Exam 2: Principles of Consolidation

Any goodwill arising on a business combination is required to be tested at least annually for impairment.This requirement arises from the operation of:

A parent and its subsidiary adopt different bases for measuring property plant and equipment assets.On consolidation the financial statements must reflect:

A company with a constitution that provides for the declaration of dividends will recognise a liability for dividends payable if:

Where a subsidiary's financial reporting period ends on a different date to that of the parent company the subsidiary must prepare additional financial statements

Assume the same data as in Question 14.Any goodwill element in the cost of acquisition had not been impaired.The consolidated shareholders' equity of Arkle Ltd and its subsidiary at June 30 20X6 is:

Dividends payable by a subsidiary on an ex-dividend basis will be ignored for the purposes of consolidation

During June 20X5,Cassius Ltd acquired all of the share capital of Cicero Ltd in exchange for 1,000,000 shares with a market value of $10 per share,$5,000,000 cash payable on June 30 20X5 plus a further $6,050,000 payable on June 30 20X7.Assume an interest rate of 10%.A consultation fee of $1,000,000 was paid to an independent firm for their assistance in the acquisition.A special department was set up in Cassius Ltd to oversee the acquisition and the estimated costs of this department that were reliably attributable to the acquisition amounted to $300,000.The cost of acquisition was (rounded to nearest $'000):

Explain why the existence of goodwill enables an entity to generate higher future cash flows or profits than would otherwise occur.

Discuss the changes in the accounting rules for recognition of liabilities for dividends payable after 1 January 2005.

The general purpose financial statements (GPFS)of a parent entity are prepared from the viewpoint of:

On July 1 20X5,Helios Ltd acquired all of the share capital of Havers Pty Ltd (100,000 shares)for $10 per share.Immediately subsequent to acquisition,the directors of Havers Ltd declared and paid a dividend of $60,000 from the retained earnings at June 30 20X5.During the year ended June 30 20X6,Helios Ltd received an interim dividend of $40,000 from Havers Ltd and the directors of Havers Ltd declared a final dividend of $60,000.At the date of acquisition,July 1 20X5,the shareholders' equity of Havers Ltd was (amounts in thousands): At the date of acquisition,the carrying amounts of the net assets of Havers Ltd approximated fair value.If a consolidated balance sheet were to be prepared for Helios Ltd and its subsidiaries at the date of acquisition,the consolidation adjustment to eliminate the investment in the subsidiary would be:

Outline the regulatory basis for the requirement to measure goodwill at cost less accumulated impairment losses.

A subsidiary which is identified as a single cash generating unit (CGU)has property plant and equipment assets with a carrying amount of $100,000 and a recoverable amount of $80,000.On acquisition of the subsidiary goodwill of $60,000 was recognised.The amount to be identified as goodwill impairment loss is:

A dividend paid by a subsidiary out of pre-acquisition profits will always result in the parent company's investment in subsidiary asset being impaired.

Explain the consequences of distinguishing between pre and post acquisition equity of a subsidiary in the consolidation process.

In a business combination share issue costs are not included as part of the cost of acquisition.

Where a subsidiary has declared but not paid a dividend on a cum div basis on acquisition date,the amount of the dividend must be recorded by the parent company as:

Under current accounting standards a dividend declared by a subsidiary from pre-acquisition equity will be recognised by the parent company as:

Consolidation worksheet adjusting journal entries are recorded:

For the year ended June 30 20X6,the following financial statements were prepared for the two companies Arkle Ltd and Red Rum Ltd (amounts in thousands).At that date,the net assets of Red Rum Ltd approximated their fair value. Balance Sheets as at June 30 20X6 Income Statements for the Year ended June 30 20X6 Statements of Movements in Retained Earnings Year ended June 30 20X6 On July 1 20X5,Arkle Ltd acquired all of the share capital for $2,250,000 cash.Immediately subsequent to acquisition,Red Rum Ltd paid a dividend of $250,000 out of retained earnings at July 1 20X5.The goodwill paid on the investment was: