GENERAL CONCEPTS (Theories questions for the evaluation process of the students)
Business Combination
*. The result of acquiring control of one or more enterprises by another enterprise or the uniting
of interest of two or more enterprises.
a. Business combinations.
c. Merger.
b. Business consolidation.
d. Pooling of interests.
RPCPA 0593)
1. When should a business combination be undertaken?
A. When a positive net present value is generated to the shareholders of an acquiring firm.
B. When the two firms are in the same line of business, but economies of scale cannot be
attained by the acquiror.
C. When two firms are in different lines of business, creating diversification.
D. When cash will be paid for the acquired firm's stock.
Gleim
Merger
2. Which of the following is a combination involving the absorption of one firm by another?
A. Merger.
C. Proxy fight.
B. Consolidation.
D. Acquisition.
Gleim
3. When firm B merges with firm C to create firm BC, what has occurred?
A. A tender offer.
C. An acquisition of stock.
B. An acquisition of assets.
D. A consolidation.
Gleim
*. A business combination whereby the company taking over the properties of other companies
retains its identity and continues operations as a larger unit and the other companies are
dissolved is known as a
a. Consolidation.
c. Pooling of interests.
b. Merger.
d. Quasi-reorganization.
RPCPA 1086
4. A business combination may be legally structured as a merger, consolidation, an investment in
stock, or a direct acquisition of assets. Which of the following describes a business
combination that is legally structured as a merger?
A. The surviving company is one of the two combining companies.
B. The surviving company is neither of the two combining companies.
C. An investor-investee relationship is established.
D. A parent-subsidiary relationship is established
Gleim
5. A business combination legally structured as a merger has one set of books and accounting
records (the surviving company's) to account for the combined (consolidated) operations. On
the other hand, if the combination is accomplished by a stock investment, each of the
combining companies continues to maintain its individual books and accounting records. For a
stock investment, the books and accounting records of the consolidated organization are
usually
A. Maintained by the parent separately from the surviving company's books.
B. Prepared in worksheet form each time consolidated statements are prepared.
C. Maintained by each organization in the same manner that branch-home office accounting
is accomplished.
D. Maintained by the subsidiary corporation.
Gleim
6. All of the following are true of mergers except
A. Mergers are legally straightforward.
B. Approval by shareholder vote of each firm involved in the merger is required.
C. The acquiring firm maintains its name and identity in a merger.
D. A merger may never result from a public offer to the shareholders of the target firm to buy
its shares directly.
Gleim
Valuation of Business
7. The q ratio of a firm equals
A. Market value of the firm's securities ÷ Replacement cost of its assets.
B. Market value of the firm's securities ÷ Book value of its assets.
C. Book value of its assets ÷ Market value of the firm's securities.
D. Book value of its assets ÷ Market value of its assets.
Gleim
POOLING METHOD
*. Stockholders of one company give up their stock in exchange for the stock of the other
company, they continue to be stockholders, but now in the expanded entity.
a. None of these.
b. Leverage of trading on equity.
c. Acquisition method of recording a combination.
d. Pooling of interests.
RPCPA 1084, 0598
8. What form of accounting is used when the assets of the acquired firm are added to the assets
of the acquiring firm at book value after business combination?
A. Consolidation.
C. Purchase.
B. Aggregation.
D. Pooling.
Gleim
*. The method of accounting for business combination in which assets and liabilities of the
separate entities are combined at their existing carrying values is called
a. Equity method.
b. Pooling of interest.
c. Purchase method.
d. Outright sale.
RPCPA 1079, 0586
9. Under accounting for consolidations, the pooling method is characterized by all of the following
attributes except that the
A. Assets and liabilities of the acquired company are recorded at book value for
consolidation reporting purposes.
B. Business combination expenses for acquiring a company under the pooling method are
capitalized.
C. Newly created goodwill, rather than goodwill that was already on the books of the
subsidiary, is not recognized.
D. Retained earnings of the acquired company are carried forward to the consolidated
financial statements.
CMA 0695 2-8
10. A supportive argument for the pooling of interests method of accounting for a business
combination is that
A. One company is clearly the dominant and continuing entity.
B. Goodwill is generally a part of any acquisition.
C. A portion of the total cost is assigned to individual assets acquired on the basis of their fair
value.
D. It was developed within the boundaries of the historical cost system and is compatible
with it.
RPCPA 0591, 1096, 0598
11. Which of the following statements is supportive of the pooling of interests method in
accounting for a business combination?
a. Bargaining between the parties is based on current values for assets and
liabilities. b. Stockholder groups remain intact but combine.
c. Goodwill is generally a part of any acquisition.
d. A portion of the total cost is assigned to individual assets acquired on the basis of their fair
value.
AICPA 1193 T-13
12. Which of the following is a potential abuse that can arise when a business combination is
accounted for as a pooling of interests?
a. Assets of the investee may be overvalued when the price paid by the investor is allocated
among specific assets.
b. Liabilities may be undervalued when the price paid by the investor is allocated to the
specific liabilities.
c. An undue amount of cost may be assigned to goodwill, thus potentially allowing for an
overstatement of pooled earnings.
d. Earnings of the pooled entity may be increased by only the combination and not as a
result of efficient operations.
AICPA 0580 T-14
23. Which of the following is not a characteristic of the pooling method of consolidation
accounting?
A. The subsidiary’s assets are revalued at their fair market values.
B. No goodwill is recognized.
C. The earnings for the subsidiary for the entire year are combined with the earnings of the
parent regardless of the acquisition date.
D. All of the above are characteristic of the pooling method.
E. None of the above is a characteristic of the pooling method.
Flamholtz & Diamond
Criteria for Pooling
13. The 12 conditions established by the Accounting Principles Board (APB) that must be present
in order to use the pooling accounting method for business combinations include all of the
following except
A. Each of the constituent companies is independent of the other companies.
B. The constituent companies combine in a single transaction or in accordance with a
specific plan within 1 year of initiating the plan.
C. None of the constituent companies change the equity interest of their voting common
stock either within 2 years of initiating the combination or between the date of initiation
and consummation of the combination.
D. The combined enterprise agrees to retire or acquire all of the common stock issued to
effect the combination.
CMA 0696 2-6
14. APB Opinion No. 16, Business Combinations, contains conditions that must be met in order for
the pooling-of-interests method of accounting to be used. Which one of the following is not a
condition that must be met to use the pooling-of-interests method to record a business
combination?
A. No constituent company may have more than a 10% ownership of the outstanding voting
common stock of another constituent company.
B. At least 90% of the combinee's outstanding voting common stock must be exchanged for
the combiner's majority voting common stock.
C. No additional capital stock must be contingently issuable to former shareholders of a
combinee after a combination has been initiated.
D. A majority of the officers of the combinee company must also be officers in the combined
enterprise after the combination.
CMA 1291 2-7
15. To report a business combination as a pooling of interests, the minimum amount of an
investee’s common stock that must be acquired during the combination period in exchange for
the investor’s common stock is
a. 51 percent.
c. 90 percent.
b. 80 percent.
d. 100 percent.
AICPA 0590 T-32
Pooling Accounting – Valuation
16. When a parent corporation acquires a new subsidiary and the pooling of interests method is
used to account for the combination, the retained earnings balance of the combined entity
immediately after acquisition is normally equal to
A. The retained earnings balance of the parent company immediately prior to the acquisition.
B. The sum of the retained earnings balances of the combining companies.
C. The sum of the retained earnings balances of the combining companies plus the amount
of the goodwill originating from the business combination.
D. The retained earnings balance of the parent company immediately prior to acquisition plus
the amount of goodwill originating from the business combination.
CIA 0591 IV-42
Pooling Accounting – Implementation
*. A business combination accounted for by the pooling of interest method
a. Records direct acquisition costs as part of the cost of investment.
b. Reports results of operations only for the period in which the combination occurs.
c. After the combination, carries the balance sheet amounts at fair market value.
d. Reports results of operations for the period in which the combination occurs as though the
enterprises had been combined at the beginning of the period.
RPCPA 1097
*. Companies A and B, both calendar combine on July 1, 19x0. The combination is properly
accounted for as a pooling of interest. How should the results of operations be reported for the
year ended December 31, 19x0?
a. Combined from July 1 to December 31 and disclosed for the separate companies from
January 1 to June 30.
b. Combined from July 1 to December 31 and disclosed for the separate companies for the
entire year.
c. Combined for the entire year and disclosed for the separate companies from January 1 to
June 30.
RPCPA 0580
d. Combined for the entire year and disclosed for the separate companies for the entire year.
17. A business combination is accounted for properly as a pooling of interests. Which of the
following expenses related to effecting the business combination should enter into the
determination of net income of the combined corporation for the period in which the expenses
are incurred?
AICPA, Adapted
A.
B.
C.
D.
Fees of Finders and Consultants
Yes
Yes
No
No
Registration Fees
Yes
No
No
Yes
18. A business combination is accounted for as a pooling of interests. Costs of furnishing
information to stockholders related to effecting the business combination should be
a. Deducted directly from retained earnings of the combined corporation.
b. Deducted in determining net income of the combined corporation for the period in which
the costs were incurred.
c. Capitalized but not amortized.
AICPA 1191 T-12
d. Capitalized and subsequently amortized over a period not exceeding forty years.
19. The business combination of Pollin – the issuing company – and the Brie Corp. was
consummated on March 14. At the initiation date, Pollin held 2,000 shares of Brie. If the
combination were accounted for as a pooling of interests, the 2,000 shares of Brie held by
Pollin would be accounted for as
a. Retired stock.
b. 2,000 shares of treasury stock.
c. (2,000 divided by the exchange rate) shares of treasury stock.
d. (2,000 times the exchange rate) shares of treasury stock.
AICPA 0573 I-6
20. On September 30, 1991, Payne, Inc. exchanged some of its shares for all of the common
stock of Salem, Inc. in a business combination accounted for as a pooling of interests.
Salem continued as a wholly owned subsidiary of Payne. How should Salem’s January 1,
1991, retained earnings and income for January 1 to September 30 be reported in 1991
consolidated statements?
AICPA 1192 T-35
1/1/91 Retained Earnings
Income for 1/1 to 9/30/91
a. Added to consolidated retained earnings.
Added to consolidated income
b. Added to consolidated retained earnings.
Excluded from consolidated income
c. Added to consolidated additional paid-in capital
Added to consolidated income
d. Added to consolidated additional paid-in capital
Excluded from consolidated income
PURCHASE METHOD
21. Which form of accounting for a business combination must result in recognition of goodwill
when the amount paid exceeds the fair value of the identifiable net assets?
A. Consolidation.
C. Purchase.
B. Aggregation.
D. Pooling.
Gleim
22. For the past several years, M.F.S. Company has invested in the common stock of Annabelle
Company. M.F.S. currently owns approximately 13% of the total of Annabelle's outstanding
voting common stock. Recently, managements of the two companies have discussed a
possible combination of the two entities. If they do decide to combine, the resulting
combination should be accounted for as a
A. Pooling of interests.
C. Part purchase, part pooling.
B. Purchase.
D. Joint venture.
Gleim
*. Investments in net assets of the acquired company require cash outlay which directly reduced
the combined capital of the acquiring company or that funds used are financed with freshly
borrowed funds.
a. Pooling of interest.
b. Leverage or trading on equity.
c. Acquisition method of recording a combination.
d. None of the above.
