Question 1

One important aim of releasing AAS 24 in 1991 and amendments made to The Corporations Law in the same year was to:

Accepted Answer

A)  require parent entities to consolidate companies that they controlled into one set of financial statements for the first time. 
B)  change the treatment of non-controlling interests to be reflected in the accounts as a liability. 
C)  prevent companies from keeping debt off the statement of financial position consolidated statement of financial position by interposing partnerships or trusts in the group structure. 
D)  require the consolidation of the cash-flow statement as well as the statement of financial position and statement of comprehensive income. 
A)  require parent entities to consolidate companies that they controlled into one set of financial statements for the first time. 
B)  change the treatment of non-controlling interests to be reflected in the accounts as a liability. 
C)  prevent companies from keeping debt off the statement of financial position consolidated statement of financial position by interposing partnerships or trusts in the group structure. 
D)  require the consolidation of the cash-flow statement as well as the statement of financial position and statement of comprehensive income.

Question 2

Arthur Ltd acquires all the issued capital of Martha Ltd for a cash payment of $3 000 000 on 30 June 2015.The statement of financial position of Martha Ltd at purchase date is:   Assuming the assets are at fair value,what is the goodwill or excess on consolidation?

Accepted Answer

A)  $500 000 goodwill 
B)  $1 580 000 excess 
C)  $510 000 goodwill 
D)  $495 000 excess 
A)  $500 000 goodwill 
B)  $1 580 000 excess 
C)  $510 000 goodwill 
D)  $495 000 excess

Question 3

Discuss how the subsidiary's post-acquisition earnings are accounted for on consolidation.

Accepted Answer

In the period following acquisition,the

Question 4

Control is defined in AASB 10 as the 'capacity to manage the policies of another entity'.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is not in accordance with AASB 3 Business Combinations?

Accepted Answer

A)  An entity shall account for each business combination by applying the acquisition method. 
B)  For each business combination, one of the combining entities shall be identified as the acquirer. 
C)  The acquirer is required to recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. 
D)  The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date agreed values. 
A)  An entity shall account for each business combination by applying the acquisition method. 
B)  For each business combination, one of the combining entities shall be identified as the acquirer. 
C)  The acquirer is required to recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. 
D)  The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date agreed values.

Question 6

'Control' over a subsidiary,once determined as being in existence,can only be lost with a change in the level of ownership.

Accepted Answer

A) True 
 B)False

Question 7

As prescribed in AASB 3 Business Combinations,when an acquirer makes a bargain purchase,the acquirer recognises the excess as goodwill on acquisition date.

Accepted Answer

A) True 
 B)False

Question 8

In the consolidated financial statements of the parent entity and its controlled entities only transactions with assets and liabilities relating to parties external to the economic entity will be reflected.

Accepted Answer

A) True 
 B)False

Question 9

AASB 10 notes that in preparing consolidated financial statements,an entity combines the financial statements of the parent and the subsidiaries line by line by adding together,in proportion to the degree of ownership,like items of assets,liabilities,income and expenses; but not equity balances.

