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Quiz 1 Answers BUSICOMBI

The document contains questions about accounting for business combinations. Long-term debt of the acquired company should be recognized at fair value on the acquisition date. Excess fair value of net assets acquired over consideration transferred should be recognized as a gain. Costs of issuing equity are treated as a direct reduction to equity, while costs of issuing debt are included in the initial measurement of debt. Inventories acquired in a business combination should be valued at acquisition-date fair values.

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1K views14 pages

Quiz 1 Answers BUSICOMBI

The document contains questions about accounting for business combinations. Long-term debt of the acquired company should be recognized at fair value on the acquisition date. Excess fair value of net assets acquired over consideration transferred should be recognized as a gain. Costs of issuing equity are treated as a direct reduction to equity, while costs of issuing debt are included in the initial measurement of debt. Inventories acquired in a business combination should be valued at acquisition-date fair values.

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1.

In a business combination, how should long-term debt of the acquired company generally be

recognized on acquisition date?

a. Fair value

b. Amortized cost

c. Carrying amount

d. Fair value less costs to sell

2. In a business combination accounted for under the acquisition method, the fair value of the

net identifiable assets acquired exceeded the consideration transferred. How should the

excess fair value be reported?

a. As negative goodwill, recognized in profit or loss in the period the business combination

occurred.

b. As an extraordinary gain.

c. As a reduction of the values assigned to noncurrent assets and an extraordinary gain for

any unallocated portion.

d. As positive goodwill.

3. The costs of issuing equity securities in a business combination are

a. expensed

b. treated as direct reduction in equity

c. included in the initial measurement of the credit to share capital account

d. b and c

4. The costs of issuing debt securities in a business combination are

a. expensed

b. included in the initial measurement of the debt securities issued

c. accounted for like a “discount” on liability

d. b and c
5. A business combination is accounted for properly as an acquisition. Direct costs of

combination, other than registration and issuance costs of equity securities, should be:

a. Capitalized as a deferred charge and amortized.

b. Deducted directly from the retained earnings of the combined corporation.

c. Deducted in determining the net income of the combined corporation for the period in

which the costs were incurred.

d. Included in the acquisition cost to be allocated to identifiable assets according to their

fair values.

6. PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition

transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and

assumed liabilities. The general guidelines for assigning amounts to the inventories acquired

provide for:

a. Raw materials to be valued at original cost.

b. Work in process to be valued at the estimated selling prices of finished goods, less both

costs to complete and costs of disposal.

c. Finished goods to be valued at replacement cost.

d. Inventories to be valued at acquisition-date fair values.

7. A business combination is accounted for as an acquisition. Which of the following expenses

related to the business combination should be included, in total, in the determination of net

income of the combined corporation for the period in which the expenses are incurred?

Fees of finders and Registration fees consultants for equity securities issued

a. Yes Yes

b. Yes No

c. No Yes

d. No No

8. Easton Company acquired Lofton Company in a business combination. Easton was able to
acquire Lofton at a bargain price. The fair value of the net identifiable assets acquired

exceeded the consideration transferred to Lofton. After revaluing noncurrent assets to zero,

there was still some "negative goodwill." Proper accounting treatment by Easton is to report

the amount as

a. an extraordinary gain.

b. part of current income in the year of combination.

c. a deferred credit and amortize it.

d. paid-in capital.

9. Goodwill may be capitalized

a. only when it arises in a business combination.

b. only when it is created internally.

c. only when it is purchased

d. on any of these cases.

10. A contingent liability assumed in a business combination is recognized

a. if it is a present obligation that arises from past events and

b. if its fair value can be measured reliably.

c. even if it has an improbable outflow of resources embodying economic benefits.

d. All of these

On January 1, 20x1, DIMINUTIVE


Co. acquired all of the assets and
assumed all of the liabilities of
SMALL, Inc. As of this date, the
carrying amounts and fair values of
the assets and liabilities of SMALL
acquired by DIMINUTIVE are
shown below:
Assets
Carrying amounts
Fair values
Cash in bank
20,000
20,000
Receivables
400,000
240,000
Allowance for probable losses on
receivables
(60,000)
Inventory
1,040,000
700,000
Building – net
2,000,000
2,200,000
Goodwill
200,000
40,000
Total assets
3,600,000
3,200,000
Liabilities
Payables
800,000
800,000

On the negotiation for the business


combination, DIMINUTIVE Co.
incurred transaction costs
amounting to
200,000 for legal, accounting,
and consultancy fees.
Case #1: If DIMINUTIVE Co. paid
3,000,000 cash as consideration
for the assets and liabilities of
SMALL,
Inc., how much is the goodwill
(gain on bargain purchase) on the
business combination?

Case #2: If DIMINUTIVE Co. paid


2,000,000 cash as consideration
for the assets and liabilities of
SMALL,
Inc., how much is the goodwill
(gain on bargain purchase) on the
business combination
On January 1, 20x1, DIMINUTIVE
Co. acquired all of the assets and
assumed all of the liabilities of
SMALL, Inc. As of this date, the
carrying amounts and fair values of
the assets and liabilities of SMALL
acquired by DIMINUTIVE are
shown below:
Assets
Carrying amounts
Fair values
Cash in bank
20,000
20,000
Receivables
400,000
240,000
Allowance for probable losses on
receivables
(60,000)
Inventory
1,040,000
700,000
Building – net
2,000,000
2,200,000
Goodwill
200,000
40,000
Total assets
3,600,000
3,200,000
Liabilities
Payables
800,000
800,000

On the negotiation for the business


combination, DIMINUTIVE Co.
incurred transaction costs
amounting to
200,000 for legal, accounting,
and consultancy fees.
Case #1: If DIMINUTIVE Co. paid
3,000,000 cash as consideration
for the assets and liabilities of
SMALL,
Inc., how much is the goodwill
(gain on bargain purchase) on the
business combination?

Case #2: If DIMINUTIVE Co. paid


2,000,000 cash as consideration
for the assets and liabilities of
SMALL,
Inc., how much is the goodwill
(gain on bargain purchase) on the
business combination
-

FV 3160
Liab (800)
Total
,600.
1. How much is the consolidated
total assets on January 1, 20x1?
a. 428,600 c. 430,800
b. 440,800 d. 465,800
Answer:
Cash= 18K (12K+6K)
AR= 50400 (36K+14400)
Inventory = 85200 (48K+37200)
Building= 273600 (216K+48K)
Goodwill= 3600
=430,800
2. How much is the consolidated
total equity on January 1, 20x1?
a. 336,600 c. 328,600
b. 363,600 d. 336,800
Share c

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