TRUE OR FALSE (Items 1–42) — Answers with Explanations

1. True – Horizontal combinations involve companies in the same

industry.
2. True – They’re often used to dominate a geographic segment.
3. True – Expanding into new product markets is a horizontal growth
strategy.
4. True – Vertical combinations aim to improve operational
efficiency.
5. False – Purchasing a competitor is horizontal, not vertical.
6. True – Buyer-seller relationships define vertical combinations.
7. False – Acquiring a supplier is vertical, not conglomerate.
8. True – Diversification helps stabilize income.
9. False – Conglomerates are harder to challenge legally than
horizontal mergers.
10. True – Friendly takeovers involve mutual agreement.
11. True – A tender offer is a public bid to buy stock.
12. True – Hostile bids are opposed by management.
13. False – Greenmail involves buying back shares from a hostile
bidder.
14. True – Poison pills deter takeovers via convertible preferred
stock.
15. False – Scorched earth involves selling more assets than just
crown jewels.
16. True – Fatman defense involves acquiring assets to become less
attractive.
17. False – Golden parachutes apply to executives, not all
employees.
18. True – Pac-Man defense flips the takeover attempt.
19. True – Control over net assets defines a business combination.
20. False – Control can also be gained via stock acquisition.
21. True – Cash acquisition increases book value.
22. True – Asset-for-asset deals don’t change acquiree ownership.
23. False – Acquirer’s ownership structure usually remains
unchanged.
24. True – Issuing stock increases capitalization.
25. True – Acquiree ownership structure remains unchanged.
26. True – Acquiree shareholders become acquirer shareholders.
27. True – Asset-for-asset = direct control; stock-for-asset =
indirect.
28. False – That describes a statutory merger, not consolidation.
29. True – Statutory merger = acquiree is liquidated.
30. True – Consolidation requires forming a new entity.
31. True – New entity starts with zero retained earnings.
32. True – Only one legal entity remains post-merger/consolidation.
33. True – Stock acquisition = parent-subsidiary structure.
34. False – Stock acquisition can involve cash or debt, not just
stock-for-stock.
35. True – Consolidated financial statements are required for stock
acquisitions.
36. True – In a statutory merger, the acquiree is absorbed and
ceases to exist.
37. True – In a statutory consolidation, both companies dissolve and
form a new entity.
38. False – In a stock acquisition, the acquiree remains a separate
legal entity.
39. True – The acquirer gains control without dissolving the
acquiree in a stock acquisition.
40. True – Consolidated financial statements present the parent and
subsidiary as one entity.
41. False – The acquiree’s assets and liabilities are not directly
recorded by the acquirer in a stock acquisition.
42. True – In a statutory merger, the acquirer records the acquiree’s
assets and liabilities directly.

43. a – Horizontal combination: This occurs when companies in the

same industry merge to monopolize or dominate the market.

44. c – A competitor: Horizontal combinations involve acquiring

competitors.

45. c – Increasing production capacity: This is more typical of

vertical integration, not horizontal combinations.

46. b – Vertical combination: These aim to improve operational

efficiency by acquiring suppliers or distributors.

47. d – Either a or c: Vertical combinations involve buyer-seller

relationships, either upstream or downstream.

48. c – Buyer/seller relationship: That’s the defining feature of

vertical combinations.

49. c – Conglomerate combination: Used to diversify investments

across unrelated industries.

50. b – Conglomerate combination: Acquiring a tangentially related

business is a diversification strategy.
51. a – Helps increase income stability: Diversification reduces risk
and stabilizes earnings.

52. b – Monopoly: A dominant company in an industry is considered

a monopoly.

53. c – Constituent companies: These are the entities involved in a

business combination.

54. a – Friendly takeover: Supported by the acquiree’s management.

55. c – Greenmail: The target company buys back shares from a

hostile bidder at a premium.

56. b – White knight: A more favorable company is sought to acquire

the target instead.

57. a – Pac-Man defense: The target company counters by

attempting to acquire the hostile bidder.

58. c – Poison pill: Shareholders are given rights to buy discounted

shares to dilute the acquirer’s stake.

59. a – Sale of the crown jewels: Valuable assets are sold to make
the company less attractive.

60. c – Issuance of convertible preferred stock: This is not a typical

shark repellent tactic.

61. d – Supermajority vote: This is an external measure, not internal.

62. b – Hostile takeover: The acquiree’s management opposes the

offer.

63. c – Either acquisition of assets or stock: Both methods can confer

control.

64. d – Any of the above: Consideration can be cash, stock, or other

assets.

65. a – Acquirer stockholders become acquiree stockholders: In

asset-for-asset exchanges, ownership shifts.
66. d – No change in acquirer ownership structure: The acquirer’s
shareholders remain the same.

67. a – Acquirer stockholders become acquiree stockholders:

Ownership shifts in asset-for-asset deals.

68. a – Acquirer stockholders become acquiree stockholders: This

reflects the ownership change.

69. b – Acquiree stockholders become owners of the acquirer: They

receive shares in the acquirer.

70. a – No change in acquiree ownership structure: The acquiree’s

internal ownership remains intact.

71. d – Either b or c: Indirect control is achieved via stock-for-asset

or stock-for-stock exchanges.

72. a – Asset-for-asset acquisition: This is not subject to specific

business combination laws.

73. d – All of the above: All statements are true regarding statutory
mergers.

74. c – Net assets acquired with assets of the new corporation: This
is not a requirement in statutory consolidation.

75. c – Zero: A newly formed corporation starts with zero retained

earnings.

76. d – All of the above: Stock acquisitions involve two entities,

parent-subsidiary relationships, and consolidated FS.

