Question 1

Company A acquires Company B In preparing consolidated financial statements, the two recognized accounting methods are:

Accepted Answer

A)  Merger accounting and Acquisition accounting 
B)  Consolidation accounting and Acquisition accounting 
C)  Merger accounting and Purchase accounting 
D)  Pooling-of-interests accounting and Purchase accounting

Question 2

When a security is reclassified from Available-for-Sale to Trading, it is transferred at fair market value and any unrealized gains and losses must be recognized in the income statement.

Accepted Answer

A) True 
 B)False

Question 3

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
 $$\begin{array} { | l | l | l | } 
\hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \
\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \
\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \
\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \
\hline \begin{array} { l } 
\text { Total Liabilities and } \
\text { Shareholders' Equity }
\end{array} & \$ 37,234 & \$ 5,379 \
\hline
\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?

Accepted Answer

A)  $28,221 
B)  $27,231 
C)  $27,741 
D)  $25,462 $23,467 + $3,764 = $27,231.

Question 4

If a company has a wholly owned foreign subsidiary located at a place where the functional currency is highly inflationary, they should use the temporal method.

Accepted Answer

A) True 
 B)False

Question 5

If a company chooses the fair value option for an asset or liability, all changes in the fair value of the asset (or liability), including unrealized gain and losses, will be included in net income.

Accepted Answer

A) True 
 B)False

Question 6

Goodwill recorded as the result of an acquisition is defined as the purchase price less the book value of net assets.

Accepted Answer

A) True 
 B)False

Question 7

Determine the amount Guido Inc. will record as investment income in its income statement under the three scenarios: Weiner is considered trading marketable equity security (MES), available for sale (AFS) MES or using cost method. $$\begin{array} { | l | c | c | c | } 
\hline & \text { Trading MES } & \text { AFS MES } & \text { Cost } \
\hline \text { A) } & \$ 10,000 & \$ 10,000 & \$ 30,000 \
\hline \text { B) } & \$ 10,000 & \$ 16,000 & \$ 10,000 \
\hline \text { C) } & \$ 16,000 & \$ 10,000 & \$ 10,000 \
\hline \text { D) } & \$ 16,000 & \$ 16,000 & \$ 10,000 \
\hline
\end{array}$$

Accepted Answer

A)  Choice A 
B)  Choice B 
C)  Choice C 
D)  Choice D

Question 8

Company ABC, an American company, has a 100% owned foreign subsidiary. The foreign subsidiary's local currency, functional currency and reporting currency are all different. The subsidiary accounts for inventories using the first-in, first-out (FIFO) method.
A. Assume the functional currency is appreciating relative to the reporting currency. Compare each of the following ratios for the foreign subsidiary in the reporting currency after translation to the same ratios in the functional currency before translation. Explain why the ratios do or do not differ.
i. Gross profit margin percentage
ii. Current ratio
B. Assume the local currency is appreciating relative to the functional currency. Compare each of the following ratios for the foreign subsidiary in the functional currency after remeasurement to the same ratios in the local currency before remeasurement. Explain why the ratios do or do not differ.
i. Gross profit margin percentage
ii. Operating profit margin
iii. Net profit margin

Accepted Answer

The answer of Company ABC, an American company, has a...

Question 9

Growth Corporation is trading at $102 per share on 11/1/06 when it makes a bid of 0.667 shares of Growth Corp. for each outstanding share of Target Corp. Target has 40M shares outstanding, and Growth Corp. has approximately 30M shares outstanding. Target closed at $50 per share on 10/31/06.
On 11/19/06, Bidder Corp. makes a bid of 2.5 shares of Bidder's stock for each share of Target. Bidder is trading at $29 on 11/19/06 with 90M shares outstanding.
The fair market value of Target's net identifiable assets is $1,020M at the time of the offers. Target's expected earnings for 2006 are $250M.
Growth Corporation's earnings for 2006 are expected to be $125M. Bidder Corp.'s earnings for 2006 are expected to be $330M.
a. How much of a percentage premium over the market price was Growth Corporation prepared to pay for Target?
b. Assuming the stock market is efficient, why would one company be prepared to pay a premium over current market value to acquire another company?
c. Assume both companies (Growth Corp. and Bidder Corp.) are expected to use pooling-of-interest accounting method to record their acquisition of Target (if they are successful). Assume any successful merger will take place on December 31, 2006. Determine for each of the proposed acquisitions whether it will increase or decrease the earnings per share of the acquiring corporation for 2006.
d. If Growth Corporation used purchase accounting instead of pooling, would this change your answer in c? Explain in full.

Accepted Answer

The answer of Growth Corporation is trading at $102 per...

Question 10

One of the problems with consolidated financial statements is that all intercompany transactions are not reported.

Accepted Answer

A) True 
 B)False

Question 11

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
 $$\begin{array} { | l | r | } 
\hline \text { Total Assets } & \$ 12 \mathrm { M } \
\hline \text { Liabilities } & \$ 8 \mathrm { M } \
\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \
\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\
\hline
\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.
-If ABC uses pooling-of-interests to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

Accepted Answer

A)  $0 
B)  $2M 
C)  $4M 
D)  $6M

Question 12

Trading Marketable Securities:

Accepted Answer

A)  are considered non-current assets. 
B)  are recorded at amortized cost. 
C)  are marked to the lower of cost or market each accounting period. 
D)  are marked to market each accounting period.

