Stock given as consideration for a business combination

1)Stock given as consideration for a business combination is valued at:

a)fair market value

b)par value

c)historical cost

d)None of these

2)Which of the following situations best describes a business combination to be accounted for as a statutory merger?

a)Both companies in a combination continue to operate as separate, but related, legal entities.

b)Only one of the combining companies survives and the other loses its separate identity.

c)Two companies combine to form a new third company, and the original two companies are dissolved.

d)One company transfers assets to another company it has created.

3)A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?

a)Cash

b)Issuing Debt

c)Issuing Stock

d)All of these

4)A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n):

a)agreeable combination.

b)friendly combination.

c)hostile combination.

d)unfriendly combination.

5)A merger between a supplier and a customer is a(n):

a)friendly combination.

b)horizontal combination.

c)unfriendly combination.

d)vertical combination.

6)The impairment standard as it relates to goodwill is an example of a:

a)consumption of benefit approach.

b)loss or lack of benefit approach.

c)component of other comprehensive income.

d)direct matching of expenses to revenues.

7)The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called:

a)poison pill.

b)pac-man defense.

c)greenmail.

d)white knight.

8)The third period of business combinations started after World War II and is called:

a)horizontal integration.

b)merger mania.

c)operating integration.

d)vertical integration.

9)Which of the following is not a component of other comprehensive income under GAAP?

 

a)earnings.

b)gains and losses that bypass earnings.

c)impairment losses.

d)accumulated other comprehensive income.

10)When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory:

a)acquisition.

b)combination.

c)consolidation.

d)merger.

11)The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the:

a)bonus.

b)goodwill.

c)implied offering price.

d)takeover premium.

12)The difference between normal earnings and expected future earnings is:

a)average earnings.

b)excess earnings.

c)ordinary earnings.

d)target earnings.

13)The first step in estimating goodwill in the excess earnings approach is to:

a)determine normal earnings.

b)identify a normal rate of return for similar firms.

c)compute excess earnings.

d)estimate expected future earnings.

15)Estimated goodwill is determined by computing the present value of the:

a)average earnings.

b)excess earnings.

c)expected future earnings.

d)normal earnings.

 

16)Which of the following statements would not be a valid or logical reason for entering into a business combination?

a)to increase market share.

b)to avoid becoming a takeover target.

c)to reduce risk by acquiring established product lines.

d)the operating costs of the combined entity would be more than the sum of the separate entities.

17)The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:

a)to provide information relevant to the controlling stockholders.

b)to represent the view that the affiliated companies are a separate, identifiable economic entity.

c)to emphasis control of the whole by a single management.

d)to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses.

18)Which of the following statements is correct?

a)Total elimination is consistent with the parent company concept.

b)Partial elimination is consistent with the economic unit concept.

c)Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.

d)none of these.

19)Under the parent company concept, consolidated net income             the consolidated net income under the economic unit concept.

a)is the same as

b)is higher than

c)is lower than

d)can be higher or lower than

20)Under the economic unit concept, noncontrolling interest in net assets is treated as:

a)a liability.

b)an asset.

c)stockholders' equity.

d)an expense.

22)The parent company concept adjusts subsidiary net asset values for the:

a)differences between cost and fair value.

b)differences between cost and book value.

c)total fair value implied by the price paid by the parent.

d)total cost implied by the price paid by the parent.

23)According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to:

a)majority stockholders.

b)minority stockholders.

c)creditors.

d)both majority and minority stockholders.

24)Which of the following statements is correct?

a)The economic unit concept suggests partial elimination of unrealized intercompany profits.

b)The parent company concept suggests partial elimination of unrealized intercompany profits.

c)The economic unit concept suggests no elimination of unrealized intercompany profits.

d)The parent company concept suggests total elimination of unrealized intercompany profits.

25)When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n):

a)prorated share of the combined income.

b)addition to combined income to arrive at consolidated net income.

c)expense deducted from combined income to arrive at consolidated net income.

d)deduction from current assets in the balance sheet.

26)When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the:

a)book values of subsidiary assets and liabilities.

b)fair values of subsidiary assets and liabilities.

c)general price level adjusted values of subsidiary assets and liabilities.

d)fair values of parent company assets and liabilities.

27)The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the:

a)parent company concept.

b)current practice concept.

c)historical cost company concept.

d)economic unit concept.

28)The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the:

a)economic unit concept.

b)parent company concept.

c)current practice concept.

d)historical cost company concept.

29)The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the:

a)economic unit concept.

b)current practice concept.

c)parent company concept.

d)historical cost company concept.

30)Estimating the value of goodwill to be included in an offering price can be done under several alternative methods. The excess earnings approach is frequently used. Identify the steps used in this approach to estimate goodwill.

31)The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept. Briefly explain the differences between the concepts.

32)Hopkins Company is considering the acquisition of Richfield, Inc. To assess the amount it might be willing to pay, Hopkins makes the following computations and assumptions.

A.Richfield, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Richfield, Inc.

B.Richfield, Inc.'s pretax incomes for the years 2014 through 2016 were $470,000, $570,000, and $370,000, respectively. Hopkins believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings:

Depreciation on Buildings (each year)     380,00

0

Depreciation on Equipment (each year)                30,000

Extraordinary Loss (year 2016)   130,00

0

Salary Expense (each year)          170,00

0

C.The normal rate of return on net assets for the industry is 15%.

Required:

A.Assume that Hopkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill.

B.Assume that Hopkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill.

