Corp Quiz 6 Right Answer = Highlighted Wrong Answer = Highlighted

1. An economic advantage of a business combination includes:

a. Utilizing duplicative assets
b. Creating separate management teams
c. Shared fixed costs
d. Horizontally combining levels within the marketing chain
2. A tax advantage of business combination can occur when the existing owner of a company sells
out and receives:
a. Cash to defer the taxable gain as a “tax-free reorganization”
b. Stock to defer the taxable gain as a “tax-free reorganization”
c. Cash to create a taxable gain
d. Stock to create a taxable gain
3. Larry’s Liquor acquired the net assets of Drake’s Drinks in exchange for cash. The acquisition
price exceeds the fair value of the net assets acquired. How should Larry’s Liquor determine the
amounts to be reported for the plant and equipment, and for long-term debt of the acquire
Drake’s Drinks?
Plant and Equipment Long-Term Debt
a. Fair value Drake’s carrying amount
b. Fair value Fair value
c. Drake’s carrying amount Fair value
d. Drake’s carrying amount Drake’s carrying amount
4. Acme Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the
following information was available related to Comb’s balance sheet:
Book Value Fair Value
Current Assets $50,000 $50,000
Building 80,000 100,000
Equipment 40,000 50,000
Liabilities 30,000 30,000

What is the amount recorded by ACME for the Building?

a. $110,000
b. $20,000
c. $80,000
d. $100,000
5. ABC Co. is acquiring XYZ Inc. XYZ has the following intangible assets:
 Patent on a product that is deemed to have no useful life $10,000
 Customer list with an observable fair value of $50,000
 A 5-year operating lease with favorable terms having a discounted present value of $8,000
 Identifiable research and development costs of $100,000

ABC will record how much for acquired Intangible Assets from the purchase of XYZ Inc?

a. $168,000
b. $58,000
c. $158,000
d. $150,000
6. Cozzi Company is being purchased and has the following balance sheet as of the purchase date:
Current assets $200,000 Liabilities $90,000
Fixed assets 180,000 Equity 290,000
Total $380,000 Total $380,000

The price paid for Cozzi’s net assets is $500,000. The fixed assets have a fair value of $220,000,
and the liabilities have a fair value of $110,000. The amount of goodwill to be recorded in the
purchase is:
a. $0
b. $150,000
c. $170,000
d. $190,000
7. Publics Company acquired the net assets of Citizen Company during 2016. The purchase price
was $800,000. On the date of the transaction, Citizen had no long-term investments in
marketable equity securities and $400,000 in liabilities, of which the fair value approximated
book value. The fair value of Citizen’s assets on the acquisition date was as follows:
Current assets $800,000
Noncurrent assets 600,000
$1,400,000

How should Publics account for the difference between the fair value of the net assets acquired
and the acquisition price of $800,000?
a. Retained earnings should be reduced by $200,000
b. A $600,000 gain on acquisition of business should be recognized
c. A $200,000 gain on acquisition of business should be recognized
d. A deferred credit of $200,000 should be set up and subsequently amortized to future
net income over a period not to exceed 40 years.
8. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the
following information was available related to Comb’s balance sheet:
Book Value Fair Value
Current Assets $50,000 $50,000
Building 80,000 100,000
Equipment 40,000 50,000
Liabilities 30,000 30,000

What is the amount of goodwill or gain related to the acquisition?

