Deck 2: Principles of Consolidation

Question 1

In a consolidation,it would be double counting to record the net assets of a subsidiary and the parent company's investment in subsidiary asset.

Answer 1

True

Question 2

The investment date and the acquisition date of a subsidiary will always be the same.

Answer 2

False

Question 3

The declaration date of a dividend determines whether it will be recorded as a liability in the financial statements.

Answer 3

True

Question 4

Goodwill is not an identifiable intangible asset because it is not separable.

Question 5

Post-acquisition changes in the composition of pre-acquisition equity can be ignored for the purposes of consolidation adjustments.

Question 6

The purpose of consolidated financial statements is to provide information to shareholders of the parent company.

Question 7

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

Question 8

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

A) group.
B) parent entity.
C) subsidiary.
D) non-controlling interest.

Question 9

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

Question 10

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

A) the accounting policy of the group.
B) the accounting policy of the subsidiary.
C) either the accounting policy of the parent or the subsidiary.
D) none of the above.

Question 11

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

A) revenue.
B) a reduction in the cost of the investment.
C) a reduction in the amount of goodwill on consolidation.
D) none of the above,

Question 12

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

A) the dividend is recommended before the balance date but not declared.
B) the dividend is declared before the balance date.
C) the dividend is recommended and declared after the balance date.
D) none of the above.

Question 13

Goodwill on acquisition is recorded when:

A) the cost of the acquisition of the subsidiary is less than the fair value of the subsidiary's equity.
B) the cost of the acquisition is more than the fair value of the subsidiary's equity.
C) the cost of the acquisition is equal to the fair value of the subsidiary's equity.
D) none of the above.

Question 14

All consolidation adjusting entries must be repeated in subsequent accounting periods.

Question 15

Consolidation worksheet adjusting entries are recorded:

A) in the general ledger of the parent entity.
B) in the general ledger of the subsidiary.
C) in the consolidation working papers.
D) none of the above.

Question 16

A company adopting the replaceable rules included in the Corporations Act announces a dividend to be paid after the balance date.The company:

A) must recognise a liability in its financial statements.
B) must not recognise a liability.
C) has the choice of whether to recognise a liability or not.
D) none of the above.

Question 17

It is important to distinguish between pre-acquisition and post-acquisition equity of a subsidiary to allow:

A) post-acquisition equity to be eliminated on consolidation.
B) goodwill or gain on bargain purchase to be calculated.
C) avoidance of double counting of pre-acquisition equity.
D) none of the above.

Question 18

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

Question 19

Totals and subtotals in a consolidation worksheet are derived by adding/subtracting down the group column.

Question 20

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

Question 21

A gain on bargain purchase will be recognised in the financial statements of the acquiring company in a business combination relating to the acquisition of a controlling interest in a company.

Question 22

A subsidiary that 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) $100 000.
B) $80 000.
C) $20 000.
D) $60 000.

Question 23

One purpose of the consolidation worksheet is to eliminate the effect of intragroup dividends.

Question 24

In August 20X6,Caesar Ltd acquired the issued ordinary shares of Alesia Ltd in a one-for-one share exchange.Immediately prior to the acquisition,the shares of Caesar Ltd and Alesia Ltd were being traded on the ASX for $12 and $10 per share respectively.Immediately following the offer to purchase the shares,the shares in Alesia Ltd were being traded at $13 per share.From this information,the cost of acquisition would be recorded at:

A) $12 per share since this is the market assessment of the fair value of the shares issued by Caesar Ltd.
B) $10 per share since this is the fair value of the shares of Alesia Ltd and thus a reliable measure of the fair value of the shares issued by Caesar Ltd.
C) $13 per share since the shareholders of Alesia Ltd have a choice between accepting the offer of Caesar Ltd or selling their shares in the market, and $13 per share is the most objective measure of the fair value of the shares in Caesar Ltd.
D) none of the above.

Question 25

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

Question 26

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) AASB 116 Property, Plant and Equipment.
B) AASB 3 Business Combinations.
C) AASB 138 Intangible Assets.
D) AASB 136 Impairment of Assets.