RPCPA 1084
*. The acquisition of some or all the stock held by minority stockholders of a subsidiary – whether
acquired by the parent, the subsidiary itself, or another affiliate shall be accounted for by the
a. Pooling of interests method.
b. None of these.
c. Purchase method.
d. Purchase method rather than by the pooling of interests method.
RPCPA 0598
23. For the past several years, Mozza Co. has invested in the common stock of Chedd Co. Mozza
currently owns approximately 13% of the total of Chedd’s outstanding voting common stock.
Recently, managements of the two companies have discussed a possible combination of the
two entities. If they do decide to combine, the resulting combination should be
accounted for as a
a. Pooling of interests.
c. Part purchase, part pooling.
b. Purchase.
d. Joint venture.
Gleim
24. Which of the following conditions would cause a business combination to be accounted for by
the purchase method?
a. The combined corporation intends to dispose of duplicate facilities within one year of the
combination.
b. Cash is to be used to acquire 2% of the outstanding stock of one of the combining
companies.
c. After the combination is consummated, one of the combining companies will be a
subsidiary of another combining company.
d. Before the combination is consummated, one of the combining companies holds 15% of
the outstanding stock of another of the combining companies.
AICPA 1192 T-32
25. Under accounting for consolidations, the purchase method is characterized by all of the
following attributes except that the
A. Assets and liabilities are recorded at fair value or the purchase price of the acquired
company, whichever is less.
B. Excess of the purchase price over the fair value of identifiable assets and liabilities is
recorded as goodwill.
C. Goodwill of the acquired company is always carried forward to the balance sheet of the
consolidated entity.
D. Fair value of the shares issued by the acquiring company is added to the paid-in capital of
the consolidated entity.
CMA 0695 2-7
26. Which of the following is a true statement about the accounting treatment of business
combinations?
A. The excess amount paid over the book value of the target's assets is added to retained
earnings under the pooling method.
B. The purchase method results in higher taxes on the transaction.
C. The purchase method is preferable to the pooling method because it eliminates any
minority interest.
D. Purchase accounting results in a write-up of the assets of the acquired firm when their
book value is less than fair value.
Gleim
Criteria for Purchase Method
Purchase Accounting – Valuation
27. A common mistake in valuing the firm to be acquired in a business combination is
A. Using market values in the valuation.
B. Including incremental cash flows in the valuation.
C. Using the acquiring firm's discount rate when valuing the incremental cash flows.
D. Including all related transaction costs associated with an acquisition.
Gleim
28. The appropriate discount rate to use in valuing a business combination is the
A. Combined firm's cost of debt.
B. Acquiring firm's weighted average cost of capital.
C. Acquiring firm's cost of equity.
D. Combined firm's cost of equity.
Gleim
29. In a business combination that is accounted for as a purchase and does not create negative
goodwill, the acquiring company records the assets of the acquired company at the
A. Original cost.
B. Original cost minus accumulated depreciation.
C. Fair market value.
D. Book value.
CMA 0697 2-21
30. In a business combination that is accounted for as a purchase and does not create negative
goodwill, the assets of the acquired company are to be recorded on the books of the acquiring
company at
A. Original cost minus accumulated depreciation.
B. Fair value.
C. Replacement cost.
D. Book value.
CMA 1292 2-9
52. Which of the following most accurately describes the position taken by current generally
accepted accounting principles?
a. Both pooling of interests and the purchase method are still permitted under certain
circumstances.
b. The purchase method results in the assets of the acquired company being recognized on
the acquiring company's balance sheet at their fair value at the date of acquisition.
c. Goodwill may arise as a result of a business acquisition accounted for as a pooling of
interests.
S,S&S
d. The purchase method requires a business acquisition transaction to be structured to meet
twelve very specific criteria required by generally accepted accounting principles.
Direct Costs of Combination
*. The acquisition of some or all the stock held by minority stockholders of a subsidiary – whether
acquired by the parent, the subsidiary itself, or another affiliate shall be accounted for by the
a. Pooling of interests method.
b. None of these.
c. Purchase method.
d. Purchase method rather than by the pooling of interests method.
RPCPA 0598
*. The costs of registering equity securities to be issued by the acquiring company in a business
combination accounted for as a purchase are a (an)
a. Expense of the combined company for the period in which the costs were incurred.
b. Reduction of the otherwise determinable fair value of the securities.
c. Direct addition to stockholders’ equity of the combined company.
d. Addition to goodwill.
RPCPA 0590
31. A business combination is accounted for properly as a purchase. 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.
AICPA 0595 F-53
32. PDC Corp. acquired 100% of the outstanding common stock of Sea Corp. in a purchase
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 to disposal.
c. Finished goods to be valued at replacement cost.
d. Finished goods to be valued at estimated selling prices, less both costs of disposal and a
reasonable profit allowance.
AICPA 0593 T-7
Property, Plant & Equipment
*. Which of the following is the appropriate basis for valuing fixed assets acquired in a business
combination accounted for as a purchase carried out by exchanging cash for common stock?
a. Cost plus any excess of purchase price over book value of asset acquired.
b. Historical cost.
c. Fair value.
d. Book value.
RPCPA 0584, 5/98
33. Under the purchase method of accounting, the value of long-lived assets of the acquired
company
A. Is the book value in the ledger and the consolidated financial statements.
B. Is the fair value in the ledger and book value in the consolidated financial statements.
C. Is the current fair value.
CMA 0695 2-9
D. Depends upon the purchase price paid for the assets on the date of acquisition.
34. On January 1, 1991, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for
cash equal to the book value of the stock. The carrying amounts of Scarp’s assets and
liabilities approximated their fair values, except that the carrying amount of its building was
more than fair value. In preparing Prim’s 1991 consolidated income statement, which of the
following adjustments would be made?
a. Depreciation expense would be decreased and goodwill amortization would be
recognized.
b. Depreciation expense would be increased and goodwill amortization would be recognized.
c. Depreciation expense would be decreased and no goodwill amortization would be
recognized.
d. Depreciation expense would be increased and no goodwill amortization would be
recognized.
AICPA 1192 T-33
Excess Appraisal Value
35. In a business combination accounted for as a purchase, the appraisal value of the identifiable
assets acquired exceeds the acquisition price. The excess appraisal value should be reported
as a
a. Reduction of values assigned to current assets and a deferred credit for any unallocated
portion.
b. Reduction of values assigned to noncurrent assets and a deferred credit for any
unallocated portion.
c. Deferred credit.
AICPA 0590 T-33, RPCPA 1096
d. Pro rata reduction of the values assigned to current and noncurrent assets.
36. In a business combination accounted for as a purchase, the appraised values of the
identifiable assets acquired exceeded the acquisition price. How should the excess appraised
value be reported?
a. As negative goodwill.
b. As additional paid-in capital.
c. As a reduction of the values assigned to noncurrent assets and a deferred credit for any
unallocated portion.
d. As positive goodwill.
AICPA 1195 F-53
*. In accounting for business combinations, what is the appropriate treatment for an excess of fair
value assigned to net assets over the cost paid for them?
a. Record as additional paid-in capital from combination on the books of the combined
company.
b. Proportionately reduce value assigned to noncurrent assets and record any remaining
excess as deferred credit.
c. Record as negative goodwill.
d. Proportionately reduce values assigned to non-monetary assets and record any remaining
excess as deferred credit.
RPCPA 0584
*. BCD Corporation acquired UVW Corporation through a business combination accounted for as
a purchase. The appraised or market values of the identifiable assets acquired less liabilities
assumed exceeds the acquisition price paid by BCD for UVW. The excess appraisal or market
value should be
a. Reported as a deferred credit amortized systematically to income.
b. Allocated to reduce proportionately the values assigned to current assets and a deferred
credit for any unallocated portion.
c. Allocated to reduce proportionately the values assigned to noncurrent assets (except
long-term investments in marketable securities) and a deferred credit for any unallocated
portion.
d. Allocated pro rata to reduce proportionately the values assigned to current and noncurrent
assets and a deferred credit for any unallocated portion.
RPCPA 1096
Patent & Research & Development Costs
37. Company B has properly treated as expense $200,000 of research and development costs
that resulted in a patent. When Company A acquired Company B in a transaction accounted
for by the purchase method, it was determined that the patent had a value of $500,000. Which
of the following statements is true?
A. On the books of Company A, the patent should have a value of $200,000 because that
was the cost to produce it.
B. The cost of the patent on the books of Company A should be $500,000.
C. The cost of the patent on the books of Company A should be the same as on the books of
Company B.
D. The cost of the patent on the books of Company A should be represented by the legal
costs involved in the patent process.
Gleim
38. Included in the assets of an acquired subsidiary that was accounted for as a purchase are a
patent that was internally developed, equipment used in research and development (R&D) that
has alternative use, and equipment used in R&D that has no alternative use. FASB
Interpretation No. 4, Applicability of SFAS 2 to Business Combinations Accounted for by the
Purchase Method, requires that the purchase price be allocated to these three asset
categories based on their fair values at the date of the business combination. Which statement
is correct concerning the subsequent accounting for these three asset types?
A. The value assigned to all three assets should be immediately expensed as R&D expense.
B. The value assigned to the two types of equipment to be used in R&D should be expensed
immediately as R&D expense.
C. The value assigned only to the equipment to be used in R&D that has no alternative use
should be immediately expensed as R&D expense.
D. The value assigned to the equipment to be used in R&D that has an alternative use
should be expensed immediately as R&D expense.
Gleim
Net Assets
39. APB 16 states the principles to be followed in allocating the cost of an acquired company
when using the purchase method for a business combination. If the current fair value of the net
assets acquired exceeds the total cost, the difference should be
A. Added directly to equity at the date of acquisition.
B. Treated as goodwill to be amortized over the period benefitted, not to exceed 40 years.
C. Allocated on a pro rata basis to the assets acquired.
CMA 1291 2-8
D. Applied pro rata to reduce, but not below zero, the amounts initially assigned to
noncurrent assets other than long-term investments in marketable securities.
Goodwill
4. In a business combination, goodwill is defined as the excess of cost over the
a. fair value of assets acquired.
b. fair value of assets acquired less the liabilities assumed.
c. book value of assets acquired less the liabilities assumed.
d. net book value of assets acquired.
S,S&S
45. Goodwill is:
A. Amortized over the greater of its estimated life or forty years.
B. Only recorded by the seller of a business.
C. The excess of the fair market value of a business over the fair market value of all net
identifiable assets.
D. Not subject to amortization for purposes of income taxes.
S,S&T
40.
When a business is acquired, the purchasing company calculates goodwill associated with the
acquisition as the difference between the purchase price and the
a. Book value of the identifiable net assets acquired.
b. Fair value of the identifiable net assets acquired.
c. Book value of the net intangible assets acquired.
d. Fair value of the net tangible assets acquired.
