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Recording Business Combinations

E1-2 Multiple-Choice Questions on Recording Business Combinations
[AICPA Adapted]
Select the correct answer for each of the following questions.
1. Goodwill represents the excess of the cost of an acquired company over the:
a. Sum of the fair values assigned to identifiable assets acquired less liabilities assumed.
b. Sum of the fair values assigned to tangible assets acquired less liabilities assumed.
c. Sum of the fair values assigned to intangible assets acquired less liabilities assumed.
d. Book value of an acquired company.
2. In a business combination, costs of registering equity securities to be issued by the acquiring company
are a(n):
a. Expense of the combined company for the period in which the costs were incurred.
b. Direct addition to stockholders' equity of the combined company.
c. Reduction of the otherwise determinable fair value of the securities.
d. Addition to goodwill.
3. Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination
carried out by exchanging cash for common stock?
a. Historical cost.
b. Book value.
c. Cost plus any excess of purchase price over book value of assets acquired.
d. Fair value.
4. In a business combination, the appraisal value of the identifiable assets acquired exceeds the acquisition
price. The excess appraisal value should be reported as a:
a. Deferred credit.
b. Reduction of the values assigned to current assets and a deferred credit for any unallocated
c. Pro rata reduction of the values assigned to current and noncurrent assets and a deferred credit for
any unallocated portion.
d. No answer listed is correct.
5. On June 30, 20X2, Pane Corporation exchanged 150,000 shares of its $20 par value common stock
for all of Sky Corporation's common stock. At that date, the fair value of Pane's common stock issued
was equal to the book value of Sky's net assets. Both corporations continued to operate as separate
businesses, maintaining accounting records with years ending December 31. Information from separate
company operations follows:
Pane Sky
Retained earnings, Dec. 31, 20X1 $3,200,000 $925,000
Net income, 6 months ended June 30, 20X2 800,000 275,000
Dividends paid, March 25, 20X2 750,000 ?
What amount of retained earnings would Pane report in its June 30, 20X2, consolidated balance
a. $5,200,000.
b. $4,450,000.
c. $3,525,000.
d. $3,250,000.
6. A and B Companies have been operating separately for five years. Each company has a minimal
amount of liabilities and a simple capital structure consisting solely of voting common stock. A Company,
in exchange for 40 percent of its voting stock, acquires 80 percent of the common stock of B Company. This was a "tax-free" stock-for-stock (type B) exchange for tax purposes. B Company
assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair
market value of the A stock used in the exchange was $700,000. The goodwill on this acquisition
would be:
a. Zero.
b. $60,000.
c. $120,000.
d. $236,000.