Question 13

Current GAAP requires that only goodwill for acquisitions completed prior to the elimination of pooling-of-interests in merger accounting be amortized.

Accepted Answer

A) True 
 B)False

Question 14

Xena Corporation has a foreign subsidiary, Zete Corporation, located in Japan. At the end of fiscal 2006, Zete has:
 $$\begin{array} { | l | l | } 
\hline \text { Non-monetary assets } & \text { 55M Yen } \
\hline \text { Monetary assets } & \text { 20M Yen } \
\hline \text { Non-monetary liabilities } & \text { 30M Yen } \
\hline \text { Monetary liabilities } & \text { 25M Yen } \
\hline
\end{array}$$
-Assume Xena uses the current rate method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?

Accepted Answer

A)  Xena will record a foreign currency translation gain on the income statement. 
B)  Xena will record a foreign currency translation loss on the income statement. 
C)  Xena will record a foreign currency translation gain in the equity section of the balance sheet. 
D)  Xena will record a foreign currency translation loss in the equity section of the balance sheet.

Question 15

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
 $$\begin{array} { | l | l | l | } 
\hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \
\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \
\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \
\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \
\hline \begin{array} { l } 
\text { Total Liabilities and } \
\text { Shareholders' Equity }
\end{array} & \$ 37,234 & \$ 5,379 \
\hline
\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective?

Accepted Answer

A)  $28,221 
B)  $27,231 
C)  $27,741 
D)  $25,462 $23,467 + $3,764 + (.34 x $1,500) = $27,741.

Question 16

One of the problems with purchase accounting is that there is often very little basis for comparability of financial statements before acquisition and after acquisition.

Accepted Answer

A) True 
 B)False

Question 17

Undie Inc. has many foreign operations, and uses the U.S. dollar as its functional currency worldwide. Which of the following statements is true with respect to foreign operations?

Accepted Answer

A)  All assets and liabilities are translated at current exchange rates. 
B)  Monetary assets and liabilities are translated at current exchange rates. 
C)  Translation gains and losses are reported in equity section of balance sheet. 
D)  Non-monetary assets and liabilities are translated at average exchange rates for the year.

Question 18

Company A acquires 40% of Company B in a stock-for-stock exchange. With respect to preparing financial statements, which of the following statements is correct?

Accepted Answer

A)  Company A will most likely use pooling-of-interest accounting for consolidation purposes. 
B)  Company A will most likely use purchase accounting. 
C)  Company A will most likely use the cost method. 
D)  Company A will most likely use the equity method.

Question 19

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006 is as follows:
 $$\begin{array} { | l | l | } 
\hline & \text { British pound } \
\hline \text { Gross profit margin } & 40 \% \
\hline \text { Inventory } & 2,000 \
\hline & \text { Exchange Rate } \
\hline \text { Balance Sheet date } & 1 \text { pound } = \$ 1.6 \
\hline \text { Average exchange rate } & 1 \text { pound } = \$ 1.5 \
\hline \text { Historical rate } & 1 \text { pound } = \$ 1.4 \
\hline
\end{array}$$
-If sales were 3,000 in British pounds for the fiscal year and the temporal method was used, what would this be in U.S. dollars?

Accepted Answer

A)  $4,800 
B)  $4,500 
C)  $4,200 
D)  $4,000

Question 20

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
 $$\begin{array} { | l | r | } 
\hline \text { Total Assets } & \$ 12 \mathrm { M } \
\hline \text { Liabilities } & \$ 8 \mathrm { M } \
\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \
\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\
\hline
\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.
-If ABC uses purchase accounting to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

Accepted Answer

A)  $0 
B)  $2M 
C)  $4M 
D)  $6M

Exam 5: Analyzing Investing Activities: Intercorporate Investments

Company A acquires Company B In preparing consolidated financial statements, the two recognized accounting methods are:

When a security is reclassified from Available-for-Sale to Trading, it is transferred at fair market value and any unrealized gains and losses must be recognized in the income statement.

If a company has a wholly owned foreign subsidiary located at a place where the functional currency is highly inflationary, they should use the temporal method.

If a company chooses the fair value option for an asset or liability, all changes in the fair value of the asset (or liability), including unrealized gain and losses, will be included in net income.

Goodwill recorded as the result of an acquisition is defined as the purchase price less the book value of net assets.

One of the problems with consolidated financial statements is that all intercompany transactions are not reported.

Trading Marketable Securities:

Current GAAP requires that only goodwill for acquisitions completed prior to the elimination of pooling-of-interests in merger accounting be amortized.

One of the problems with purchase accounting is that there is often very little basis for comparability of financial statements before acquisition and after acquisition.

Undie Inc. has many foreign operations, and uses the U.S. dollar as its functional currency worldwide. Which of the following statements is true with respect to foreign operations?

Company A acquires 40% of Company B in a stock-for-stock exchange. With respect to preparing financial statements, which of the following statements is correct?