Accounting for Business Combinations
Final Exam Questions
Course Introduction
Accounting for Business Combinations explores the principles and practices involved when two or more businesses come together through mergers, acquisitions, or other forms of business combinations. The course examines the relevant standards governing recognition and measurement of assets, liabilities, and goodwill, emphasizing the application of International Financial Reporting Standards (IFRS 3) or Generally Accepted Accounting Principles (GAAP). Students learn to prepare consolidated financial statements, account for non-controlling interests, eliminate intercompany transactions, and assess the financial impact of business combinations. Case studies and real-world scenarios are used to develop analytical skills essential for understanding complex group structures and regulatory disclosures.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Chapter 1: Setting the Stage
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Q1) NFP organizations can choose among reporting approaches contained within the framework provided by the CICA Handbook. Which of the following is not a consideration in choosing the approach?
A)Nature of the NFP's operations
B)Sources of the NFP's funding
C)The NFP's reporting objectives
D)Whether or not the NFP uses the restricted fund method of accounting Answer: D
Q2) Which of the following statements is not true about private companies?
A)Private companies usually have easily identifiable user groups.
B)User groups of a private company are not permitted to request additional information, outside of the issued financial statements, from the company.
C)Private companies are not required to issue "general-purpose" financial statements.
D)Private companies often report to specific user groups for specific purposes.
Answer: B
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Which methods will result in the same income and shareholders' equity?
A)Equity and consolidation
B)Cost and consolidation
C)Cost and equity
D)Each method results in different income and shareholders' equity amounts.
Answer: A
Q2) Forest Ltd. reports its investment in Leeds Co. on an equity basis. During the year, Forest received $10,000 in dividends from Leeds. How should Forest report these dividends?
A)As an increase to the "Investment in Leeds Co." account on its statement of financial position
B)As a decrease to the "Investment in Leeds Co." account on its statement of financial position
C)As dividend income on its statement of changes in equity-retained earnings section
D)As dividend income in its statement of comprehensive income
Answer: B
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Chapter 3: Business Combinations
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Q1) There are a number of possible approaches to reporting consolidated financial statements after one company acquires control over another. Which of the following methods reports the consolidated amounts by adding together the carrying values of the assets and liabilities of the parent and the subsidiary?
A)Pooling-of-interests method
B)Acquisition method
C)Purchase method
D)New entity method
Answer: A
Q2) Nashman Ltd. is a private enterprise with five subsidiaries. Which of the following statements is true?
A)Nashman must prepare consolidated financial statements.
B)Nashman should report all subsidiaries on the same basis.
C)Nashman must use the cost basis to report all subsidiaries.
D)Nashman can choose the subsidiaries it wishes to include in its consolidated financial statements.
Answer: B
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Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) O'Ball Ltd. wants to acquire Kiro Ltd. to take advantage of its tax losses and credit carryforwards. In what way can O'Ball accomplish this?
A)O'Ball can purchase Kiro's net assets.
B)O'Ball can do a share exchange with Kiro.
C)O'Ball can either purchase Kiro's net assets or purchase Kiro's shares.
D)O'Ball can either purchase Kiro's net assets or do a share exchange with Kiro.
Q2) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the amount of the deferred tax liability on Castle's consolidated SFP?
A)$40,000
B)$60,000
C)$100,000
D)$280,000
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) In consolidating a wholly owned parent-founded subsidiary, which of the following adjustments or eliminations is not required?
A)Eliminating any unrealized profits or losses
B)Eliminating intercompany payables and receivables
C)Adjusting for intercompany transactions
D)Adjusting for goodwill impairment
Q2) At the time of acquisition, Mitzi's baking system had a fair value of $140,000. At the end of 20X3, how much amortization expense should Mitzi report?
A)$0
B)$14,000
C)$15,000
D)$17,500
Q3) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
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Q1) At the time of acquisition, the fair values of these assets were higher than their carrying values and their tax bases. In Morin's consolidation each year, it must adjust for the deferred taxes that resulted from these temporary differences. Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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Q1) For private enterprises that have acquired goodwill in a business combination, which of the following is considered a change of circumstances for purposes of testing for goodwill impairment?
A)A large unfavourable income tax reassessment
B)Sale of a capital asset for a small loss
C)A major competitor has ceased operations
D)Retirement of the subsidiary's operations manager
Q2) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Q3) For private enterprises that have acquired goodwill in a business combination, how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
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9
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Assume that a parent company has four subsidiaries. Under IFRS 3, which of the following statements is true?
A)All four subsidiaries must be reported using the parent-company extension method.
B)All four subsidiaries must be reported using the entity method.
C)Each subsidiary must be reported using either the parent-company extension method or the entity method. Consistency is not required.
D)All four subsidiaries must be reported using either the parent-company extension method or the entity method. Consistency is required.
Q2) Lopez Ltd. purchases 65% of Wheatfall Co. Under the entity method of consolidation, what is allocated to non-controlling interest?
