ADVANCED FINANCIAL ACCOUNTING

CHAPTERS ONE AND TWO

QUESTION ONE:
.Indicate whether the following statement is true or false

If company A owns 90% of company B and company B owns 60% of company C, this represents for .1
.company A 90% direct ownership in B and 60% indirect ownership in C. False (54%=90%*60%)
In a merger business combination one company takes over the operations of another entity and that entity .2
goes out of business. True
When one company acquires all the stocks of another company and the acquired company is liquidated, .3
the detailed assets and liabilities of the acquired company are recorded on the books of the acquiring
company. False (no need to record net assets because it is an acquisition of the outstanding common
.stocks)
Horizontal integration is the combination of firms in different business line or market. False .4
(conglomeration)
:QUESTION TWO
.Select the best answer for each of the following multiple choice questions
?Which of the following statements describe a business combination as a merger .1
.The surviving company is one of the two combining companies (a)
.The surviving company is neither of the two combining companies (b)
.An investor\investee relationship is established (c)
.A parent\subsidiary relationship is established (d)
The process of converting all corporate assets into cash or another distributable form, paying all creditors .2
:and expenses and distributing any remainder to stockholders is a definition of a
Business combination (a)
.Corporate merger (b)
.Corporate liquidation (c)
.Corporate consolidation (d)
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When one company acquires the net assets of another company whether in exchange for cash or newly .3
issued stock
Detailed assets and liabilities of the acquired company are recorded on the records of the (a)
.acquiring company
Detailed assets and liabilities of the acquired company are not recorded on the records of the acquiring (b)
.company
.Added to the cost of investment (c)
.Deducted from additional paid in capital (d)
.When one company acquires all the stocks of another company and the acquired company is liquidated .4
Detailed assets and liabilities of the acquired company are recorded on the records of the acquiring (a)
.company
Detailed assets and liabilities of the acquired company are not recorded on the records of the (b)
.acquiring company
.Added to the cost of investment (c)
.Deducted from additional paid in capital (d)
Which of the following accounts in the records of the parent company would not appear on the .5
:consolidated balance sheet
Common stock (a)
Equipment (b)
Investment in subsidiary (c)
Retained Earnings (d)
:Goodwill represents the excess of the cost of an acquired company over the .6
Sum of the fair values assigned to identifiable assets acquired less liabilities assumed (a)
Sum of the fair values assigned to tangible assets acquired less liabilities assumed (b)
Sum of the fair values assigned to intangible assets acquired less liabilities assumed (c)
Book value of an acquired company (d)
Which of the following business combinations would require a consolidation procedure to produce .7
?consolidated financial statements
Acquisition of acquired companys stock and acquired company is liquidated (a)
Acquisition of acquired companys assets and acquired company is not liquidated (b)
Acquisition of acquired companys assets and acquired company is liquidated (c)
Acquisition of acquired companys voting stock and the acquired company is not liquidated (d)
Which of the following statements best describes the accounting treatment of the consolidation worksheet .8
?adjustments
They are recorded on the records of the parent company (a)
They are recorded on the records of the subsidiary company (b)
They are strictly worksheet adjustments and are not recorded either the parent or the subsidiary (c)
They may be recorded on the records of both the parent and the subsidiary company (d)

:QUESTION THREE
.Fill in the space the following statements with the appropriate term
1. Transactions that bring together the net assets of two or more business entities in a single accounting
entity is called business combination.
2. When one business entity gains control over another business entity in a business combination, the
entity gaining control is called the acquiring company.
3. Business combinations may be use to foster three types of expansion for a company
(1) vertical integration, (2) horizontal integration, and (3) conglomeration (diversification).
4. When a company expands by combining with another company engaged in the same type of
production or the sale of the same general product, the combination is an example of horizontal.
5. The large multi-industry organizations formed by combinations aimed at diversifying business risk
are called conglomerates.
6. The company that secures control over the net assets of another company in a business combination
is called the acquiring company whereas the company whose assets are controlled is called the
acquired company.
7. The liabilities of an acquired company are either liquidated as part of the combination or assumed
by the acquiring company.
8. When one company acquired another by paying cash and assuming the liabilities of the acquired
company, the transaction can be viewed in two ways: (1) an acquisition of assets in exchange for
consideration equal to the cash given plus the liabilities assumed, (2) as an acquisition of net assets
in exchange for consideration equal to the cash given.
9. From an accounting viewpoint, all business combinations are either purchase method or pooling of
interest method.
10. The process of converting all corporate assets into cash or another distributable for, paying all
creditors and expenses, and distributing any remainder to stockholders is called corporate
liquidation.
11. If the combined entity takes the form of a newly created corporation, then the combination is called a
consolidation, whereas if the combined entity takes the form of one of the original corporate parties
to the combination, then the combination is called a merger.
12. The fair value of the consideration given by the acquiring company in a purchase combination is
called the acquisition cost.
13. Direct costs of acquisition are included in acquisition cost whereas indirect costs of acquisition is
expensed as incurred.
14. Goodwill is the portion of the acquisition cost that cannot be attributed to identifiable assets or
liabilities.
15. The revaluation increment is the difference between the fair value and the book value of
identifiable net assets.
16. The excess of acquisition cost over the total fair value allocated to identifiable net assets acquired is
called the goodwill.
17. The excess of acquisition cost over the book value of the net assets acquired is called the valuation
differential.
18. The total excess of fir value over book value for all identifiable net assets acquired is called
revaluation increment.
19. The par value of the acquiring companys stock is the basis for the reclassification of the acquired
companys stockholders equity in pooling of interests combination.
20. The financial statements that represent the parent company and its subsidiary as if they were a single
accounting entity are called consolidated financial statements
21. The general rule calls for consolidation of all minority owned subsidiaries.
22. In most published consolidated balance sheet, minority interest equals to
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minority interest %*owners' equity

23. Elimination adjustments are necessary in consolidation procedures to avoid double counting