Accounting for Mergers and Acquisitions
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Course Introduction
Accounting for Mergers and Acquisitions explores the financial reporting and regulatory issues associated with business combinations, consolidations, and related transactions. The course covers key concepts such as purchase method accounting, goodwill recognition and impairment, allocation of purchase price, minority interest, and the preparation of consolidated financial statements. Students will analyze the impacts of mergers and acquisitions on financial statements, learn how to account for non-controlling interests, and understand disclosure requirements under current accounting standards. Through real-world examples and case studies, the course prepares students to address the complex accounting challenges involved in corporate restructuring and growth.
Recommended Textbook
Advanced Financial Accounting 6th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) Which financial reporting objective is common to both users and preparers of financial statements?
A)Cash flow prediction
B)Contract compliance
C)Income tax deferral
D)Net income maximization
Answer: B
Q2) How do financial analysts refer to earnings that correspond closely to cash flows?
A)Cash flow per share
B)High quality earnings
C)Earnings determined on a cash basis
D)Low quality earnings
Answer: B
Q3) How does a company usually take a "big bath" in a loss year?
A)Reduces its long-term liabilities
B)Expenses as many of its costs as possible
C)Recognizes revenue as soon as possible
D)Writes-down its assets
Answer: D
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Page 3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Forest Ltd.reports its investment in Leeds Co.using the cost method.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: D
Q2) Jarrett Corporation uses the equity method to account for its 25% investment in Polo Corporation and receives $15,000 in dividends.How should Jarrett account for these dividends?
A)An increase in assets
B)A decrease in the investment
C)An increase in income
D)A decrease in income
Answer: B
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Chapter 3: Business Combinations
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Q1) Which of the following statements about a bargain purchase is true?
A)It is reported on the financial statements as an "excess of fair value over cost of assets acquired".
B)It is reported as a deferred credit on the financial statements called negative goodwill.
C)Assets and liabilities of the acquired company are reported at net book value.
D)Assets and liabilities of the acquired company are reported at their fair value.
Answer: D
Q2) Perez Co.acquired Roo Co.in a business combination.Roo issued new shares to Perez's shareholders in exchange for their outstanding shares.What type of share exchange is this?
A)Direct exchange
B)Indirect exchange
C)Hostile takeover
D)Reverse takeover
Answer: D
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Chapter 4: Wholly-Owned Subsidiaries: Reporting
Subsequent to Acquisition
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Q1) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
Q2) On the date that a company acquires a subsidiary,which consolidated financial statement(s)must be prepared?
A)Consolidated statement of financial position
B)Consolidated statement of financial position and consolidated statement of comprehensive income
C)Complete set of consolidated financial statements
D)No consolidated financial statements are required at the acquisition date
Q3) Which of the following consolidation adjustments will be required for a subsidiary that was acquired as a going concern,but will not be applicable for a parent-founded subsidiary?
A)Amortization of fair value increments on plant and equipment
B)Unrealized profits in ending inventory
C)Unrealized profits in beginning inventory
D)Future income tax on unrealized profits
6
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Amber Ltd.purchased 80% of Patel Ltd.for $1,000,000.At the time of acquisition,the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000.What is the amount of the goodwill under the entity method?
A)$(100,000)
B)$100,000
C)$280,000
D)$350,000
Q2) Olthius Ltd.purchased 60% of Fredo Ltd.for $1,500,000.At the date of acquisition,the carrying value of Fredo's net identifiable assets was $1,800,000 and the fair value was $2,200,000.What is the amount of the goodwill under the entity method?
A)$(300,000)
B)$120,000
C)$300,000
D)$400,000
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) On January 2,20X5,Ross Co.acquired 90% of Singh Ltd.for $490,000.On that date,Singh's shareholders' equity totalled $420,000.Ross uses the equity method to record its investment.On the acquisition date,Ross sold a capital asset,with a remaining useful life of 10 years,to Singh for a gain of $14,000.At Ross's December 31,20X5 year-end,what is the amount of realized profit with respect to the sale of this capital asset? Ignore income taxes.
A)$0
B)$1,400
C)$12,600
D)$14,000
Q2) On the consolidated statement of financial position,which balances differ Between the parent-company extension method and the entity method?
A)Retained earnings and goodwill
B)Retained earnings and non-controlling interest
C)Goodwill and non-controlling interest
D)Common shares and retained earnings
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Chapter 7: Segmented and Interim Reporting
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Q1) Under IAS 34,which of the following costs is not viewed as a constructive obligation?
A)Contingent lease payments in excess of a contractual base amount
B)Year-end bonuses
C)Quantity discounts or rebates
D)Maintenance costs
Q2) Which of the following is not a threshold for identifying a reportable segment?
A)The segment contributes at least 10% of the organization's total revenues.
B)The segment contributes at least 10% of the organization's operating profits.
C)The segment contributes at least 10% of the organization's combined assets of all operating segments.
D)The segment contributes at least 10% of the organization's total expenses.
Q3) Rules for interim reporting require that comparative information be presented.What comparative information should the current statement of financial position include?
A)The same quarter,last year
B)The immediate preceding quarter
C)The year end,last year
D)As budgeted for the period
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) What is the exchange rate in effect at the date of the transaction called?
