The Islamic University of Gaza

Faculty of Commerce
Accounting Department

Advanced Accounting
Mid Exam First Semester,
2015/2016
Time Allowed: One hour

Student Name... Student

No.

Ramadan Al-Omari, FCCA

24 November 2015
Answer the following TWO Questions on the provided loose paper
Question No. 1
marks)

(10

On January 1, 2012, Palmira Company acquired the net assets of Sandwich Ltd. for $750,000
cash. On that date, the fair value of Sandwich Ltds identifiable assets was $850,000 and the fair
value of its liabilities was $200,000. Palmira decided to measure goodwill impairment using the
present value of future cash flows to estimate the fair value of Sandwich Ltd. The information for
the subsequent years is as follows:
Year
2012
2013
2014

Present Value of Future

Cash Flows
650,000
600,000
550,000

Carrying Value of*

Sandwich Net Assets
500,000
520,000
450,000

Fair Value of
of Sandwich Net Assets
540,000
580,000
525,000

*Excluding Goodwill
For each year determine the amount of goodwill impairment, and prepare the journal
entry needed each year to record the goodwill impairment, if any.

Question No.2
marks)

(10

On 1 January 2015, Perfection Ltd acquired Sky Services Inc. To assess the amount it was
willing to pay, Perfection Ltd made the following computations and assumptions.
At the time, Sky Services Inc. had identifiable assets with a total fair value of $7,000,000 and
liabilities of $2,000,000. The assets included buildings with a fair value higher 30% than book
value, Plant and Machinery with a fair value 20% higher than book value, and land with a fair
value 40% higher than book value. The remaining lives of the assets were deemed to be
approximately equal to those used by Sky Services Inc.
Sky Services Inc.s pretax incomes for the years 2012, 2013, 2014 were $1,500,000, $1,600,000,
and $1,070,000, respectively. Perfection Ltd believed that an average of these earnings
represents a fair estimate of annual earnings for the indefinite future. The following were
included in the pretax earnings:
Depreciation on Plant and Machinery (each year)
Depreciation on Buildings (each year)
Extraordinary gain (2013)
Extraordinary loss (year 2014)
The normal rate of return on net assets is 15%.
2

1,000,000
800,000
310,000
160,000

Calculate what you would think was a reasonable offering price for Sky Services Inc.,
assuming that Perfection Ltd believes that it must earn a 30% return on its investment and
that goodwill is determined by capitalizing excess earnings.

Question No. 3
(10 marks)

Choose the correct answer

1. A friendly business combination is a combination where the

a. Board of directors of the company targeted for acquisition resists the
combination.
b. Boards of directors of the combining companies negotiate mutually
agreeable terms of a proposed combination.
c. Shareholders of the two companies vote to sell their respective shares.
d. Shareholders of the two companies decide to acquire a third company.
2. The excess amount agreed upon in an acquisition over the stock price of
the acquired firm is called
a. Bargain purchase
b. Revaluation of non-current assets
c. Additional paid in capital
d. Takeover Premium
3. According to the economic unit concept, the primary purpose of
consolidated financial statements is to provide information that is relevant to
a. Parent company stockholders.
b. Non-controlling interest.
c. The industry.
d. The Board of Directors of the group.
4. A majority-owned subsidiary could be excluded from the consolidated
statements if
a. Control does not rest with the majority owner.
b. Subsidiary operates under governmentally imposed uncertainty so
severe as to raise significant doubt about the parents control.
c. Control is meant to be temporary.
d. All of the above.
5. From an accounting point of view, the difference between acquired
goodwill and self-generated goodwill is that
a. Acquired goodwill is recorded and tested annually for impairment, selfgenerated goodwill is recorded and amortized.
b. Acquired goodwill is not recorded, self-generated goodwill is recorded
and amortized over the number of years of its useful life.

c. Acquired goodwill is recorded and is amortized over the number of

years of its useful life, self-generated goodwill is not recorded.
d. Both are not recorded.
6. When the consideration paid to acquire another firm is lower than the fair
value of identifiable net assets, the acquisition is referred to as a
a. Bargain
b. Goodwill
c. Premium
d. Non-controlling interest

7. A business combination is called a statutory merger when

a. A new corporation is formed to acquire two or more other corporations
through an exchange of voting stock; the acquired corporations then
cease to exist as separate legal entities.
b. A company acquires a controlling interest in the voting stock of another
company, resulting in a parentsubsidiary relationship.
c. One company acquires all the net assets of another company with the
result that the acquired company ceases to exist as a separate legal
entity.
d. All of the above.
8. Acquired intangible assets other than goodwill with a limited useful life
a. Should be amortized, but should not be reviewed for impairment.
b. Should not be amortized, but should be tested annually for
impairment.
c. Should not be amortized, and should not be tested for impairment.
d. Should be amortized over its useful economic life and should be
reviewed for impairment
9. The first step in determining goodwill impairment involves comparing the
a. Implied value of a reporting unit to its carrying amount (goodwill
excluded).
b. Fair value of a reporting unit to its carrying amount (goodwill
excluded).
c. Implied value of a reporting unit to its carrying amount (goodwill
included).
d. Fair value of a reporting unit to its carrying amount (goodwill included).
10. Purchase agreements may provide that the purchasing company will
give additional consideration (contingent consideration) to the seller if
a. Certain future events or transactions occur.
b. Further calculations provide evidence for goodwill impairment.
c. The total fair value of the assets exceeds their carrying value.
d. The acquisition is a bargain acquisition.

Student NameStudent No
Answer Question No. 1 on this side and Question No. 2 on the back of this blank paper