Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities
Chapter 01
Intercorporate Acquisitions and Investments in Other Entities
Multiple Choice Questions
1. Assuming no impairment in value prior to transfer, assets transferred by a parent
company to another entity it has created should be recorded by the newly created entity at
the assets’:
A. cost to the parent company.
B. book value on the parent company’s books at the date of transfer.
C. fair value at the date of transfer.
D. fair value of consideration exchanged by the newly created entity.
2. Given the increased development of complex business structures, which of the
following regulators is responsible for the continued usefulness of accounting reports?
A. Securities and Exchange Commission (SEC)
B. Public Company Accounting Oversight Board (PCAOB)
C. Financial Accounting Standards Board (FASB)
D. All of the above
3. A business combination in which the acquired company’s assets and liabilities are
combined with those of the acquiring company into a single entity is defined as:
A. Stock acquisition
B. Leveraged buyout
C. Statutory Merger
D. Reverse statutory rollup
4. In which of the following situations do accounting standards not require that the
financial statements of the parent and subsidiary be consolidated?
A. A corporation creates a new 100 percent owned subsidiary
B. A corporation purchases 90 percent of the voting stock of another company
C. A corporation has both control and majority ownership of an unincorporated company
D. A corporation owns less-than a controlling interest in an unincorporated company
In order to reduce the risk associated with a new line of business, Conservative
Corporation established Spin Company as a wholly owned subsidiary. It transferred assets
and accounts payable to Spin in exchange for its common stock. Spin recorded the
following entry when the transaction occurred:
5. Based on the preceding information, what number of shares of $7 par value stock did
Spin issue to Conservative?
A. 10,000
B. 7,000
C. 8,000
D. 25,000
6. Based on the preceding information, what was Conservative’s book value of assets
transferred to Spin Company?
A. $243,000
B. $263,000
C. $221,000
D. $201,000
7. Based on the preceding information, what amount did Conservative report as its
investment in Spin after the transfer of assets and liabilities?
A. $181,000
B. $221,000
C. $263,000
D. $243,000
8. Based on the preceding information, immediately after the transfer,
A. Conservative’s total assets decreased by $23,000.
B. Conservative’s total assets decreased by $20,000.
C. Conservative’s total assets increased by $56,000.
D. Conservative’s total assets remained the same.
During its inception, Devon Company purchased land for $100,000 and a building for
$180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly
created subsidiary, Regan Company, in exchange for 15,000 shares of Regan’s $10 par
value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years,
with zero residual value. An appraisal revealed that the building has a fair value of
$200,000.
9. Based on the information provided, at the time of the transfer, Regan Company should
record:
A. Building at $180,000 and no accumulated depreciation.
B. Building at $162,000 and no accumulated depreciation.
C. Building at $200,000 and accumulated depreciation of $24,000.
D. Building at $180,000 and accumulated depreciation of $18,000.
10. Based on the information provided, what amount would be reported by Devon
Company as investment in Regan Company common stock?
A. $312,000
B. $180,000
C. $330,000
D. $150,000
11. Based on the preceding information, Regan Company will report
A. additional paid-in capital of $0.
B. additional paid-in capital of $150,000.
C. additional paid-in capital of $162,000.
D. additional paid-in capital of $180,000.
12. 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.
13. A statutory consolidation is a type of business combination in which:
A. one of the combining companies survives and the other loses its separate identity.
B. one company acquires the voting shares of the other company and the two companies
continue to operate as separate legal entities.
C. two publicly traded companies agree to share a board of directors.
D. each of the combining companies is dissolved and the net assets of both companies are
transferred to a newly created corporation.
Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the
merger, Rivendell paid finder’s fees of $40,000, legal fees of $13,000, audit fees related to
the stock issuance of $10,000, stock registration fees of $5,000, and stock listing
application fees of $4,000.
14. Based on the preceding information, under the acquisition method, what amount
relating to the business combination would be expensed?
A. $72,000
B. $19,000
C. $53,000
D. $63,000
15. Based on the preceding information, under the acquisition method:
A. $72,000 of stock issue costs are treated as goodwill.
B. $19,000 of stock issue costs are treated as a reduction in the issue price.
C. $19,000 of stock issue costs are expensed.
D. $72,000 of stock issue costs are expensed.
16. Using the preceding information, what amount would have been expensed if the
purchase method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000
17. Using the preceding information, what amount would have been expensed if the
pooling-of-interests method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000
18. Burrough Corporation paid $80,000 to acquire all of Helyar Company’s net assets.
Helyar reported assets with a book value of $60,000 and fair value of $98,000 and
liabilities with a book value and fair value of $23,000 on the date of combination.
Burrough also paid $3,000 to a search firm for finder’s fees related to the acquisition. What
amount will be recorded as goodwill by Burrough Corporation while recording its
investment in Helyar?
A. $0
B. $5,000
C. $8,000
D. $13,000
Plummet Corporation reported the book value of its net assets at $400,000 when Zenith
Corporation acquired 100 percent ownership. The fair value of Plummet’s net assets was
determined to be $510,000 on that date.
19. Based on the preceding information, what amount of goodwill will be reported in
consolidated financial statements presented immediately following the combination if
Zenith paid $550,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
20. Based on the preceding information, what amount will be recorded by Zenith as its
investment in Plummet, if it paid $500,000 for the acquisition?
A. $610,000
B. $400,000
C. $500,000
D. $510,000
21. Based on the preceding information, what amount of goodwill will be reported in
consolidated financial statements presented immediately following the combination if
Zenith paid $500,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
22. The fair value of net identifiable assets of a reporting unit of X Company is $300,000.
On X Company’s books, the carrying value of this reporting unit’s net assets is $350,000,
including $60,000 goodwill. If the fair value of the reporting unit is subsequently
$335,000, what amount of goodwill impairment will be recognized for this unit?
A. $0
B. $10,000
C. $25,000
D. $35,000
23. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000.
The carrying value of the reporting unit’s net assets on Y Company’s books is $320,000,
including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000,
what would be the fair value of the reporting unit?
A. $320,000
B. $310,000
C. $270,000
D. $290,000
Following its acquisition of the net assets of Dan Company, Empire Company assigned
goodwill of $60,000 to one of the reporting divisions. Information for this division
follows:
24. Based on the preceding information, what amount of goodwill will be reported for this
division if its fair value is determined to be $200,000?
A. $0
B. $60,000
C. $30,000
D. $10,000
25. Based on the preceding information, what amount of goodwill impairment will be
recognized for this division if its fair value is determined to be $195,000?
A. $5,000
B. $30,000
C. $60,000
D. $55,000
26. Based on the preceding information, what amount of goodwill impairment will be
recognized for this division if its fair value is determined to be $245,000?
A. $0
B. $5,000
C. $60,000
D. $55,000
Public Equity Corporation acquired Lenore Company through an exchange of common
shares. All of Lenore’s assets and liabilities were immediately transferred to Public Equity.
Public’s common stock was trading at $20 per share at the time of exchange. Following
selected information is also available.
27. Based on the preceding information, what number of shares was issued at the time of
the exchange?
A. 5,000
B. 17,500
C. 12,500
D. 10,000
28. Based on the preceding information, what is the par value of Public’s common stock?
A. $10
B. $1
C. $5
D. $4
29. Based on the preceding information, what is the fair value of Lenore’s net assets, if
goodwill of $56,000 is recorded?
A. $306,000
B. $244,000
C. $194,000
D. $300,000
Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company’s net
assets and assigned them to four separate reporting divisions. Wilson assigned total
goodwill of $134,000 to the four reporting divisions as given below:
