Reading 22- LOS b ～ Q1－4 class, equipment, property, tangible

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1.Assume Company P acquires Company T for $100 million. The fair market value of Company T’s net tangible assets is $75 million. The only differences in fair market value of the assets and liabilities is in property, plant, and equipment (PP&E), which has a book value of $20 million and a fair market value of $25 million. No other intangible assets are identified. The PP&E has a remaining useful life of ten years. Company P has a company policy of amortizing all intangible assets over 20 years. The acquisition takes place on October 1, 2006, and is accounted for using the purchase method according to U.S. GAAP. Company P has a 31st December fiscal year end. The combined amount of incremental amortization of intangible assets and depreciation of PP&E attributable to the write-up of assets under the purchase method that should be taken by Company P in 2006 is closest to:

A)   $125,000.

B)   $375,000.

C)   $500,000.

D)   $1,500,000.

2.Relative to the pre-acquisition financial statements, what would be the most likely impact on the following items of financing the acquisition with new debt?

Leverage

Total Assets

Current ratio

 

A)    Small increase                 Increase                         Increase

B)    Large increase                 Unchanged                    Insufficient information

C     Large increase               Unchanged                    Falls

D)    Large increase                Increase                         Insufficient information

3.Which of the following statements regarding the statement of cash flow impacts of an acquisition is FALSE?

A)   When the acquisition is financed from cash, the impact is mostly an investing cash outflow.

B)   When using the pooling method, no cash flow arises as a result of the transaction itself.

C)   When the acquisition is accounted for using the purchase method, the cost of the acquisition is mostly an investing cash outflow offset by a financing inflow.

D)   When the acquisition is financed with debt, the only impact is a cash flow financing inflow.

4.Company A is about to merge with Company B. Relative to the pre-merger financial statements of Company A what would be the most likely impact on the following items if the pooling of interests method was used to record the merger of Company A and B?

Total Assets

Revenues

Profit Margin

 

A)  Unchanged                  Increase                           Increases

B)  Increases                    Increases                         Indeterminate

C)  Increases                     Increase                           Increases

D)  Unchanged                  Unchanged                      Indeterminate