CIA 1195 IV-31
30. During 2001, Bond Company purchased the net assets of Lett Corporation for $635,000. On
the date of the transaction, Lett had no long-term investments in marketable securities and
had $200,000 of liabilities. The fair value of Lett's assets when acquired were as follows:
Current assets
Noncurrent assets
$
360,000
840,000
$ 1,200,000
How should the $365,000 difference between the fair value of the net assets acquired
($1,000,000) and the cost ($635,000) be accounted for by Bond?
a. The $365,000 difference should be credited to retained earnings.
b. The noncurrent assets should be recorded at $475,000.
c. The current assets should be recorded at $250,500 and the noncurrent assets should be
recorded at $584,500.
d. A deferred credit of $365,000 should be set up and then amortized to income over a
period not to exceed forty years.
K, W & W
41. An internal auditor is asked to assist the organization by reviewing the terms of a tentative
merger. A review of the financial statements of the firm that the organization wishes to acquire
reveals an asset recorded for goodwill. This account indicates that the firm under review had
previously acquired another organization, and the
A. Pooling-of-interests method of recording was used, and that assets were valued at their
estimated market value at the time of the merger.
B. Purchase method of recording was used, and that assets were valued at their estimated
market value at the time of the merger.
C. Pooling-of-interests method of recording was used, and that the assets of the merging
firms were added, without adjustment, at the time of the merger.
D. Purchase method of recording was used and that the assets of the merging firms were
added, without adjustment, at the time of the merger.
CIA 0592 IV-54
42. When a business is acquired, the purchasing company calculates goodwill associated with the
acquisition as the difference between the purchase price and the
A. Book value of the identifiable net assets acquired.
B. Fair value of the identifiable net assets acquired.
C. Book value of the net tangible assets acquired.
D. Fair value of the net tangible assets acquired.
CIA 1195 IV-31
*. Goodwill arising from a business combination should
a. Be expensed in the year of acquisition.
c. Not be amortized as it is an asset.
b. Be amortized over its economic life.
d. Be written off after 40 years. RPCPA 0588
43. An entire acquired company is sold. The unamortized cost of the goodwill recognized in the
acquisition should be
A. Included in the cost of the assets sold.
B. Charged to retained earnings of the current period.
C. Expensed in the period sold.
D. Charged to retained earnings of prior periods.
Gleim
44. Dire Co. purchased Wall Co. at a cost that resulted in recognition of goodwill having an
expected 10-year benefit period However, Dire plans to make additional expenditures to
maintain goodwill for a total of 40 years. What costs should be capitalized and over how many
years should they be amortized?
AICPA 1191 T-13
Costs Capitalized
Amortization
Period
a.
Acquisition costs only.
10 years
Acquisition costs only.
40 years
b.
c.
Acquisition and maintenance costs.
10 years
d.
Acquisition and maintenance costs.
40 years
45. Parent Co. recognized goodwill when it acquired Sub Co. in a business combination
accounted for as a purchase. As of the most recent balance sheet date, Parent determined
that a separable group of assets to be held and used that were acquired in the combination
had been impaired. How does Parent’s recognition of an impairment loss on the separable
group of assets affect its accounting for the goodwill recognized in the acquisition of Sub Co.?
A. Goodwill is not affected.
B. The goodwill associated with the impaired assets is eliminated before reducing carrying
amounts of those assets.
C. The goodwill associated with the impaired assets is reduced on a pro rata basis.
D. The goodwill associated with the impaired assets is eliminated only if the assets are to be
disposed of.
Gleim
Bonds
46. In a business combination, the purchasing company's acquisitions on January 1, year 1
included $100,000 of debenture bonds paying 8% annual interest and maturing December 31,
year 3. If the current interest rate at January 1, year 1 is 12%, the formula to compute the
recorded basis of the bonds is
A. ($100,000 x the present value of $1 at 8% for 3 periods) + ($8,000 x the present value of
an ordinary annuity at 8% for 3 periods).
B. ($100,000 x the present value of $1 at 8% for 3 periods) + ($8,000 x the present value of
an ordinary annuity at 12% for 3 periods).
C. ($100,000 x the present value of $1 at 12% for 3 periods) + ($8,000 x the present value of
an ordinary annuity at 12% for 3 periods).
D. ($100,000 x the present value of $1 at 12% for 3 periods) + ($8,000 x the present value of
an ordinary annuity at 8% for 3 periods).
CIA 0591 IV-39
Lease
47. Which of the following statements is true about a lease held by a subsidiary acquired in a
business combination accounted for as a purchase?
A. The classification of a lease in accordance with the criteria of SFAS 13 should be based
on the value assigned to the lease at the date of the business combination.
B. The provisions of a lease that are modified in connection with the business combination
should be disregarded in the classification of the lease.
C. The lease should be accounted for by the combined enterprise in the same manner that it
was accounted for (both classification and valuation) by the subsidiary.
D. The valuation of the lease asset and obligation should be based on their fair market
values as of the date of the business combination.
Gleim
Preacquisition Contingency
48. SFAS 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, defines a
preacquisition contingency as a contingency of an enterprise acquired in a business
combination accounted for by the purchase method that is in existence before the end of the
allocation period. The allocation period is defined as the period required to identify and
quantify the assets acquired and the liabilities assumed. A preacquisition contingency will be
excluded from the allocation of the purchase price if it involves an infringement of patent
lawsuit brought
a. Against the acquired company that is settled before the consummation of the business
combination.
b. By the acquired company against a competitor that is settled before the consummation of
the business combination.
c. By the acquired company against a competitor for which information obtained prior to the
end of the allocation period indicates that it is probable that the lawsuit will be favorably
settled for an amount that is reasonably estimable.
d. By the acquired company against a competitor for which information obtained prior to the
end of the allocation period indicates that it is reasonably possible that the lawsuit will be
favorably settled for an amount that is reasonably estimable.
Gleim
Single-Employer Defined Pension Plan
49.
In a business combination structured as a purchase, Ryan Co. acquired Pichardo Co., which
sponsors a single-employer defined pension plan. Ryan should
a. Recognize any previously existing unrecognized net gain or loss.
b. Assign as part of the purchase price to the unrecognized prior service cost as an
intangible asset.
c. Assign part of the purchase price to the excess of plan assets over the projected benefit
obligation.
d. Recognize a previously existing unrecognized transition net asset or obligation of the
plan.
Gleim
50. If, in a business combination structured as a purchase, the acquired company sponsors a
defined benefit pension plan, the acquiring company should
A. Recognize any previously existing unrecognized net gain or loss.
B. Assign part of the purchase price to the unrecognized prior service cost as an intangible
asset.
C. Assign part of the purchase price to the excess of plan assets over the projected benefit
obligation.
D. Recognize a previously existing unrecognized transition net asset or obligation of the
plan.
Gleim
51.
On January 1 of this year, Ent Co. acquired Idiary Co. in a business combination accounted for
as a purchase. Idiary sponsors a single-employer defined benefit pension plan. At the date of
the combination, the following data were available:
Projected benefit obligation
$5,000,000
Fair value of plan assets
4,000,000
Accumulated benefit obligation
4,500,000
Unrecognized net transition obligation
600,0000
Unrecognized prior service cost
200,000
Prepaid pension cost
100,000
The allocation of the purchase price should be based on which of the following?
a. The only allocation related to the pension plan will be $100,000 for prepaid pension cost.
b. An allocation must be made to liabilities for the transition net obligation, prior service cost,
and net loss.
c. A liability must be recognized for the excess of the projected benefit obligation over plan
assets.
d. A liability must be recognized for the excess of the accumulated benefit obligation over
plan assets.
Gleim
Acquisitions by Banks or Thrift Institutions
52. SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, is applicable to
business combinations in which the fair value of liabilities assumed exceeds the fair value of
the identifiable assets acquired in the acquisition by a banking of thrift institution. In such an
acquisition, the identifiable intangible asset (goodwill) that is recognized in the business
combination should be amortized over
a. Its expected useful life using the straight-line method.
b. Its expected useful life, not exceeding 40 years, using the straight-line method.
c. Its expected useful life, not exceeding 40 years, using the interest method.
d. A period no longer than over which the discount on the long-term interest-bearing assets
acquired is to be recognized as interest income, not to exceed 40 years, using the interest
method.
Gleim
53. In connection with an acquisition by a banking or thrift institution, a regulatory authority may
provide assistance by agreeing to pay amounts by which future interest received or receivable
on the interest-bearing assets acquired is less than the interest cost of carrying those assets
for a period by a stated margin. Which of the following statements relative to such a case is
true?
a. The projected assistance must be included in the determination of their fair value of the
interest bearing assets acquired.
b. The carrying amount of interest-bearing assets must be adjusted as the projected
assistance is received.
c. The actual assistance must be reported in the income of the period in which it is received.
d. The projected assistance must be included in the determination of the fair value of
interest-bearing assets, except those assets that the enterprise intends to sell or a portion
of.
Gleim
Purchase Accounting – Implementation
PURCHASE VS. POOLING OF INTEREST METHOD
Valuation of Assets
54. In preparing consolidated financial statements for a parent company and two subsidiary
companies, a major difference between the pooling and purchase accounting treatments is
that
A. The fair values of the assets of the subsidiaries at the time of acquisition are used in
purchase accounting but are not used in pooling accounting.
B. The fair values of the assets of the subsidiaries at the time of acquisition are used in
pooling accounting but are not used in purchase accounting.
C. Recognition of consolidated goodwill can result under pooling accounting but not under
purchase accounting.
D. Comparative financial statements that pertain to pre-combination periods must be
restated on the combined basis under purchase accounting but not under the pooling
treatment.
CIA 0591 IV-29
Acquisition Occurring in the Middle of the Year
55. A business combination occurs in the middle of the year. Results of operations for the year of
combination would include the combined results of operations of the separate companies for
the entire year if the business combination is a
AICPA 0594 F-52
a.
b.
c.
d.
Purchase
Yes
Yes
No
No
Pooling of interests
Yes
No
No
Yes
37. A business combination occurs in the middle of the year. Operating results for the year of
combination would include the combined results of operations of the separate companies for
the entire year if the combination is a
RPCPA 0593
a.
b.
c.
d.
Pooling of interests
Yes
Yes
No
No
Purchase
No
Yes
Yes
No
Long-term Debt
56. In a business combination, how should long-term debt of the acquired company generally be
reported under each of the following methods?
AICPA 1195 F-52
a.
b.
c.
d.
Pooling of interest
Fair value
Fair value Carrying amount Carrying amount
Purchase
Carrying amount Fair value Fair value
Carrying amount
Minority Interest
57. A subsidiary may be acquired by issuing common stock in a pooling-of-interests transaction or
by paying cash in a purchase transaction. Which of the following items is reported in the
consolidated financial statements at the same amount regardless of the accounting method
used?
a. Minority interest.
c. Retained earnings.
b. Goodwill.
d. Capital stock.
AICPA 0582 T-12
Retained Earnings
58. How would the retained earnings of a subsidiary acquired in a business combination usually
be treated in a consolidated balance sheet prepared immediately after the acquisition?
a. Excluded for both a purchase and a pooling of interests.
b. Excluded for a pooling of interests but included for a purchase.
c. Included for both a purchase and a pooling of interests.
d. Included for a pooling of interests but excluded for a purchase.
