Chapter 5 Business Combinations
True/False Questions
1. All out-of-pocket costs of a business combination are recognized as expenses by the
combinor.
Answer: False
2. Contingent consideration that is determinable on the date of a business combination is
part of the total cost of the combinor's investment in the combinee.
Answer: True
3. A bargain purchase excess in a business combination is credited to the Paid-in Capital in
Excess of Par ledger account of the combined enterprise.
Answer: False
4. Horizontal business combinations involve constituent companies in different industries.
Answer: False
5. In a statutory merger, all except one of the constituent companies are liquidated.
Answer: True
6. A business combination may be effected through the combinor's tender offer for the
combinee's common stock.
Answer: True
7. Carrying amounts of the combinee's identifiable net assets are disregarded in
accounting for a business combination.
Answer: True
8. A part of the cost of a combinee is allocated to identifiable tangible and intangible assets
that resulted from research and development activities of the combinee.
Answer: True
9. A combinee in a business combination may have preacquisition contingencies to which
a value is assigned during the allocation period.
Answer: True
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Chapter 5 Business Combinations
10. The issuer of common stock in a business combination always is the combinor.
Answer: False
11. Goodwill acquired in a business combination is amortized over its economic life.
Answer: False
12. The defense against a hostile takeover known as a poison pill involves the amendment
of the target company's articles of incorporation or bylaws to make it more difficult to obtain stockholder approval for a takeover.
Answer: True
Multiple Choice Questions
13. Two methods for arranging business combinations that begin with similar transactions
by the combinor are:
A) Statutory merger and statutory consolidation B) Statutory merger and acquisition of common stock C) Acquisition of common stock and acquisition of net assets D) Statutory consolidation and acquisition of common stock
Answer: B
14. In a business combination, the appropriate accounting for an excess of current fair
values the combinee's identifiable net assets over the combinor's cost is to:
A) Recognize as negative goodwill in the accounting records of the combinee B) Recognize as additional paid-in capital in the accounting records of the combinor C) Reduce proportionately current fair values assigned to the combinee's nonmonetary
assets and recognize any remaining excess as a deferred credit
D) Reduce proportionately current fair values assigned to the combinee's noncurrent
assets other than investments in marketable securities and recognize any remaining excess as a deferred credit
E) Take some other action
Answer: E
15. The business enterprises that enter into a business combination are termed the: A) Merging companies B) Joining companies C) Constituent companies D) Combinor companies
Answer: C
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Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 5 Business Combinations
16. Which of the following is not included in the combinor's cost of a combinee in a
business combination?
A) Present value of debt securities issued by combinor in the combination B) Costs of issuing debt securities in the combination C) Investment banker's finder's fee for the combination D) Contingent consideration that is determinable on the date of the combination
Answer: B
17. On March 1, 2006, Selig Corporation acquired for $1,400,000 (including out-of-pocket
costs of the business combination) all the net assets of Maree Company. On the date of the combination, the carrying amount of Maree's identifiable net assets was $1,150,000. The current fair value of Maree's inventories was $200,000 less than their carrying amount, and the current fair value of Maree's plant assets was $400,000 larger than their carrying amount. The current fair values of all other identifiable net assets of Maree were equal to their carrying amounts. The journal entry prepared by Selig to record the business combination includes:
A) A debit of $200,000 to Inventories B) A credit of $400,000 to Plant Assets (net) C) A debit of $350,000 to Goodwill D) A credit of $50,000 to Goodwill E) None of the foregoing
Answer: E
18. Direct out-of-pocket costs of a business combination that are part of the cost of the
combinee do not include:
A) Legal fees for registration of securities issued by the combinor B) Finder's fee C) Legal fees for the contract of combination D) CPA firm fees for pre-combination investigation of the combinee
Answer: A
19. Slocum Corporation and Merton Company, both publicly owned companies, are
planning a merger, with Slocum being the survivor. Which of the following is a requirement of the merger?
A) The Securities and Exchange Commission must approve the merger B) The common stockholders of Merton must receive common stock of Slocum C) The creditors of Merton must approve the merger D) The boards of directors of both Slocum and Merton must approve the merger
Answer: D
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Chapter 5 Business Combinations
20. Subsequent to the date of a business combination, is goodwill recognized in the
combination subject to:
A) B) C) D)
Amortization?
Yes No Yes No Test for impairment?
No Yes Yes No
Answer: B
Problems
21. On May 1, 2006, Regis Corporation acquired all the net assets of Wayland Company for
$550,000 cash and a $500,000, 10% promissory note due May 1, 2011. The total interest of $250,000 also was due on May 1, 2008. The current fair rate of interest for the promissory note was 12%. The balance sheet of Wayland and the related current fair values of its identifiable assets and liabilities on the date of the business combination follow:
WAYLAND COMPANY
Balance Sheet (prior to business combination)
May 1, 2006
Carrying Current Fair Assets Amounts Values Current assets $ 600,000 $630,000 Plant assets (net) 900,000 950,000 Identifiable intangible assets (net) 40,000 50,000 Total assets $1,540,000 Liabilities & Stockholders' Equity Current liabilities $ 300,000 $300,000 Long-term debt 200,000 230,000 Common stock, $10 par 300,000 Additional paid-in capital 400,000 Retained earnings 340,000 Total liabilities & stockholders' equity $1,540,000 Legal fees of $24,430 incurred by Regis to effect the business combination were paid by
Regis on May 1, 2006. The present value of 1 due in five years at 12% is 0.567427.
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Prepare journal entries on May 1, 2006, to record Regis Corporation's acquisition of the net assets of Wayland Company. Disregard income taxes.
Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 5 Business Combinations
Answer:
Investment in Net Assets of Wayland Company Discount on Notes Payable ($500,000 – $425,570) Cash Notes Payable
To record acquisition of net assets of Wayland Company for cash and 10% note payable in a business combination. Present value of note: $750,000 x 0.567427 = $425,570.
Investment in Net Assets of Wayland Company Cash
To record payment of legal fees incurred in acquisition of net assets of Wayland Company.
Current Assets Plant Assets (net) [$950,000 – ($100,000 x 0.95)] Identifiable Intangible Assets (net) [$50,000 – ($100,000 x 0.05)] Current Liabilities Long-Term Debt Premium on Long-Term Debt Investment in Net Assets of Wayland Company To allocate cost of net assets acquired to identifiable net assets, with excess of current fair values of the net
assets over their cost ($1,100,000 – $1,000,000 = $100,000) prorated to appropriate assets on the basis of relative
current fair values, $950,000:$50,000 ratio.
Larsen, Modern Advanced Accounting, Tenth Edition 975,570 74,430
24,430
630,000 855,000 45,000 550,000 500,000
24,430
300,000 200,000 30,000
611,000,000