MODEL A
Islamic university – Gaza Mid exam 2009/2010 advanced accounting
College of commerce Thursday 19/11/2009
Accounting department
One hour
Name: …………………………………………………… Id.:…………………………
Question 1: choose the best answer. (14 marks)
1. From the standpoint of accounting theory, which of the following statements is
the best justification for the preparation of consolidated financial statements?
a. In substance the companies are separate, but in form the companies are one entity.
b. In substance the companies are one entity, but in form they are separate.
c. In substance and form the companies are one entity.
d. In substance and form the companies are separate entities.
2. Which of the following is a reason why a company would expand through a
combination, rather than by building new facilities?
a. A combination might provide cost advantages.
b. A combination might provide fewer operating delays.
c. A combination might provide easier access to intangible assets.
d. All of the above are possible reasons that a company might choose a combination.
3. Durer Inc acquired Sea Corporation in a business combination and Sea Corp went out of
existence. Sea Corp developed a patent listed as an asset on Sea Corp’s books at the patent office
filing cost. In recording the combination
a. fair value is not assigned to the patent because the research and development costs
have been expensed by Sea Corp.
b. Sea Corp’s prior expenses to develop the patent are recorded as an asset by Durer at
purchase.
c. The patent is recorded as an asset at fair market value.
d. The patent's market value increases goodwill.
4. In a merger, which of the following will occur?
a. A merger occurs when one corporation takes over the operations of another business
entity, and the acquired entity is dissolved.
b. None of the business entities will be dissolved.
c. The acquired assets will be recorded at book value by the acquiring entity.
d. None of the above is correct.
5. With respect to goodwill, an impairment
a. Will be amortized over the remaining useful life.
b. Is a two-step process which analyzes each business unit of the entity.
c. Is a one-step process considering the entire firm.
d. Occurs when asset values are adjusted to fair value in a purchase.
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6. Raphael Company paid $2,000,000 for the net assets of Paris Corporation and Paris was
then dissolved. Paris had no liabilities. The fair values of Paris’ assets were $2,500,000.
Paris’s only non-current assets were land and equipment with fair values of $160,000 and
$640,000, respectively. At what value will the equipment be recorded by Raphael?
a. $640,000
b. $240,000
c. $400,000
d. $0
7. In reference to the FASB disclosure requirements, which of the following is correct?
a. Information related to several minor acquisitions may not be combined.
b. Firms are not required to disclose the business purpose for a combination
c. Notes to the financial statements of an acquiring corporation must disclose that the
business combination was accounted for by the acquisition method.
d. All of the above are correct.
8. Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and
Burrow Corporation owns the remaining 10% of Crevice’s voting stock. On the
consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is
a. An affiliate.
b. A minority interest.
c. An equity investee.
d. A related party.
9. A newly acquired subsidiary had pre-existing goodwill on its books. The parent company's
consolidated balance sheet will
a. Not show any value for the subsidiary's pre-existing goodwill.
b. Treat the goodwill similarly to other intangible assets of the acquired company.
c. Not show any value for the pre-existing goodwill unless all other assets of the subsidiary are
stated at their full fair value.
d. Always show the pre-existing goodwill of the subsidiary at its book value.
10. On July 1, 2005, when Worm Company’s total stockholders’ equity was $180,000, Bird
Corporation purchased 7,000 shares of Worm’s common stock at $30 per share. Worm Company
had 10,000 shares of common stock outstanding both before and after the purchase by Bird, and
the book value of Worm’s net assets on July 1, 2005 was equal to the fair value. On a
consolidated balance sheet prepared at July 1, 2005, goodwill would be
a. $30,000.
b. $40,000.
c. $50,000.
d. $120,000.
Please transfer your answer to the following table:
Q. NO. 1 2 3 4 5 6 7 8 9 10
ANSWER
IMPORTANT NOTE: any answer out of the table will not consider
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Question 2: P. Company is considering the acquisition of S. Company in 2008.
To assess the amount it might be willing to pay, P makes the following computations:
S. Company has identifiable assets with fair value 8,000,000 and liabilities of 2,700,000
The assets include equipments with fair value 40% higher than book value.
The pretax incomes for 2005 to 2007 were 900,000, 1,550,000, and 1,280,000 respectively.
P. believes that the average of these earnings represents estimates for S. annual earnings for infinity.
The pretax income includes:
Depreciation (equipment each year) 60,000
Extraordinary loss (2005) 150,000
Extraordinary gain (2006) 200,000
Required:
Estimate the offer price?
Note: Goodwill is estimated based on excess earnings and discounted at 25% for perpetuity.
Normal rate of return =22%
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Question 3: In 2008, P. decided to purchase the assets except for cash and assumed liabilities by paying
cash 5,250,000 and giving 20,000 shares of its common shares.
Balance sheet for S. Company at Jan, 1st, 2008 is as follows:
Balance Sheet of S. company Jan 1st , 2008
Book value Fair Value
Cash 800,000 800,000
Accounts receivable 1,200,000 1,250,000
Inventory 800,000 786,000
Land 1,390,000 1,490,000
Building 2,700,000 2,700,000
Accumulated depreciation (300,000) (300,000)
Equipment 970,000 1,358,000
Accumulated depreciation (60,000) (84,000)
Total 7,500,000 8,000,000
Liabilities 2,700,000 2,700,000
Common stock($5) 2,500,000
Other contributed 800,000
Retained earnings 1,500,000
Total 7,500,000
P. company
Stock par value fair value
Common $8 $ 25
Preferred 110 110
Required: Prepare the journal entry on the books of P. Company to record the acquisition of the assets
and assumption of the liabilities of S. Company.
Debit side credit side
With best wishes
Mohammad Marwan Al Ashi
& Ghadeer Mohtadi
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