a. Goodwill of $70,000
b. Goodwill of $30,000
c. A gain of $30,000
d. A gain of $70,000
9. Jones Company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of
recorded assets and liabilities was $1,500,000 and $250,000, respectively. Jackson also had
unrecorded copyrights valued at $150,000 and its direct costs related to the acquisition were
$50,000. What was the amount of the goodwill related to the acquisition?
a. $600,000
b. $650,000
 c. $550,000
d. $700,000
10. Jones company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of
recorded assets and liabilities was $1,500,000 and $250,000, respectively. Jackson also had in-
process research and development projects valued at $150,000 and its pension plan’s projected
benefit obligation exceeded the plan assets by $50,000. What was the amount of the goodwill
related to the acquisition?
a. $750,000
b. $50,000
c. $250,000
d. $650,000
11. Jones Company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of
recorded assets and liabilities was $1,500,000 and $250,000, respectively. If Jackson meets
specified sales targets, Jones is required to pay an additional $200,000 in cash per the
acquisition agreement. Jones estimates the probability of this to be 50%. The direct costs related
to the acquisition were $50,000. What was the amount of the goodwill related to the
acquisition?
a. $900,000
b. $950,000
c. $850,000
d. $750,000
12. Rugby, Inc. issues 20,000 shares of $10 par value common stock with a market value of $15 each
for Soccer Company. Rugby, Inc. pays related acquisition cost of $50,000. The total fair value of
net assets acquired from Soccer Company is $450,000. Which of the following is true related to
recording the purchase and related costs:
a. Debit a loss for $150,000 on the acquisition of the business
b. Debit goodwill for $250,000 above par value on the acquisition of the business
c. Credit a gain for $150,000 on the acquisition of the business and capitalize the $55,000
of acquisition costs
d. Credit a gain for $150,000 on the acquisition of the business and expense the acquisition
costs
13. One large bank’s acquisition of another bank would be an example of a :
a. Market extension merger
b. Conglomerate merger
c. Product extension merger
d. Horizontal merger
14. A large nation-wide bank’s acquisition of a major investment advisory firm would be an example
of a:
a. Market extension merger
b. Conglomerate merger
c. Product extension merger
d. Horizontal merger
15. A building materials company’s acquisition of a television station would be an example of a:
a. Market extension merger
b. Conglomerate merger
 c. Product extension merger
d. Horizontal merger
16. A controlling interest in a company implies that the parent company
a. Owns all of the subsidiary’s stock
b. Has acquired a majority of the subsidiary’s common stock
c. Has paid cash for a majority of the subsidiary’s stock
d. Has transferred common stock for a majority of the subsidiary’s outstanding bonds and
debentures
17. Acquisition costs such as the fees of accountants and lawyers that ere necessary to negotiate
and consummate the purchase are
a. Recorded as a deferred asset and amortized over a period not to exceed 15 years
b. Expensed if immaterial but capitalized and amortized if over 2% of the acquisition price
c. Expensed in the period of the purchase
d. Included as part of the price paid for the company purchased
18. Goodwill results when:
a. A controlling interest is acquired
b. The price of the acquisition exceeds the sum of the fair values of the net identifiable
assets acquired
c. The fair value of net assets acquired exceeds the acquisition price
d. The price of the acquisition exceeds the book value of an acquired company
19. When measuring the fair value of the acquired company as the price paid by the acquirer, the
price calculation needs to consider the following ESCEPT for:
a. The estimated value of contingent consideration like assets or stock at a later date if
specified events occur like targeted sales or income performance
b. The costs of accomplishing the acquisition, such as accounting and legal fees
c. Common agreements like targeted sales or income performance by the acquire company
are acceptable for valuation
d. Issue costs from the stock of the acquirer may be expenses or they can be deducted
from the value assigned to paid-in capital in excess of par only
20. Which of the following costs of a business combination can be deducted from the value assigned
to paid-in capital in excess of par?
a. Direct and indirect acquisition costs
b. Direct acquisition costs
c. Direct acquisition costs and stock issue costs if stock is issued as consideration
d. Stock issue costs if stock is issued as consideration
21. An operating segment is a reportable segment if
a. Its operating profit is 10% or more of the combined operating profit of profitable
segments
b. Its operating loss is 10% or more of the combined operating losses of segments that
incurred an operating loss
c. The absolute amount of its operating profit or loss is 10% or more of the company’s
combined operating profit or loss
d. None of these answers are correct
22. A company that uses the last-in, first-out (LIFO) method of inventory pricing finds at an interim
reporting date that there has been a partial liquidation of the base period inventory level. The
 decline is considered temporary and the partial liquidation is expected to be replaced prior to
year end. The amount shown as inventory at the interim reporting date should
a. Be shown at the actual level, and cost of sales for the interim reporting period should
include the expected cost of replacement of the liquidated LIFO base
b. Be shown at the actual level, and cost of sales for the interim reporting period should
reflect the historical cost of the liquidated LIFO base
c. Not give effect to the LIFO liquidation, and cost of sales for the interim reporting period
should reflect the historical cost of the liquidated LIFO base
d. Be shown at the actual level, and the decrease in inventory level should not be reflected
in the cost of sales for the interim reporting period
23. Harrison Company paid the annual fee of $30,000 for an equipment maintenance contract on
July 1, the first day of its second quarter and incurred research costs in the same quarter of
$12,000. The research did not prove to be fruitful. Harrison should recognize the following
expense amount in the second quarter:
a. $10,500
b. $11,500
c. $19,500
d. $42,000
24. Ansfield, Inc. has several potentially reportable segments. The following financial information
has been determined for the current fiscal year:
Consolidated net income $1,000,000
Operating income before taxes 1,500,000
Net operating income of all segments 1,350,000
Total consolidated revenue 8,000,000
Total revenue of all segments,
excluding intersegment sales 7,000,000
Total intersegment sales 1,200,000
Consolidated total assets 50,000,000
Total assets of all segments 45,000,000

