Deck 4: Consolidation of Non-Wholly Owned Subsidiaries

Question 1

Which consolidation theory should be used in preparing consolidated financial statements in accordance with IFRS?

A) Proprietary Theory.
B) Parent Company Theory.
C) Proportionate Consolidation.
D) Either Entity Theory or Parent Company Extension Theory.

Answer 1

D

Question 2

Any negative goodwill arising on the date of acquisition:

A) is recognized as a gain on the date of acquisition.
B) is prorated among the parent company's identifiable net assets.
C) should be amortized over a predetermined period.
D) is recognized as a loss on the date of acquisition.

Answer 2

A

Question 3

The calculation of Goodwill and Non-Controlling Interest under the Entity Theory is derived :

A) by using an imputed acquisition cost, which would be the presumed cost of acquiring 100% of the outstanding voting shares of the subsidiary.
B) by using the actual acquisition cost.
C) by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at fair market value.
D) by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at book value.

Answer 3

A

Question 4

On that date, which of the following statements pertaining to Non-Controlling Interest is TRUE?

A) HRN's Non-Controlling Interest account will include 20% of the fair value of NHR's net assets.
B) HRN's Non-Controlling Interest account will include 20% of the book value of NHR's net assets.
C) HRN's Non-Controlling Interest account will include 20% of the acquisition differential on the Date of Acquisition.
D) HRN's Non-Controlling Interest account will include 20% of any unallocated portion of the acquisition differential on the Date of Acquisition.

Question 5

A negative acquisition differential:

A) is always equal to negative goodwill.
B) occurs when the fair value of the subsidiary's net assets are less than their carrying amounts.
C) implies that the parent company may have overpaid for its acquisition.
D) cannot occur under the acquisition method.

Question 6

On the date of formation of a 100% owned subsidiary by the parent, which of the following statements pertaining to Consolidated Financial Statements is TRUE?

A) It is possible to prepare Consolidated Financial Statements that include all the assets and liabilities of the subsidiary.
B) Consolidated Financial Statements are difficult to prepare because the assets and liabilities of the subsidiary have yet to be determined.
C) Consolidation requires the elimination of the parent's investment account against the subsidiary's share capital.
D) None of the above.

Question 7

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

A) revalued to fair market value.
B) replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
C) replaced with 100% of the assets and liabilities of the subsidiary at book value.
D) replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at fair market value.

Question 8

One weakness associated with the Entity Theory is that:

A) it is inconsistent with the Historical Cost Principle.
B) Non-Controlling Interest is computed using the fair market values of the subsidiary's net assets.
C) Non-Controlling interest is computed using the book values of the subsidiary's net assets.
D) the presumed acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares, or voting control is achieved incrementally.

Question 9

Contingent consideration will be classified as a liability when:

A) it will be paid in the form of additional equity.
B) it will be paid in the form of cash or another asset.
C) the form of payment will be determined at a future date.
D) the acquirer decides the appropriate time to make a payment.

Question 10

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2012 and decides to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 80% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2012)?

A) $104,000
B) $120,000
C) $130,000
D) Nil

Question 11

The purchase price of an entity includes:

A) the book value of the subsidiary's shareholders' equity and the acquisition differential.
B) the book value of the subsidiary's shareholders' equity and goodwill.
C) the fair market value of the subsidiary's shareholders' equity and the purchase price discrepancy.
D) the fair market value of the subsidiary's net assets.

Question 12

Under the Proprietary theory, Non-Controlling Interest is:

A) nonexistent. Goodwill is established based on the Parent's pro-rata share of any acquisition differential.
B) nonexistent. Goodwill is established based on the Parent's acquisition cost.
C) based on the fair market values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost.
D) based on the book values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost.

Question 13

Under the Parent Company Theory, which of the following statements pertaining to Consolidated Financial Statements is TRUE?

A) The Consolidated Balance Sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary.
B) The Consolidated Balance Sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials.
C) The Consolidated Balance Sheet is prepared by adding the fair market values of both the Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D) The Consolidated Balance Sheet is prepared by adding together the fair market values of both the parent and its subsidiary.

Question 14

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2012, what amount would appear in the Non- Controlling Interest Account on the Consolidated Balance Sheet on the date of acquisition if the Proprietary Method were used?

A) Nil
B) $100,000
C) $120,000
D) $200,000

Question 15

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

A) the sum of the parent and subsidiary's shareholders' equities.
B) the sum of the parent's shareholders' equity plus its pro rata share of the subsidiary's shareholders' equity on the date of acquisition.
C) the parent's shareholders' equity.
D) the subsidiary's shareholders' equity.

