Mergers and Acquisitions MCQs

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 a...

$0
$100,000
$200,000
$300,000

A business combination may be legally structured as a merger, a consolidation, or an acquisition. Which of the following describes a business combinat...

The surviving company is one of the two combining companies.
The surviving company is neither of the two combining companies.
An investor-investee relationship is established.
A parent-subsidiary relationship is established.

A horizontal merger is a merger between

Two or more firms from different and unrelated markets.
Two or more firms at different stages of the production process.
A producer and its supplier.
Two or more firms in the same market.

Which type of acquisition does not require shareholders to have a formal vote to approve?

Merger.
Acquisition of stock.
Acquisition of all of the firm’s assets.
Consolidation.

The acquisition of a retail shoe store by a shoe manufacturer is an example of

Vertical integration.
A conglomerate.
Market extension.
Horizontal integration.

Which of the following is a combination involving the absorption of one firm by another?

Merger.
Consolidation.
Proxy fight.
Acquisition.

When firm B merges with firm C to create firm BC, what has occurred?

A tender offer.
An acquisition of assets.
An acquisition of stock.
A consolidation.

All of the following are true of mergers except

Mergers are legally straightforward.
Approval by shareholder vote of each firm involved in the merger is required.
The acquiring firm maintains its name and identity in a merger.
A merger may never result from a public offer to the shareholders of the target firm to buy its shares directly.

The merger of General Motors and Ford would be categorized as a

Diversifying merger.
Horizontal merger.
Conglomerate merger.
Vertical merger.

When choosing a merger over an acquisition of stock to accomplish a business combination, which of the following is irrelevant to the decision?

Dealing directly with shareholders in an acquisition of stock.
Absence of tender by some minority shareholders in a tender offer.
Resistance to an acquisition by the target’s management usually causing an increase in the stock price.
Whether the companies are in the same industry.

The merger of an oil refinery by a chain of gasoline stations is an example of a

Conglomerate merger.
White knight.
Vertical merger.
Horizontal merger.

All of the following statements about acquisition of stock through tender offers is true except

Shareholder meetings do not need to be held.
A vote is not required.
The acquiring firm directly deals with the target firm’s shareholders.
All of the outstanding stock of the target firm must be tendered.

Business combinations are accomplished either through a direct acquisition of assets and liabilities by a surviving corporation or by stock investment...

Tax-free reorganization.
Vertical combination.
Horizontal combination.
Greater than 50% stock investment in another company.

An attempt to replace management in which a group of shareholders try to solicit votes is a

Tender offer.
Takeover.
Proxy fight.
Leveraged buyout.

Which of the following is a defensive tactic against a hostile takeover by tender offer?

Leveraged buyout (LBO).
Acquisition.
Conglomerate merger.
Saturday night special.

Which of the following statements about the benefits and costs of mergers is correct?

The shareholders of target firms that are acquired substantially benefit.
The shareholders of acquiring firms substantially benefit in successful takeovers.
The shareholders of target firms not acquired substantially benefit.
Both shareholders of the acquiring firm and the target firm are required to receive positive returns.

A parent company sold a subsidiary to a group of managers of the subsidiary. The purchasing group invested $1 million and borrowed $49 million against...

Spin-off.
Leveraged buyout.
Joint venture.
Liquidation.

Which of the following will reduce average production costs following a merger?

A conglomerate merger.
The existence of economies of scale.
A vertical merger.
Net operating losses of an acquired firm.

All of the following are potential sources of tax savings in an acquisition except

Economies of scale.
Net operating losses.
Unused debt capacity.
Surplus funds of the acquiring firm.

A firm is most likely to be a bargain for an acquirer if

Its q ratio is greater than one.
Its q ratio is less than one.
The replacement cost of its assets is less than the value of the firm’s securities.
The combination is more expensive than internal expansion.

Which of the following is true if no synergies occur after the merger of two firms?

The shareholders benefit from the reduction in the systematic risk of the combined entity.
The value of the combined firms’ debt will be less than the value of the previously separate firms’ debt.
Unsystematic risk will be unaffected.
The coinsurance effect results in a gain for the bondholders.

The coinsurance effect can be reduced by Retirement of Debt before a Combination Issuance of Debt after a Combination

Yes Yes
Yes No
No Yes
No No

Ogden Enterprises is a holding company for several successful retail businesses including bookstores, pharmacies, and gourmet food shops. Ogden has ex...

Operating synergy, tax considerations, and market power.
Financial synergy, strategic realignment, and tax considerations.
Differential efficiency, undervaluation, and operating synergy.
Strategic realignment, financial synergy, and market power.

After a merger, the difference between the value of the combined entity and the sum of the values of the separate entities is

A pooling of interests.
Consolidation.
Goodwill.
Synergy.

