CPA Financial Accounting and Reporting Far Quiz: Account For Business Combinations

What this quiz covers

This quiz focuses on Account For Business Combinations, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Expensed as incurred in the period the costs are incurred. (correct answer)
2. Capitalized as part of the cost of the acquired business.
3. Added to goodwill on the acquisition date.
4. Deferred and amortized over the expected benefit period.

Explanation: Under ASC 805, acquisition-related costs are expensed as incurred and are not included in the consideration transferred or added to goodwill. Answer A is correct. Answer B and C reflect the pre-ASC 805 treatment under APB 16. Answer D (deferral and amortization) has no basis in current GAAP for transaction costs.

Question 2

1. 6 months from the acquisition date.
2. Until the acquirer's first annual financial statements are issued.
3. One year from the acquisition date. (correct answer)
4. 18 months from the acquisition date.

Explanation: ASC 805 limits the measurement period to no longer than one year from the acquisition date. Answer C is correct. Answer A (6 months) is too short. Answer B is incorrect because the measurement period is time-based, not tied to the issuance of annual statements. Answer D (18 months) exceeds the maximum allowed under ASC 805.

Question 3

1. $250,000, based on the fair value of shares issued on the acquisition date. (correct answer)
2. $10,000, based on the par value of shares issued.
3. $250,000, recorded as$10,000 common stock and $240,000 APIC with no effect on goodwill.
4. The book value of the acquired company's net assets.

Explanation: Under ASC 805, consideration transferred in a business combination is measured at fair value on the acquisition date. For shares issued, fair value = 10,000 shares x $25 =$250,000. Answer A is correct. Answer B uses par value, which is not fair value. Answer C correctly states the equity recording but incorrectly suggests this has no effect on goodwill - the full $250,000 is used in the goodwill calculation. Answer D uses the acquiree's book value, which violates the acquisition method requirement to use fair values.

Question 4

1. Individual asset level
2. Legal entity level
3. Operating segment level
4. Reporting unit level (correct answer)

Explanation: Under ASC 350, goodwill is allocated to reporting units and tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (a component). Answer D is correct. Answer A - individual asset level - is used for long-lived asset impairment under ASC 360, not goodwill. Answer B - legal entity - is not the prescribed level. Answer C - operating segment - is one level above a reporting unit and could inappropriately mask impairment within subcomponents.

Question 5

1. The fair value of contingent consideration arrangements on the acquisition date. (correct answer)
2. Direct transaction costs such as legal and due diligence fees.
3. Costs to register and issue equity securities used as consideration.
4. Post-combination compensation arrangements for former owners who become employees.

Explanation: Under ASC 805, consideration transferred includes cash, other assets, liabilities incurred, equity instruments issued, and the acquisition-date fair value of contingent consideration arrangements. Answer A is correct. Direct transaction costs (B) are expensed, not included in consideration. Equity issuance costs (C) reduce APIC and are not part of consideration transferred. Post-combination compensation (D) is a separate arrangement expensed post-acquisition, not part of consideration transferred.

Question 6

1. Recognized as a separately identified intangible asset at fair value.
2. Recognized as an intangible asset only if the employees are under contract.
3. Not recognized separately; subsumed within goodwill. (correct answer)
4. Recognized at the cost to replace the workforce (replacement cost method).

Explanation: Under ASC 805, an assembled workforce does not meet the contractual-legal or separability criteria for separate recognition as an intangible asset. It cannot be sold, transferred, or licensed independently and does not arise from legal or contractual rights. Therefore, it is subsumed within goodwill. Answer C is correct. Answers A and D would require separate recognition, which is prohibited. Answer B - recognizing only contracted employees - is a partial approach that still does not comply with ASC 805.

Question 7

1. $400,000
2. $150,000 (correct answer)
3. $250,000
4. $600,000

Explanation: Under the acquisition method, goodwill = consideration transferred - fair value of identifiable net assets = $1,000,000 -$850,000 = $150,000. Answer B is correct. Answer A subtracts book value ($1,000,000 - $600,000), which is the pre-ASC 805 approach. Answer C is the difference between fair value and book value of net assets ($850,000 - $600,000), which is the fair value step-up, not goodwill. Answer D uses book value as the measurement, ignoring the fair value requirement.

Question 8

1. Recognized as a reduction of the proceeds from equity issuance (i.e., reduces APIC), not included in consideration transferred. (correct answer)
2. Capitalized as part of the cost of the business combination and added to goodwill.
3. Expensed immediately as acquisition-related costs.
4. Deferred as debt issuance costs and amortized over the expected holding period.

