Name________________________________________ Date____________________

Business Combination

1. For the past several years, Mozza Company has invested in the common stock of Chedd
Company. As of July 1, 2001, Mozza owned approximately 13% of the total of Chedd's
outstanding voting common stock. Recently, management of the two companies have discussed
a possible combination of the two entities. However, no public announcement has been made,
and no notice to owners has been given. The resulting business combination would be
accounted for under the ______ method.
a) pooling of interests
b) acquisition
c) part acquisition, part pooling
d) joint venture

2. A business combination in which the surviving entity is not one of the two combining
entities is a(n):
a) investment in stock
b) statutory consolidation
c) statutory merger
d) stock acquisition

3. To effect a business combination, Proper Co. acquired all the outstanding common shares
of Scapula Co., a business entity, for cash equal to the carrying amount of Scapula's net
assets. The carrying amounts of Scapula's assets and liabilities approximated their fair
values at the acquisition date, except that the carrying amount of its building was more
than fair value. In preparing Proper's year-end consolidated income statement, what is the
effect of recording the assets acquired and liabilities assumed at fair value, and should
goodwill amortization be recognized:
Depreciation Expense Goodwill Amortization
a) Lower Yes
b) Higher Yes
c) Lower No
d) Higher No

4. If the acquiring company pays $5 per share for 100,000 shares of acquired company
voting stock in exchange for assets with a fair value of $500,000 and liabilities at a
fair value of $25,000, what is the amount of goodwill recognized by the acquiring company:
a) $500,000 b) $475,000 c) $25,000 d) $0

5. At what value should an accountant record a preacquisition contingency:

a) fair value b) cost c) tax basis d) present value

6. When there is a difference between the book and tax basis of an acquired company, the
difference is:
a) a permanent difference
b) usually immaterial and not recognized
c) a temporary difference d) written off as an expense

7. If the acquiring company determines that a $500,000 difference exists between the book
and tax bases (book basis > tax basis) and the company's tax rate is 40 percent, what is
the amount of the deferred tax liability:
a) a deferred tax asset of $200,000 results
b) a deferred tax asset results when there is a difference between fair value and
tax basis
c) a deferred tax liability amounting to $200,000
d) 0

8. In the period when a material business combination occurs, what supplemental

information should be disclosed on a pro forma basis in the notes to the financial
statements of a combined entity that is a public business enterprise:
a) contingent payments, options, or commitments specified in the acquisition
agreement
b) if comparative statements are presented, the results of operations for all
periods reported as though the combination had been completed at the beginning
of the earliest period
c) if comparative financial statements are presented, the results of operations for
the comparable prior period as though the combination had been completed at the
beginning of that period d) the period for which the results of operations of
the acquired entity are included in the income statement of the combined entity

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