Accepted Answer

A) True 
 B)False

Question 10

On 1 July 2012,Carol Ltd acquires all shares in Alice Ltd for $400 000.The fair value of net assets acquired is $320 000 comprising $200 000 in share capital and $120 000 in retained earnings.On the date of purchase,a contingent liability is not recorded in the books of the acquiree but assumed by the acquirer.The contingent liability is estimated at $20 000 and likely to eventuate after acquisition.What is the appropriate elimination entry for this investment that is in accordance with AASB 3 Business Combinations and AASB 10 Consolidated Financial Statements?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Investment in subsidiary } & 400 & \
\hline \mathrm { Dr } & \text { Gain on bargain purchase } & & 80 \
\hline \mathrm { Dr } & \text { Share capital } & & 200 \
\hline \mathrm { Cr } & \text { Retained earnings } & & 120 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Investment in subsidiary } & 400 & \
\hline \mathrm { Cr } & \text { Cash } & & 400 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 200 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 120 & \
\hline \mathrm { Dr } & \text { Goodwill } & 80 & \
\hline \mathrm { Cr } & \text { Investment in subsidiary } & & 400 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \text { Dr } & \text { Share capital } & 200 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 120 & \
\hline \mathrm { Dr } & \text { Contingent liability } & 20 & \
\hline \mathrm { Dr } & \text { Goodwill } & 60 & \
\hline \mathrm { Cr } & \text { Investment in subsidiary } & & 400 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Investment in subsidiary } & 400 & \
\hline \mathrm { Dr } & \text { Gain on bargain purchase } & & 80 \
\hline \mathrm { Dr } & \text { Share capital } & & 200 \
\hline \mathrm { Cr } & \text { Retained earnings } & & 120 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Investment in subsidiary } & 400 & \
\hline \mathrm { Cr } & \text { Cash } & & 400 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 200 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 120 & \
\hline \mathrm { Dr } & \text { Goodwill } & 80 & \
\hline \mathrm { Cr } & \text { Investment in subsidiary } & & 400 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \text { Dr } & \text { Share capital } & 200 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 120 & \
\hline \mathrm { Dr } & \text { Contingent liability } & 20 & \
\hline \mathrm { Dr } & \text { Goodwill } & 60 & \
\hline \mathrm { Cr } & \text { Investment in subsidiary } & & 400 \
\hline
\end{array}$$

Question 11

In a situation where the net assets acquired in the controlled entity are not recorded at fair value,approaches that may be taken to account for this include:

Accepted Answer

A)  Adjust the excess or goodwill so that the elimination entry balances. 
B)  Revalue the assets in the parent entity's books. 
C)  Revalue the assets during the consolidation process each period. 
D)  Adjust the depreciation on the assets to bring them to fair value in the consolidated accounts. 
A)  Adjust the excess or goodwill so that the elimination entry balances. 
B)  Revalue the assets in the parent entity's books. 
C)  Revalue the assets during the consolidation process each period. 
D)  Adjust the depreciation on the assets to bring them to fair value in the consolidated accounts.

Question 12

The first step in the consolidation process is substituting the assets and liabilities of the subsidiary for the investment account that currently exists in the parent company.

Accepted Answer

A) True 
 B)False

Question 13

Richer Ltd is owed a material amount by Poorer Partnership.Poorer is heavily in debt to Richer Ltd,but due to an unexpected economic downturn is unable to make repayments according to schedule.The board of Richer Ltd believes that Poorer has a good chance of trading out of its current economic difficulties as its management and product are sound and the current problems stem from external factors that are expected to pass within the next 12 to 18 months.Richer Ltd enters into an arrangement with Poorer to manage its finances until the economic situation reverses.At this stage it is not perceived as necessary for Richer Ltd to be otherwise involved in the running of Poorer.Given the situation described,what is Richer Ltd most likely to be required to do to account for Poorer under AASB 10?

Accepted Answer

A)  As the control achieved is only temporary, under AASB 10 Richer would not be required to consolidate Poorer. 
B)  Richer Ltd should consolidate Poorer under AASB 10 because it has control over it by the definition of 'control' in AASB. 
C)  Richer Ltd should not be required to consolidate Poorer as it does not have control as defined in AASB 10. 
D)  Richer Ltd does have temporary control of Poorer, but since Poorer is a partnership Richer is not required to include it in a consolidated set of financial statements. 
A)  As the control achieved is only temporary, under AASB 10 Richer would not be required to consolidate Poorer. 
B)  Richer Ltd should consolidate Poorer under AASB 10 because it has control over it by the definition of 'control' in AASB. 
C)  Richer Ltd should not be required to consolidate Poorer as it does not have control as defined in AASB 10. 
D)  Richer Ltd does have temporary control of Poorer, but since Poorer is a partnership Richer is not required to include it in a consolidated set of financial statements.

Question 14

AASB 10 requires the parent company to have control of another entity in order for that entity's consolidation into the group accounts to be required.

Accepted Answer

A) True 
 B)False

Question 15

Banderas Ltd acquires all the issued capital of Ryan Ltd for a cash payment of $2 900 000 on 30 June 2014.The statement of financial position of Ryan Ltd at purchase date is:   Assuming the assets are at fair value,what is the consolidation entry to eliminate the investment in Ryan Ltd?