Which of the following is most likely to be a bad reason for a business combination involving publicly held companies?

Diversification.
Greater leverage through the increase of debt capacity.
Ouster of incumbent management.
A breakup value in excess of the cost.

The synergy of a business combination can be determined by

Calculating the change in revenue minus the change in cost.
Calculating the change in revenue minus the change in taxes.
Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity.
Using the risk adjusted discount rate to discount the change in revenues of the newly-formed entity.

Which of the following is not a revenue enhancement advantage of acquiring another firm?

Improvement of media efforts.
A strategic advantage in a new product line.
Enlarging an already existing distribution network.
Economies of scale.

A company transferred ownership of one of its divisions to the company’s existing shareholders, and the shareholders received new stock representing...

Liquidation.
Spin-off.
Leveraged buyout.
Managerial buyout.

Which of the following defense maneuvers involves the issuance of rights to buy shares at an extremely reduced price upon the occurrence of a takeover...

Greenmail.
Golden parachutes.
A poison pill.
Crown jewels.

A large U.S. company recently set up a new corporation based on the assets from one of its divisions. The stock of the new corporation was titled to t...

Merger.
Synergistic merger.
Holding company.
Divestiture.

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. Th...

Spin-off.
Stock split.
Scrip dividend.
Reverse split.

BigCo, a large conglomerate, has a division that has developed a new and highly promising technology. BigCo would like to retain control of this divis...

A spin-off of the division.
Sale of the division to another firm.
A management buy-out of the division.
An equity carve-out of the division.

When a company decides to divest a segment, the underlying reason for this decision could be any one of the following except

The segment is a chronic loser and the company is unwilling to commit the resources to make it profitable.
Another company is willing to pay a higher price for the segment than its present value to the current owner.
As a result of a change in the company’s long-range strategy, what was once a good fit is no longer a good fit.
The realization of economies of scale where average cost declines as volume increases.

Which of the following expenses related to the business acquisition should be included, in total, in the determination of net income of the combined...

Yes Yes
Yes No
No Yes
No No

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...

$3,600,000
$3,680,000
$3,760,000
$3,840,000

Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless

The subsidiary is a finance company.
The fiscal year-ends of the two companies are more than three months apart.
The investee is in bankruptcy.
The two companies are in unrelated industries, such as manufacturing and real estate.

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, ...

Goodwill on the balance sheet.
A gain from bargain purchase.
A reduction in certain noncurrent assets on the balance sheet.
An extraordinary gain.

A business combination is accounted for appropriately as an acquisition. Which of the following should be deducted in determining the combined corpora...

Yes No
Yes Yes
No Yes
No No

Which of the following situations would require the use of the acquisition method in a business combination?

The acquisition of a group of assets.
The formation of a joint venture.
The purchase of more than 50% of a business.
All of the above would require the use of the acquisition method.

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?

Prepare pro forma financial statements prior to acquisition.
Determine the acquisition date.
Identify the acquirer.
Expense the costs and general expenses of the acquisition in the period of acquisition.

Kennedy Company is acquiring Ross Company in an acquisition. What date should be used as the acquisition date for the transaction?

The date Kennedy signs the contract to purchase the business.
The date Kennedy obtains control of Ross.
The date that all contingencies related to the transaction are resolved.
The date Kennedy purchased more than 20% of the stock of Ross.

Lebow Corp. acquired control of Wilson Corp. by purchasing stock in steps. Which of the following regarding this type of acquisition is true?

The cost of acquisition equals the amount paid for the previously held shares plus the fair value of shares issued at the date of acquisition.
The previously held shares should be remeasured at fair value on the acquisition date, and any gain on previously held shares should be included in other comprehensive income for the period.
The previously held shares should be remeasured at fair value on the acquisition date and the gain recognized in earnings of the period.
The acquisition cost includes only the newly issued shares measured at fair value on the date of acquisition.

In accounting for a business combination, which of the following intangibles should not be recognized as an asset apart from goodwill?

Trademarks.
Lease agreements.
Employee quality.
Patents.

With respect to the allocation of the cost of a business acquisition, ASC Topic 805 (SFAS 141[R]) requires

Cost to be allocated to the assets based on their carrying values.
Cost to be allocated based on relative fair values.
Cost to be allocated based on original costs.
None of the above.

On November 30, year 1, Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw Co. At November ...

$750,000
$400,000
$350,000
$0

On April 1, year 1, Parson Corp. purchased 80% of the outstanding stock of Sloan Corp. for $700,000 cash. Parson determined that the fair value of t...

$0
$ 60,000
$ 80,000
$120,000

A subsidiary, acquired for cash in a business combination, owned inventories with a market value greater than the book value as of the date of combi...

Deferred credits.
Goodwill.
Inventories.
Retained earnings.

