Exam 4: Consolidation of Non-Wholly Owned Subsidiaries

After the introduction of the entity method in Canada, many companies opted to value the non-controlling interest in subsidiaries based on the fair value of the subsidiary's identifiable net assets at the acquisition date instead of valuing the non-controlling interest at its fair value. That is, they opted to use the parent company extension approach rather than the entity method when preparing consolidated financial statements. What motivation might preparers of consolidated financial statements have that would cause them to have this preference?

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

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

Keen Inc and Lax Inc had the following balance sheets on October 31, 2018: Keen Inc Lax Inc Lax Inc (carry ing 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 \ 200,000 Bonds Pay able \ 400,000 \ 120,000 \ 100,000 Common Shares \ 100,000 \ 60,000 Retained Earnings \ 50,000 \ 70,000 Total Labilities and Equiby \ 700,000 \ 450,000 Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts for its investment using the cost method, prepare (under the Entity Theory): a) the journal entry that Keen Inc. would make to record the acquisition; b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

Jean and John Inc had the following balance sheets on August 31, 2018: Jean Inc. John Inc. John Inc. (carry ing value) (carrying value) (fair value) Cash \ 1,200,000 \ 300,000 \ 300,000 Accounts Receivable \ 400,000 \ 64,000 \ 64,000 Inventory \ 240,000 \ 80,000 \ 60,000 Plant and Equipment (net) \ 860,000 \ 256,000 \ 300,000 Trademark \ 20,000 \ 36,000 Total Assets \ 2,700,000 \ 720,000 Accounts Payable \ 1,500,000 \ 300,000 \ 300,000 Bonds Pay able \ 600,000 \ 240,000 \ 210,000 Common Shares \ 500,000 \ 60,000 Retained Earnings \ 100,000 \ 120,000 Total Labilities and Equiby \ 2,700,000 \ 720,000 On August 31^, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc.'s consolidated balance sheet on the date of acquisition using the Entity Theory.

When preparing the consolidated balance sheet on the date of acquisition, the parent's investment (in subsidiary company) is:

Under the Proprietary Theory, non-controlling interest (NCI) is:

Which accounts differ on the consolidated balance sheet when Entity Theory compared to Parent Company Extension Theory?

On the date of acquisition, consolidated shareholders' equity under proprietary theory is equal to:

The focus of the consolidated financial statements on the shareholders of the parent company is characteristic of:

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?

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 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?

Any negative goodwill arising on the date of acquisition:

Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and decides to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 100% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2018)?

When a contingent consideration arising from a business combination is classified as equity, how is any change in its fair value accounted for if the difference arises due to a change in circumstances?

What would be the amount of Non-Controlling Interest (NCI) appearing on the consolidated balance sheet on the date of acquisition (August 1, 2018), under the Proprietary Method, assuming that Parent purchased 80% of Sub Inc. for $180,000?

Contingent consideration should be valued at:

Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018: Keen Inc. Lax Inc. Lax Inc. (carry ing 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 \ 200,000 Bonds Pay able \ 400,000 \ 120,000 \ 100,000 Common Shares \ 100,000 \ 60,000 Retained Earnings \ 50,000 \ 70,000 Total Labilities and Equiby \ 700,000 \ 450,000 Assume that the following draft balance sheet was prepared by a co-worker subsequent to Keen's 80% purchase of Lax Inc. for $240,000. Assuming this balance sheet is devoid of technical errors, what can be concluded about the balance sheet below?