The minimum amount of revenues a segment must have to qualify as reportable is __________.
a. $700,000
b. $800,000
c. $820,000
d. The answer cannot be determined from the information given
25. On January 2, 2015, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of $200,000 starting at the beginning of the first
year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this
transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no
salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate
lease payments were determined to have a present value of $1,200,000, based on implicit
interest of 10%
 In its 2015 income statement, what amount of interest expense should Hernandez report from
this lease transaction?
a. $0
b. $81,000
c. $108,000
d. $120,000
26. What impact does a bargain purchase option have on the present value of the minimum lease
payments computed by the lessee?
a. There is no impact as the option does not enter into the transaction until the end of the
lease term
b. The lessee must increase the present value of the minimum lease payments by the
present value of the option price
c. The lessee must decrease the present value of the minimum lease payments by the
present value of the option price
d. The minimum lease payments would be increased by the present value of the option
price if, at the time of the lease agreement, it appeared certain that the lessee would
exercise the option at the end of the lease and purchase the asset at the option price
27. In computing depreciation of a leased asset, the lessee should subtract
a. A guaranteed residual value and depreciate over the term of the lease
b. An unguaranteed residual value and depreciate over the term of the lease
c. A guaranteed residual value and depreciate over the life of the asset
d. An unguaranteed residual value and depreciate over the life of the asset
28. On January 1, 2014, Sauder Corporation signed a five-year noncancelable lease for equipment.
The terms of the lease called for Sauder to make annual payments of $150,000 at the beginning
of each year for five years with the title passing to Sauder at the end of this period. The
equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-
line method of depreciation for all of its fixed assets. Sauder accordingly accounts for this lease
transaction as a capital lease. The minimum lease payments were determined to have a present
value of $625,479 at an effective interest rate of 10%.

In 2015, Sauder should record interest expense of

a. $32,547
b. $52,303
c. $47,548
d. $52,302
29. A temporary difference arises when a revenue item is reported for tax purposes in a period
After it is reported Before it is reported
In financial income in financial income
a. Yes Yes
b. Yes No
c. No Yes
d. No No
30. A company uses the equity method to account for an investment for financial reporting
purposes. This would result in what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Permanent Asset
 b. Permanent Liability
c. Temporary Asset
d. Temporary Liability
31. At the beginning of 2015, Pitman Co. purchased an asset for $1,200,000 with an estimated
useful life of 5 years and an estimate salvage value of $100,000. For financial reporting purposes
the asset is being depreciated using the straight-line method; for tax purposes the double-
declining-balance method is being used. Pitman Co.’s tax rate is 40% for 2015 and all future
years.

At the end of 2015, which of the following deferred tax accounts and balance is reported on
Pitman’s balance sheet?
Account Balance
a. Deferred tax asset $104,000
b. Deferred tax liability $104,000
c. Deferred tax asset $156,000
d. Deferred tax liability $156,000
32. Mathis Co. at the end of 201, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income $800,000
Estimated litigation expense 2,000,000
Installment sales (1,600,000)
Taxable income $1,200,000

The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is expected to
be paid. The gross profit from the installment sales will realized in the amount of $800,000 in
each of the next two years. The estimated liability for litigation is classified as noncurrent and
the installment accounts receivable are classified as $800,000 current and $800,000 noncurrent.
The income tax rate is 30% for all years.

The income tax expense is

a. $240,000
b. $360,000
c. $400,000
d. $800,000
33. Which of the following is (are) the proper time period9s) to record the effects of a change in
accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only
34. Presenting consolidated financial statements this year when statements of individual companies
were presented last year is
a. A correction of an error
b. An accounting change that should be reported prospectively
c. An accounting change that should be reported by restating the financial statements of all
prior periods presented
 d. Not an accounting change
35. On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000. Nobel
adopted the straight-line method of depreciation for this machine and had been recording
depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015,
a decision was made to change to the double-declining balance method of depreciation for this
machine.

Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained
earnings, is
a. $134,400
b. $0
c. $157,920
d. $225,660
36. Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended
12/31/14 and 12/31/15 contained the following errors:
2015 2014
Ending inventory $25,000 overstatement $40,000 understatement
Depreciation expense 10,000 understatement 20,000 overstatement

Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income taxes,
by how much will retained earnings at 12/31/15 be overstated or understated?
a. $40,000 overstatement
b. $35,000 overstatement
c. $50,000 understatement
d. $15,000 understatement
37. Which of the following suggests that the foreign entity’s functional currency is the parent’s
currency?
a. Intercompany transaction volume is low
b. Debt is serviced through local operations
c. There is an active and primarily local market
d. Sales prices are influenced by international factors
38. If currency exchange rate changes impact potential cash flows available to the parent and the
parent’s economic well-being:
a. The functional currency of the subsidiary is the foreign currency
b. Translation gains or losses should be included in net income
c. The financial relationships as measured in the translated statements are the same as
those measured in the foreign currency
d. The parent may adopt a change in the subsidiary’s functional currency
39. Patents are on the books of a British subsidiary of a U.S. firm at a value of 50,000 pounds. The
patents were acquired in 20X0 when the exchange rate was 1 pound = $1.50. The British
subsidiary was acquired by the U.S. firm in 2016 when the exchange rate was 1 pound = $1.40.
The exchange rate on December 31, 2017, the date of the most current balance sheet, is 1
pound = $1.55. The average rate of exchange for 2017 is $1.53. Assuming the dollar is the
functional currency of the subsidiary, what exchange rate will be used to re-measure patents for
the consolidated statements dated December 31, 2017?
 a. $1.40
b. $1.50
c. $1.53
d. $1.55
40. Patents are on the books of a British subsidiary of a U.S. firm at a value of 50,000 pounds. The
patents were acquired in 2016 when the exchange rate was 1 pound = $1.50. The British
subsidiary was acquired by the U.S. in 20X0 when the exchange rate was 1 pound = $1.40. The
exchange rate on December 31, 2017, the date of the most current balance sheet, is 1 pound =
$1.55. The average rate of exchange for 2017 is $1.53. Assuming the pound is the functional
currency of the subsidiary, what exchange rate will be used to translate patents for the
consolidated statements dated December 31, 2017?
a. $1.40
b. $1.50
c. $1.53
d. $1.55
41. On January 1, 2016, Honey Bee Corporation purchased the net assets of Green Hornet Company
for $1,500,000. On this date, a condensed balance sheet for Green Hornet showed:
Book Fair
Value Value
Current Assets $500,000 $800,000
Long-term investments in Securities 200,000 150,000
Land 100,000 600,000
Buildings (net) 700,000 900,000
$1,500,000