Question 27

For the year ended 30 June 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 30 June 20X6
$\begin{array}{lrr}&\text { Arkle }&\text {RedRun }\\&\text { Ltd }&\text { Ltd }\\\text { Assets }\\\text { Sundry assets } & \$ 10000 & \$ 2000 \\\text { Investment in Subsidiary } & 2000 &\\\text { Total assets } & \$ 12000&\$2000 \\\text { Less liabilities } & 2000&500\\\text { Net assets }&\$10,000&\$1500\\\text { Shareholders' equity } & \\\text { Issued capital } & \$ 2000&\$1000 \\\text { Retained earnings } & 8000&500\\\text { Total shareholders' equity }&\$10,000&\$1500\end{array}$ Income Statements for the Year ended 30 June 20X6
$\begin{array}{lrr}&\text { Arkle }&\text {RedRun }\\&\text { Ltd }&\text { Ltd }\\\text { Sales revenue }&\$ 20000 & \$ 2000 \\\text {Less cost of goods sold }&12000 & 1200\\\text { Gross profit }&\$8000&\$800\\\text { Less sundry expenses }&4000&100\\\text { Profit from continuing activities before tax }&\$4000&\$800\\\text { Less income tax expense }&1500&350\\\text { Profit for the year }&\$2500&\$350\end{array}$ Statements of Movements in Retained Earnings Year ended June 30 20X6
$\begin{array}{lrr}&\text { Arkle }&\text {RedRun }\\&\text { Ltd }&\text { Ltd }\\\text { Retained earnings } 1 \text { July 20X5 } & \$ 6000 & \$ 400 \\\text { Add profitfor the year } & 2500 & 350 \\\text { Less dividend paid } & 500 & 250\\\text { Retained earnings } 30 \text { June } 20X6&\$8000&\$500\end{array}$ On 1 July 20X5,Arkle Ltd acquired all the issued capital for $2 250 000 cash.Immediately subsequent to acquisition,Red Rum Ltd paid a dividend of $250 000 out of retained earnings at 1 July 20X5.The goodwill paid on the investment was:

A) $850 000.
B) $750 000.
C) $600,000.
D) none of the above.

Question 28

In preparing the consolidated financial statements in the year ended 30 June 20X6,the consolidation adjustment to eliminate the investment in the subsidiary would be:

A) $\begin{array}{ll}\text { Issued Capital }&\$200,000\\\text { Retained Earnings } & 340,000 \\\text { Goodwill } &400,000 \\\quad \text { Investment in Subsidiary } &\$940,000\end{array}$
B) $\begin{array}{ll}\text { Issued Capital } & \$ 200,000 \\\text { Retained Earnings } & 400,000 \\\text { Dividend Payable } &\$60,000\\\text { Goodwill }&400,000\\\text { Investment in Subsidiary }&\$940,000\end{array}$
C) $\begin{array}{ll}\text { Issued Capital }&\$200,000\\\text { Retained Earnings } & 400,000 \\\text { Goodwill } &340,000 \\\quad \text { Investment in Subsidiary } &\$940,000\end{array}$
D)none of the above

Question 29

Explain why dividends paid by subsidiaries out of pre-acquisition profits will result in impairment of the parent company's investment in subsidiary asset.

Question 30

During August 20X5,Atticus Ltd acquired the issued capital of Finch Pty Ltd in exchange for 1 000 000 shares in Atticus Ltd with a fair value of $10 per share.Share issue costs amounted to $400 000 and an amount of $400 000 was paid to consultants.Atticus Ltd also took over the loans payable to the shareholders of Finch Pty Ltd by that company of $2 000 000.The cost of the investment is:

A) $12 400 000.
B) $8 400 000.
C) $12 800,000.
D) none of the above.

Question 31

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

A) $10 080 000.
B) $10 100 000.
C) $10 350 000.
D) none of the above.

Question 32

During June 20X5,Cassius Ltd acquired all the issued 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 the nearest $1 000):

A) $21 000 000.
B) $22 350 000.
C) $22 050 000.
D) $21 300 000.

Question 33

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

Question 34

There is no limit to the amount of impairment loss write-down of the assets of a cash-generating unit (CGU).

Question 35

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.

Question 36

Changes in fair value of contingent consideration in a business combination will affect the calculation of any goodwill or gain on bargain purchase.

Question 37

During August 20X5,Tiberius Ltd acquired the issued capital of Capri Ltd in exchange for 1 000 000 shares in Tiberius Ltd with a fair value of $10 per share.Share issue costs amounted to $400 000.Tiberius Ltd also took over the loan payable by Capri Ltd to Ethereal Finance Ltd of $2 000 000.The cost of the investment is:

A) $10 000 000.
B) $10 300 000.
C) $12 000 000.
D) none of the above.

