Chapter 2 – Consolidation of Financial Information

At the date of an acquisition which is not a bargain purchase, the acquisition method A. consolidates the subsidiary's assets at fair value and the liabilities at book value. B. consolidates all subsidiary assets and liabilities at book value. C. consolidates all subsidiary assets and liabilities at fair value. D. consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value. E. consolidates the subsidiary's assets at book value and the liabilities at fair value.

Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A. a worksheet. B. Lisa's general journal. C. Victoria's general journal. D. Victoria's secret consolidation journal. E. the general journals of both companies.

Using the acquisition method for a business combination, goodwill is generally defined as: A. Cost of the investment less the subsidiary's book value at the beginning of the year. B. Cost of the investment less the subsidiary's book value at the acquisition date. C. Cost of the investment less the subsidiary's fair value at the beginning of the year. D. Cost of the investment less the subsidiary's fair value at acquisition date. E. is no longer allowed under federal law.

What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? A. If the subsidiary is dissolved, it will not be operated as a separate division. B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

According to GAAP, the pooling of interest method for business combinations A. Is preferred to the purchase method. B. Is allowed for all new acquisitions. C. Is no longer allowed for business combinations after June 30, 2001. D. Is no longer allowed for business combinations after December 31, 2001. E. Is only allowed for large corporate mergers like Exxon and Mobil.

An example of a difference in types of business combination is: A. A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition. B. A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition. C. A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution. D. A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E. Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

Acquired in-process research and development is considered as A. a definite-lived asset subject to amortization. B. a definite-lived asset subject to testing for impairment. C. an indefinite-lived asset subject to amortization. D. an indefinite-lived asset subject to testing for impairment. E. a research and development expense at the date of acquisition.

Which one of the following is a characteristic of a business combination accounted for as an acquisition? A. The combination must involve the exchange of equity securities only. B. The transaction establishes an acquisition fair value basis for the company being acquired. C. The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company. D. The transaction may be considered to be the uniting of the ownership interests of the companies involved. E. The acquired subsidiary must be smaller in size than the acquiring parent.

Which one of the following is a characteristic of a business combination that is accounted for as an acquisition? A. Fair value only for items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. B. Fair value only for the consideration transferred by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. C. Fair value for the consideration transferred by the acquirer as well as the fair value of items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. D. Fair value for only consideration transferred and identifiable assets received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. E. Only fair value of identifiable assets received enters into the determination of the acquirer's accounting valuation of the acquired company.

A statutory merger is a(n) A. business combination in which only one of the two companies continues to exist as a legal corporation. B. business combination in which both companies continue to exist. C. acquisition of a competitor. D. acquisition of a supplier or a customer. E. legal proposal to acquire outstanding shares of the target's stock.

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed. B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital. C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital. D. Both are treated as part of the acquisition consideration transferred. E. Both are treated as a reduction to additional paid-in capital.

Which of the following is a not a reason for a business combination to take place? A. Cost savings through elimination of duplicate facilities. B. Quick entry for new and existing products into domestic and foreign markets. C. Diversification of business risk. D. Vertical integration. E. Increase in stock price of the acquired company.

Which of the following statements is true regarding a statutory merger? A. The original companies dissolve while remaining as separate divisions of a newly created company. B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D. The acquiring company acquires the stock of the acquired company as an investment. E. A statutory merger is no longer a legal option.

Which of the following statements is true regarding a statutory consolidation? A. The original companies dissolve while remaining as separate divisions of a newly created company. B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D. The acquiring company acquires the stock of the acquired company as an investment. E. A statutory consolidation is no longer a legal option.

In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment? A. Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill. B. Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill. C. Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill. D. Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill.

In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true? A. Negative goodwill is recorded. B. A deferred credit is recorded. C. A gain on bargain purchase is recorded. D. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit. E. Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain.

Which of the following statements is true regarding the acquisition method of accounting for a business combination? A. Net assets of the acquired company are reported at their fair values. B. Net assets of the acquired company are reported at their book values. C. Any goodwill associated with the acquisition is reported as a development cost. D. The acquisition can only be effected by a mutual exchange of voting common stock. E. Indirect costs of the combination reduce additional paid-in capital.

Which of the following statements is true? A. The pooling of interests for business combinations is an alternative to the acquisition method. B. The purchase method for business combinations is an alternative to the acquisition method. C. Neither the purchase method nor the pooling of interests method is allowed for new business combinations. D. Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations. E. Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.