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In a statutory merger, all except one of the constituent companies are liquidated. A) True B) False 2.

1. In a statutory merger, all except one of the constituent companies are liquidated.
A) True
B) False

2. Carrying amounts of the combinee's identifiable net assets are disregarded in accounting for a business combination.
A) True
B) False

3. 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.
A) True
B) False

4. All out-of-pocket costs of a business combination are recognized as expenses by the combinor.
A) True
B) False

5. 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

6. 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
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.

The following journal entries are made on May 1, 2006, to record Regis Corporation's acquisition of the net assets of Wayland Company. Disregard income taxes.

7. The following journal entry is 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 975,570
Discount on Notes Payable ($500,000 – $425,570) 74,430
Cash 550,000
Notes Payable 500,000


A) True
B) False

8. The following journal entry is to record payment of legal fees incurred in acquisition of net assets of Wayland Company.

Investment in Net Assets of Wayland Company 24,430
Cash 24,430

A) True
B) False

9. The following journal entry is 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.

Current Assets 630,000
Plant Assets (net) [$950,000 – ($100,000 x 0.95)] 855,000
Identifiable Intangible Assets (net)
[$50,000 – ($100,000 x 0.05)] 45,000
Current Liabilities 300,000
Long-Term Debt 200,000
Premium on Long-Term Debt 30,000
Investment in Net Assets of Wayland Company 1,000,000
A) True
B) False


10. A parent company's journal entries to record a business combination with a subsidiary do not include debits and credits to recognize the assets and liabilities of the subsidiary.

A) True
B) False

11. Only the balance sheet is consolidated on the date of a business combination of a parent company and subsidiary.

A) True
B) False




12. A controlling financial interest traditionally has been defined as the investor corporation's ownership of more than 50% of the investee corporation's outstanding common stock.

A) True
B) False

13. Consolidated financial statements are prepared when a parent-subsidiary relationship exists, in recognition of the accounting principle or concept of:

A) Materiality
B) Entity
C) Reliability
D) Going concern

14. On March 31, 2006, Preston Corporation acquired for cash at $25 a share all 300,000 shares of the outstanding common stock of Sexton Company. Out-of-pocket costs of the business combination may be disregarded. Sexton's balance sheet on March 31, 2006, had net assets of $6,000,000. Additionally, the current fair value of Preston's plant assets on March 31, 2006, was $800,000 in excess of carrying amount. The amount to be shown for the balance sheet caption "Goodwill" in the March 31, 2006, consolidated balance sheet of Preston Corporation and its wholly owned subsidiary, Sexton Company, is:

A) $0
B) $700,000
C) $800,000
D) $1,500,000
E) Some other amount

15. Consolidated financial statements are not appropriate if:

A) The subsidiary is in the process of bankruptcy reorganization
B) There is a minority interest in the subsidiary
C) The subsidiary has a substantial amount of long-term debt payable to outsiders
D) The parent company makes substantial purchases of material from the subsidiary


16. Which of the following is the best theoretical justification for consolidated financial statements?

A) In form the constituent companies are one economic entity; in substance they are separate
B) In form the constituent companies are separate; in substance they are one economic entity
C) In form and substance the constituent companies are one economic entity
D) In form and substance the constituent companies are separate




17. On the date of a business combination resulting in a parent-subsidiary relationship, the differences between current fair values and carrying amounts of the subsidiary's identifiable net assets are:

A) Included in a working paper elimination
B) Recognized in the applicable asset and liability ledger accounts of the subsidiary
C) Recognized in the applicable asset and liability ledger accounts of the parent company
D) Accounted for in some other manner




18. Consolidated financial statements are intended primarily for the use of:

A) Stockholders of the parent company
B) Taxing authorities
C) Management of the parent company
D) Creditors of the parent company



19. Skeene Company, the 70%-owned subsidiary of Probert Corporation, had a net income of $80,000 and declared dividends of $30,000 during the fiscal year ended February 28, 2006. Fiscal Year 2006 depreciation and amortization of differences between current fair values and carrying amounts of Skeene's identifiable net assets on the date of the business combination was $15,000; and Fiscal Year 2006 impairment of goodwill recognized in the Probert-Skeene business combination was $500. The minority interest in net income of Skeene for Fiscal Year 2006 was:

A) $24,000
B) $19,500
C) $19,350
D) $9,000
E) Some other amount


20. Stock given as consideration for a business combination is valued at

a. fair market value
b. par value
c. historical cost
d. None of the above


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

a. Both companies in a combination continue to operate as separate, but related, legal entities.
b. Only one of the combining companies survives and the other loses its separate identity.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created.


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

a. Cash
b. Issuing Debt
c. Issuing Stock
d. All of the above



23. SFAS 141R requires that all business combinations be accounted for using

a. the pooling of interests method.
b. the acquisition method.
c. either the acquisition or the pooling of interests methods.
d. neither the acquisition nor the pooling of interests methods.



24. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw's assets and liabilities on February 5 were as follows

Book Value Fair Value
Cash $ 160,000 $ 160,000
Receivables (net) 180,000 180,000
Inventory 315,000 300,000
Plant and equipment (net) 820,000 920,000
Liabilities (350,000) (350,000)
Net assets $1,125,000 $1,210,000

What is the amount of goodwill resulting from the business combination?

a. $-0-.
b. $475,000.
c. $85,000.
d. $390,000.


25. A majority-owned subsidiary that is in legal reorganization should normally be accounted for using

a. consolidated financial statements.
b. the equity method.
c. the market value method.
d. the cost method.


26. In a business combination accounted for as an acquisition, registration costs related to common stock issued by the parent company are

a. expensed as incurred.
b. deducted from other contributed capital.
c. included in the investment cost.
d. deducted from the investment cost.



27. On the consolidated balance sheet, consolidated stockholders' equity is
a. equal to the sum of the parent and subsidiary stockholders' equity.
b. greater than the parent's stockholders' equity.
c. less than the parent's stockholders' equity.
d. equal to the parent's stockholders' equity.

28. Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010. Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly throughout the respective years. Prior received $24,000 dividends from Stevenson in 2010 and $36,000 in 2011. Prior uses the equity method to record its investment.

Prior should record investment income from Stevenson during 2011 of:
a. $36,000
b. $120,000
c. $84,000
d. $48,000

29. The parent company records its share of a subsidiary’s income by
a. crediting Investment in S Company under the partial equity method.
b. crediting Equity in Subsidiary Income under both the cost and partial equity methods.
c. debiting Equity in Subsidiary Income under the cost method.
d. none of these.

30. Eliminating entries are made to cancel the effects of intercompany transactions and are made on the
a. books of the parent company.
b. books of the subsidiary company.
c. workpaper only.
d. books of both the parent company and the subsidiary.

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