Explanation: Under ASC 805, costs to register and issue equity securities (e.g., underwriting fees) are not acquisition-related costs and are not expensed. Instead, they reduce the proceeds from the equity issuance and are recorded as a reduction of APIC. They do not affect consideration transferred or goodwill. Answer A is correct. Answer B adds them to goodwill, which is incorrect. Answer C treats them as acquisition-related costs and expenses them, but ASC 805 distinguishes between transaction costs (expensed) and equity issuance costs (charged to APIC). Answer D is a debt treatment and does not apply.

Question 9

1. Synergies expected from combining the two businesses.
2. The going concern value of the acquiree's existing business.
3. Overpayment by the acquirer.
4. The fair value of the acquiree's identifiable intangible assets. (correct answer)

Explanation: Goodwill represents assets not separately identifiable, including synergies (A), going concern value (B), and acquirer overpayment (C). Identifiable intangible assets (D) - those that are separable or arise from contractual rights - are recognized separately at fair value and are excluded from goodwill. Answer D is NOT a component of goodwill and is therefore correct. ASC 805 specifically requires that all identifiable intangibles be recognized separately rather than subsumed in goodwill.

Question 10

1. They are included in consideration transferred and affect goodwill.
2. They are always recognized as a gain at the acquisition date.
3. They are recognized separately from the business combination, with a gain or loss measured based on the settlement terms versus market terms. (correct answer)
4. They are eliminated in consolidation with no income statement impact.

Explanation: Under ASC 805, pre-existing relationships (e.g., a contract between acquirer and acquiree that is effectively settled by the combination) are accounted for separately from the business combination. A gain or loss is measured as the difference between contractual terms and current market terms. Answer C is correct. Answer A incorrectly includes settlement of pre-existing relationships in consideration transferred. Answer B overstates the outcome - a loss is also possible. Answer D incorrectly absorbs the settlement with no income statement recognition.

Question 11

1. The liability is not recognized because it fails the ASC 450 probability threshold.
2. The liability is recognized at its acquisition-date fair value of $40,000, regardless of probability. (correct answer)
3. The liability is disclosed only; no amount is recorded at acquisition.
4. The liability is recognized at its expected value, discounted at the acquirer's borrowing rate.

Explanation: ASC 805 requires that contingent liabilities assumed in a business combination be recognized at fair value on the acquisition date, even if they would not meet the ASC 450 recognition threshold (probable and estimable). The fair value measurement standard overrides the contingency standard for items acquired in a business combination. Answer B is correct. Answer A incorrectly applies the ASC 450 probability threshold. Answer C merely discloses rather than recognizes. Answer D uses an expected value approach that is not the prescribed method under ASC 805 - fair value is required.

Question 12

1. $80,000
2. $100,000
3. $140,000
4. $95,000 (correct answer)

Explanation: Under the full goodwill method, total goodwill = (Consideration transferred + NCI fair value) - Fair value of identifiable net assets = ($640,000 +$155,000) - $700,000 =$795,000 - $700,000 =$95,000. Answer D is correct. Answer A subtracts only the proportionate share of net assets. Answer B uses a rounded or incorrect NCI assumption. Answer C adds the NCI to the purchase price without netting identifiable assets.

Question 13

1. As negative goodwill, amortized over 40 years.
2. As a reduction to the carrying amount of acquired long-term assets.
3. As a gain on bargain purchase, recognized in earnings on the acquisition date. (correct answer)
4. As additional paid-in capital in the acquirer's equity section.

Explanation: Under ASC 805, when the fair value of identifiable net assets exceeds the consideration transferred, the excess is a bargain purchase gain, recognized immediately in earnings on the acquisition date. Answer C is correct. Answer A reflects the old treatment under APB 16, which is no longer permitted. Answer B describes the IFRS approach under older standards. Answer D incorrectly credits equity rather than earnings.

Question 14

1. The carrying amount of the previously held interest is retained and no adjustment is made.
2. The previously held interest is written off and replaced with the fair value of the entire acquired entity.
3. The previously held interest is added to consideration transferred at its original cost.
4. The previously held interest is remeasured at fair value on the acquisition date, with any resulting gain or loss recognized in earnings. (correct answer)

Explanation: Under ASC 805, in a step acquisition, the acquirer remeasures its previously held equity interest at fair value as of the acquisition date. Any difference between fair value and prior carrying amount is recognized as a gain or loss in earnings. Answer D is correct. Answer A retains the old carrying amount, ignoring required remeasurement. Answer B is incorrect - the previously held interest is not written off; it is remeasured. Answer C adds original cost to consideration transferred, which violates the fair value measurement requirement.

