Exam 3: Consolidation: Wholly Owned Subsidiaries

Helly Company purchased 100% of the outstanding common shares of Cobra Company on December 31, 2012 for $170,000. At that date, Cobra had $100,000 of outstanding common stock and retained earnings of $30,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000. The capital assets had a remaining useful life of eight years as of the acquisition date and have no salvage value. Inventory turns over four times a year. Both companies pay tax at a rate of 30%. What adjustment should be made to the consolidated financial statements for the year ended December 31, 2013 for the difference in inventory valuation?

The first step in the consolidation process, regardless of which year is being reported, is to undertake the __________.

Inventory was acquired as part of a business combination at the end of 2012. The inventory was sold in 2013. How should the fair value adjustment for the inventory at acquisition be treated for consolidation at the end of 2013?

The acquisition analysis may include the recognition of assets and liabilities not recognized in the records of the subsidiary.

The _______________ are required to eliminate the carrying amount of the parent's investment in the subsidiary and the parent's portion of pre-acquisition equity.

Which of the following statements about the consolidation process is FALSE?

On January 1, 2013 Paisley Ltd. Acquired 100% of the issued shares of Plaid Incorporated. The fair value of the consideration paid was measured at $460,000. At this date, records of Plaid Incorporated included the following information: Share Capital \ 200,000 Retained Eamings \ 80,000 Goodwill \ 20,000 As at January 1, 2013, all the identifiable assets and liabilities of Plaid were recorded in the subsidiary's books at fair value except for the following assets: Carrying Amount Fair Value Inventory \ 60,000 \ 90,000 Land \ 100,000 \ 125,000 The inventory was all sold by December 31, 2013. The land is still remaining with Plaid as at December 31, 2013. Goodwill has not been deemed to be impaired. The tax rate is 40%. The summarized financial statements of both entities as at December 31, 2013 are shown below. Required:. Prepare the consolidated financial statements of Paisley Ltd. As at December 31, 2013. Paisley Ltd. Plaid Incorporated Revenues \ 950,000 \ 725,000 Expenses \ 430,000 \ 375,000 Profit before tax \ 520,000 \ 350,000 Income tax expense \ 200,000 \ 150,000 Profit for the period \ 320,000 \ 200,000 Retained eamings 1/1/2013 \ 150,000 \ 80,000 Retained eamings 12/31/2013 \ 470,000 \ 280,000 Share capital \ 300,000 \ 200,000 Deferred tax liabilities \ 15,000 \ 10,000 Other liabilities \ 200,000 \ 175,000 Total liabilities \ 215,000 \ 185,000 Total equity and liabilities \ 985,000 \ 665,000 Cash \ 175,000 \ 90,000 Inventory \ 225,000 \ 110,000 Financial assets \ 40,000 \ 65,000 Land - \ 100,000 Investment in Plaid Incorporated \ 460,000 - Intangible assets \ 85,000 \ 280,000 Goodwill - \ 20,000 Total assets \ 985,000 \ 665,000

The consolidation process will involve replacing the investment account that is recorded in the books of the acquirer with the ____________ acquired from the acquiree.

What adjustments are typically needed when consolidated financial statements are prepared at the acquisition date?

Which of the following statements regarding the acquisition analysis is FALSE?

When the parent has previously held equity interest in the subsidiary, in accordance with IFRS 3.42, the parent revalues the previously held investment to fair value, recognizing the increment in ___________________.

Which of the following is false regarding making adjustments in relation to the content of the subsidiary's financial statements?

Azra Company purchased 100% of the outstanding common shares of Hassan Company on December 31, 2011 for $170,000. At that date, Hassan had $100,000 of outstanding common stock and retained earnings of $30,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000. The capital assets had a remaining useful life of eight years as of the acquisition date and have no salvage value. Inventory turns over four times a year. Both companies pay tax at the rate of 40%. What adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 for the fair value increment related to the capital assets?

The goodwill impairment test does not involve elimination of all goodwill as a consequence.

A parent can acquire the shares in a subsidiary on a "cum div." or an "ex div." basis.

A parent can acquire the shares in a subsidiary on a "cum div." or an "ex div." basis. If the shares are acquired on a cum div. basis:

On January 1, 2012 Finn Ltd. Acquired 75% of the shares of Ewe Corporation for $10 per share in cash. The equity of Ewe as at that date was: Share capital-20,000 shares \ 20,000 Retained earnings \ 50,000 Finn had previously acquired 25% of the shares of Ewe for $10,000. The fair value of this investment as at January 1, 2012 was $50,000. At the acquisition date all of the identifiable assets and liabilities of Ewe were recorded at fair value except for a plant and inventory, whose carrying amounts were $15,000 and $5,000 respectively less than their fair value. All of the inventory was subsequently sold during 2012 and the plant had a remaining useful life at the acquisition date of 5 years. The tax rate is 40%. Ewe had been actively researching a new process, which is part of the reason why Finn acquired the remaining outstanding shares of Ewe. Finn estimated the value of this intangible to be $10,000 and that it would have an indefinite useful life. Required: Prepare the acquisition analysis and the consolidation adjustments of Finn and Ewe as at December 31, 2013.

Kayla Ltd. owns 100% of Milos Ltd. Kayla records its investment at cost. Kayla received $300,000 in dividends from Milos. What adjustment should Kayla make on its consolidated financial statements with respect to the dividends?

The starting point for the preparation of the consolidated financial statements is the parent company's individual statements at year end.

Which of the following statements is true regarding the consolidation process under ASPE?