CPA Quiz: Account For Business Combinations
20 questions · exam conditions
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Account For Business CombinationsQuestion 1 of 20

Under ASC 805, how are acquisition-related transaction costs (e.g., legal fees, due diligence costs) treated by the acquirer?

Expensed as incurred in the period the costs are incurred.
Capitalized as part of the cost of the acquired business.
Added to goodwill on the acquisition date.
Deferred and amortized over the expected benefit period.
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CPA Quiz

CPA Quiz: Account For Business Combinations

Practice Account For Business Combinations in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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.

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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.

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Question 1

Under ASC 805, how are acquisition-related transaction costs (e.g., legal fees, due diligence costs) treated by the acquirer?

  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

Company A issues 10,000 shares of its $1 par value common stock (fair value $25 per share) as consideration in a business combination. How should the consideration transferred be measured under ASC 805?

  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 3

Company A acquires all of Company B's outstanding stock for $1,000,000. Company B's recorded net assets have a book value of $600,000 and a fair value of $850,000. What amount of goodwill should be recognized at the acquisition date?

  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.AnswerBiscorrect.AnswerAsubtractsbookvalue(150,000. Answer B is correct. Answer A subtracts book value (1,000,000 - 600,000),whichisthepre−ASC805approach.AnswerCisthedifferencebetweenfairvalueandbookvalueofnetassets(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 4

Under ASC 805, which of the following is NOT a component of goodwill recognized in a business combination?

  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 5

Which of the following best describes the treatment of pre-existing relationships between the acquirer and acquiree that are effectively settled in a business combination?

  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 6

On the acquisition date, Company A identifies a contingent liability of the acquiree that has a fair value of $40,000 but is not probable of payment under ASC 450 criteria. Under ASC 805, what is the correct treatment?

  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 7

Company A acquires 80% of Company B for $640,000. The fair value of Company B's identifiable net assets is $700,000. The fair value of the 20% noncontrolling interest is $155,000. Under the full goodwill method, what is the total goodwill recognized?

  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 8

When a business combination is achieved in stages (a step acquisition), how does the acquirer account for its previously held equity interest in the acquiree?

  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 9

Company A acquires Company B. As part of the arrangement, Company A agrees to pay former shareholders of Company B an additional $50,000 if Company B's revenues exceed a target in Year 2. At the acquisition date, this contingent payment has a fair value of $30,000. How should this arrangement be recorded at the acquisition date?

  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 10

Contingent consideration in a business combination is classified as a liability. After the acquisition date, the contingent consideration liability is remeasured. How are subsequent changes in fair value recorded under ASC 805?

  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 11

A company that applies the acquisition method records the acquired entity's assets and liabilities at their fair values on the acquisition date. Which of the following is the most accurate statement about how the acquired entity's pre-acquisition retained earnings affect the consolidated balance sheet?

  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 12

Company A (acquirer) and Company B (acquiree) both have deferred tax assets and liabilities that must be recognized as part of a business combination. Under ASC 805, how are the acquired deferred tax balances recorded?

  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.

Question 13

At the acquisition date, Company A records an acquired contingent liability of Company B at fair value of $80,000. The liability is ultimately settled for $95,000 in a subsequent period. How should the $15,000 difference be recorded in the subsequent period?

  1. Retroactively adjust goodwill by $15,000.
  2. Recognize a $15,000 loss in earnings in the period of settlement. (correct answer)
  3. Reduce other acquired assets by $15,000.
  4. Record as an adjustment to additional paid-in capital.
Explanation: Under ASC 805, contingent liabilities assumed in a business combination are initially recorded at fair value. Subsequent changes in the measured amount after the measurement period closes are recognized in earnings, not as adjustments to goodwill. The $15,000 excess settlement is a loss in the period of settlement. Answer B is correct. Answer A retroactively adjusts goodwill, which is only permitted during the measurement period (up to one year). Answers C and D have no basis in ASC 805.

Question 14

On January 1, 2024, Apex Corporation acquired 100% of the outstanding common stock of Beta Company for $850,000 cash. At the acquisition date, Beta's book value was $600,000, consisting of assets of $900,000 and liabilities of $300,000. The fair values of Beta's identifiable assets and liabilities were equal to their book values except for: (1) inventory with a fair value $40,000 above book value, (2) equipment with a fair value $60,000 above book value, and (3) an unrecorded patent with a fair value of $80,000.

What amount of goodwill should Apex record in the business combination?