Current Liabilities $300,000 $300,000

Long-Term Debt 550,000 600,000
Common Stock (no-par) 300,000
Retained Earnings 350,000
$1,500,000

Required:
Record the entry on Honey Bee’s books for the acquisition of Green Hornet’s net assets

Acquisition price 1,500,000 (c)

Acquired net assets:
Current assets 800,000 (d)
Long-term investments in securities 150,000 (d)
Land 600,000 (d)
Buildings 900,000 (d)
Current liabilities (300,000) (d)
Long-term debt (600,000) (d) 1,550,000
Gain on acquisition of business $ 50,000
Current Assets 800,000 (d)
Long-term investments in securities 150,000 (d)
Land 600,000 (d)
Building 900,000 (d)
Current liabilities 300,000 (c)
Long-term debt 600,000 (c)
Gain on acquisition of business 50,000 (c)
Cash 1,500,000 (c)

42. Diamond acquired Heart’s net assets. At the time of the acquisition Heart’s Balance sheet was as
follows:
Accounts Receivable $130,000
Inventory 70,000
Equipment, Net 50,000
Building, Net 250,000
Land 100,000
Total Assets $600,000

Bonds Payable $100,000

Common Stock 50,000
Retained Earnings 450,000
Total Liabilities and Stockholders’ Equity $600,000

Fair values on the date of acquisition:

Inventory $100,000
Equipment 30,000
Building 350,000
Land 120,000
Brand Name 50,000
Bonds payable 120,000

Acquisition costs: $5,000

Record the entry for the purchase of the net assets of Heart by Diamond at the following cash
prices:
a. $700,000
b. $300,000

Answer:

a.
Accounts receivable 130,000 (d)
Inventory 100,000 (d)
Equipment 30,000 (d)
 Building 350,000 (d)
Land 120,000 (d)
Brand name 50,000 (d)
Goodwill 40,000 (d)
Acquisition expenses 5,000 (d)
Bonds payable 100,000 (c)
Premium on bonds payable 20,000 (c)
Cash 705,000 (c)
b.
Accounts receivable 130,000 (d)
Inventory 100,000 (d)
Equipment 30,000 (d)
Building 350,000 (d)
Land 120,000 (d)
Brand name 50,000 (d))
Acquisition expenses 5,000 (d)
Bonds payable 100,000 (c)
Premium on bonds payable 20,000 (c)
Gain on Acquisition 360,000 (c)
Cash 305,000 (c)

43. The records for Bosch Co. show this data for 2015:

 Gross profit on installment sales recorded on the books was $420,000. Gross profit from
collections of installment receivables was $280,000
 Life insurance on officers was $3,800
 Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year
life (no salvage value) is used. For tax purposes, MACS depreciation is used and Bosch may
deduct 14% for 2015
 Interest received on tax exempt Iowa State bonds was $9,000
 The estimated warranty liability related to 2015 sales was $21,600. Repair costs under
warranties during 2015 were $13,600. The remainder will be incurred in 2016
 Pretax financial income is $600,000. The tax rate is 30%

Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income
(b) Prepare the journal entry to record income taxes for 2015

Answer:

a.
Pretax financial income 600,000
Permanent differences
Life insurance 3,800
Tax-exempt interest (9,000)
Temporary difference
Installment sales (140,000)
Extra depreciation (12,000)
Warranties 8,000
Taxable income 450,800

b.
Income tax expense 178,440 (d)
Deferred tax asset 2,400 (d)
Deferred tax liability 45,600 (c)
Income taxes payable 135,240 (c)