BUSINESS COMBINATION – MERGER AND CONSOLIDATION

THEORIES: TRUE OR FALSE

1. When two entities competing in the same industry combine, it is called a horizontal
business combination.
2. Horizontal business combinations are likely to occur when management is
attempting to dominate a geographic segment of the market.
3. One way that a horizontal business combination can increase sales for an entity’s is
to expand into new product markets.
4. A vertical business combination generally involves companies attempting to improve
the efficiency of operations by purchasing suppliers of inputs or purchasers of
outputs.
5. When a retail clothing store purchases a competitor in another city, a vertical
combination has occurred.
6. A vertical combination is one where the entities have a potential buyer-seller
relationship.
7. A business combination in which a supplier of raw materials is acquired is a
conglomerate combination.
8. A conglomerate combination is often undertaken to help increase income stability
due to diversifying the asset base of an entity.
9. Conglomerate entity are easy for the government to challenge
10. If negotiation between management groups leads to a mutually agreeable business
combination, the process is called a friendly takeover.
11. An offer by an acquirer to buy the stock of another company is commonly called a
tender offer
12. A tender offer that is opposed by the acquire management is called a hostile bid
13. A business combination occurs when one entity gains control over the net assets of
another entity.
14. The only way to attain control over the net assets of another entity is to purchase the
net assets.
15. In an exchange of stock (acquirer) for assets (Acquiree), the ownership structure of
the acquire does not change.
16. In an exchange of stock (acquirer) for assets (Acquiree), the acquire stockholders
become acquirer stockholders.
17. A business combination that occurs where only one of the original entities in
existence after the combination is called a statutory consolidation.
18. The acquire entity is liquidated in a statutory merger
19. For business combination to qualify as a statutory consolidation, a new corporation
must be formed.
20. In a statutory consolidation form of business combination, the retained earnings of
the newly formed corporation has a zero balance immediately after the combination.