A)35% of Wheatfall's net assets at fair value
B)35% of Wheatfall's net assets at carrying value
C)35% of Wheatfall's net assets at carrying value plus 35% of Wheatfall's fair value increments excluding goodwill
D)35% of Wheatfall's net assets at carrying value plus 35% of Wheatfall's fair value increments including goodwill
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Chapter 5: Appendix A: Step Purchases
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Q1) Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$50,000
B)$66,667
C)$200,000
D)$250,000
Q2) Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
Q2) Gumble Ltd. has owned 65% of the common shares of Lopez for several years. This year, Gumble reduced its interest in Lopez to 10%. Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumble must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Linville Ltd. owns 80% of the outstanding shares of Chance Co. On January 2, 20X1, Chance sold a machine to Linville for $270,000. Chance recorded a $45,000 gain on the sale. At the time of the sale, the machine had a remaining useful life of three years. Both companies use the straight-line method of depreciation. What amount should be shown for depreciation expense on Linville's consolidated statement of comprehensive income at December 31, 20X1?
A)$15,000
B)$72,000
C)$75,000
D)$90,000
Q2) What is the amount of Goldberg's fair value increments?
A)$54,000
B)$70,000
C)$85,000
D)$121,000
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) A parent company owns a subsidiary's preferred and common shares. How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q2) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Q3) Ngo Ltd.'s subsidiary has restricted shares. What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Basaraba Ltd. owns 75% of the outstanding common shares of Gill Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. Under the par-value approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?
A)The gain is allocated all to the purchaser.
B)The gain is allocated all to the issuer.
C)The gain is allocated to both the purchaser and issuer as though they do not have any affiliation with each other.
D)The gain is eliminated on consolidation.
Q2) A subsidiary has purchased some bonds from its parent company. Under the par-value method, the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Chapter 7: Segment and Interim Reporting
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Q1) HB Company is a private company with a significant amount of long-term debt. The company reports under IFRS. One of the conditions of the debt-financing indenture is that it must provide quarterly financial statements to the lender. HB pays tax at the rate of 20% on the first $200,000 of income and 40% on any income in excess of $200,000. During 20X5, the company earned $500,000 and paid tax at an average rate of 32%. Similar results were expected for 20X6. HB realized the following actual results for the year ended December 31, 20X6 (in thousands):
\[\begin{array} { c l }
\text { Quarter } & { \text { Income (loss) } } \\
1 & \$ 100 \\
2 & ( 150 ) \\
3 & 200 \\
4 & 400
\end{array}\] Required:
Calculate income tax expense (recovery)for each quarter in 20X6 and for the year in total under the:
a. discreet approach
b. integral approach
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) At December 31, what is the balance of Gillard's forward contract payable?
A)$515,000
B)$515,650
C)$515,750
D)$515,850
Q2) Assume that the transaction qualifies as a cash-flow hedge. What is the cost of the hedge?
A)$ 1,800
B)$ 2,200
C)$ 4,960
D)$12,360
Q3) Fransen Co. does a lot of businesses in Denmark. It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones. What type of hedge does Fransen have?
A)Fair-value hedge
B)Cash-flow hedge
C)Natural hedge
D)Hedge instrument
Q4) Compare and contrast accounting for foreign currency transactions and hedge accounting under IFRS and ASPE.
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Chapter 9: Reporting Foreign Operations
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Q1) The January 1, 20X5 retained earnings balance of the London Branch of the Liverpool Company correctly translated to Canadian dollars was $1,783,774. The beginning inventory of £380,000 was acquired during the last quarter of 20X4 and the ending inventory was acquired during the last quarter of 20X5. Sales and purchases were made, and other expenses were incurred, evenly throughout the year.
Required:
Translate the statement of comprehensive income and statement of changes in equity-partial-retained earnings section of Liverpool Company for the year ending December 31, 20X5, into dollars, assuming that the temporal method is appropriate.
Q2) Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Bralta had net assets at June 30, 20X4, of R$1,100,000. What is the cost of sales under the temporal method?
A)$801,406
B)$804,160
C)$807,946
D)$809,896
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Help Yourself, a not-for-profit organization, has a 5% economic interest in the Furnishing Bank, another not-for-profit organization. The organizations operate independently, have no directors in common, and have no transactions with each other. For financial reporting purposes, how should Help Yourself account for its interest in the Furnishing Bank?
A)Consolidation
B)The equity method
C)The cost method
D)Note disclosure only
Q2) For a not-for-profit organization, an expenditure is ________.
A)any payment for expenses or to settle a liability
B)a payment, a liability incurred, or a transfer of property to obtain goods or services
C)any cost associated with the consumption of goods or services
D)a capital acquisition only
Q3) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?
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Chapter 10: Appendix A: Fund Accounting
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Q1) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd. What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
Q2) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
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Chapter 11: Public Sector Financial Reporting
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Q1) On what statement does the amortization of tangible capital assets appear as a reconciling item?
A)Statement of financial position
B)Statement of operations
C)Statement of changes in net debt
D)Statement of cash flows
Q2) What can the non-financial assets of a government be used for?
A)Providing services only
B)Debt payment only
C)Providing services and debt payment
D)Neither service provision nor debt payment
Q3) A provincial government provides a grant to one of its cities to support a winter festival. The provincial government can recognize this transfer when it has been fully authorized. When is the transfer considered fully authorized?
A)When the appropriate government minister has provided written approval for the transfer
B)When the grant has been received by the city
C)When the grant has been used by the city for the required purpose
D)When the transfer has been approved by the legislature
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