Question 16

A company owning a majority (but less than 100%) of another company's voting shares on the date of acquisition should account for its subsidiary (in its consolidated balance sheet):

A) by including only its share of the fair market values of the subsidiary's net assets.
B) by including only its share of the book values of the subsidiary's net assets.
C) by including 100% of the fair market values of the subsidiary's net assets.
D) by including 100% of the fair market values of the subsidiary's net assets and accounting for any unowned portion of the subsidiary's voting shares using the Non-Controlling Interest account.

Question 17

Contingent consideration should be valued at:

A) the fair value of the consideration on the date of acquisition.
B) the book value of the consideration at the date of acquisition.
C) the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of acquisition.
D) the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition.

Question 18

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2012 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, 2012)?

A) $60,000
B) $120,000
C) $180,000
D) Nil

Question 19

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August 1, 2012) for $180,000, what would be the amount of the Non-Controlling Interest on the date of acquisition if the Entity Method were used?

A) $26,000
B) $38,000
C) $45,000
D) $104,000

Question 20

When the parent forms a new subsidiary:

A) there should be no acquisition differential.
B) gain or loss will usually arise.
C) push down accounting rules must be followed.
D) it should not be included in the company's consolidated financial statements as this would effectively be double-counting.

Question 21

Non-Controlling Interest is presented under the Liabilities section of the Consolidated Balance Sheet using the:

A) the Entity Theory.
B) the Proprietary Theory.
C) the Parent Company Theory.
D) both the Parent Company Theory and the Proprietary Theory.

Question 22

Non-Controlling Interest is presented in the Shareholders' Equity section of the Balance Sheet under:

A) the Entity Theory.
B) the Proprietary Theory.
C) the Parent Company Theory.
D) both the Parent Company Theory and the Proprietary Theory.

Question 23

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming Parent purchased 80% of Sub Inc. for $180,000; the Assets section of Parent's Consolidated Balance Sheet on the date of acquisition (August 1, 2012) would total what amount under the Entity Method?

A) $552,000
B) $639,200
C) $651,000
D) $659,000

Question 24

A business combination involves a contingent consideration. It is considered 70% probable that a payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, what liability should be recorded for the contingent consideration on the acquisition date?

A) $285,704
B) $350,000
C) $408,149
D) $500,000

Question 25

Any goodwill on the subsidiary company's books on the date of acquisition:

A) must be revalued.
B) must be eliminated in preparing consolidated financial statements.
C) must be recorded as a loss on acquisition.
D) must be subject to an impairment test.

Question 26

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. The Shareholders' Equity section of Parent's Consolidated Balance Sheet on the date of acquisition would total what amount under the Entity Method?

A) $140,000
B) $185,000
C) $244,000
D) $270,000

Question 27

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming once again that the Proprietary Theory was applied, what would be the amount of Goodwill appearing on the Consolidated Balance Sheet on the Date of acquisition, assuming once again that Parent purchased 80% of Sub Inc. for $180,000 on August 1, 2012?

A) $72,000
B) $88,000
C) Nil
D) Cannot be determined from the information given.

Question 28

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?

A) As an adjustment to the consideration paid for the subsidiary.
B) As an adjustment to an estimate included in the determination of net income.
C) As a direct adjustment to consolidated retained earnings.
D) As an adjustment to consolidated contributed surplus.

Question 29

Which accounts on the consolidated balance sheet will be different when the entity method is used from when the parent company extension theory is used?

A) The investment in subsidiary balance and the consolidated retained earnings balance.
B) The goodwill balance and the consolidated retained earnings balance.
C) The goodwill balance and the non-controlling interest balance.
D) The investment in subsidiary balance and the non-controlling interest balance.

Question 30

The focus of the Consolidated Financial Statements on the shareholders of the parent company is characteristic of:

A) the Entity Theory.
B) the Proprietary Theory.
C) the Parent Company Theory.
D) both the Parent Company Theory and the Proprietary Theory.

Question 31

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?

A) As an adjustment to the consideration paid for the subsidiary.
B) As an adjustment to an estimate included in the determination of net income.
C) As a memorandum entry indicating that additional shares had been issued.
D) As an adjustment to consolidated contributed surplus.

Question 32

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

A) IFRS and US GAAP both require the use of the entity theory.
B) IFRS and US GAAP both require the use of the parent company extension theory.
C) IFRS permits either the entity theory or the parent company extension theory; US GAAP requires the entity theory.
D) IFRS permits either the entity theory or the parent company extension theory; US GAAP requires the parent company extension theory.

Question 33

If the non-controlling interest at acquisition is based on the fair value of the subsidiary's identifiable net assets, which consolidation theory is being applied?

A) The proprietary theory.
B) The parent company theory.
C) The entity theory.
D) The parent company extension theory.

Question 34

When the Non-Controlling Interest's share of the subsidiary's goodwill cannot be reliably determined, the method used to prepare consolidated financial statements is:

A) the Entity Theory.
B) the Proprietary Theory.
C) the Parent Company Theory.
D) the Parent Company Extension Theory.