A)Closing rate
B)Spot rate
C)Forward rate
D)Settlement rate
Q2) On November 2,20X9,Henry Company purchased a machine for 100,000 Swiss francs (CHF)with payment requirement on March 30,20X10.To eliminate the risk of foreign exchange losses on this payable,Henry entered into a forward exchange contract on November 3,20X9 to receive CHF 100,000 at a forward rate of CHF1 = $2 on March 30,20X10.The spot rate was CHF1 = $1.95 on November 2,20X9 and CHF1 = $1.97 on December 1,20X9.How should the premium or discount on the forward exchange contract be accounted for?
A)It should be expensed on the inception date of the forward exchange contract.
B)It should be expensed over the 5-month term of the forward exchange contract.
C)It should be expensed on the maturity date of the forward exchange contract.
D)It should be added to the cost of the machine.
Q3) Compare and contrast accounting for foreign currency transactions and hedges under IFRS and ASPE.
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10
Chapter 9: Reporting Foreign Operations
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Q1) Cho Co. ,a public Canadian corporation has a subsidiary in South Africa that supplies half of the components that Cho needs for its plant in Alberta.It has been determined that the functional currency of the foreign operations is the Canadian dollar.Which of the following statements is true?
A)The exchange gains and losses on the monetary items will be recognized in net income.
B)The exchange gains and losses on the monetary items will be recognized as other comprehensive income.
C)The cumulative exchange gains and losses will be shown as a separate component of shareholders' equity.
D)The exchange gains and losses on nonmonetary items are deferred.
Q2) Under the current-rate method,which of the following items would be translated using the historical rate?
A)Land
B)Inventory
C)Long-term debentures
D)Share capital
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Mr.Generous donated $100,000 to Excel Private School and specified that the principal amount not be spent but be maintained permanently.Interest on the invested funds can be used to award scholarships to those who excel in drama.How should the $100,000 contribution be presented on Excel Private School's financial statements?
A)As a direct increase in net assets of the endowment fund
B)As revenue of the operating fund
C)As revenue of the endowment fund
D)As deferred revenue of the operating fund
Q2) A not-for-profit organization is not required to capitalize and amortize its capital assets if the organization ________.
A)has assets that total less than $500,000
B)has a two-year average annual gross consolidated revenues of less than $500,000
C)has an annual change to net assets of less than $500,000
D)has less than 10 full-time employees
Q3) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises.What are the reporting objectives of NFP's ?
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Page 12
Chapter 11: Public Sector Financial Reporting
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Q1) One of the objectives of government reporting is to allow users the ability to assess the government's finances.A statement of financial position is prepared and the government's "net debt" is presented on this statement.Describe what is meant by "net debt" and why this is an important indicator of the government's financial position.How does net debt impact the government's accumulated deficit or surplus.
Q2) Which of the following is not a suggested objective for financial statements for public sector entities?
A)To provide an accounting of financial affairs and resources
B)To enable evaluation of compliance with legislation
C)To provide information on financing and investing activities
D)To determine if programs are economical,efficient,and effective
Q3) The CICA's Public Sector Accounting Board (PSAB)identified nine unique characteristics of governments that differentiate them from private sector reporting.List these nine characteristics.
Q4) Who is the largest issuer of debt?
A)Banks
B)Government
C)Publicly-accountable enterprises
D)Private enterprises
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Chapter 12: Income Tax Allocation
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Q1) O'Ball Ltd.wants to acquire Kiro Ltd.to take advantage of its tax losses and credit carry forwards.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.
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Chapter 13: Income Tax Allocation Subsequent to Acquisition
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Q1) Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.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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Chapter 14: Good will Impairment Test
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Q1) How often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q2) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Q3) Proudfoot Ltd.acquired all the shares of Jacob Ltd.several years ago.In conducting its goodwill impairment test for the current year,Proudfoot has determined that there has been an impairment related to revalued assets.On Proudfoot's consolidated financial statements,where should this impairment be reported?
A)As part of profit or loss
B)As part of other comprehensive income
C)As an adjustment to retained earnings
D)As a separate amount under shareholders' equity
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16
Chapter 15: Step Purchases
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Q1) When an inter-corporate investment is acquired in stages,when does the equity method first becomes appropriate?
A)The initial investment is made
B)The intent to control is determined
C)Significant influence is first achieved
D)When control is attained
Q2) Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the entity method,the balance of the non-controlling interest at December 31,20X7 was $660,000.What adjustment should be made to 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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17
Chapter 16: Decreases in Ownership Interest
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Q1) Frey Ltd.acquired 70% of Sabo Ltd.several years ago.On January 1,20X8,Frey reduced its holding in Sabo by 10%.The shares were sold for $160,000.At December 31,20X7,under the entity method,the balance of Frey's share of Sabo's net assets was $84,000.What adjustment should be made to the consolidated shareholders' equity to reflect Frey's reduction in interest in Sabo to 60%?
A)$76,000
B)$84,000
C)$148,000
D)$160,000
Q2) When a subsidiary issues shares,________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces minority interest
D)this may increase minority interest
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18
Chapter 17: Preferred and Restricted Shares of Investee Corporation
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Q1) 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
Q2) 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
Q3) What is a coattail provision?
A)It allows preferred shares to be converted to common shares.
B)It allows restricted shares to become fully voting shares under limited circumstances.
C)It allows common shares to be converted to preferred shares.
D)It allows restricted shares to receive additional dividends.
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Page 19
Chapter 18: 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 carrying value
C)the bond's market value and carrying value
D)the bond's par value and carrying value
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Page 20
Chapter 19: Fund Accounting
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Q1) 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
Q2) 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
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