A corporation issued a property dividend to its shareholders. The dividend was distributed in the form of 100% of the common stock of a subsidiary. This is known as a
Answer (A) is correct. A spin-off creates a new, separate entity. It is accomplished by distributing a property dividend in the form of stock of another corporation to shareholders, who then become shareholders of both corporations.
BigCo, a large conglomerate, has a division that has developed a new and highly promising technology. BigCo would like to retain control of this division but also raise additional capital to support the further development of this technology. BigCo also realizes this promising technology is different than its usual business lines and will require a new management style and incentive program to attract and maintain talent. Which one of the following would best allow BigCo to achieve these objectives?
Answer (D) is correct. An equity carve-out involves the sale of a portion of the firm through an equity offering of shares in the new entity to outsiders. This would allow BigCo to raise additional capital as well as bring in new management while still maintaining control, as it does not have to sell the whole division to achieve an equity-carve out.
When a company decides to divest a segment, the underlying reason for this decision could be any one of the following except
Answer (D) is correct. Reasons for divestitures include governmental antitrust litigation, refocusing of a firm’s operations, and raising capital for the core business operation. The realization of economies of scale where average cost declines as volume increases is not a reason for a company to decide to divest a segment.
Which of the following expenses related to the business
acquisition should be included, in total, in the determination of
net income of the combined corporation for the period in which
the expenses are incurred?
Fees of finders and consultants
Registration fees for equity securities issued
(b) Acquisition costs such as finder’s fees are expensed
in the period incurred. Registration fees for equity securities are
a reduction in the issue price of the securities. Therefore, answer
(b) is correct.
On August 31, year 1, Wood Corp. issued 100,000 shares of
its $20 par value common stock for the net assets of Pine, Inc., in
a business combination accounted for by the acquisition method.
The market value of Wood’s common stock on August 31 was
$36 per share. Wood paid a fee of $160,000 to the consultant
who arranged this acquisition. Costs of registering and issuing
the equity securities amounted to $80,000. No goodwill was
involved in the acquisition. What amount should Wood capitalize
as the cost of acquiring Pine’s net assets?
(a) In a business combination accounted for as an
acquisition, the fair market value of the net assets is used as the
valuation basis for the combination. In this case, the net assets of
the subsidiary have an implied fair market value of $3,600,000
which is the value of the common stock issued to Pine’s shareholders
(100,000 shares × $36). The direct cost of acquisition
should not be included as part of the cost of a company acquired,
and the cost of registering equity securities should be a reduction
of the issue price of the securities (i.e., additional paid-in capital).
Thus, the $160,000 paid for a consultant who arranged the acquisition
should be expensed, and the $80,000 cost for registering
and issuing the equity securities should be treated as a reduction
of additional paid-in capital. Answer (a) is correct because the
total amount to be capitalized is $3,600,000.
Consolidated financial statements are typically prepared
when one company has a controlling financial interest in another
(c) A subsidiary should not be consolidated when it is in
bankruptcy. Consolidation of all majority-owned subsidiaries is
required regardless of the industry or business of the subsidiary.
A difference in fiscal periods of a parent and a subsidiary does not
of itself justify the exclusion of the subsidiary from consolidation.
On January 1, year 1, Lake Corporation acquired 100% of
the outstanding common stock of Shore Corporation for
$800,000. On the date of acquisition, the fair value of Shore’s net
identifiable assets is $820,000. The book value of Shore Corporation’s
net assets is $760,000. In Lake’s year 1 financial statements,
Lake should recognize
(b) The consideration paid plus the fair value of the
noncontrolling interest plus the fair value of any previous purchases
of common stock is less than the fair value of the net identifiable
assets acquired, the acquirer should recognize a gain from
bargain purchase on the income statement. The gain would be
equal to $20,000 ($820,000 – 800,000). Answer (a) is incorrect
because goodwill is only recognized when the purchase price is
greater than the fair value of the recorded assets. Answer (c) is
incorrect because it describes an inappropriate method. Answer
(d) is incorrect because the gain is not treated as extraordinary.
A business combination is accounted for appropriately as an
acquisition. Which of the following should be deducted in determining
the combined corporation’s net income for the current
Direct costs of acquisition
General expenses related to acquisition
(b) The direct costs of acquisition should be an expense
of the period in a business combination accounted for by the
acquisition method. General expenses related to the acquisition
are also deducted as incurred in determining the combined corporation’s
net income for the current period.
Which of the following situations would require the use of
the acquisition method in a business combination?
(c) Answer (c) is correct because the acquisition
method applies only to acquisitions of a business. Answers (a),
(b), and (d) are incorrect because none of these situations would
constitute an acquisition.
ASC Topic 805 (SFAS 141[R]) sets forth certain steps in
accounting for an acquisition. Which of the following is not one
of those steps?
(a) Preparing pro forma financial statements prior to
acquisition is not required in the application of the acquisition
method. Answers (b) and (c) are incorrect because identifying
the acquirer and determining the acquisition date are both steps
in applying the acquisition method. Answer (d) is incorrect because
direct costs of acquisitions and general expenses related to
an acquisition should be expensed in the period of acquisition.