77. a – Future acquiree earnings: These can affect the acquisition

cost.

78. d – All of the above: All criteria must be met for tax
reorganization.

79. b – Joint venture: This is not considered a business combination

under IFRS 3.

80. c – Acquisition method: PFRS 3 mandates this method for

business combinations.
81. b – Board composition: This helps identify the acquirer when
ownership is split.

82. a – Perez prefers asset purchase; Roo prefers share sale: Tax
implications drive these preferences.

83. d – Reverse takeover: The acquiree issues shares to the

acquirer’s shareholders.

84. d – Reverse takeover: Same scenario as above, just flipped.

85. c – Multiple factors: Net assets alone don’t determine the

acquirer.

86. d – Deducted from equity net of tax: Share issuance costs

reduce equity after tax adjustments.

87. b – Amortized over term: Debt issuance costs are amortized.

88. a – Expensed: Accounting fees are not capitalized under PFRS 3.

89. c – Equity-only financing: This is not a reason for bargain

purchase.

90. d – Fair value: Assets and liabilities are recorded at fair value in
a bargain purchase.

91. b – Income-based: Most common method for valuing intangibles.

92. a – Gain in comprehensive income: Negative goodwill is

recognized as a gain.

93. d – Not identifiable: Pre-existing goodwill is excluded from PPD.

94. b – Joint venture: Not a business combination under IFRS 3.

95. d – One company continues to exist: That’s the essence of a

statutory merger.

96. a – Only one company continues: The acquiree is dissolved.

97. a – Estimated fair value: Liabilities are recorded at fair value.

98. d – All of the above: All disclosures are required.

99. d – Never amortized: Goodwill is tested for impairment, not

amortized.

100. d – All of the above: These are all true regarding international
goodwill accounting.

101. a – Registration costs are expensed: They don’t affect the fair
value of securities.

102. d – Acquired company dissolves: This is incorrect for stock

acquisitions.

103. d – Any of the above: All forms of consideration are acceptable.

104. d – Board approval: Required for mergers.

105. c – Acquisition method: Required under PFRS 3.

106. d – Ordinary gain: Excess fair value over purchase price is

recorded as gain.

107. d – All disclosures are required: Name, percentage, and

consideration.

108. d – All recorded at fair value: No exceptions.

109. b – All costs expensed: PFRS 3 requires this.

110. a – Both costs affect net income: They’re expensed.

111. c – Only security issue costs are capitalized: Professional fees

are expensed.

112. c – Ordinary gain: Negative goodwill is treated as income.

113. a – Expensed: Direct and indirect costs are not capitalized.

114. d – Ordinary gain: Excess fair value is recognized as income.

115. d – Allocated to goodwill: Excess purchase price becomes

goodwill.
116. c – Paid-in capital: Additional shares issued for contingencies
increase equity.

117. b – Date control is obtained: Fair value is measured at this

point.

118. b – Fair value: Assets and liabilities are recorded at fair value
on acquisition date.

119. c – Expense if no alternative use: In-process R&D is expensed

unless usable.

120. a – Intangible asset under contractual-legal criterion: Favorable

lease terms qualify.

121. a – When bargain purchase occurs: Gain is recognized

immediately.

122. a – Fair value for both: Assets and liabilities are recorded at fair
value.

123. b – Fair value of tangible and identifiable intangibles less

liabilities: That’s the definition of goodwill.

124. c – Hypothetical results not required: IASB doesn’t mandate this

disclosure.

125. b – Based on benefit pattern: Amortization reflects asset usage.

126. c – Expensed: Acquisition-related costs are not capitalized.

127. c – Extraordinary items: These are excluded from goodwill

estimation.
FALSE Statements (with Explanations)

5. When a retail clothing store purchases a competitor in another

city, a vertical combination has occurred.
→ False: This is a horizontal combination, since both companies
operate in the same industry.

7. A business combination in which a supplier of raw materials is

acquired is a conglomerate combination.
→ False: Acquiring a supplier is a vertical combination, not a
conglomerate.

9. Conglomerate combinations are easy for the government to

challenge in court.
→ False: Horizontal combinations are more likely to face antitrust
scrutiny; conglomerates are harder to challenge.

13. Greenmail exists when a company is encouraged to buy a

potential acquiree.
→ False: Greenmail refers to a company buying back its own shares
from a hostile bidder at a premium to avoid takeover.

15. The sale of the crown jewels defensive maneuver involves the
sale of more assets than does the scorched earth defense.
→ False: Scorched earth involves selling off even more assets than
the crown jewels tactic, often to make the company less attractive.

17. Golden parachutes give a bonus to all employees if the company

is acquired.
→ False: Golden parachutes apply only to top executives, not all
employees.

20. The only way to attain control over the net assets of another
entity is to purchase the net assets.
→ False: Control can also be achieved through stock acquisition, not
just asset purchase.

23. In an acquisition of assets for assets, the ownership structure of

the acquirer changes.
→ False: The acquirer’s ownership structure typically remains
unchanged in asset-for-asset transactions.

28. A business combination that occurs where only one of the

original entities is in existence after the combination is called a
statutory consolidation.
→ False: That describes a statutory merger. A statutory consolidation
results in a new entity, with both original entities dissolving.

34. A business combination accomplished as a stock acquisition

must be accomplished with a stock-for-stock exchange.
→ False: Stock acquisitions can involve various forms of
consideration, including cash or debt—not just stock-for-stock.

36. The substance of statutory mergers, statutory consolidations, and stock

acquisitions is the same.

False: While statutory mergers, consolidations, and stock acquisitions all result in control, they diffe