Select the correct answer for each of the following questions.
1. Goodwill represents the excess of the sum of the fair value of the
(1) Consideration given,
(2) Shares already owned, and
(3) The noncontrolling interest 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 recorded 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 in which an acquiring company purchases 100 percent of the outstanding common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a
a. Deferred credit.
b. Reduction of the values assigned to current assets and a deferred credit for any unallocated portion.
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. 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. In exchange for 40 percent of its voting stock A Company, acquires 80 percent of the common stock of B Company. This is a “tax-free” stock-for-stock exchange for tax purposes. B Company’s identifiable 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 is $700,000, and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the
acquisition would be
a. Zero.
b. $60,000.
c. $75,000.
d. $295,000.