AICPA 1182 T-2
Net Income
59. Kiwi, Inc.’s planned combination with Mori Co. on January 1, 1994, can be structured either as
a purchase or a pooling of interests. In a purchase, Kiwi would acquire Mori’s identifiable net
assets for more than their book values. These book values approximate fair values. Mori’s
assets consist of current assets and depreciable noncurrent assets. Ignoring costs required to
effect the combination and income tax expense, how would the combined entity’s 1994 net
income under purchase accounting compare to that under pooling of interests accounting?
a. Less than pooling.
c. Greater than pooling. AICPA 0594 F- 51
b. Equal to pooling.
d. Not determinable from information given.
*. In a planned combination, WYX Corporation, would acquire ABC, Inc.’s identifiable assets for
more than their book values. These book values approximate fair value. ABC’s assets consists
of current assets and depreciable non-current assets. Ignoring costs required to effect the
combination and income tax expense, how would the combined entity’s net income the year
following the acquisition using purchase accounting compared to that under pooling of
interests accounting.
a. Not determinable from the facts given.
c. Equal to pooling.
b. Less than pooling.
d. Greater than pooling.
RPCPA 1097
60. Cedar Co.’s planned combination with Birch Co. on January 1, 1992, can be structured as
either a purchase or a pooling of interests. In a purchase, Cedar would acquire Birch’s
identifiable net assets for less than their book values. These book values approximate fair
values. Birch’s assets consist of current assets and depreciable noncurrent assets. How would
the combined entity’s 1992 net income and operating cash flows under purchase accounting
compare to those under pooling of interests accounting? Ignore costs required to
effect the combination and income tax expense.
AICPA 1191 T-11
Purchase accounting net income
Purchase accounting operating cash flows
a.
Equal to pooling
Greater than pooling
b.
Equal to pooling
Equal to pooling
c.
Greater than pooling
Greater than pooling
d.
Greater than pooling
Equal to pooling
COMBINED FINANCIAL STATEMENTS
*. For which of the following reporting units is the preparation of combined financial statements
most appropriate? AICPA 1191 T-8, RPCPA 1096 a. A corporation and a majority-owned
subsidiary with non-homogeneous operations.
b. A corporation and a foreign subsidiary with non-integrated homogeneous operations.
c. Several corporations with related operations with some common individual owners.
d. Several corporations with related operations owned by one individual.
*. Combined statements may be used to present the results of operations of
AICPA 1190 T-3
a.
b.
c.
Unconsolidated subsidiaries
Yes
Yes
No
Companies under common management
Yes
No
Yes
d.
No
No
*. Combined financial statements may be used to present the results of
a. A group of unconsolidated subsidiaries but not
for enterprises under common
management.
b. A group of unconsolidated subsidiaries or for enterprises under common management.
c. Neither a group of unconsolidated subsidiaries nor enterprises under common
management.
d. Enterprises under common management but not for a group of unconsolidated
subsidiaries.
RPCPA 1097
61. Combined statements may be used to present the results of operations of
AICPA 0593 T-8
a.
b.
c.
Companies under common management
No
Yes
No
Commonly controlled companies
Yes
No
No
d.
Yes
Yes
62. In a business combination accounted for as a pooling
a. Income is combined only from date of combination, not for prior periods presented.
b. Income is combined for all periods presented.
AICPA 1193 T-12
c. After the combination, balance sheet amounts are carried at fair market value.
d. Direct acquisition costs are recorded as part of the cost of the investment.
Combined and Consolidated Financial Statements
63. Which of the following items should be treated in the same manner in both combined financial
statements and consolidated statements?
AICPA, Adapted
A.
B.
C.
D.
Different Fiscal Periods
No
No
Yes
Yes
Foreign Operations
No
Yes
Yes
No
EARNINGS PER SHARE
64. Which of the following statements concerning the effect of business combinations on
computation of earnings per share is correct according to GAAP?
A. When shares are issued to acquire a business in a transaction accounted for as a
purchase, the computation of EPS should not give recognition to the new shares from the
date the acquisition took place.
B. When a business combination is accounted for as a pooling of interests, the computation
should be based on the aggregate of the weighted average outstanding shares of the
constituent businesses, adjusted to equivalent shares of the surviving business for all
periods presented.
C. When a business combination is accounted for as a pooling of interests, the computation
should be based on the aggregate of the weighted average outstanding shares of the
constituent businesses, but not adjusted to equivalent shares of the surviving entity.
D. The computation of EPS will be exactly the same whichever method (purchase vs. pooling
of interests) is used to account for a business combination.
Gleim
DISCLOSURE REQUIREMENTS
Pooling of Interest
65. If a business combination is accounted for as a pooling of interests, which one of the following
items does not need to be disclosed in notes to the financial statements?
A. Details of an increase or decrease in retained earnings from changing the fiscal year of a
combining company.
B. Details of the results of operations of the previously separate companies, for the period
before the combination is consummated, that are included in the current combined net
income.
C. Description and number of shares of stock issued in the business combination.
D. Description of the plan for amortization of goodwill resulting from the combination. Gleim
66. The disclosures required for a business combination concluded in the current year and
accounted for as a pooling of interests include all of the following except
A. A description of the stock transaction along with the number of shares of stock issued in
the combination.
B. The names and descriptions of the enterprises combined, except an enterprise whose
name is carried forward to the combined enterprise.
C. The names of the finance companies cooperating in or providing funds to the acquiring
company to facilitate the acquisition.
D. Detailed operational results of the previously separate enterprises for the period before
the combination that are included in the current combined net income.
CMA 0693 2-11
Purchase Method
67. When a business combination occurs that is accounted for by the purchase method, what pro
forma data should be disclosed as supplemental information in the financial statements of the
acquiring company?
A. Contingent payments, options, or commitments specified in the acquisition agreement.
B. If comparative statements are presented, the results of operations for all periods reported
as though the companies had combined at the beginning of the earliest period.
C. If comparative financial statements are presented, the results of operations for the
immediately preceding period as though the companies had combined at the beginning of
that period.
D. The period for which the results of operations of the acquired company are included on
the income statement of the acquiring corporation.
Gleim


COMPREHENSIVE
*. The following statements relate to business combinations:
 In a pooling of interests, retained earnings may be decreased but not increased.
 Direct out-of-pocket costs (e.g., lawyers’ fees) should be expended in a pooling
combination.
 The purchase method is the only method where goodwill resulting from a business
combination is recorded.
 In recording a pooling of interest, fair values of net assets acquired are ignored ad book
values are used.
a. None of the statements is false.
c. Only two statements are false.
b. Only one statement is false.
d. Three statements are false. RPCPA 1091
68. An entire acquired company is sold. The unamortized cost of the goodwill recognized in the
acquisition should be
A. Included in the cost of the assets sold.
B. Charged to retained earnings of the current period.
C. Expensed in the period sold.
D. Charged to retained earnings of prior periods.
Gleim
ANSWER EXPLANATIONS
1. Answer (A) is correct. A business combination is beneficial when the result is a positive NPV.
This effect results from synergy, which exists when the value of the combined firm exceeds the
sum of the values of the separate firms. It can be determined by using the risk-adjusted rate to
discount the change in cash flows of the newly formed entity. If a positive net present value is
generated, a combination is indicated.
Answer (B) is incorrect because a combination is indicated if economies of scale can be
attained. Answer (C) is incorrect because diversification may or may not result in a positive
NPV. Answer (D) is incorrect because some beneficial combinations involve exchanges of
stock.
separate legal entity. The nonsurviving company generally ceases to exist as a separate
entity. Its stock is canceled, and its books are closed.
Answer (B) is incorrect because, in a consolidation, a new company is formed to account for
the assets and liabilities of the combining companies. This term should not be confused with
the consolidation of the financial statements of legally separate entities. Answers (C) and (D)
are incorrect because they describe an investment in stock. A parent-subsidiary relationship
exists when the investor company holds more than 50% of the outstanding stock of the
investee company.
Answer (D) is incorrect because
2. Answer (A) is correct. A merger is a business combination in which an acquiring firm absorbs
another firm. The acquiring firm remains in business as a combination of the two merged firms.
Thus, the acquiring firm maintains its name and identity. The combination is legally
straightforward. However, approval of the merger is required by votes of the shareholders of
each firm.
Answer (B) is incorrect because a consolidation merges two companies and forms a new
company in which neither of the two merging firms survives. It is similar to a merger, but one
firm is not absorbed by another. Answer (C) is incorrect because a proxy fight is an attempt by
dissident shareholders to gain control of the corporation by electing directors. Answer (D) is
incorrect because an acquisition involves the purchase of all of another firm's assets or a
controlling interest in its stock.
5. Answer (B) is correct. No formal books are kept and no formal journal entries are prepared for
a consolidated entity created by a stock investment. When consolidated financial statements
are prepared, the normal procedure is to start with the output of the formal accounting systems
of the parent and the subsidiary and, on a worksheet only, prepare the informal (worksheet)
adjusting and elimination entries necessary to prepare the consolidated financial statements.
These consolidating adjusting entries must be cumulative because previous worksheet entries
were not recorded in the accounts of either the parent or the subsidiary.
Answer (A) is incorrect because a separate (formal) set of accounting records is usually not
maintained for a consolidated entity. Answer (C) is incorrect because a separate (formal) set
of accounting records is usually not maintained for a consolidated entity. Answer (D) is
incorrect because a separate (formal) set of accounting records is usually not maintained for a
consolidated entity.
3. Answer (D) is correct. A consolidation is a business transaction in which an acquiring firm
absorbs a second firm. An entirely new company is formed, and neither of the merging
companies survives. Firm B merges with firm C to form an entirely new company called BC,
and neither B nor C survives. Therefore, this is a consolidation.
Answer (A) is incorrect because a tender offer is used in an acquisition by a firm to the
shareholders of another firm to tender their shares for a specified price. Answer (B) is incorrect
because an acquisition of assets results in the ending of the existence of the acquired firm with
the acquiring firm remaining in existence. Answer (C) is incorrect because an acquisition of
stock results in the ending of the existence of the acquired firm with the acquiring firm
remaining in existence.
6. Answer (D) is correct. A merger is a business combination in which the acquiring firm absorbs
a second firm, and the acquiring firm remains in business as a combination of the two merged
firms. The acquiring firm usually maintains its name and identity. Mergers are legally
straightforward because there is usually a single bidder and payment is made primarily with
stock. The shareholders of each firm involved with the merger are required to vote to approve
the merger. However, merger of the operations of two firms may ultimately result from an
acquisition of stock.
Answer (A) is incorrect because it is a true statement about mergers. Answer (B) is incorrect
because it is a true statement about mergers. Answer (C) is incorrect because it is a true
statement about mergers.
4. REQUIRED: The characteristic of a business combination legally structured as a merger.
DISCUSSION: (A) In a business combination legally structured as a merger, the assets and
liabilities of one of the combining companies are transferred to the books of the other
combining company (the surviving company). The surviving company continues to exist as a
7. Answer (A) is correct. Undervaluation of the firm to be acquired may result if the market
focuses on short-term earnings rather than long-term prospects. Thus, such a firm may be a
bargain for the acquirer. Another aspect of undervaluation is that a firm's q ratio (market value
of the firm's securities ÷ replacement cost of its assets) may be less than one. Hence, an
acquiring firm that wishes to add capacity or diversify into new product lines may discover that
a combination is less expensive than internal expansion.