Question 38

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

Question 39

On 1 July 20X5,Helios Ltd acquired all the issued capital of Havers Pty Ltd (100 000 shares)for $10 per share.During the year ended 30 June 20X6,Helios Ltd received a dividend from Havers Ltd of $60 000; a dividend which had been declared by the directors of Havers Ltd in the year ended 30 June 20X5 and was not subject to ratification by the shareholders of Havers Ltd.During the year ended 30 June 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 30 June 20X6,the directors estimated that the fair value of the shares in Havers Ltd was only $9 per share at that date,but the estimated fall in value was considered to be only temporary and the carrying amount of the investment had not been impaired. At the date of acquisition,1 July 20X5,the shareholders' equity of Havers Ltd was (amounts in thousands):
$\begin{array}{ll}\text { Shareholders' equity }&\\\text { Issued capital}&\$200\\\text {Retained earnings }&400\\&---\\\text {Total shareholders' equity}&\$600\end{array}$
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:

A)

$\begin{array}{ll}\text { Issued Capital } & \$ 200,000 \\\text { Retained Earnings } & 400,000 \\\text { Goodwill } & 400,000\\\text { Investment in Subsidiary }&\$1,000,000\end{array}$
B)
$\begin{array}{ll}\text { Issued Capital } & \$ 200,000 \\\text { Retained Earnings } & 400,000 \\\text { Dividend Payable } & 60,000 \\\text { Goodwill } & 340,000\\\text { Investment in Subsidiary }&\$1,000,000\end{array}$
C)
$\begin{array}{ll}\text { Issued Capital }&\$200,000\\\text { Retained Earnings } & 340,000 \\\text { Dividend Payable } & 60,000 \\\text { Goodwill } & 340,000 \\\quad \text { Investment in Subsidiary } &\$940,000\end{array}$
D) None of the above

Question 40

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

A) revenue.
B) a reduction in the investment in subsidiary asset.
C) not recognised.
D) none of the above.

Question 41

When testing goodwill for impairment,the original goodwill recognised at the acquisition date is the starting point.

Question 42

Which item is eliminated when preparing a consolidated worksheet?

A) Goodwill
B) Issued capital
C) Equipment acquisitions
D) Intragroup dividends

Question 43

Which items are listed first on a consolidated worksheet?

A) Statement of financial position items
B) Profit or loss items
C) Intra-entity transactions
D) Retained earnings items

Question 44

On 1 July 20X5,Helios Ltd acquired all of the issued 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 30 June 20X5.During the year ended 30 June 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,1 July 20X5,the shareholders' equity of Havers Ltd was (amounts in thousands): $\begin{array}{ll}\text {Shareholders' equity }\\\text { Issued capital}&\$200\\\text { Retained earnings}&400\\&---\\\text { Total shareholders' equity }&\$600\end{array}$
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:

A) $\begin{array}{ll}\text { Issued Capital } & \$ 200,000 \\\text { Retained Earnings } & 400,000 \\\text { Goodwill } & 400,000\\\text { Investment in Subsidiary }&\$1,000,000\end{array}$
B) $\begin{array}{ll}\text { Issued Capital } & \$ 200,000 \\\text { Retained Earnings } & 400,000 \\\text { Dividend Payable } & 60,000 \\\text { Goodwill } & 340,000\\\text { Investment in Subsidiary }&\$1,000,000\end{array}$
C) $\begin{array}{ll}\text { Issued Capital } & \$ 200,000 \\\text { Retained Earnings } & 340,000 \\\text { Dividend Payable } & 60,000 \\\text { Goodwill } & 340,000 \\\quad \text { Investment in Subsidiary } &\$940,000\end{array}$
D)none of the above

Question 45

Where can the investment in a subsidiary be found in a group's consolidated financial statements?

A) Statement of cash flows
B) Statement of financial position
C) Consolidation worksheet
D) Income statement

Question 46

On the acquisition date,the fair value of Slate's identifiable net assets was $750 000,which was represented by issued capital of $550 000 and retained earnings of $200 000.If Pristine Company paid $825 000 to acquire all of the issued shares of Slate,what amount of goodwill will be recognised by the group?

A) $200 000
B) $0
C) $75 000
D) $275 000

Question 47

The investment elimination entry to eliminate the investment in subsidiary asset is a standing consolidation worksheet adjustment and will not alter from year to year.

Question 48

When a dividend declared by a subsidiary results in an adjustment for impairment of the parent company's investment in subsidiary asset,the following consolidation worksheet adjustment is required:

A) Dr. Impairment loss Investment in Subsidiary Cr. Accumulated Impairment Loss
B) Dr. Accumulated Impairment Loss Cr. Impairment Loss Investment in Subsidiary
C) Dr. Impairment Loss Investment in Subsidiary Cr. Investment in Subsidiary
D) none of the above.