Accepted Answer

A) 
$$\begin{array} { | c | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2500 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 995 & \
\hline \mathrm { Dr } & \text { Goodwill } & & 595 \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2500 & \
\hline \mathrm { Dr } & \text { Goodwill } & 400 & \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2500 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 995 & \
\hline \mathrm { Cr } & \text { Excess } & & 595 \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2072 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 828 & \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | c | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2500 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 995 & \
\hline \mathrm { Dr } & \text { Goodwill } & & 595 \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2500 & \
\hline \mathrm { Dr } & \text { Goodwill } & 400 & \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2500 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 995 & \
\hline \mathrm { Cr } & \text { Excess } & & 595 \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline & & ( \$ 000 ) & ( \$ 000 ) \
\hline \mathrm { Dr } & \text { Share capital } & 2072 & \
\hline \mathrm { Dr } & \text { Retained earnings } & 828 & \
\hline \mathrm { Cr } & \text { Investment in Ryan Ltd } & & 2900 \
\hline
\end{array}$$

Question 16

Which of the following statements is an accurate description of the difference between a legal entity and an economic entity?

Accepted Answer

A)  An economic entity is one that combines one or more legal entities with synergy such that they each make higher returns than they would individually. If an entity ceases to effectively produce increased returns in this way it becomes uneconomic. A legal entity is one that is recognised in law as having a separate existence from its owners. 
B)  A legal entity is one that uses appropriate corporate governance measures to ensure that it abides by legislative requirements and other legal regulations. An economic entity may span more than one legal entity, but is not a legal entity in itself. 
C)  An economic entity is one that is formed for the purpose of generating a profit and therefore a return to owners. A legal entity is one that is circumscribed by legal constitution or accounting standards as constituting a reporting entity. 
D)  A legal entity refers to an entity that has its own particular legal status such as a company, trust or partnership. The concept of an economic entity emphasises substance over legal form. It may operate as a coordinated entity and contain more than one legal entity. 
A)  An economic entity is one that combines one or more legal entities with synergy such that they each make higher returns than they would individually. If an entity ceases to effectively produce increased returns in this way it becomes uneconomic. A legal entity is one that is recognised in law as having a separate existence from its owners. 
B)  A legal entity is one that uses appropriate corporate governance measures to ensure that it abides by legislative requirements and other legal regulations. An economic entity may span more than one legal entity, but is not a legal entity in itself. 
C)  An economic entity is one that is formed for the purpose of generating a profit and therefore a return to owners. A legal entity is one that is circumscribed by legal constitution or accounting standards as constituting a reporting entity. 
D)  A legal entity refers to an entity that has its own particular legal status such as a company, trust or partnership. The concept of an economic entity emphasises substance over legal form. It may operate as a coordinated entity and contain more than one legal entity.

Question 17

In the situation in which a subsidiary is only controlled temporarily,AASB 10 requires:

Accepted Answer

A)  the investment be recorded at fair market value and any gain or loss on acquisition recognised immediately in the statement of comprehensive income. 
B)  the subsidiary to be treated as an associate and equity accounting applied. 
C)  the results of the subsidiary for the period of time that it was controlled to be included in the consolidated accounts. 
D)  the investment to be reported at cost and dividends be accrued when declared. 
A)  the investment be recorded at fair market value and any gain or loss on acquisition recognised immediately in the statement of comprehensive income. 
B)  the subsidiary to be treated as an associate and equity accounting applied. 
C)  the results of the subsidiary for the period of time that it was controlled to be included in the consolidated accounts. 
D)  the investment to be reported at cost and dividends be accrued when declared.