Answer (B) is incorrect because the q ratio equals market value of the firm's securities ÷
replacement cost of its assets. Answer (C) is incorrect because the q ratio equals market value
of the firm's securities ÷ replacement cost of its assets. Answer (D) is incorrect because the q
ratio equals market value of the firm's securities ÷ replacement cost of its assets.
8. Answer (D) is correct. In pooling of interests, assets and liabilities are recorded by the
combined entity at their carrying (book) value, a treatment compatible with historical cost. If the
separate companies recorded assets and liabilities using different methods, the amounts may
be adjusted to the same basis of accounting if the change would have been appropriate for the
separate company.
Answer (A) is incorrect because a consolidation may be accounted for as a purchase wherein
assets are recorded at fair values. Answer (B) is incorrect because aggregation is a nonsense
term in this context. Answer (C) is incorrect because purchase accounting records fair, not
book, values.
9. Answer (B) is correct. Costs incurred to effect a business combination accounted for as a
pooling of interests are expenses of the combined corporation, not additions to assets or direct
reductions of equity. Consequently, they are deducted in determining the net income of the
combined company for the period in which they are incurred (APB 16).
Answer (A) is incorrect because pooling of interests accounting assumes a combining of
ownership interests, not a purchase, and no basis exists for revaluing assets. No readjustment
of asset and liability balances occurs except to conform the accounting principles of the pooled
companies. Accordingly, the retained earnings of the acquired company are also carried
forward to the consolidated financial statements. Answer (C) is incorrect because no goodwill
is recorded in a pooling unless it was already on the books of a combining company. Goodwill
is recognized only if a purchase has occurred to establish an objective valuation. Answer (D) is
incorrect because pooling of interests accounting assumes a combining of ownership
interests, not a purchase, and no basis exists for revaluing assets. No readjustment of asset
and liability balances occurs except to conform the accounting principles of the pooled
companies. Accordingly, the retained earnings of the acquired company are also carried
forward to the consolidated financial statements.
10. REQUIRED: The justification for using the pooling of interests method to account for a
business combination.
DISCUSSION: (D) Under the pooling of interests method, the assets, liabilities, and owners’
equity of the participating entities are combined (pooled) at their current book values. Hence,
a pooling of interests is a combination rather than an acquisition. Maintenance of original
historical costs is inconsistent with an acquisition.
Answer (A) is incorrect because the ownership interest of each combining company continues
intact in a pooling of interests. Answer (B) is incorrect because a pooling of interests is
theoretically different from an acquisition. Because assets and liabilities are combined at their
recorded values, no goodwill results. Answer (C) is incorrect because the fair value of
individual assets is not a consideration in the pooling of interests.
11. REQUIRED: The statement that supports the pooling-of-interests method in a business
combination.
DISCUSSION: (B) One of the 12 requirements for the pooling-of-interests method is that the
ratio of ownership among individual shareholders remains the same. Hence, the shareholder
groups remain intact but combine.
Answer (A) is incorrect because book values are used to account for pooling. Answer (C) is
incorrect because goodwill is recorded when purchase method is used. Answer (D) is incorrect
because book values are used to record assets.
12. REQUIRED: The potential abuse from accounting for a business combination as a pooling of
interests.
DISCUSSION: (D) Because a pooling of interests is accounted for as a combining of
ownership interests rather than an acquisition, the net income of the pooled entity must be
restated to include the income of all of the constituent companies. There is no accounting
recognition of the value of the stock exchanged, so earnings of the pooled entity would
increase even if the combination were economically inefficient.
Answers (A) and (B) are incorrect because the pooling-of-interests method does not allocate
fair values among specific assets and/or liabilities but combines the assets and liabilities at
their book values. Answer (C) is incorrect because the pooling-of-interests method does not
give rise to goodwill recognition.
13. Answer (D) is correct. Under APB 16, all 12 of the following criteria must be met: (1) The
combining companies are autonomous; i.e., one has not been a subsidiary of the other during
the past 2 years. (2) Not more than 10% of the stock of any combining company is held by the
other combining companies before the pooling. (3) The combination is effected in a single
transaction within 1 year after the plan is initiated. (4) Only common stock of the surviving
company is issued for at least 90% of the outstanding voting stock of the other combining
companies. (5) The combining companies do not change the composition of shareholders'
equity or the amount of common stock in contemplation of the combination. (6) The combining
companies reacquire treasury stock only for purposes other than the business combination. (7)
The ratio of ownership of individual common shareholders to that of other common
shareholders remains the same after the exchange of stock; i.e., each shareholder maintains
his/her relative percentage of ownership. (8) The new shareholders are not deprived of or
restricted in exercising the voting rights of their stock. (9) The combination is resolved when
initiated, and there are no provisions for contingent issuances of securities or for the payment
of other contingent consideration. (10) There is no plan to retire any stock issued to effect the
combination. (11) No special financial arrangements are made to benefit former shareholders
of the combining companies. (12) There is no plan to dispose of a significant amount of the
combining companies' assets for the 2 years following the combination, except to eliminate
duplicate facilities or excess capacity. As noted above, an agreement to directly or indirectly
retire or acquire all of the common stock issued to effect the combination would rule out the
use of the pooling method.
Answer (A) is incorrect because these are all pooling criteria specified in APB 16. Answer (B)
is incorrect because these are all pooling criteria specified in APB 16. Answer (C) is incorrect
because these are all pooling criteria specified in APB 16.
14. Answer (D) is correct. According to APB 16, the 12 conditions are grouped into three
categories:
Combining Companies
1. Each combining company is autonomous.
2. Each company is independent of the others.
Combining Interests
1. A combination is a single transaction or is completed within 1 year of initiation.
2. An issuance is made solely of common stock for at least 90% of the outstanding voting
common stock of the other company.
3. No change in stockholders' equities is made in contemplation of the combination.
4. No reacquisition of more than a normal number of shares prior to the combination occurs.
5. The ratio of ownership among individual stockholders remains the same.
6. Voting rights of stockholders are not restricted.
7. No contingent stock issuances, payments, etc., exist after the combination is
consummated. Absence of Planned Transactions
1. There are no plans to retire any of the common stock issued in the combination.
2. No special arrangements exist to benefit former stockholders.
3. There is no intention to dispose of significant assets, except duplicate facilities or excess
capacity, for 2 years.
Thus, APB 16 has no provision regarding the officers of the combined companies.
Answer (A) is incorrect because APB 16 limits common ownership of the constituent
companies. Answer (B) is incorrect because APB 16 states that at least 90% of the
combinee's outstanding voting common stock must be exchanged for the combinor's majority
voting common stock. Answer (C) is incorrect because APB 16 states that no additional capital
stock must be contingently issuable to former shareholders of a combinee after a combination
has been initiated.
15. REQUIRED: The minimum investment for a business combination to quality as a pooling of
interests.
DISCUSSION: (C) One of the 12 conditions to be satisfied before a business combination is
eligible for the pooling-of-interests method is that a corporation offer and issue only common
stock in exchange for substantially all (90% or more) of the outstanding voting common stock
of another company. The measurement date is that date the business combination is
consummated.
Answers (A), (B), and (D) are incorrect because the applicable percentage is 90%.
16. Answer (B) is correct. In a pooling of interests, the retained earnings balance of the surviving
entity should be equal to the total of retained earnings of the combining entities except in
certain circumstances, such as when an allocation of retained earnings was made to
contributed capital or when intercompany transactions must be eliminated.
Answer (A) is incorrect because the retained earnings of the subsidiary should be included.
Answer (C) is incorrect because no goodwill is recognized in a pooling of interests. Answer (D)
is incorrect because the subsidiary's retained earnings should be included, and goodwill is not
recognized in a pooling of interests.
17. REQUIRED: The correct treatment of the costs of effecting a pooling of interests.
DISCUSSION: (A) APB 16 states that all costs incurred to effect a business combination
accounted for as a pooling of interests should be treated as expenses of the combined entity.
These expenses include fees of finders and consultants, registration fees, salaries and other
expenses related to services of employees, costs of providing information to shareholders, and
costs and losses of combining operations and instituting efficiencies. These costs should be
deducted to determine net income of the combined entity in the period in which the costs were
incurred.
Answers (B), (C), and (D) are incorrect because fees of finders and consultants and
registration fees are treated as expenses.
18. REQUIRED: The accounting treatment for costs of furnishing information to shareholders
about a business combination.
DISCUSSION: (B) APB 16 states that all costs incurred to effect a business combination
accounted for as a pooling of interests should be treated as expenses of the combined entity.
Answers (A), (C), and (D) are incorrect because the costs incurred should be treated as
expenses of the combined entity.
19. REQUIRED: The treatment of stock of a combining company held by the issuing company in a
business combination accounted for under the pooling-of-interests method.
DISCUSSION: (A) APB 16 requires that an investment in a combining company by the
surviving entity at the date of initiation of a combination be treated as stock retired as part of
the business combination.
Answer (B) is incorrect because the stock is considered retired rather than treasury stock.
Answers (C) and (D) are incorrect because either dividing by or multiplying by the exchange
rate is not appropriate in this calculation.
20. REQUIRED: The treatment of the subsidiary’s beginning retained earnings and income in the
year of a pooling.
DISCUSSION: (A) In a pooling of interests, the contributed capital of the surviving entity
should be equal to the total of the contributed capital for the combining entities. The retained
earnings for the surviving entity should also be equal to the total of the retained earnings of the
combining entities except in certain circumstances, e.g., when an allocation of retained
earnings was made to contributed capital or the effects of intercompany transactions must be
eliminated. In the year of a business combination appropriately accounted for as a pooling of
interests, consolidated income should be recorded as the combined net income of the entities
involved regardless of when the combination occurred during the year (assuming no
intercompany transactions).
Answers (B), (C), and (D) are incorrect because 1/1/91 retained earnings and income for 1/1
to 9/30/91 are added to the consolidated amounts.
the purchase method must be used. One condition is that the combining companies may hold
as intercorporate investments no more than 10% of the outstanding voting common stock of
any combining company as of the dates of initiation and consummation of the combination.
M.F.S. already owns 13% of Annabelle, and the combination will not meet this ownership test.
Answer (A) is incorrect because the ownership test is not met. Answer (C) is incorrect because
accounting for a business combination as part purchase and part pooling is not allowed.
Answer (D) is incorrect because a business combination cannot be accounted for as a joint
venture.
23. REQUIRED: The accounting for a business combination, given 13% ownership of one
combining entity by the other.
DISCUSSION: (B) If a business combination meets 12 conditions, it should be accounted for
under the pooling-of-interests method. If any one of these conditions is not met, however, the
purchase method must be used. One condition is that the combining companies may hold as
intercorporate investments no more than 10% of the outstanding common tock of any
combining company as of the dates of initiation and consummation of the combination. Mozza
already owns 13% of Chedd, and the combination will not meet this ownership test.
Answer (A) is incorrect because the ownership test is not met. Answer (C) is incorrect because
accounting for a business combination as part purchase and part pooling is not allowed.
Answer (D) is incorrect because a business combination cannot be accounted for as a joint
venture.
21. Answer (C) is correct. The purchase method treats the combination as an acquisition of one
company by another. The acquirer records the identifiable assets obtained and liabilities
assumed at their fair values. Goodwill is the excess of the purchase price of the assets or an
investee over the sum of the assigned costs (fair values) of the net identifiable assets (sum of
the identifiable tangible and identifiable intangible assets, minus liabilities assumed).
Answer (A) is incorrect because a consolidation may be accounted for as a pooling, a method
that records only book values. Answer (B) is incorrect because aggregation is a nonsense
term in this context. Answer (D) is incorrect because, in a pooling, assets and liabilities are
recorded at book value, so goodwill is not recognized.
24. REQUIRED: The condition that would cause a business combination to be accounted for by
the purchase method.
DISCUSSION: (D) If a business combination meets 12 conditions, it should be accounted for
under the pooling-of-interests method. If any one of these conditions is not met, however, the
purchase method must be used. One condition is that the combining companies may hold as
intercorporate investments no more than 10% of the outstanding voting common stock of any
combining company as of the dates of initiation and consummation of the combination.
Answer (A) is incorrect because pooling is not permissible unless there is not intention to
dispose of significant assets, except duplicate facilities or excess capacity, for 2 years. Answer
(B) is incorrect because pooling may be used. The condition that one corporation offer and
issue common stock in exchange for substantially all of the outstanding voting common stock
of another company is met when 90% or more is considered to be exchanged. Answer (C) is
incorrect because pooling is applicable to the parent-subsidiary relationship.
22. Answer (B) is correct. If a business combination meets 12 conditions, it should be accounted
for under the pooling of interests method. If any one of these conditions is not met, however,
25. Answer (C) is correct. When a business combination is accounted for as a purchase, the cost
is allocated to the specifically identifiable assets acquired and liabilities assumed based on
their fair values. If the cost exceeds the sum of the amounts assigned to the net identifiable
assets, the excess is recorded as goodwill, an intangible that is not specifically identifiable.
Thus, the acquiring company will seldom record goodwill equal to the amount on the acquired
company's balance sheet. Indeed, goodwill may not be recorded because the fair value of the
identifiable net assets exceeds the cost.
Answer (A) is incorrect because purchase accounting requires the identifiable net assets to be
recorded at fair value or the purchase price of the acquired company, whichever is less.
Answer (B) is incorrect because goodwill is the excess of the price over the fair value of the
identifiable net assets. Answer (D) is incorrect because the stock issued by the parent is
recorded at its fair value, just as in any purchase transaction.
26. Answer (D) is correct. In a pooling, assets are recorded at their existing book values. In a
purchase, assets are recorded at fair value. Thus, if book value exceeds fair value, the pooling
method records the larger amounts on the balance sheet.
Answer (A) is incorrect because a pooling involves an issuance solely of common stock, and
retained earnings is ordinarily unaffected. Answer (B) is incorrect because certain tax-free
reorganizations are accounted for using the purchase method. Answer (C) is incorrect
because when a stock investment includes more than 50% but less than 100% of the
outstanding stock of a company, a minority interest exists in the consolidated balance sheet.
27. Answer (C) is correct. If the net incremental cash flows to the acquiring firm's shareholders are
to be valued, the discount rate used should be the cost of equity capital. Moreover, this rate
should reflect the risk associated with the use of funds rather than their source. The rate
therefore should not be the cost of capital of the acquiring firm but rather the cost of equity of
the combined firm after the combination. This calculation requires a new estimate of beta to be
used in the Capital Asset Pricing Model.
Answer (A) is incorrect because market values is an essential element of the valuation.
Answer (B) is incorrect because incremental cash flow is an essential element of the valuation.
Answer (D) is incorrect because transaction costs is an essential element of the valuation.
28. Answer (D) is correct. If the net incremental cash flows to the acquiring firm's shareholders are
to be calculated, the discount rate used should be the cost of equity capital. Moreover, this
rate should reflect the risk associated with the use of funds rather than their source. The rate
therefore should not be the cost of capital of the acquiring firm but rather the cost of equity of
the acquired firm after the combination. This calculation requires a new estimate of beta to be
used in the Capital Asset Pricing Model.
Answer (A) is incorrect because the cost of equity not the cost of debt should be the discount
rate. Answer (B) is incorrect because the discount rate should be that of the combined firm,
not the acquiring firm. Answer (C) is incorrect because the discount rate should be that of the
combined firm, not the acquiring firm.
29. Answer (C) is correct. Business combinations are accounted for either as a purchase or as a
pooling of interests. Under purchase accounting, the cost of the acquired company is allocated
to the assets acquired and liabilities assumed on the basis of their fair values. Any excess of
the cost over the fair value of the identifiable net assets acquired is allocated to goodwill. If the
fair value of the identifiable net assets acquired is greater than cost, the excess (negative
goodwill) is allocated proportionately to reduce the values assigned to noncurrent assets
(except long-term investments in marketable securities). Any remainder is classified as a
deferred credit (APB 16).
Answer (A) is incorrect because assets are recorded at their fair value in a purchase. Answer
(B) is incorrect because assets are recorded at their fair value in a purchase. Answer (D) is
incorrect because book value is the method used to record assets in a pooling of interests.
30. Answer (B) is correct. The purchase method of accounting for a business combination requires
the assignment of fair values to all identifiable assets acquired and liabilities assumed. Any
excess of cost over the net fair value acquired should be recorded as goodwill. However, if the
fair value of the identifiable net assets acquired exceeds the price (negative goodwill), the
values of noncurrent assets (other than long-term marketable securities) are reduced
accordingly.
Answer (A) is incorrect because valuation at book value, which may equal original (historical)
cost or original cost minus accumulated depreciation, is characteristic of pooling accounting. In
a pooling, ownership interests are combined, not purchased. Accordingly, the book values of
the accounts of the combining entities are added. Assets and liabilities are not revalued.
Answer (C) is incorrect because valuation at book value, which may equal original (historical)
cost or original cost minus accumulated depreciation, is characteristic of pooling accounting. In
a pooling, ownership interests are combined, not purchased. Accordingly, the book values of
the accounts of the combining entities are added. Assets and liabilities are not revalued.
Answer (D) is incorrect because replacement cost is not used unless it is the same as the fair
value.
31. REQUIRED: The treatment of direct costs of acquisition in a purchase combination.
DISCUSSION: (D) Direct costs of acquisition, such as legal, accounting, consulting, and
finder’s fees, are included in the cost of the company acquired. The costs of registration and
issuance of equity securities reduce the otherwise determinable fair value of the securities,
ordinarily as a debit to additional paid-in capital.
Answers (A) and (B) are incorrect because direct costs of acquisition are included in the cost
of the company acquired. Answer (C) is incorrect because indirect and general expenses
related to the acquisition, not direct costs, are included Answer () is incorrect because
32. REQUIRED: The proper accounting for inventories when the cost of the acquisition exceeds
the fair value of the identifiable net assets acquired.
DISCUSSION: (D) APB 16 states general guides for assigning amounts to the individual
assets acquired and liabilities assumed in a business combination accounted for as a
purchase. Finished goods and merchandise should be assigned amounts equal to estimated
selling prices minus the sum of (1) costs of disposal and (2) a reasonable profit allowance for
the selling effort of the acquiring corporation.
Answer (A) is incorrect because raw materials should be valued at current replacement cost.
Answer (B) is incorrect because work-in-process should be valued at estimated selling prices
of finished goods minus the sum of (1) costs to complete, (2) costs of disposal, and (3) a
reasonable profit allowance for the completing and selling effort of the acquiring corporation
based on profit for similar finished goods. Answer (C) is incorrect because finished goods are
valued at estimated selling prices minus the sum of (1) costs of disposal and (2) a reasonable
profit allowance.
33. Answer (D) is correct. The purchase method follows principles normally applied under
historical cost accounting. Assets acquired for cash or other assets are recorded at cost (cash
paid or the fair value of the other assets). Assets acquired by incurring liabilities are also
recorded at cost (the present value of the amounts to be paid). Assets acquired by issuing
stock are recorded at their fair value. Whatever the form of the price paid, it must then be
allocated to the individual assets acquired and liabilities assumed.
Answer (A) is incorrect because a pooling of interests records assets acquired at their book
values. Answer (B) is incorrect because the old book values are not carried forward unless
they are equal to the fair values at the time of acquisition. Answer (C) is incorrect because the
fair values may be written down if the purchase price is less than the fair value, that is, if
negative goodwill exists.
34. REQUIRED: The adjustments made in preparing the consolidated income statement.
DISCUSSION: (A) APB 16 requires that a business combination be accounted for as a
purchase when cash is used to effect the combination. Under the purchase accounting, assets
acquired and liabilities assumed should be recorded at their fair values. The differences
between fair values and book values will be allocated to income when related expenses are
incurred. The effect of recording the building at fair value in the consolidated
balance sheet instead of its higher carrying amount on Scarp’s books will be to decrease
future depreciation. If the building is to be used, fair value is its current replacement cost for
similar capacity unless expected use indicates a lower value to the acquirer. If the building is
to be sold, it should be reported at fair value minus cost to sell. The excess of the cost over fair
value of the net identifiable assets acquired will be recognized as goodwill, an amount that will
be amortized over its expected useful life, not to exceed 40 years.
Answers (B), (C), and (D) are incorrect because depreciation will decrease and goodwill will be
amortized.
35. REQUIRED: The accounting for a bargain purchase business combination.
DISCUSSION: (C) In a business combination accounted for using the purchase method, any
excess of the fair value of the identifiable net assets acquired over the cost of the purchase
must be allocated proportionately to noncurrent assets (other than long-term investments in
marketable securities) based on their relative fair values. Any excess remaining after
noncurrent assets are adjusted to zero is a deferred credit to be amortized over the period
benefited but not exceeding 40 years.
Answer (A) is incorrect because a deferred credit is established only after the noncurrent
assets other than long-term investments in marketable securities are reduced to zero.
Answers (B) and (D) are incorrect because the excess appraisal value reduces noncurrent but
not current assets.
36. REQUIRED: The reporting of assets acquired for less than appraised value.
DISCUSSION: (C)Under purchase accounting, the excess of the fair value of the net
identifiable assets over cost should be allocated to reduce proportionately the values assigned
to noncurrent assets (except long-term investments in marketable securities). Any remainder
is classified as a deferred credit to be amortized systematically over the period benefited.
Answer (A) is incorrect because negative goodwill is a term for the excess appraised value,
not a method of reporting. Answer (B) is incorrect because additional paid-in capital is not
affected. Answer (D) is incorrect because the excess appraised value is negative goodwill.
37. Answer (B) is correct. In applying the purchase method of accounting for a business
combination, the fair values of all identifiable assets and liabilities must be determined and
recorded regardless of whether they are recorded in the books of the acquired company. The
$500,000 value of the patent must therefore be recorded in the books of Company A at the
date of the combination, even though it was previously expensed by Company B.