Company J acquired all of the outstanding common stock of Company K in exchange for cash. The acquisition price exceeds the fair value of net assets...

K’s carrying amount K’s carrying amount
K’s carrying amount Fair value
Fair value K’s carrying amount
Fair value Fair value

In a business combination accounted for as an acquisition the appraised values of the identifiable assets acquired exceeded the acquisition price. H...

As negative goodwill.
As additional paid-in capital.
As a reduction of the values assigned to certain assets and an extraordinary gain for any unallocated portion.
As a gain in net income for the period.

Shep Co. has a receivable from its parent, Pep Co. Should this receivable be separately reported in Shep’s balance sheet and in Pep’s consolidat...

Yes No
Yes Yes
No No
No Yes

On January 1, year 1, Palm, Inc. purchased 80% of the stock of Stone Corp. for $4,000,000 cash. Prior to the acquisition, Stone had 100,000 shares o...

$1,000,000
$1,040,000
$1,086,000
$1,096,000

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of

Reliability.
Materiality.
Legal entity.
Economic entity.

A subsidiary was acquired for cash in a business combination on January 1, year 1. The consideration given exceeded the fair value of identifiable n...

Report the unamortized portion of the excess of the market value over the carrying amount of the equipment as part of goodwill.
Report the unamortized portion of the excess of the market value over the carrying amount of the equipment as part of plant and equipment.
Report the excess of the market value over the carrying amount of the equipment as part of plant and equipment.
Not report the excess of the market value over the carrying amount of the equipment because it would be expensed in the year of the acquisition.

Pride, Inc. owns 80% of Simba, Inc.’s outstanding common stock. Simba, in turn, owns 10% of Pride’s outstanding common stock. What percentage of...

90% 0%
90% 20%
100% 0%
100% 20%

It is generally presumed that an entity is a variable interest entity subject to consolidation if its equity is

Less than 50% of total assets.
Less than 25% of total assets.
Less than 10% of total assets.
Less than 10% of total liabilities.

Morton Inc., Gilman Co., and Willis Corporation established a special-purpose entity (SPE) (variable interest entity) to perform leasing activities ...

The corporation with the largest interest in the entity.
The corporation that is the primary beneficiary.
The corporation that has the most voting equity interest.
Each corporation should consolidate one-third of the SPE.

The determination of whether an interest holder must consolidate a variable interest entity is made

By reassessing on an ongoing basis.
When the interest holder initially gets involved with the variable interest entity.
Every time the cash flows of the variable interest entity change.
Interests in variable interest entities are never consolidated.

Matt Co. included a foreign subsidiary in its year 5 consolidated financial statements. The subsidiary was acquired in year 1 and was excluded from ...

By footnote disclosure only.
Currently and prospectively.
Currently with footnote disclosure of pro forma effects of retroactive application.
By restating the financial statements of all prior periods presented.

Clark Co. had the following transactions with affiliated parties during year 1: • Sales of $60,000 to Dean, Inc., with $20,000 gross profit. Dean...

$320,000
$317,000
$308,000
$303,000

During year 1, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December 31, year 1, one-half of these goods were included in Seed�...

$1,500,000
$1,480,000
$1,475,000
$1,450,000

On January 1, year 1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly owned subsidiary. Poe paid $1,100,000 for this machine, which ...

$1,100,000 $300,000
$1,100,000 $290,000
$ 900,000 $ 40,000
$ 850,000 $ 42,500

Wagner, a holder of a $1,000,000 Palmer, Inc. bonds, collected the interest due on March 31, year 1, and then sold the bonds to Seal, Inc. for $975,...

$100,000 increase $0
$ 75,000 increase $ 25,000 increase
$0 $ 25,000 increase
$0 $100,000 increase

Sun, Inc. is a wholly owned subsidiary of Patton, Inc. On June 1, year 1, Patton declared and paid a $1 per share cash dividend to stockholders of r...

$0
$390,000
$400,000
$410,000

Perez, Inc. owns 80% of Senior, Inc. During year 1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in year 1. Fo...

Sales and cost of goods sold should be reduced by the intercompany sales.
Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
Net income should be reduced by 80% of the gross profit on intercompany sales.
No adjustment is necessary.

Winston Co. owns 80% of the outstanding common stock of Foster Co. On December 31, year 2, Winston sold equipment to Foster at a price in excess of ...

Foster’s original cost.
Winston’s original cost.
Foster’s original cost less Winston’s recorded gain.
Foster’s original cost less 80% of Winston’s recorded gain.

Port, Inc. owns 100% of Salem, Inc. On January 1, year 6, Port sold Salem delivery equipment at a gain. Port had owned the equipment for two years a...

20% of the gain on sale.
33 1/3% of the gain on sale.
50% of the gain on sale.
100% of the gain on sale.