Question 18

The factors that are taken into consideration in determining whether or not an entity should be consolidated under AASB 10 include:

Accepted Answer

A)  the nature of the legal form of the entity and whether or not the 'parent' entity owns enough of the equity in the entity to effectively control the benefits that flow from the relationship with the other entity. 
B)  whether or not the potential 'parent' entity controls the other entity. 
C)  the number of members on the board under the control of the potential 'parent' entity, and whether or not the other entity has been partitioned by the potential 'parent' entity. 
D)  whether or not the potential 'parent' entity controls the other entity and whether or not it is in a significantly different business to the potential 'parent'. 
A)  the nature of the legal form of the entity and whether or not the 'parent' entity owns enough of the equity in the entity to effectively control the benefits that flow from the relationship with the other entity. 
B)  whether or not the potential 'parent' entity controls the other entity. 
C)  the number of members on the board under the control of the potential 'parent' entity, and whether or not the other entity has been partitioned by the potential 'parent' entity. 
D)  whether or not the potential 'parent' entity controls the other entity and whether or not it is in a significantly different business to the potential 'parent'.

Question 19

AASB 10 defines control as:

Accepted Answer

A)  governing the financial, operating and sustainability policies of an entity so as to benefit from its activities. 
B)  the capacity of an entity to dominate the decision making of another entity by virtue of a majority shareholding or controlling ownership interest in some form. 
C)  the capacity and willingness to direct the decision making of another entity with respect to its financial and operating policies to improve the performance and position of the controlling entity. 
D)  the power to govern the financial and operating policies of an entity so as to benefit from its activities. 
A)  governing the financial, operating and sustainability policies of an entity so as to benefit from its activities. 
B)  the capacity of an entity to dominate the decision making of another entity by virtue of a majority shareholding or controlling ownership interest in some form. 
C)  the capacity and willingness to direct the decision making of another entity with respect to its financial and operating policies to improve the performance and position of the controlling entity. 
D)  the power to govern the financial and operating policies of an entity so as to benefit from its activities.

Question 20

Discuss the treatment as required in AASB 10 Consolidated Financial Statements for potential voting rights when considering whether one entity controls another entity.

Accepted Answer

Potential voting rights are financial in

Exam 27: Accounting for Group Structures

One important aim of releasing AAS 24 in 1991 and amendments made to The Corporations Law in the same year was to:

Arthur Ltd acquires all the issued capital of Martha Ltd for a cash payment of $3 000 000 on 30 June 2015.The statement of financial position of Martha Ltd at purchase date is: Assuming the assets are at fair value,what is the goodwill or excess on consolidation?

Discuss how the subsidiary's post-acquisition earnings are accounted for on consolidation.

Control is defined in AASB 10 as the 'capacity to manage the policies of another entity'.

Which of the following statements is not in accordance with AASB 3 Business Combinations?

'Control' over a subsidiary,once determined as being in existence,can only be lost with a change in the level of ownership.

As prescribed in AASB 3 Business Combinations,when an acquirer makes a bargain purchase,the acquirer recognises the excess as goodwill on acquisition date.

In the consolidated financial statements of the parent entity and its controlled entities only transactions with assets and liabilities relating to parties external to the economic entity will be reflected.

AASB 10 notes that in preparing consolidated financial statements,an entity combines the financial statements of the parent and the subsidiaries line by line by adding together,in proportion to the degree of ownership,like items of assets,liabilities,income and expenses; but not equity balances.

In a situation where the net assets acquired in the controlled entity are not recorded at fair value,approaches that may be taken to account for this include:

The first step in the consolidation process is substituting the assets and liabilities of the subsidiary for the investment account that currently exists in the parent company.

AASB 10 requires the parent company to have control of another entity in order for that entity's consolidation into the group accounts to be required.

Banderas Ltd acquires all the issued capital of Ryan Ltd for a cash payment of $2 900 000 on 30 June 2014.The statement of financial position of Ryan Ltd at purchase date is: Assuming the assets are at fair value,what is the consolidation entry to eliminate the investment in Ryan Ltd?

Which of the following statements is an accurate description of the difference between a legal entity and an economic entity?

In the situation in which a subsidiary is only controlled temporarily,AASB 10 requires:

The factors that are taken into consideration in determining whether or not an entity should be consolidated under AASB 10 include:

AASB 10 defines control as:

Discuss the treatment as required in AASB 10 Consolidated Financial Statements for potential voting rights when considering whether one entity controls another entity.

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of 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

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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