Exam 4: Consolidation of Non-Wholly Owned Subsidiaries

Parent Inc. and Sub Inc. had the following balance sheets on July 31, 2019: Parent Inc Sub Inc Sub Inc (caryying value) (carrying value) (fair value) Cash \ 180,000 \ 36,000 \ 36,000 Accounts Receivable \ 100,000 \ 40,000 \ 40,000 Inventory \ 60,000 \ 24,000 \ 27,000 Plant and Equipment (net) \ 200,000 \ 80,000 \ 93,000 Goodwill \- \ 8,000 Trademark \- \ 12,000 \ 15,000 Total Assets \ \ 200,000 Current Liabilities \ 80,000 \ 50,000 \ 50,000 Bonds Payable \ 320,000 \ 20,000 \ 24,000 Common Shares \ 90,000 \ 80,000 Retained Earnings \ 50,000 \ 50,000 Total Liabilities and Equity \ 540,000 \ 200,000 Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2019 for cash of $180,000, the liabilities section of Parent's consolidated balance sheet on the date of acquisition (August 1, 2019) would total to what amount under the fair value enterprise method?

IFRS permits several methods to be used to determine the fair value of the non-controlling interest in a subsidiary at the acquisition date. Which of the following is NOT an appropriate method to determine the fair value of the non-controlling interest (NCI)?

What value should be recorded as the fair value of a contingent consideration arising from a business acquisition when it is classified as a liability?

Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of Minor Corporation on August 1, Year 1. The shares issued have a fair market value of $40. In addition, the merger agreement provides that if the market price of Major's shares is below $60 two years from the date of the merger, Major will issue additional shares to the former shareholders of Minor Corporation in an amount that will compensate them for their loss of value. Major predicts that there is a 25% probability that Major's shares will be trading at $59 per share and a 75% probability that they will be trading at greater than $60 per share two years from the date of the merger. Assume a discount rate of 7%. Required: Prepare the journal entry to record the issuance of the shares.

If a business combination occurs and the consideration paid exceeds the fair value of the identifiable net assets of the subsidiary on the acquisition date and the parent acquires less than 100% of the outstanding common shares of the subsidiary, which consolidation method will result in the highest value for non-controlling interest on the acquisition date?

X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000 worth of common shares. An agreement was drawn whereby X Company would pay 10% of any earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On that date, X's shares had a market value of $80 per share. Required: a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X) that you feel may be necessary to reflect Y's results under IFRS 3 Business Combinations. Assume that on the acquisition date no provision was made for the contingent consideration. b) Assuming that the agreement called for Y's shareholders to be compensated with 1,250 shares for any decline in X's share price, what journal entries would be required under IFRS 3, if the market value of X's shares dropped to $64 within the year?

When a contingent consideration arising from a business combination is classified as a liability, how is any difference between the original estimate of the amount to be paid and the actual amount paid accounted for if the difference arises due to a change in circumstances?

Under the proportionate consolidation method the non-controlling interest (NCI) is:

Company A Inc. owns a controlling interest in Company B. which is located overseas. Company A and B are in entirely different lines of business. Company A wishes to file a request allowing it to not consolidate its financial statements with those of Company B. Assuming that Company A is based in Canada, is this allowed? Explain.

In an inflationary economy, under which consolidation method would total assets in the consolidated balance sheet at the acquisition date be greatest?

Any goodwill on the subsidiary company's books on the date of acquisition:

Parent Inc. and Sub Inc. had the following balance sheets on July 31, 2019: Parent Inc Sub Inc Sub Inc (caryying value) (carrying value) (fair value) Cash \ 180,000 \ 36,000 \ 36,000 Accounts Receivable \ 100,000 \ 40,000 \ 40,000 Inventory \ 60,000 \ 24,000 \ 27,000 Plant and Equipment (net) \ 200,000 \ 80,000 \ 93,000 Goodwill \- \ 8,000 Trademark \- \ 12,000 \ 15,000 Total Assets \ \ 200,000 Current Liabilities \ 80,000 \ 50,000 \ 50,000 Bonds Payable \ 320,000 \ 20,000 \ 24,000 Common Shares \ 90,000 \ 80,000 Retained Earnings \ 50,000 \ 50,000 Total Liabilities and Equity \ 540,000 \ 200,000 Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2019 for cash of $180,000, the assets section of Parent's consolidated balance sheet on the date of acquisition would total what amount if the proportionate consolidation method were used?

On the date of formation of a 100% owned subsidiary by the parent, which of the following statements pertaining to consolidated financial statements is TRUE?

Parent Inc. and Sub Inc. had the following balance sheets on July 31, 2019: Parent Inc Sub Inc Sub Inc (caryying value) (carrying value) (fair value) Cash \ 180,000 \ 36,000 \ 36,000 Accounts Receivable \ 100,000 \ 40,000 \ 40,000 Inventory \ 60,000 \ 24,000 \ 27,000 Plant and Equipment (net) \ 200,000 \ 80,000 \ 93,000 Goodwill \- \ 8,000 Trademark \- \ 12,000 \ 15,000 Total Assets \ \ 200,000 Current Liabilities \ 80,000 \ 50,000 \ 50,000 Bonds Payable \ 320,000 \ 20,000 \ 24,000 Common Shares \ 90,000 \ 80,000 Retained Earnings \ 50,000 \ 50,000 Total Liabilities and Equity \ 540,000 \ 200,000 Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2019 for cash of $180,000, the Shareholders' Equity section of Parent's consolidated balance sheet on the date of acquisition would total to what amount under the fair value enterprise method?

Why might the fair value of the non-controlling interest in a subsidiary on the date that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?

Which method presents the non-controlling interest (NCI) in in the Shareholders' Equity section of the balance sheet?

On the date of acquisition, consolidated retained earnings and consolidated ordinary shares in shareholders' equity is equal to:

When the non-controlling interest's share of the subsidiary's goodwill cannot be reliably determined, the method used to prepare consolidated financial statements is:

Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2019: Keen Inc Lax Inc Lax Inc (carrying value) (carrying value) (fair value) Cash \ 300,000 \ 80,000 \ 80,000 Accounts Receivable \ 60,000 \ 24,000 \ 24,000 Inventory \ 30,000 \ 54,000 \ 50,000 Plant and Equipment (net) \ 310,000 \ 280,000 \ 300,000 Trademark \ 12,000 \ 16,000 Total Assets \ 700,000 \ 450,000 Accounts Payable \ 150,000 \ 200,000 \2 00,000 Bonds Payable \ 400,000 \ 120,000 \1 00,000 Common Shares \ 100,000 \ 60,000 Retained Earnings \ 50,000 \ 70,000 Total Liabilities and Equity \ 700,000 \ 450,000 Assuming that Keen Inc. purchases 80% of Lax Inc. for cash of $240,000 on November 1, 2019, prepare the consolidated balance sheet on the date of acquisition under the Fair Value Enterprise Method.

Which statement about the differences between consolidation methods permitted under ASPE and IFRS is true?