has in the past prepared consolidated financial statements.

Required:
Prepare a discussion around the need to prepare consolidated financial statements.

IAS 27 Separate Financial Statements states that a parent is not required to present
consolidated financial statements for external reporting purposes if and only if:

a) The parent itself is a wholly owned subsidiary, or a partially owned subsidiary, of

another entity and its owners, including those that are not otherwise entitled to vote, have
been informed about, and do not object to, the parent not presenting consolidated
financial statements;
b) The parent's debt or equity instruments are not traded on a public market (a domestic
or foreign stock exchange or an over-the-counter market);
c) The parent did not file, nor is in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any class
of instruments in a public market;
d) The ultimate or intermediate parent of the parent produces consolidated financial
statements available for public use that comply with IFRSs.
If GWM meets these conditions, it can (but is not required to) present separate financial
statements in accordance with GAAP as its only financial statements to end users.

Blooms: Application
Blooms: Knowledge
Difficulty: Easy
Gradable: manual
 Hilton - Chapter 03 #61
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-11 Recognition of Goodwill
Topic: 03-15 Consolidated Financial Statements
Topic: 03-16 Control Through Purchase of Shares
Topic: 03-20 Reporting Depreciable Assets

62. George Inc. acquired all of the outstanding shares of Martha Limited by paying $200,000 in
cash, issuing a debenture for $300,000 and issuing 10,000 common shares with a fair
value of $50 each. George Inc. incurred costs of $60,000 in investigation, accounting and
legal fees directly related to the acquisition. In addition, the company incurred costs of
$10,000 for the issue of the debenture and another $10,000 for the issue of the additional
shares.

Required:
Prepare the journal entries necessary to record the acquisition and related costs on the
books of George Inc.

Investment in Martha Limited $1,00,000

Cash $200,000

Debenture payable $300,000

Common shares $500,000

Investment acquisition costs $60,000

Cash $60,000

Debentures payable $10,000

Cash $10,000

Common shares $10,000

Cash $10,000

Blooms: Application
Difficulty: Easy
Gradable: manual
 Hilton - Chapter 03 #62
Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination.
Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of-shares business combination.
Topic: 03-07 Accounting for Business Combinations Under Acquisition Method
Topic: 03-10 Recognition and Measurement of Net Assets Acquired
Topic: 03-11 Recognition of Goodwill
Topic: 03-16 Control Through Purchase of Shares
 c3 Summary

Category # of Questio
ns

Accessibility: Keyboard Navigation 42

Blooms: Application 24

Blooms: Comprehension 4

Blooms: Knowledge 37

Difficulty: Difficult 2

Difficulty: Easy 48

Difficulty: Moderate 12

Gradable: automatic 49

Gradable: manual 13

Hilton - Chapter 03 62

Learning Objective: 03- 13

01 Define a business combination and evaluate relevant factors to determine whether control exists in a business a
cquisition.

Learning Objective: 03-02 Describe the basic forms for achieving a business combination. 14

Learning Objective: 03-03 Apply the acquisition method to a purchase-of-net-assets business combination. 10

Learning Objective: 03-04 Prepare consolidated financial statements for a purchase-of- 37

shares business combination.

Topic: 03-01 Business Combinations 13

Topic: 03-02 Forms of Business Combinations 5

Topic: 03-03 Purchase of Assets or Net Assets 4

Topic: 03-04 Purchase of Shares 4

Topic: 03-06 Variations 1

Topic: 03-07 Accounting for Business Combinations Under Acquisition Method 11

Topic: 03-09 Acquisition Cost 4

Topic: 03-10 Recognition and Measurement of Net Assets Acquired 10

Topic: 03-11 Recognition of Goodwill 12

Topic: 03-12 Control Through Purchase of Net Assets 1

Topic: 03-15 Consolidated Financial Statements 22

Topic: 03-16 Control Through Purchase of Shares 24

Topic: 03-19 The Direct Approach 1

Topic: 03-20 Reporting Depreciable Assets 3

Topic: 03-21 Other Consolidated Financial Statements in Year of Acquisition 2

Topic: 03-23 Push-Down Accounting 1

Topic: 03-24 Subsidiary Formed by Parent 1

Topic: 03-25 New-Entity Method 3