  1. $70,000 (correct answer)
  2. $130,000
  3. $180,000
  4. $250,000
Explanation: Goodwill = Purchase price - Fair value of net identifiable assets acquired. Fair value of net assets = Book value of net assets (600,000)+Fairvalueadjustments(600,000) + Fair value adjustments (40,000 + $60,000 + $80,000) = $780,000. Goodwill = $850,000 - $780,000 = 70,000.ChoiceBincorrectlyusesbookvalueofnetassets(70,000. Choice B incorrectly uses book value of net assets (850,000 - $600,000 - 120,000).ChoiceCincorrectlyomitsthepatentadjustment(120,000). Choice C incorrectly omits the patent adjustment (850,000 - $600,000 - $40,000 - 60,000).ChoiceDincorrectlyusesonlybookvalueofnetassets(60,000). Choice D incorrectly uses only book value of net assets (850,000 - $600,000).

Question 15

Delta Inc. acquired 80% of Echo Corp. for $720,000 on July 1, 2024. Echo's net assets had a book value of $800,000 and fair value of $850,000 on the acquisition date. Echo reported net income of $120,000 for the year ended December 31, 2024, with income earned evenly throughout the year. Echo declared and paid dividends of $40,000 on October 1, 2024.

In Delta's consolidated financial statements for the year ended December 31, 2024, what amount should be reported as noncontrolling interest in net income?

  1. $8,000
  2. $12,000 (correct answer)
  3. $16,000
  4. $24,000
Explanation: Noncontrolling interest in net income = Noncontrolling percentage × Subsidiary's post-acquisition net income. Echo's post-acquisition income = $120,000 × 6/12 = $60,000 (July 1 to Dec 31). Noncontrolling interest = 20% × $60,000 = 12,000.ChoiceAincorrectlyusesthedividendamount(12,000. Choice A incorrectly uses the dividend amount (40,000 × 20%). Choice C uses full-year income for 4 months (120,000×20120,000 × 20% × 4/12). Choice D incorrectly uses full-year income (120,000 × 20%).

Question 16

Rho Corporation is considering the acquisition of Tau Company. Tau operates in the technology sector and owns several intangible assets. At the potential acquisition date, Tau's assets include: developed software with 3 years of remaining legal protection, a customer database developed over 5 years, an assembled workforce of specialized engineers, and in-process research and development projects that are 60% complete.

In a business combination, which of Tau's intangible assets should Rho recognize separately from goodwill on the acquisition date?

  1. Only the developed software, because it has legal protection and definite useful life
  2. The developed software and customer database, because both meet the separability criterion for recognition
  3. All intangible assets including the assembled workforce, because they were acquired in a business combination
  4. The developed software, customer database, and in-process R&D, because they meet either separability or contractual-legal criteria (correct answer)
Explanation: When you encounter intangible asset recognition in business combinations, you need to apply the two-part test from ASC 805: intangible assets can be recognized separately from goodwill if they meet either the separability criterion OR the contractual-legal criterion. Let's evaluate each of Tau's assets. The developed software has legal protection (patent or copyright), clearly meeting the contractual-legal criterion. The customer database, while lacking legal protection, meets the separability criterion because it can be sold, transferred, or licensed independently - companies routinely buy and sell customer lists. The in-process R&D projects also meet the separability criterion, as these can be sold or licensed to other companies, even in their incomplete state. The assembled workforce, however, fails both tests. You cannot legally sell employees due to employment laws, and there's no contractual right to the workforce that can be transferred. Answer A is too narrow, recognizing only software based on legal protection while ignoring the separability test that applies to other assets. Answer B misses the in-process R&D, which clearly meets separability criteria since R&D projects are frequently bought and sold. Answer C incorrectly includes assembled workforce - this is a classic trap since workforce seems valuable but fails the recognition criteria. Answer D correctly identifies the three assets that meet the recognition requirements: software (contractual-legal), customer database (separability), and in-process R&D (separability). Remember: assembled workforce never qualifies for separate recognition in business combinations, regardless of its value. Focus on whether assets can be separated and sold or have legal/contractual substance.

Question 17

On January 1, 2024, Phoenix Corp. acquired 100% of Eagle Inc. in a business combination. The purchase price was $2,000,000, and Eagle's identifiable net assets had a fair value of $1,600,000. During 2024, it became apparent that goodwill from this acquisition was impaired. Phoenix performs its annual goodwill impairment test on December 31. The fair value of Eagle as a reporting unit on December 31, 2024, was determined to be $1,800,000, and the carrying amount of Eagle's net assets (including goodwill) was $1,900,000.

What amount of goodwill impairment loss should Phoenix recognize for 2024?

  1. $0
  2. $100,000 (correct answer)
  3. $200,000
  4. $400,000
Explanation: Under ASC 350, goodwill impairment is measured as the amount by which the carrying amount of the reporting unit exceeds its fair value, but limited to the carrying amount of goodwill. Impairment = $1,900,000 (carrying amount) - $1,800,000 (fair value) = $100,000. Since goodwill carrying amount is 400,000(400,000 (2,000,000 - $1,600,000), the impairment loss is $100,000. Choice A ignores the impairment. Choice C uses the difference between original goodwill and the calculated impairment incorrectly. Choice D uses the total goodwill amount.