P Co. purchased term bonds at a premium on the open market. These bonds represented 20% of the outstanding class of bonds issued at a discount by S ...

Decrease retained earnings.
Increase retained earnings.
Be reported as a deferred debit to be amortized over the remaining life of the bonds.
Be reported as a deferred credit to be amortized over the remaining life of the bonds.

Planet Company acquired a 70% interest in the Star Company in year 1. For the year ended December 31, year 2, Star reported net income of $80,000. D...

$23,400
$24,000
$24,600
$26,000

On January 1, year 1, Ritt Corp. purchased 80% of Shaw Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Shaw’s ne...

$0
$ 75,000
$ 95,000
$125,000

On January 1, year 1, Ritt Corp. purchased 80% of Shaw Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Shaw’s ne...

$200,000
$213,000
$233,000
$263,000

In a business acquisition, consideration transferred includes which of the following? I. The fair value of assets transferred by the acquirer. II. ...

I and II.
I, II, and IV.
I, II, IV, and V.
I, II, III, and IV.

On June 30, year 1, Wyler Corporation acquires Boston Corporation in a transaction properly accounted for as a business acquisition. At the time of ...

Do not record the uncertain items until complete information is available.
Record a contra account to the investment account for the amounts involved.
Record the uncertain items at the book value of the acquiree.
Record the uncertain items at a provisional amount measured at the date of acquisition.

When does the measurement period end for a business combination in which there was incomplete accounting information on the date of acquisition?

When the acquirer receives the information or one year from the acquisition date, whichever occurs earlier.
On the final date when all contingencies are resolved.
Thirty days from the date of acquisition.
At the end of the reporting period in the year of acquisition.

Ross Corporation recorded a provisional amount for an identifiable asset at the date of its acquisition of Layton Inc. because the asset’s fair va...

As an expense in the current period income statement.
As an extraordinary loss on the current period income statement.
As a reduction in recorded goodwill.
As a gain from bargain purchase.

Able Corp. acquires Bailey Company in a transaction that is properly accounted for as a business acquisition. The acquisition contract and Bailey’...

As a cost of acquisition.
As an expense in the current period.
As a loss in the current period.
As an extraordinary loss in the period.

On January 1, year 1, Post Inc. acquires Sam Company in a transaction properly accounted for as a business combination. Sam’s employees have share...

Post should include the fair value of the awards as consideration paid in the cost of acquisition.
Post should recognize compensation expense for the value of the awards in the postcombination financial statements.
Post should recognize an extraordinary loss for the fair value of the replacement awards in its financial statements.
Post should capitalize the cost of the awards and amortize the cost over the remaining service years of the employees.

When should an acquirer derecognize a contingent liability recognized as the result of an acquisition?

When it becomes more likely than not that the firm will not be liable.
When the contingency is resolved.
At the end of the year of acquisition.
When it is reasonably possible that the liability will not require payment.

On September 1, year 1, Phillips, Inc. issued common stock in exchange for 20% of Sago, Inc.’s outstanding common stock. On July 1, year 2, Philli...

20% of Sago’s net income to June 30 and all of Sago’s net income from July 1 to December 31.
20% of Sago’s net income to June 30 and 95% of Sago’s net income from July 1 to December 31.
95% of Sago’s net income.
All of Sago’s net income.

On September 1, year 1, Phillips, Inc. issued common stock in exchange for 20% of Sago, Inc.’s outstanding common stock. On July 1, year 2, Philli...

Mr. & Mrs. Dart own a majority of the outstanding capital stock of Wall Corp., Black Co., and West, Inc. During year 1, Wall advanced cash to Black ...

$200,000
$130,000
$ 60,000
$0

Combined statements may be used to present the results of operations of Companies under common management Commonly controlled companies

No Yes
Yes No
No No
Yes Yes

Which of the following items should be treated in the same manner in both combined financial statements and consolidated statements? Income taxes ...

No No
No Yes
Yes Yes
Yes No

Which of the following items should be treated in the same manner in both combined financial statements and consolidated statements? Different fisc...

No No
No Yes
Yes Yes
Yes No

Under IFRS the asset goodwill may be recognized

When it is acquired by purchase.
When it is internally generated or acquired by purchase.
When it is clear that it exists and has value.
When it has future economic benefits.

Under IFRS a parent may exclude a subsidiary from consolidation only if all of the following conditions exist, except

It is wholly or partially owned and its owners do not object to nonconsolidation.
It does not have any debt or equity instruments publicly traded.
It has one class of stock.
Its parent prepares consolidated financial statements that comply with IFRS.

A parent company sold a subsidiary to a group of managers of the subsidiary. The purchasing group invested $1 million and borrowed $49 million again...

Spin-off.
Leveraged buyout.
Joint venture.
Liquidation.

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Mergers and Acquisitions MCQs