ACC 401 Week 5 Quiz – Mid-Term Exam– Strayer

ACC 401 Week 5 Quiz – Mid-Term Exam– Strayer

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Chapter 1 Through 4, 6 and 7 (Quiz 6 - 7 – Mid-Term Exam 1 – 4)

Chapter 1

Introduction to Business Combinations and the Conceptual Framework

Multiple Choice
1. Stock given as consideration for a business combination is valued at
a. fair market value
b. par value
c. historical cost
d. None of the above

2. Which of the following situations best describes a business combination to be accounted for as a statutory merger?
a. Both companies in a combination continue to operate as separate, but related, legal entities.
b. Only one of the combining companies survives and the other loses its separate identity.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created.

3. A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
a. Cash
b. Issuing Debt
c. Issuing Stock
d. All of the above

4. The objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling Interests in Consolidated Financial Statements) are as follows:
a. to improve the relevance, comparibility, and transparency of financial information related to business combinations.
b. to eliminate the amortization of Goodwill.
c. to facilitate the convergence project of the FASB and the International Accounting Standards Board.
d. a and b only

5. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n)
a. agreeable combination.
b. friendly combination.
c. hostile combination.
d. unfriendly combination.

6. A merger between a supplier and a customer is a(n)
a. friendly combination.
b. horizontal combination.
c. unfriendly combination.
d. vertical combination.

7. When a business acquisition is financed using debt, the interest payments are tax deductible and create
a. operating synergy.
b. international synergy.
c. financial synergy.
d. diversification synergy.

8. The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called
a. poison pill.
b. pac-man defense.
c. greenmail.
d. white knight.

9. The third period of business combinations started after World War II and is called
a. horizontal integration.
b. merger mania.
c. operating integration.
d. vertical integration.

10. A statutory ______________ results when one company acquires all the net assets of another company and the acquired company ceases to exist as a separate legal entity.
a. acquisition.
b. combination.
c. consolidation.
d. merger.

11. When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory
a. acquisition.
b. combination.
c. consolidation.
d. merger.

12. The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the
a. bonus.
b. goodwill.
c. implied offering price.
d. takeover premium.

13. The difference between normal earnings and expected future earnings is
a. average earnings.
b. excess earnings.
c. ordinary earnings.
d. target earnings.

14. The first step in estimating goodwill in the excess earnings approach is to
a. determine normal earnings.
b. identify a normal rate of return for similar firms.
c. compute excess earnings.
d. estimate expected future earnings.

15. A potential offering price for a company is computed by adding the estimated goodwill to the
a. book value of the company’s net assets.
b. book value of the company’s net identifiable assets.
c. fair value of the company’s net assets.
d. fair value of the company’s net identifiable assets.

16. Estimated goodwill is determined by computing the present value of the
a. average earnings.
b. excess earnings.
c. expected future earnings.
d. normal earnings.

17. Which of the following statements would not be a valid or logical reason for entering into a business combination?
a. to increase market share.
b. to avoid becoming a takeover target.
c. to reduce risk by acquiring established product lines.
d. the operating costs of the combined entity would be more than the sum of the separate entities.

18. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
a. to provide information relevant to the controlling stockholders.
b. to represent the view that the affiliated companies are a separate, identifiable economic entity.
c. to emphasis control of the whole by a single management.
d. to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses.

19. Which of the following statements is correct?
a. Total elimination is consistent with the parent company concept.
b. Partial elimination is consistent with the economic unit concept.
c. Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.
d. none of these.

20. Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.
a. is the same as
b. is higher than
c. is lower than
d. can be higher or lower than

21. Under the economic unit concept, noncontrolling interest in net assets is treated as
a. a liability.
b. an asset.
c. stockholders' equity.
d. an expense.

22. The parent company concept adjusts subsidiary net asset values for the
a. differences between cost and fair value.
b. differences between cost and book value.
c. total fair value implied by the price paid by the parent.
d. total cost implied by the price paid by the parent.




23. According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to
a. majority stockholders.
b. minority stockholders.
c. creditors.
d. both majority and minority stockholders.

24. Which of the following statements is correct?
a. The economic unit concept suggests partial elimination of unrealized intercompany profits.
b. The parent company concept suggests partial elimination of unrealized intercompany profits.
c. The economic unit concept suggests no elimination of unrealized intercompany profits.
d. The parent company concept suggests total elimination of unrealized intercompany profits.

25. When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n)
a. prorated share of the combined income.
b. addition to combined income to arrive at consolidated net income.
c. expense deducted from combined income to arrive at consolidated net income.
d. deduction from current assets in the balance sheet.

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


Problems

1-1 Perkins Company is considering the acquisition of Barkley, Inc.  To assess the amount it might be willing to pay, Perkins makes the following computations and assumptions.
A. Barkley, 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 Barkley, Inc.
B. Barkley, Inc.'s pretax incomes for the years 2009 through 2011 were $470,000, $570,000, and $370,000, respectively.  Perkins 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) 380,000
Depreciation on Equipment (each year) 30,000
Extraordinary Loss (year 2011) 130,000
Salary Expense (each year)                                  170,000

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

Required:
A. Assume that Perkins 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 Barkley, Inc.  Indicate how much of the price consists of goodwill.
B. Assume that Perkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be c