MULTIPLE CHOICE
1. Which of the following occurs when a management is attempting to monopolize a
particular industry?
a. Horizontal Combination
b. Vertical Combination
c. Conglomerate
d. Market Domination
2. Horizontal combinatiron occur when one entity purchases which of the following?
a. A supplier
b. A customer
c. A competitor
d. None of the above
3. Horizontal combination help sales increase by all but which of the following?
a. Entering new product markets
b. Taking control of a distribution system
c. Increasing production supply
d. Expanding into new geographic regions
4. Which of the following types of business combination typically occurs when the
management tries to diversify its investment?
a. Horizontal
b. Vertical
c. Conglomerate
d. Diversification can be the goal of any type of combination
5. One reason for conglomerate combinations is that management has become more
aware that it helps accomplish which of the following?
a. It helps increase income stability provided by diversifying the asset but base of an
entity
b. It helps increase market share in the industry
c. It helps assure a constant supply of raw materials
d. A conglomerate combination helps accomplish all three
6. Business combinations that result in one dominant company in an industry are said
to have formed which of the following?
a. Pure competition
b. Monopoly
c. Oligopoly
d. Free market
7. In acquisition of an assets, the acquirer must give up which of the following?
a. Cash
b. Other assets
c. Liabilities
d. Any of the above can be given
8. Under PFRS 3, which method must be used to account for business combination?
a. Purchase method
b. Pooling of interest method
c. Acquisition method
d. New entity method
9. After an exchange of shares in a business combination, each group of shareholders
held 50% of the voting rights. Which of the following factors should be considered in
determining the acquirer?
a. Head office location
b. Composition of the board of directors
c. If there are material transactions between the combining entities
d. The entity who initiated the combination
10. How should the transaction cost of issuing shares in an acquisition be recognized?
a. Expensed
b. Capitalized as part of the cost of the shares
c. Deducted in total from shareholder’s entity
d. Deducted from shareholder’s equity net of related income tax
11. How should cost of issuing debt in an acquisition be recognized?
a. Expensed
b. Amortized over the term of the debt
c. Deducted from the value of the debts
d. Deducted from shareholder’s equity
12. How accounting fees be accounted for in a business combination?
a. Expensed in the period of acquisition
b. Capitalized as part of the acquisition cost
c. Deferred and amortized
 d. None of the above
13. How should a negative goodwill be shown on the consolidated financial statements of
a business combination?
a. As gain in the statement of comprehensive income
b. As a loss in the statement of comprehensive income
c. As a liability
d. As a separate amount under shareholder’s equity
14. Which of the following does not constitute a business combination under IFRS 3
a. A corporation purchases the net assets of B Corp
b. A corp enters into a joint venture with B Copr
c. A corp acquires 51% 0f B Corp’s voting shares for 1M cash
15. Goodwill arising to business combination is
a. Amortized to 40 years or its useful life whichever is shorter
b. Amortized to 40 years or its useful life whichever is longer
c. Charged to retained earnings after the acquisition
d. Never amortized
16. Company B acquired the net assets of S in exchange for cash. The acquisition price
exceeds the fair value of the net assets acquired. How should company B determine
the amount to be reported for PPE and Long term debt of the acquired company S?
a. Fair value ; carrying amount
b. Fair value; Fair value
c. Carrying amount ; Carrying amount
d. Carrying amount ; fair value
17. When an acquisition of another company occurs, IASB recommends disclosing all of
the following EXCEPT?
a. Goodwill assigned to each reportable segment
b. Information concerning contingent consideration
c. Result of operations for the current period if both companies had remained
separated
d. A qualitative description of factors that make up the goodwill recognized
18. Goodwill represents the excess of cost of an acquisition over the
a. Sum of fair value assigned to intangible assets less liabilities assumed
b. Sum of the fair values assigned to tangible and identifiable intangible less
liabilities assumed
c. Sum of the fair values assigned to intangible acquired less liabilities
d. Book value of the company acquired
19. What is the appropriate accounting for the value assigned to in-process research and
development acquired in business combination
a. Expensed during the period of acquisition
b. Capitalized as an asset
c. Expensed if there is no alternative use for the assets and feasibility has to be
reached
d. Expense until future economic benefits become certain
20. Which of the following can be used as consideration in a stock acquisition?
a. Cash
b. Debt
c. Stocks
d. Any of the above

PROBLEMS

Problem 1 Zyxel Corporation acquired all the assets and liabilities of Globe Tattoo
Corporation by issuing shares of its common stock. On January 1, 2016, partial alance sheet
data for the companies prior to the business combination and immediately following the
combination is provided:
 Zyxel Book Values Globe Book Value Consolidated
Cash 65,000 25,000 90,000
AR 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
PPE net 400,000 150,000 650,000
Goodwill P?
TOTAL 570,000 240,000 P?
AP 50,000 25,000 75,000
Bonds 250,000 100,000 350,000
Common Stock, P2 100,000 25,000 160,000
par
APIC 65,000 20,000 245,000
Retained Earnings 105,000 70,000 P?
TOTAL 570,000 240,000 P?

Question 1: What number of shares did Zyxel issue for the acquisition?
a. 80,000
b. 50,000
c. 30,000
d. 17,500
Question 2: At what price was zyxel stock trading when stock was issued for this
acquisition?
a. 2.00
b. 5.63
c. 6.00
d. 8.00
Question 3: What was the fair value of the net assets held by Globe at the date of
acquisition?
a. 115,000
b. 227,000
c. 270,000
d. 497,000
Question 4: What amount of goodwill will be reported by the combined entity immediately
following the combination?
a. 13,000
b. 125,000
c. 173,000
d. 413,000
Question 5: What balance in retained earnings will the combined entity report immediately
following the combination?
a. 35,000
b. 70,000
c. 105,000
d. 175,000

Judge 6:16 – The Lord answered, “I will be with you.”