33)Eden Company is trying to decide whether to acquire Bloomington Inc. The following balance sheet for Bloomington Inc. provides information about book values. Estimated market values are also listed, based upon Eden Company's appraisals.

                Bloomington Inc.

 

Book Values       Bloomington Inc. Market Values

Current Assets  $ 450,000             $ 450,000

Property, Plant & Equipment (net)          1,140,000             1,300,000

Total Assets        $1,590,000           $1,750,000          

Total Liabilities   $700,000              $700,000

Common Stock, $10 par value    280,000

Retained Earnings            610,000

 Total Liabilities and Equities        $1,590,000          

Eden Company expects that Bloomington will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm."

Required:

A.Compute an estimation of goodwill based on the information above that Eden might be willing to pay (include in its purchase price), under each of the following additional assumptions:

(1)Eden is willing to pay for excess earnings for an expected life of 4 years (undiscounted).

(2)Eden is willing to pay for excess earnings for an expected life of 4 years, which should be

capitalized at the industry normal rate of return.

(3)Excess earnings are expected to last indefinitely, but Eden demands a higher rate of return of

20% because of the risk involved.

B.Determine the amount of goodwill to be recorded on the books if Eden pays $1,300,000 cash and assumes Bloomington's liabilities.

34)Park Company acquired an 80% interest in the common stock of Southdale Company for

$1,540,000 on July 1, 2016. Southdale Company's stockholders' equity on that date consisted of:

Common stock $800,000

Other contributed capital 400,000 Retained earnings 330,000 Required:

Compute the total noncontrolling interest to be reported in the consolidated balance sheet

assuming the:

 

(1)parent company concept.

(2)economic unit concept.

35)The following balances were taken from the records of S Company:

Common stock (1/1/13 and 12/31/13)                    $720,000

Retained earnings 1/1/13             $160,000             

Net income for 2016       180,000

Dividends declared in 2016          (40,000)               

Retained earnings, 12/31/13                       300,000

Total stockholders' equity on 12/31/13                   $1,020,000

P Company purchased 75% of S Company's common stock on January 1, 2014 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2016 of ten years.

Required:

A.Compute the difference between cost/(implied) and book value applying:

1.Parent company theory.

2.Economic unit theory.

B.Assuming the economic unit theory:

1.Compute noncontrolling interest in consolidated income for 2016.

2.Compute noncontrolling interest in net assets on December 31, 2016.

 

1)Management accounting:

A)focuses on estimating future revenues, costs, and other measures to forecast activities and their results

B)provides information about the company as a whole

C)reports information that has occurred in the past that is verifiable and reliable

D)provides information that is generally available only on a quarterly or annual basis

2)Managers use management accounting information to              strategy.

A)choose

B)communicate

C)implement

D)All of these answers are correct.

3)Financial accounting:

A)focuses on the future and includes activities such as preparing next year's operating budget

B)must comply with GAAP (generally accepted accounting principles)

C)reports include detailed information on the various operating segments of the business such as product lines or departments

D)is prepared for the use of department heads and other employees

4)The person most likely to use ONLY financial accounting information is a:

A)factory shift supervisor

B)vice president of operations

C)current shareholder

D)department manager

5)Which of the following people is LEAST likely to use management accounting information?

A)the controller

B)a shareholder evaluating a stock investment

C)the treasurer

D)an assembly department supervisor

6)Financial accounting provides the primary source of information for:

A)decision making in the finishing department

B)improving customer service

C)preparing the income statement for shareholders

D)planning next year's operating budget

7)Which of the following descriptors refers to management accounting information?

A)It is verifiable and reliable.

B)It is driven by rules.

C)It is prepared for shareholders.

D)It provides reasonable and timely estimates.

8)Which of the following statements refers to management accounting information?

A)There are no regulations governing the reports.

B)The reports are generally delayed and historical.

C)The audience tends to be stockholders, creditors, and tax authorities.

D)It primarily measures and records business transactions.

9)Which of the following groups would be LEAST likely to receive detailed management accounting reports?

A)stockholders

B)sales representatives

C)production supervisors

D)managers

10)Management accounting information includes:

A)tabulated results of customer satisfaction surveys

B)the cost of producing a product

C)the percentage of units produced that are defective

D)All of these answers are correct.

11)Cost accounting:

A)provides information on the efficiency of factory labor

B)provides information on the cost of servicing commercial customers

C)provides information on the performance of an operating division

D)All of these answers are correct.

12)Which of the following types of information are used in management accounting?

A)financial information

B)nonfinancial information

C)information focused on the long term

D)All of these answers are correct.

13)Modern cost accounting plays a role in:

A)planning new products

B)evaluating operational processes

C)controlling costs

D)All of these answers are correct.

14)Cost accounting provides all of the following EXCEPT:

A)information for management accounting and financial accounting

B)pricing information from marketing studies

C)financial information regarding the cost of acquiring resources

D)nonfinancial information regarding the cost of operational efficiencies

15)Management accounting includes all of the following EXCEPT

A)implementing strategies

B)developing budgets

C)preparing special studies and forecasts

D)preparing the statement of cash flows

16)Financial accounting is concerned primarily with:

A)external reporting to investors, creditors, and government authorities

B)cost planning and cost controls

C)profitability analysis

D)providing information for strategic and tactical decisions

17)Financial accounting provides a historical perspective, whereas management accounting emphasizes:

A)the future

B)past transactions

C)a current perspective

D)reports to shareholders