Answer (A) is incorrect because purchase accounting in a business combination requires use
of fair values in recording the net assets of the acquired company. Answer (C) is incorrect
because purchase accounting in a business combination requires use of fair values in
recording the net assets of the acquired company. Answer (D) is incorrect because purchase
accounting in a business combination requires use of fair values in recording the net assets of
the acquired company.
38. Answer (C) is correct. FASB Interpretation No. 4 requires the allocation of the purchase price
to all identifiable assets, whether tangible or intangible. FASB Interpretation No. 4 further
requires that the cost assigned to assets that are to be used in a particular R&D project and
that have no alternative future use be charged to R&D expense at the date of the
consummation of the combination.
Answer (A) is incorrect because only the R&D equipment with no alternative future use should
be charged to R&D expense. The patent and the R&D equipment with alternative uses should
be capitalized. Answer (B) is incorrect because only the R&D equipment with no alternative
future use should be charged to R&D expense. The patent and the R&D equipment with
alternative uses should be capitalized. Answer (D) is incorrect because only the R&D
equipment with no alternative future use should be charged to R&D expense. The patent and
the R&D equipment with alternative uses should be capitalized.
39. Answer (D) is correct. APB 16 requires that the excess (negative goodwill) be allocated
proportionately based on their fair values to all noncurrent assets except long-term
investments in marketable securities. Any excess remaining after noncurrent assets are
adjusted to zero should be classified as a deferred credit to be amortized over a period not
exceeding 40 years.
Answer (A) is incorrect because negative goodwill is not added to equity. Answer (B) is
incorrect because the difference is not goodwill, which is the excess of cost over the fair value
of the identifiable net assets, but negative goodwill. Answer (C) is incorrect because
allocations are made only to noncurrent assets.
40.
Answer (B) is correct. Goodwill is recognized only as the result of the purchase of a business.
It is the excess of the purchase price over the fair value of the identifiable net assets acquired.
Answer (A) is incorrect because goodwill is the excess of the purchase price over the fair
value of the identifiable net assets acquired, whether tangible or intangible. Answer (C) is
incorrect because goodwill is the excess of the purchase price over the fair value of the
identifiable net assets acquired, whether tangible or intangible. Answer (D) is incorrect
because goodwill is the excess of the purchase price over the fair value of the identifiable net
assets acquired, whether tangible or intangible.
41. Answer (B) is correct. The purchase method of accounting for a business combination requires
the assignment of fair values to all identifiable assets acquired and liabilities assumed. Any
excess of cost over the fair value of the identifiable net assets acquired should be recorded as
goodwill. Goodwill is recorded only as a result of a business combination accounted for as a
purchase.
Answer (A) is incorrect because the pooling-of-interests method of recording a merger can
never result in the recording of goodwill. Answer (C) is incorrect because the pooling-ofinterests method of recording a merger can never result in the recording of goodwill.
Furthermore, the existence of a goodwill account indicates that, at the time of the merger,
assets were recorded at their estimated fair value. Answer (D) is incorrect because a goodwill
account can never be created by adding the asset accounts of combining firms.
42. Answer (B) is correct. Goodwill is recognized only as the result of the purchase of a business.
It is the difference between the purchase price and the fair value of the identifiable net assets
acquired.
Answer (A) is incorrect because goodwill is the difference between the purchase price and the
fair value of the identifiable net assets acquired, whether tangible or intangible. Answer (C) is
incorrect because goodwill is the difference between the purchase price and the fair value of
the identifiable net assets acquired, whether tangible or intangible. Answer (D) is incorrect
because goodwill is the difference between the purchase price and the fair value of the
identifiable net assets acquired, whether tangible or intangible.
43. Answer (A) is correct. Unamortized goodwill on the books of a consolidated entity related to
the company whose purchase gave rise to the goodwill must be added to the carrying value of
the assets when the related assets are sold to determine any gain or loss on the disposition.
Answer (B) is incorrect because goodwill directly related to the underlying assets sold is not
properly chargeable to retained earnings. Answer (C) is incorrect because goodwill directly
related to the underlying assets sold is not properly chargeable to income. Answer (D) is
incorrect because goodwill directly related to the underlying assets sold is not properly
chargeable to retained earnings.
44. REQUIRED: The costs to be capitalized and the amortization period.
DISCUSSION: (A) APB 16, Business Combinations, requires that the cost of goodwill from a
business combination accounted for as a purchase be capitalized and amortized over its
estimated useful life. In contrast, the cost of developing, maintaining, or restoring intangible
assets that are inherent in a continuing business and related to an enterprise as whole should
be expensed as incurred.
Answer (B) is incorrect because the goodwill acquired externally should be amortized over its
10-year benefit period. Answer (C) is incorrect because the costs of maintaining goodwill
should be expensed as incurred. Answer (D) is incorrect because the goodwill acquired
externally should be amortized over its 10-year benefit period and the cots of maintaining
goodwill should be expensed as incurred.
45. REQUIRED: The accounting for goodwill associated with impaired assets.
DISCUSSION: (B) If some but not all assets (long-lived assets and certain identifiable
intangibles) acquired in a business combination are tested for impairment, goodwill is allocated
to the tested assets pro rate using their relative fair values at the purchase date. If goodwill is
associated with impaired assets to be held and used, it should be eliminated before reducing
the carrying amounts of the impaired assets.
Answers (A), (C), and (D) are incorrect because the goodwill associated with the impaired
assets is eliminated before reducing carrying amounts of those assets.
46. Answer (C) is correct. The present value of the principal equals $100,000 times the time value
of money factor for the present value of $1 discounted at 12% (the current market rate) for
three periods. The present value of the annual interest payments equals $8,000 (8% nominal
rate x $100,000) times the time value of money factor for the present value of an ordinary
annuity of $1 discounted at 12% for three periods. The basis of the bonds is the sum of these
two present values.
Answer (A) is incorrect because the principal and interest payments must be discounted at the
indicated market rate. Answer (B) is incorrect because the present value of the principal must
be computed based on the 12% market rate. Answer (D) is incorrect because the present
value of the interest payments must be computed based on the 12% market rate.
47. Answer (D) is correct. FASB Interpretation No. 21, Accounting for Leases in a Business
Combination, requires that the amounts assigned to lease assets and lease liabilities assumed
at the date of the business combination be allocated based on their fair values as of the date
the combination is accounted for as a purchase.
Answer (A) is incorrect because the classification of a lease should be changed only if the
provisions of the lease are modified in the business combination. The modified lease should
then be classified by the combined enterprise in accordance with the criteria in SFAS 13,
Accounting for Leases. Answer (B) is incorrect because the classification of a lease should be
changed only if the provisions of the lease are modified in the business combination. The
modified lease should then be classified by the combined enterprise in accordance with the
criteria in SFAS 13, Accounting for Leases. Answer (C) is incorrect because the valuation
should be changed to fair value, but the classification should not be changed unless the lease
is modified in the business combination.
48. REQUIRED: The preacquisition contingency to which part of the purchase price would not be
allocated in a combination accounted for by the purchase method.
DISCUSSION: SFAS 38 states that a preacquisition contingency may be a contingent asset, a
contingent liability, or a contingent impairment of an asset. The preacquisition contingency,
other than the potential tax benefit of a loss carryforward, must be included in the allocation of
the purchase price if the contingency is settled during the period required to identify and
quantify the assets acquired and the liabilities assumed, or if information obtained during this
period indicates that it is probable the contingency will be satisfied and the amount of the asset
or liability is reasonably estimable. However, if these conditions are not met, the preacquisition
contingency should not be included in the allocation of the purchase price. Accordingly, a
reasonably possible preacquisition contingency concerning the patent infringement lawsuit
should be included in the determination of net income in the period in which settlement is
reached.
Answers (A), (B), and (C) are incorrect because each reflects preacquisition contingencies that
meet the criteria of SFAS 38 for inclusion in the allocation of the purchase price.
49
. The correct answer is (C). REQUIRED: The acquiring company’s accounting when the
acquired company sponsors a pension plan.
DISCUSSION: In a business combination structured as a purchase, the acquiring
company should recognize a pension liability if the PBO of the acquired company
is in excess of that company’s plan assets. Likewise, a pension asset should be
recognized if plan assets exceed the PBO.
Answers (A), (B), and (D) are incorrect because, in a business combination
accounted for as a purchase, unrecognized net gains and losses, prior service
cost, and the transition net asset or obligation of the acquired company’s defined
benefit pension plan are eliminated by the assignment of part of the purchase
price to a liability (excess of PBO over plan assets) or an asset (excess of plan
assets over the PBO).
50. Answer (C) is correct. In a business combination structured as a purchase, the acquiring
company should recognize a pension liability if the PBO of the acquired company is in excess
of that company's plan assets. Likewise, a pension asset should be recognized if plan assets
exceed the PBO.
Answer (A) is incorrect because, in a business combination accounted for as a purchase,
unrecognized net gains and losses are eliminated by the assignment of part of the purchase
price to a liability (excess of PBO over plan assets) or an asset (excess of plan assets over the
PBO). Answer (B) is incorrect because, in a business combination accounted for as a
purchase, prior service cost is eliminated by the assignment of part of the purchase price to a
liability (excess of PBO over plan assets) or an asset (excess of plan assets over the PBO).
Answer (D) is incorrect because, in a business combination accounted for as a purchase, the
transition net asset or obligation of the acquired company's defined benefit plan is eliminated
by the assignment of part of the purchase price to a liability (excess of PBO over plan assets)
or an asset (excess of plan assets over the PBO).
51
. The correct answer is (C). REQUIRED: The proper allocation of the pension-plan-related
portion of the purchase price in a business combination.
DISCUSSION: For business combinations accounted for as a purchase, when the
acquired company sponsors a single-employer defined benefit plan, the acquiring
company’s allocation of the purchase price to the individual assets acquired and
liabilities assumed must include recognition of a liability for a PBO in excess of
plan assets or an asset for plan assets in excess of the PBO. Any previously
existing unrecognized net gain or loss, prior service cost, or transition net
obligation or asset is eliminated. Idiary’s PBO exceeded plan assets, so Ent
should recognize a liability of $1,000,000($5,000,000 - $4,000,000).
Answer (A) is incorrect because an allocation will be made to a liability account in
order to recognize the amount that the PBO exceeds plan assets. Answer (B) is
incorrect because the unrecognized transition net obligation, prior service cost,
and any of the net gains or loss are eliminated. Answer (D) is incorrect because
the difference between the PBO and plan assets is the amount of the liability that
must be recorded, not the difference between the ABO and plan assets.
52. REQUIRED: The proper method of accounting for goodwill acquired in certain acquisitions of
banking or thrift institutions.
