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Solutions for Advanced Financial Midterm #1 (1st edition by Nathalie Johnstone)
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Solutions for Advanced Financial Midterm #1 (1st edition by Nathalie Johnstone)
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Solutions for Advanced FinancialMidterm #1 (1st edition by Nathalie
Johnstone)
CHAPTER 1 - ANSCHAPTER 1
What are reasons for enterprise expansion? - ANS- Economies of scale
- New earnings potential
- Earning stability through diversification
- Greater management reward for a bigger company size
- Prestige of having a larger company size
What are the two types of expansion? - ANS1. Internal expansion
2. External expansion
What are motivating factors for creating a new business entity? - ANS- Establish clear lines of
control and facilitate clear evaluation of operating results
- Special tax incentives
- Regulatory reasons
- Protection from legal liability
- Dispose of a portion of existing operations
Is it possible to have control of a company without owning >50% of the voting shares? - ANSYes
- contractual agreements or financial arrangements
If a bargain purchase occurs what happens? - ANSAcquirer would recognize a gain on
Acquisition
One type of uncertainty in business combinations arises from numerous required fair value
measurements. Because the acquirer may not have sufficient information available immediately
to properly ascertain fair values, ASC 805 allows for a period of time, called the measurement
period. How long is the measurement period? - ANSUp to one year after acquisition (the value
of the assets obtained in the acquisition can change during that year)
What is contingent consideration? How should it be treated? - ANSconsideration exchanged by
the acquirer in a business combination is not fixed in amount, but rather is contingent on future
events.
Should be valued at acquisition date and recorded
, If an entity has an existing interest in a sub and then acquires more of the sub to qualify for
consolidation - how should the previously existing interest in sub be treated? - ANSThe
previously existing interest would be adjusted to FV at acquisition date and a gain/loss would be
recognized
If an acquirer is going to receive in-process R&D, how should it be treated? - ANSThe R&D
should be classified as an asset with an indefinite life and would be subsequently tested for
impairment.
In the past, there were two methods of accounting for business combinations which were... -
ANS1. Pooling of interests method (not allowed anymore)
2. Purchase method
In acquisition accounting:
a. common stock must be the consideration given.
b. goodwill is not reported.
c. a statutory merger occurs.
d. a change of basis in accounting occurs.
e. none of the above. - ANSD
To qualify for acquisition accounting treatment,
a. one company must acquire common stock of the other combining company.
b. a statutory consolidation must occur.
c. each company must be approximately the same size.
d. a stock-for-stock exchange must occur.
e. none of the above. - ANSE
What are the three primary legal forms of business combinations? - ANS1. Statutory merger
2. Statutory consolidation
3. Stock acquisition
What is a statutory merger? What is the result? - ANSThe acquired company's assets and
liabilities are transferred to the acquiring company, and the acquired company is dissolved, or
liquidated. Operations of the previous separate companies are carried on in a single legal entity.
Result: one legal entity survives
What is a statutory consolidation? What is the result? - ANSBoth combining companies are
dissolved and the assets and liabilities of both companies are transferred to a newly created
corporation.
Result: one "new" legal entity survives
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