Question 18

Alpha Corporation acquired 60% of Beta Corporation on January 1, 2024, for $840,000. At the acquisition date, Beta's net assets had a book value of $1,000,000 and fair value of $1,200,000, with the fair value excess attributable to undervalued land. Alpha uses the economic unit concept to measure noncontrolling interest at fair value. Independent appraisals indicate that 100% of Beta had a fair value of $1,500,000 on the acquisition date.

Under the acquisition method using the economic unit concept, what amount should be recorded as noncontrolling interest on the acquisition date?

  1. $400,000
  2. $480,000
  3. $600,000 (correct answer)
  4. $660,000
Explanation: Under the economic unit concept, noncontrolling interest is measured at fair value. Noncontrolling interest = 40% × Total fair value of Beta = 40% × $1,500,000 = 600,000.ChoiceAusesbookvalueofnetassets(600,000. Choice A uses book value of net assets (1,000,000 × 40%). Choice B uses fair value of net assets (1,200,000×401,200,000 × 40%). Choice D incorrectly calculates based on total consideration (1,500,000 + $840,000) × 40%.

Question 19

Sigma Corporation acquired Nova Company on October 1, 2024, for $650,000. The transaction was structured so that Nova's shareholders received $400,000 in cash and $250,000 in Sigma common stock (1,000 shares at $250 per share fair value). Nova's net assets had a book value of $500,000 and fair value of $580,000. Transaction costs of $25,000 were incurred, consisting of $15,000 in legal fees and $10,000 in stock issuance costs.

How should Sigma account for the total transaction costs in this business combination?

  1. Capitalize all $25,000 as part of the investment in Nova, increasing goodwill by $25,000
  2. Expense the entire $25,000 in the current period as acquisition-related costs
  3. Capitalize $15,000 as part of goodwill and expense $10,000 as stock issuance costs in the current period
  4. Expense $15,000 as acquisition costs and reduce additional paid-in capital by $10,000 for stock issuance costs (correct answer)
Explanation: When you encounter business combination questions involving transaction costs, you need to distinguish between acquisition-related costs and stock issuance costs, as they receive different accounting treatment under ASC 805. Acquisition-related costs like legal fees, due diligence expenses, and advisory fees must be expensed in the period incurred—they cannot be capitalized as part of goodwill or the investment cost. However, stock issuance costs are treated differently. When a company issues stock to finance an acquisition, the costs directly related to issuing those shares reduce additional paid-in capital rather than being expensed. In this scenario, the $15,000 in legal fees represents acquisition-related costs that must be expensed immediately. The $10,000 in stock issuance costs should reduce additional paid-in capital since Sigma issued 1,000 shares of common stock as part of the consideration. This makes answer D correct. Answer A is wrong because current GAAP prohibits capitalizing acquisition-related costs as part of goodwill. Answer B incorrectly treats stock issuance costs the same as acquisition costs—they have different accounting treatments. Answer C makes the same error as A by suggesting legal fees can be capitalized as goodwill, plus it incorrectly expenses stock issuance costs. Remember this pattern: In business combinations, separate transaction costs by type. Acquisition-related costs always hit the income statement immediately, while stock issuance costs always reduce equity through additional paid-in capital. This distinction appears frequently on FAR exam questions about business combinations.

Question 20

On January 1, 2024, Omega Corp. acquired 100% of Zeta Inc. for $1,200,000. At acquisition, Zeta's identifiable net assets had a fair value of $900,000, resulting in goodwill of $300,000. During 2024, the following elimination entries were required in the consolidation process: (1) Eliminate intercompany sales of $80,000, (2) Eliminate unrealized profit in ending inventory of $20,000, (3) Eliminate intercompany debt of $50,000, and (4) Eliminate intercompany dividend income of $30,000.

In preparing the consolidated financial statements, which of the following consolidation elimination entries will have a net impact on consolidated net income?

  1. Elimination of intercompany sales and the related cost of goods sold, reducing consolidated net income by $80,000
  2. Elimination of unrealized profit in ending inventory, reducing consolidated net income by $20,000 (correct answer)
  3. Elimination of intercompany debt balances, which has no impact on consolidated net income
  4. Elimination of intercompany dividend income and the related dividend expense, which has no net impact on consolidated net income
Explanation: The elimination of unrealized profit in ending inventory reduces consolidated net income because it removes profit that hasn't been realized through sales to external parties. Choice A is incorrect because eliminating intercompany sales also eliminates the related COGS, resulting in no net impact on income. Choice C correctly states debt elimination has no income impact but isn't the answer asking for an impact. Choice D is incorrect because dividend elimination removes income without a corresponding expense (dividends aren't expenses).