Question 35

IFRS permits several methods to be used to determine the fair value of the non-controlling interest in a subsidiary at the acquisition date. Which of the following is NOT an appropriate method to determine the fair value of the non-controlling interest (NCI)?

A) The NCI may be valued at the market value of the subsidiary's shares.
B) The NCI may be valued by determining the fair value of the business by means of an independent business valuation and then deducting the fair value of the controlling interest.
C) The NCI may be valued proportionately to the price paid by the parent for its controlling interest.
D) The NCI may be valued at the fair value of the subsidiary's identifiable net assets.

Question 36

When the acquisition differential is calculated and allocated, what will the consequence be of a "bargain purchase"?

A) The acquisition differential will always be negative.
B) The goodwill balance will always be negative.
C) The fair value of the assets will always have been overstated.
D) Both the acquisition differential and goodwill balances will always be negative.

Question 37

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. What would be the amount of Non-Controlling Interest appearing on the Consolidated Balance Sheet on the date of acquisition (August 1, 2012), under the Parent Company Method, assuming once again that Parent purchased 80% of Sub Inc. for $180,000?

A) $26,000
B) $72,000
C) $86,000
D) The answer cannot be determined from the information given.

Question 38

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming the Entity Theory was applied, what would be the amount of Goodwill appearing on the Consolidated Balance Sheet on the Date of acquisition, assuming once again that Parent purchased 80% of Sub Inc. for $180,000?

A) $88,000
B) $130,000
C) $137,000
D) $138,000

Question 39

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. If Parent Company purchased 80% of Sub Inc. for $180,000, the Liabilities section of Parent's Consolidated Balance Sheet on the date of acquisition (August 1, 2012) would total what amount under GAAP after January 1, 2011?

A) $470,000
B) $474,000
C) $500,000
D) $519,000

Question 40

When a contingent consideration arising from a business combination is classified as a liability, how is any change in its fair value as a result of new information about the facts and circumstances that existed at the acquisition date accounted for if identified and measured within one year subsequent to the acquisition date?

A) As an adjustment to the consideration paid for the subsidiary.
B) As an adjustment to an estimate included in the determination of net income.
C) As a direct adjustment to consolidated retained earnings.
D) As an adjustment to consolidated contributed surplus.

Question 41

What value should be recorded as the fair value of a contingent consideration arising from a business acquisition when it is classified as a liability?

A) The undiscounted maximum amount that could be paid.
B) The discounted present value of the maximum amount that could be paid.
C) The undiscounted probabilistic estimate of the amount to be paid.
D) The discounted probabilistic estimate of the amount to be paid.

Question 42

Keen and Lax Inc had the following balance sheets on October 31, 2012: Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare: 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.

Question 43

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?

Question 44

A business combination involves a contingent consideration. As a result, two years after the acquisition date, the acquirer was required to issue an additional 40,000 common shares at a time when the fair value of the common shares was $4 per share. What effect would this transaction have on the balance in the common shares account in the consolidated financial statements on the date of acquisition?

A) It would increase by $160,000.
B) It would not change.
C) It would decrease by $160,000.
D) It is not possible to determine the effect from the information provided.

Question 45

Discuss the disclosure requirements for long term investments including accounting policies and NCI.

Question 46

After the introduction of the entity method in Canada, many companies opted to value the noncontrolling interest in subsidiaries based on the fair value of the subsidiary's identifiable net assets at the acquisition date instead of valuing the noncontrolling 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?

Question 47

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

A) The proprietary theory.
B) The parent company theory.
C) The entity theory.
D) The parent company extension theory.

Question 48

On August 31, 2012, 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 Proprietary Theory.

Question 49

A business combination involves a contingent consideration. It is considered 70% probable that a payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, how much interest expense should be recorded on the liability for the first year after acquisition?

A) $19,999
B) $24,500
C) $28,570
D) $35,000

Question 50

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare: 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.

Question 51

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare the Consolidated Balance Sheet on the Date of Acquisition.

Question 52

There are a number of theories of how financial statements should be prepared for non-wholly owned subsidiaries. Briefly discuss each theory and provide your reasoning to support the theory that is being adopted under IFRSs.

Question 53

Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the Consolidated Balance Sheet on the Date of Acquisition.

Question 54

If a business combination occurs and the consideration paid exceeds the fair value of the identifiable net assets of the subsidiary on the acquisition date and the parent acquires less than 100% of the outstanding common shares of the subsidiary, which consolidation method will result in the highest value for non-controlling interest on the acquisition date?

A) The proprietary theory.
B) The parent company theory.
C) The entity theory.
D) The parent company extension theory.

Question 55

Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts for its investment using the cost method, prepare: 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.

Question 56

Why might the fair value of the noncontrolling interest in a subsidiary on the date that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?