Radio Ltd acquired all the issued capital of Wave Ltd on 1 July 2014 for cash consideration of $2 million.The fair value of the net assets of Wave Ltd at that date was $1.8 million as follows: \[\begin{array} { | l | r | } \hline \text { Share capital } & \$ 1000000 \\ \hline \text { Retained earnings } & 800000 \\ \hline \text { Total equity } & \$ 1800000 \\ \hline \end{array}\] During the period ending 30 June 2015,Wave Ltd declare a dividend of $300 000 that is identified as being paid out of pre-acquisition profits.Goodwill had been determined to have impaired by $20 000 during the period.What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2015?

A) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 1000000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 500000 & \\ \hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 2000000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Impairment loss } & 250000 & \\ \hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 250000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 300000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\ \hline \end{array}\] B) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 1000000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 800000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 1800000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 20000 & \\ \hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 20000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\ \hline \end{array}\] C) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 1000000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 500000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 1500000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Impairment loss } & 20000 & \\ \hline \mathrm { Cr } & \text { Retained earnings } & & 20000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\ \hline \end{array}\] D) $\begin{array}{|l|l|r|l|} \hline \mathrm{Dr} & \text { Share capital } & 1,000,000 & \\ \hline \mathrm{Dr} & \text { Retained earnings } & 800,000 & \\ \hline \mathrm{Dr} & \text { Goodwill } & 200,000 & \\ \hline \mathrm{Cr} & \text { Investment in Wave Ltd } & & 200,0000 \\ \hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss - goodwill } & 20,000 & \\ \hline \mathrm{Cr} & \text { Accumulated impairment loss\_goodwill } & & 20,000 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Dividend payable } & 300,000 & \\ \hline \mathrm{Cr} & \text { Dividend receivable } & & 300,000 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Dividend declared } & 300,000 & \\ \hline \mathrm{Cr} & \text { Dividend income } & & 300,000 \\ \hline \end{array}$ A) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 1000000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 500000 & \\ \hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 2000000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Impairment loss } & 250000 & \\ \hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 250000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 300000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\ \hline \end{array}\] B) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 1000000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 800000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 1800000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 20000 & \\ \hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 20000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\ \hline \end{array}\] C) \[\begin{array} { | c | l | r | r | } \hline \text { Dr } & \text { Share capital } & 1000000 & \\ \hline \mathrm { Dr } & \text { Retained earnings } & 500000 & \\ \hline \mathrm { Cr } & \text { Investment in Wave Ltd } & & 1500000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Impairment loss } & 20000 & \\ \hline \mathrm { Cr } & \text { Retained earnings } & & 20000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend payable } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend receivable } & & 300000 \\ \hline & & & \\ \hline \mathrm { Dr } & \text { Dividend declared } & 300000 & \\ \hline \mathrm { Cr } & \text { Dividend income } & & 300000 \\ \hline \end{array}\] D) $\begin{array}{|l|l|r|l|} \hline \mathrm{Dr} & \text { Share capital } & 1,000,000 & \\ \hline \mathrm{Dr} & \text { Retained earnings } & 800,000 & \\ \hline \mathrm{Dr} & \text { Goodwill } & 200,000 & \\ \hline \mathrm{Cr} & \text { Investment in Wave Ltd } & & 200,0000 \\ \hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss - goodwill } & 20,000 & \\ \hline \mathrm{Cr} & \text { Accumulated impairment loss\_goodwill } & & 20,000 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Dividend payable } & 300,000 & \\ \hline \mathrm{Cr} & \text { Dividend receivable } & & 300,000 \\ \hline & & & \\ \hline \mathrm{Dr} & \text { Dividend declared } & 300,000 & \\ \hline \mathrm{Cr} & \text { Dividend income } & & 300,000 \\ \hline \end{array}$

Exam 21: Further Consolidation Issues I: Accounting for Intragroup Transactions

In the absence of an election to be a 'tax consolidated group',the taxation authorities typically assess income earned by individual legal entities in an economic group and does not take into consideration consolidation adjustments required for group accounts.

(True/False)

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Question 21

IFRS 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation.This requirement is consistent with the parent entity concept of consolidation.

(True/False)

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Question 22

Large Company owns 80% of the issued capital of Smaller Company and Large Company owns 60% of the issued capital of Medium Company.The three companies form an economic entity for the purposes of consolidated accounts.During the period Smaller Company sold inventory to Medium for £400 000.Medium sold the same inventory to Large for £560 000 and Large sold it to an entity external to the group for £760 000.What are the sales revenue reported in the consolidated statements for this item?

(Multiple Choice)

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Question 23

Little Company declared a dividend of €90 000 for the period ended 30 June 2014.Big Company owns 100% of the equity of Little Company.Big Company accrues dividends when they are declared by its subsidiaries.What elimination entry would be required to prepare the consolidated financial statements for the group for the period ended 30 June 2014?

(Multiple Choice)

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Question 24

If we simply aggregate the sales of the parent and subsidiary companies,without adjustment,when there have been intragroup sales,total income would be overstated.

(True/False)

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Question 25

Stormy Ltd has purchased all the issued capital of Cloud Ltd at the beginning of the current period.At the end of the period Cloud Ltd declares a dividend of €50 000 that is identified as being paid out of pre-acquisition profits.What entries would Stormy Ltd and Cloud Ltd make in their own books? (Assume Stormy Ltd accrues the dividends of subsidiaries when they are declared.)

(Multiple Choice)

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Question 26

Parent Plc sells inventories to Child Plc amounting to €200 000 during the financial year.The inventories are no longer in the hands of Child Plc at year-end.Parent Plc is no longer required to eliminate these intragroup transactions because these transactions have been realised by sale to external parties.

