Chapter 1 — Business Combinations: America's Most Popular Business Activity, Bringing an End to the Controversy MULTIPLE CHOICE 1. An economic advantage of a business combination includes a. Utilizing duplicative assets. b. Creating separate management teams. c. Coordinated marketing campaigns. d. Horizontally combining levels within the marketing chain. ANS: C DIF: E OBJ: 1 2. A tax advantage of business combination can occur when the existing owner of a company sells out and receives: a. cash to defer the taxable gain as a "tax-free reorganization." b. stock to defer the taxable gain as a "tax-free reorganization." c. cash to create a taxable gain. d. stock to create a taxable gain. ANS: B DIF: E OBJ: 1 3. A controlling interest in a company implies that the parent company a. owns all of the subsidiary's stock. b. has influence over a majority of the subsidiary's assets. c. has paid cash for a majority of the subsidiary's stock. d. has transferred common stock for a majority of the subsidiary's outstanding bonds and debentures. ANS: B DIF: M OBJ: 2 4. Which of the following is a potential abuse that may arise when a business combination is accounted for as a pooling of interests? a. Assets of the buyer may be overvalued when the price paid by the investor is allocated among specific assets. b. Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient operations. c. Liabilities may be undervalued when the price paid by the investor is allocated to specific liabilities. d. An undue amount of cost may be assigned to goodwill, thus potentially allowing an understatement of pooled earnings. ANS: B DIF: M OBJ: 3, Appendix A