DISCUSSION: (D) According to SFAS 72, in certain business combinations of banking or thrift
institutions, when the fair value of liabilities assumed exceeds the fair value of identifiable
assets acquired, the unidentifiable intangible (goodwill) recognized should usually be
amortized by the interest method, over a period no longer than that over which the discount on
the long-term interest-bearing assets acquired is to be recognized as interest income. In no
case, however, should the period of amortization exceed 40 years. In other words, low-rate
interest-bearing assets may have been discounted to fair value by applying current (higher)
interest rates, and the fair value of the liabilities assumed may then exceed the fair value of the
assets acquired. In that case, the unidentifiable intangible asset (goodwill) and the discount on
the identifiable assets will be amortized to income using the interest method over the same
period, that is, the estimated remaining life of the long-term interest-bearing assets acquired.
Answer (A) is incorrect because the 40-year limit applies to the amortization of all goodwill
recognized. Answers (B) and (C) are incorrect because the expected useful life of the goodwill
is not the relevant information.
53. REQUIRED: The true statement about regulatory assisted business combinations by banking
or thrift institutions.
DISCUSSION: (A) SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions, is applicable when a regulatory authority provides assistance to a business
combination by a banking or thrift institution in the form of amounts by which future interest
receivable on the interest bearing assets acquired is less than the interest cost of projected
assistance, computed as of the date of acquisition and based on the interest rate margin
existing at that date, must be considered as additional interest on the assets acquired in
determining their fair value for purposes of applying the purchase method of accounting.
Answer (B) is incorrect because the interest-bearing assets must be valued at the date of the
business combination and not adjusted at the date of the business combination and not
adjusted for subsequent changes in the estimated amount of assistance to be received.
Answer (C) is incorrect because the actual assistance should be reported in the period in
which it is accrued. Answer (D) is incorrect because, for those interest-bearing assets acquired
that the acquiring enterprise intends to sell, projected assistance must be included in the
determination of fair value to the degree of those assets are not stated at amounts in excess of
their current market values.
54. Answer (A) is correct. The purchase method of accounting for a business combination
ordinarily follows the same accounting principles used in purchasing any assets. The
specifically identifiable assets and liabilities of the acquired companies are recorded on the
books of the acquiring entity at their fair values, with any excess of cost (fair value of the
consideration given over fair value of the assets minus liabilities assumed) designated as
goodwill. Under the pooling of interests method, the assets, liabilities, and equity of the
participating entities are combined (pooled) at their current book values. A pooling of interests
is a combination rather than an acquisition, and maintenance of original historical costs is
inconsistent with an acquisition.
Answer (B) is incorrect because fair values are used in a purchase, not a pooling. Answer (C)
is incorrect because consolidated goodwill can result under purchase but not pooling
accounting. Answer (D) is incorrect because when a business combination is accounted for as
a pooling of interests, this method should be applied retroactively to the earliest period
presented in comparative financial statements. The effects of the combination are reported as
if the companies had been combined as of the beginning of the earliest period presented. This
treatment is not applicable to a purchase.
55. REQUIRED: The accounting for combined operating results if a business combination occurs
in midyear.
DISCUSSION: (D) In a business combination accounted for as a pooling, the results of
operations for the year of combination include the combined results of operations of the
separate companies for the entire year. For a purchase, the combined results include the
results of operations of the acquired company only from the date of acquisition to the end of
the year.
Answers (A), (B), and (C) are incorrect because results are combined for the full year under
pooling but not purchase accounting.
56. REQUIRED: The reporting of long-term debt under the pooling of interests and purchase
methods.
DISCUSSION: (C) Under the pooling of interests method, long-term debt is reported at its
carrying amount. Under the purchase method, long-term debt is reported at the present value
of amounts to be paid determined at appropriate current interest rates. This amount
approximates fair value.
Answers (A), (B), and (D) are incorrect because, under the pooling of interests method, longterm debt is reported at its carrying amount. Under the purchase method, long-term debt is
reported at fair value.
57. REQUIRED: The item having the same value under both the pooling-of-interests and the
purchase methods of accounting.
DISCUSSION: (A) When a stock investment includes more than 50% but less than 100% of
the outstanding stock of a company, a minority interest exists. The computation of that minority
interest is identical under both the pooling-of-interests and the purchase methods.
Answer (B) is incorrect because the pooling-of-interests method does not allow the recognition
of goodwill. Answer (C) is incorrect because retained earnings is reported differently in a
pooling of interests than in a purchase. Answer (D) is incorrect because capital stock is
reported differently in a pooling of interests than in purchase.
58. REQUIRED: The treatment of retained earnings of a subsidiary in a consolidated balance
sheet prepared immediately after the business combination.
DISCUSSION: (D) A pooling is viewed as a combining of ownership interests. Hence, the
assets, liabilities, and owners’ equity (including retained earnings) of a subsidiary acquired in a
business combination are included at book value in a consolidated balance sheet. A purchase
is viewed as an acquisition of net assets. Thus, only the fair value of the net assets of a
subsidiary is included in a consolidated balance sheet prepared using the purchase method.
The shareholders’ equity, including retained earnings, is excluded.
Answers (A), (B), and (C) are incorrect because the retained earnings of a subsidiary are
included for a pooling but excluded for a purchase.
59. REQUIRED: The comparison of purchase accounting and pooling accounting net income.
DISCUSSION: (A) Because this combination occurred on the first day of the calendar and
fiscal year, the combined results of operations will include the results of operations for all of
2001 for both companies regardless of the method of accounting chosen. However, purchase
accounting will yield a lower net income than pooling accounting. The former method records
depreciable assets acquired at more than their amounts on Notion’s books. Hence,
depreciation charges will be higher and net income lower under purchase accounting.
Answers (B), (C), and (D) are incorrect because purchase accounting net income is lower.
60. REQUIRED: The comparison of net income and operating cash flows under purchase
accounting and the pooling-of-interests method.
DISCUSSION: (D) Cedar would acquire Birch’s identifiable net assets for less than their book
values and these book values approximate fair values. If the combination was structured as a
purchase, negative goodwill would result. This negative goodwill must first be allocated against
Birch’s depreciable noncurrent assets with any remainder recognized as a deferred credit. The
resulting decrease in depreciation expense and amortization of any deferred credit would
increase purchase accounting net income to an amount greater than Birch’s reported net
income. Since pooling accounting net income is equal to this reported net income, purchase
net income would be greater than pooling net income. In contrast, since the business
combination occurred at the beginning of the year, cash flows would be the same under both
purchase and pooling.
Answers (A), (B), and (C) are incorrect because cash flows will be the same, but purchase
accounting net income will be greater.
61. REQUIRED: The condition(s) in which combined financial statements are appropriate.
DISCUSSION: ARB 51 states that combined (as distinguished from consolidated) statements
of commonly controlled companies may be more meaningful that their separate statements.
For example, combined statements may be used (1) to combine the statements of several
companies with related operations when one individual owns a controlling interest in them, (2)
to present financial position and results of operations of a group of unconsolidated
subsidiaries, or (3) to combine the statements of companies under common management.
Answers (A), (B), and (C) are incorrect because common management or common control
justifies use of combined statements.
62. REQUIRED: The correct statement about a business combination accounted for as a pooling.
DISCUSSION: (B) The pooling of interests method of accounting should be applied
retroactively to the earliest period presented in comparative financial statements. The effects
of the combination are reported as if the companies had been combined as of the beginning of
the earliest period presented. Thus, income is combined for all periods presented.
Answer (A) is incorrect because income is combined for all prior periods presented. Answer
(C) is incorrect because balance sheet amounts are carried at book value after the
combination. Answer (D) is incorrect because direct acquisition costs are recorded as
expenses.
63. REQUIRED: The items treated in the same manner in both combine financial statements and
consolidated statements.
DISCUSSION: (C) According to ARB 51, when combined statements are prepared, “if there
are problems in connection with such matters as minority interests, foreign operations,
different fiscal periods, or income taxes, they should be treated in the same manner as in
consolidated statements.”
Answers (A), (B), and (D) are incorrect because different fiscal periods and foreign operations
are treated in the same manner as in consolidated statements.
64. Answer (B) is correct. In accounting for a business combination by the pooling of interests
method, operations of the combined entities must be reported for all periods presented as if
the pooling had occurred prior to the earliest statement presented. The restatement
requirement covers balance sheet and income statement data, including EPS calculations.
Answer (A) is incorrect because, when accounting for a business combination as a purchase,
the new shares outstanding following the combination are included from the date of the
acquisition in the calculation of the weighted average number of shares for EPS purposes.
Answer (C) is incorrect because, in a pooling of interests, the relevant EPS calculation must
be based on shares outstanding that represent equivalent shares of the surviving entity.
Answer (D) is incorrect because the method used will dictate whether the number of shares
outstanding is adjusted retroactively to the beginning of the earliest period presented as in a
pooling, or is considered to be outstanding from the time of issuance as in a purchase.
65. Answer (D) is correct. In a pooling of interests, the assets and liabilities of the combining
companies are brought together at their book values. Accordingly, recognition or disclosure of
goodwill is not appropriate.
Answer (A) is incorrect because, if the pooling of interests results in changing the fiscal year of
a combining company, details of any changes must be disclosed in shareholders' equity for the
period excluded from the reported results of operations. Answer (B) is incorrect because a
combined corporation should disclose the revenue, extraordinary items, and net income of
each separate company from the beginning of the period to the date the combination is
consummated in notes to financial statements. Answer (C) is incorrect because details of the
stock issued in a business combination must be disclosed.
66. Answer (C) is correct. Under APB 16, the disclosures made in the statements for the year in
which a pooling of interests occurred should include the items in answers (A), (B), and (D) as
well as the method of accounting for the combination, descriptions of the nature of the
adjustments of net assets required for the combining companies to adopt the same accounting
principles and of the effects on net income previously reported, and reconciliations of revenue
and earnings previously reported by the company that issued stock in the combination with the
combined amounts in the current statements. There is no requirement under APB 16 to
provide the names of the finance companies cooperating in or providing funds to the acquiring
company to facilitate the acquisition.
Answer (A) is incorrect because a description of the stock transaction should be disclosed in
the consolidated financial statements. Answer (B) is incorrect because the names and
descriptions of the combining enterprises should be disclosed in the consolidated financial
statements. Answer (D) is incorrect because financial statements of prior periods should be
reported for the pooled entities.
67. Answer (C) is correct. APB 16, Business Combinations, requires pro forma disclosure of the
results of operations (1) for the current period as though the companies had combined at the
beginning of the period, and (2) for the immediately preceding period if comparative financial
statements are presented. SFAS 79, Elimination of Certain Disclosures for Business
Combinations by Nonpublic Enterprises, eliminates these pro forma disclosures for nonpublic
entities.
Answer (A) is incorrect because each is a required disclosure of actual data. Answer (B) is
incorrect because disclosure is only required for the immediately preceding period. Answer (D)
is incorrect because it is a required disclosure of actual data.
68. Answer (A) is correct. Unamortized goodwill on the books of a consolidated entity related to
the company whose purchase gave rise to the goodwill must be added to the carrying value of
the assets when the related assets are sold to determine any gain or loss on the disposition.
Answer (B) is incorrect because goodwill directly related to the underlying assets sold is not
properly chargeable to retained earnings. Answer (C) is incorrect because goodwill directly
related to the underlying assets sold is not properly chargeable to income. Answer (D) is
incorrect because goodwill directly related to the underlying assets sold is not properly
chargeable to retained earnings.