Entity A acquires all of the voting shares of Entity B for $1,000,000. At the time of the
acquisition, the net fair value of the identifiable assets acquired and liabilities assumed had
a carrying amount of $900,000 and a fair value of $800,000. The amount of goodwill Entity
A will record on the acquisition date is
Answer (C) is correct.
Given no prior equity interest or non controlling interest, goodwill equals
the excess of the fair value of the consideration transferred over the fair
value of the net of the identifiable assets acquired and liabilities assumed.
Consequently, goodwill is $200,000 ($1,000,000 – $800,000).
A business combination may be legally structured as a merger, a consolidation, or an acquisition. Which of the following describes a business combination that is legally structured as a merger?
Answer (A) is correct. In a business combination legally structured as a merger, the assets and liabilities of one of the combining companies are transferred to the books of the other combining company (the surviving company). The surviving company continues to exist as a separate legal entity. The nonsurviving company ceases to exist as a separate entity. Its stock is canceled, and its books are closed.
A horizontal merger is a merger between
Answer (D) is correct. A horizontal merger is one between competitors in the same market. From the viewpoint of the Justice Department, it is the most closely scrutinized type of merger because it has the greatest tendency to reduce competition.
Which type of acquisition does not require shareholders to have a formal vote to approve?
Answer (B) is correct. Purchasing the stock of another company is advantageous when management and the board of directors of the purchased company are hostile to the combination because the acquisition does not require a formal vote by the shareholders. Thus, the management and the board of directors cannot influence shareholders. Also, after the acquisition, both companies continue to operate separately.
The acquisition of a retail shoe store by a shoe manufacturer is an example of
Answer (A) is correct. The acquisition of a shoe retailer by a shoe manufacturer is an example of vertical integration. Vertical integration is typified by a merger or acquisition involving
companies that are in the same industry but at different levels in the supply chain. In other words, one of the companies supplies inputs for the other.
Which of the following is a combination involving the absorption of one firm by another?
Answer (A) is correct. A merger is a business combination in which an acquiring firm absorbs another firm. The acquiring firm remains in business as a combination of the two merged firms. Thus, the acquiring firm maintains its name and identity. However, approval of the merger is required by votes of the shareholders of each firm.
When firm B merges with firm C to create firm BC, what has occurred?
Answer (D) is correct. A consolidation is a business transaction in which a new company is organized to take over the combining companies. An entirely new company is formed, and neither of the merging companies survives. Firm B merges with firm C to form an entirely new company called BC, and neither B nor C survives. Therefore, this is a consolidation.
All of the following are true of mergers except
Answer (D) is correct. A merger is a business combination in which the acquiring firm absorbs a second firm, and the acquiring firm remains in business as a combination of the two merged firms. The acquiring firm usually maintains its name and identity. Mergers are legally straightforward because there is usually a single bidder and payment is made primarily with stock. The shareholders of each firm involved with the merger are required to vote to approve the merger. However, merger of the operations of two firms may ultimately result from an acquisition of stock.
The merger of General Motors and Ford would be categorized as a
Answer (B) is correct. A horizontal merger occurs when two firms in the same industry combine. General Motors and Ford are both in the automobile industry. A merger of these two companies would be a horizontal merger.
When choosing a merger over an acquisition of stock to accomplish a business combination, which of the following is irrelevant to the decision?
Answer (D) is correct. Many factors influence whether a transaction should be a merger or an acquisition of stock. Whether the companies are in the same industry or not is usually not a factor. In an acquisition of stock, an acquiring firm usually makes a tender offer directly to the shareholders of another firm to obtain a controlling interest. Therefore, the acquiring firm must directly deal with shareholders of the other firm. There is the possibility that some minority shareholders will not tender their shares. Management may be hostile to the combination, which usually causes an increase in the stock price. This increase will require the acquiring firm to pay more money in its tender offer. On the other hand, a merger is much more straightforward legally. It is usually a negotiated arrangement between a single bidder and the acquired firm. However, a merger does require a formal vote of the shareholders of each of the merging firms, whereas an acquisition does not.