Question 15

1. Acquisition method (correct answer)
2. Pooling-of-interests method
3. Purchase method
4. Equity method

Explanation: ASC 805 requires the acquisition method for all business combinations. Answer A is correct. The pooling-of-interests method (B) was eliminated by SFAS 141 and is no longer permitted. The purchase method (C) was the predecessor to the acquisition method and was replaced by ASC 805. The equity method (D) applies to significant-influence investments, not business combinations.

Question 16

1. The new information is reflected prospectively and disclosed in the notes.
2. The new information adjusts earnings in the period it is received.
3. The new information is disclosed only; provisional amounts are not changed.
4. Provisional amounts are retrospectively adjusted with a corresponding adjustment to goodwill. (correct answer)

Explanation: During the measurement period (up to one year from the acquisition date), new information about facts existing at the acquisition date is reflected by retrospectively adjusting provisional amounts. A corresponding adjustment is made to goodwill or to the bargain purchase gain. Answer D is correct. Answer A applies a prospective treatment, which is used for changes unrelated to facts at the acquisition date. Answer B recognizes income statement effects rather than adjusting acquisition-date balances. Answer C (disclosure only) fails to adjust the provisional amounts as required by ASC 805.

Question 17

1. No entry until it is probable the target will be met.
2. Record a liability of $30,000 as part of the consideration transferred. (correct answer)
3. Record a liability of $50,000, the maximum potential payment.
4. Disclose only; contingent consideration is not recognized until earned.

Explanation: Under ASC 805, contingent consideration is recognized at fair value on the acquisition date as part of the consideration transferred. Since the contingent arrangement meets the definition of a liability, a liability of $30,000 (fair value) is recorded. Answer B is correct. Answer A incorrectly waits for probability, which was the old contingency approach. Answer C records the maximum undiscounted payment rather than fair value. Answer D (disclosure only) does not comply with ASC 805's recognition requirements.

Question 18

1. As adjustments to goodwill in all periods.
2. As adjustments to goodwill only during the measurement period.
3. As adjustments to additional paid-in capital.
4. As gains or losses in earnings in the period of the change. (correct answer)

Explanation: Under ASC 805, contingent consideration classified as a liability is remeasured at fair value each reporting date. Changes in fair value after the acquisition date measurement period are recognized in earnings. Answer D is correct. Answer A is incorrect because only measurement period adjustments arising from new information about facts existing at the acquisition date adjust goodwill. Answer B limits the goodwill adjustment to the measurement period but ignores the earnings treatment after that period. Answer C (APIC) applies only to equity-classified contingent consideration that meets specific criteria.

Question 19

1. The acquired entity's retained earnings are added to the acquirer's retained earnings.
2. The acquired entity's retained earnings are reclassified to additional paid-in capital.
3. The acquired entity's pre-acquisition retained earnings do not appear in the consolidated balance sheet. (correct answer)
4. The acquired entity's retained earnings reduce the goodwill recognized.

Explanation: Under the acquisition method, the acquiree's pre-acquisition retained earnings are eliminated in consolidation. Only the acquirer's retained earnings appear in the consolidated balance sheet. Answer C is correct. Answer A would double-count equity by adding the acquiree's retained earnings to the acquirer's. Answer B reclassifying to APIC has no basis in ASC 805. Answer D incorrectly nets retained earnings against goodwill rather than using fair value of net assets.

Question 20

1. At their carrying amounts on Company B's books on the acquisition date.
2. At zero, since deferred taxes are not recognized in a business combination.
3. At their acquisition-date values reflecting temporary differences between assigned fair values and tax bases. (correct answer)
4. At the blended rate of the acquirer's and acquiree's effective tax rates.

Explanation: Under ASC 805 and ASC 740, deferred tax assets and liabilities arising in a business combination are recognized for the temporary differences between the fair values assigned to acquired assets and liabilities and their tax bases. Answer C is correct. Answer A uses book carrying amounts rather than fair value-based temporary differences. Answer B is incorrect; deferred taxes are recognized in business combinations. Answer D describes a blended rate that is not prescribed by GAAP - the acquirer's enacted rate applies.