(True/False)

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Question 27

Hammer Ltd acquired all the issued capital of Nail Ltd on 1 July 2015 for cash consideration of $1.5 million.The fair value of the net assets of Nail Ltd at that date was $1.2 million as follows: Share capital \ 1000000 Retained earnings 200000 Total equity \ 1200000 During the period ended 30 June 2016,Nail Ltd declared a dividend of $200 000 that is identified as being paid out of pre-acquisition profits and a further $100 000 is declared at the end of the period that is out of post-acquisition profits.Goodwill had been determined to have been impaired by $15 000 during the period.What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2016?

(Multiple Choice)

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Question 28

Companies A,B and C are all part of the one economic entity,but are all separate legal entities required to prepare their own financial statements.Company A sold Company B inventory that cost £56 000 for £78 000.At the end of the same period Company B has three-quarters of that inventory still on hand and the rest has been sold to an entity outside the economic group.At what amount should the inventory remaining in Company B be recorded in the consolidated statements?

(Multiple Choice)

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Question 29

Companies A,B and C are all part of the one economic entity,but are all separate legal entities required to prepare their own financial statements.Company A sold Company B's inventory that cost £56 000 for £78 000.At the end of the same period Company B has three-quarters of that inventory still on hand and the rest has been sold to an entity outside the economic group.At what amount should the inventory remaining in Company B be recorded in Company B's own financial statements?

(Multiple Choice)

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Question 30

Dividends may be identified as being paid out of pre-acquisition or post-acquisition profits by a subsidiary company.Where dividends are paid out of post-acquisition profits the investment in the subsidiary should be decreased by the amount of the dividend.

(True/False)

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Question 31

Radio Ltd acquired all the issued capital of Wave Ltd on 1 July 2014 for cash consideration of $2 million.The fair value of the net assets of Wave Ltd at that date was $1.8 million as follows: Share capital \ 1000000 Retained earnings 800000 Total equity \ 1800000 During the period ending 30 June 2015,Wave Ltd declare a dividend of $300 000 that is identified as being paid out of pre-acquisition profits.Goodwill had been determined to have impaired by $20 000 during the period.What consolidation journal entries would be required to prepare group accounts for the period ended 30 June 2015?

(Multiple Choice)

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Question 32

Explain why gains recognised on sale of assets between entities within a group are reversed on consolidation.

(Essay)

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Question 33

Woody Plc sold inventory items to its subsidiary Buzz Lightyear Plc and had the following intercompany transactions: Cost of inventory €300 000 sold for €375 000 for the year ended 30 June 2012.One third of the inventory items were sold by Buzz Lightyear Plc to external parties before the financial year end 30 June 2012. Cost of inventory €100 000 sold for €75 000 for the year ended 30 June 2013.Half of the inventory items were sold by Buzz Lightyear Plc to external parties before the financial year end 30 June 2013. Ignoring taxes,which of the following statements is correct with respect to this transaction only for the year ended 30 June 2013

(Multiple Choice)

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Question 34

Apple Plc owns all the issued capital of Pear Plc.On 1 July 2014,Pear Plc purchased an item of plant from Apple Plc for £1 000 000.Apple Plc had owned the plant for 5 years.It originally cost £1 350 000 and the accumulated depreciation at 1 July 2004 is £562 500.The remaining useful life of the equipment on the date of sale to Pear Ltd is estimated to be 7 years.The pattern of benefits is expected to be obtained from the equipment evenly over its useful life.The tax rate is 30%.Round all calculations to the nearest dollar. What are the consolidation journal entries required for this inter-company transaction for the periods ended 30 June 2015 and 30 June 2016?

(Multiple Choice)

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Question 35

Explain the accounting treatment for impairment to the subsidiary investment when dividends have been paid out of pre-acquisition profits.

(Essay)

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Question 36

The fact that consolidation worksheets start 'afresh' each year means that the tax entry for eliminating unrealised profit in opening inventory requires a 'Dr' to deferred tax assets,rather than income tax expense.

(True/False)

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Question 37

Examples of intragroup transactions include:

(Multiple Choice)

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Question 38

IFRS 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation even where the parent entity holds only a fraction of the issued equity.

(True/False)

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Question 39

What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Morecombe Plc is the parent of Wise Plc? (Ignore the tax effect.) Morecombe purchases 500 units of inventory for £20 each.Morecombe sells this entire inventory to Wise at a mark up of 25%.Wise then sells half of the inventory to an external party.Half of the remaining amount (after the external sale)is sold back to Morecombe for £2500.

(Multiple Choice)

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Question 40

Showing 21 - 40 of 46

In the absence of an election to be a 'tax consolidated group',the taxation authorities typically assess income earned by individual legal entities in an economic group and does not take into consideration consolidation adjustments required for group accounts.

IFRS 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation.This requirement is consistent with the parent entity concept of consolidation.

If we simply aggregate the sales of the parent and subsidiary companies,without adjustment,when there have been intragroup sales,total income would be overstated.

Dividends may be identified as being paid out of pre-acquisition or post-acquisition profits by a subsidiary company.Where dividends are paid out of post-acquisition profits the investment in the subsidiary should be decreased by the amount of the dividend.

Explain why gains recognised on sale of assets between entities within a group are reversed on consolidation.

Explain the accounting treatment for impairment to the subsidiary investment when dividends have been paid out of pre-acquisition profits.

The fact that consolidation worksheets start 'afresh' each year means that the tax entry for eliminating unrealised profit in opening inventory requires a 'Dr' to deferred tax assets,rather than income tax expense.

Examples of intragroup transactions include:

IFRS 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation even where the parent entity holds only a fraction of the issued equity.

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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