Multiple Choice Questions
1. FASB ASC 805, “Business Combinations,” provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be:
a. Recognized as an ordinary gain from a bargain purchase.
b. Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years.
c. Treated as goodwill and tested for impairment on an annual basis.
d. Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific noncurrent assets of the acquired firm.

2. What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination?
a. Expense upon acquisition.
b. Capitalize as an asset.
c. Expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached.
d. Expense until future economic benefits become certain and then capitalize as an asset.

3. An acquired entity has a long-term operating lease for an office building used for central management. The terms of the lease are very favorable relative to current market rates. However, the lease prohibits subleasing or any other transfer of rights. In its financial statements, the acquiring firm should report the value assigned to the lease contract as
a. An intangible asset under the contractual-legal criterion.
b. A part of goodwill.
c. An intangible asset under the separability criterion.
d. A building.

4. When does gain recognition accompany a business combination?
a. When a bargain purchase occurs.
b. In a combination created in the middle of a fiscal year.
c. In an acquisition when the value of all assets and liabilities cannot be determined.
d. When the amount of a bargain purchase exceeds the value of the applicable noncurrent assets (other than certain exceptions) held by the acquired company.

5. According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be
a. Capitalized as part of the overall fair value acquired in the merger.
b. Recorded as an expense in the period the merger takes place.
c. Included in recognized goodwill.
d. Written off over a 5-year maximum useful life.

6. When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?
a. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.
b. The fair value of the contingent consideration is expensed immediately at acquisition date.
c. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners’ equity is recognized.
d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.

7. An acquired firm’s financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary?
a. The parent tests the preexisting goodwill for impairment before recording the goodwill as part of the acquisition.
b. The parent includes the preexisting goodwill as an identified intangible asset acquired.
c. The parent ignores preexisting subsidiary goodwill and allocates the subsidiary’s fair value among the separately identifiable assets acquired and liabilities assumed.
d. Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value.