Deck 21: Direct Non-Controlling Interest

Question 1

Paul Ltd owns 60% of John Ltd and both companies have a financial year end of 30 April.On 30 April 20X0, John Ltd sold a non-current asset to Paul Ltd for $1 million profit.The remaining useful life at sale date was 10 years.Both entities assume the same total useful life, zero residual amount and use straight-line depreciation.Paul Ltd is currently preparing the financial statements for the year ended 30 April 20X2.Profit for that year (unadjusted for consolidation matters) is Paul $5 million, John $3 million.What is the NCI share of John Ltd's profit for the year?

A)$1 200 000
B)$400 000
C)$600 000
D)$1 000 000

Answer 1

A

Question 2

On 1 January 20X0, Zed Ltd acquired 90 % of the share capital of Ned Ltd for $900 000 cash.At that date, the equity section of Ned Ltd's balance sheet was as follows:
$$\begin{array} { | c | r | } \hline & { \$ } \\\hline \text { Share capital } & 700000 \\\hline \text { Retained profits } & 50000 \\\hline \text { Asset revaluation reserve } & 100000 \\\hline\end{array}$$
Assume all assets and liabilities were recorded at their fair values, except for a piece of equipment recorded at $50 000 but Zed Ltd considers it to have a fair value of $100 000.This equipment is not revalued by Ned Ltd.The fair value of NCI under the full method was estimated as being $100 000.What was the difference on acquisition?

A)Nil
B)$100 000 goodwill
C)$90 000 goodwill
D)$50 000 goodwill

Answer 2

$100 000 goodwill

Question 3

Black Ltd acquired 75 % of White Ltd on 1 January 20X1 by paying $5 000 000 cash.At that date, the equity section of White Ltd's balance sheet was as follows:
$\begin{array}{llcc}&\$\\ \text {Share capital } &1000000 \\ \text { Retained profits} &3000000\\ \text { Asset revaluation reserve } &500000\\\end{array}$


All assets and liabilities were recorded at their fair values.During May 20X1 White Ltd paid a total dividend of $1 000 000 out of profits earned before 1 January 20X1.Under the full method, the fair value of NCI was assessed as being $1 250 000.
How much consolidation goodwill will be reported by the Black group ?

A)$1 000 000
B)$1 125 000
C)$1 625 000
D)$1 750 000

Answer 3

$1 750 000

Question 4

Black Ltd acquired 75 % of White Ltd on 1 January 20X1 by paying $5 000 000 cash.At that date, the equity section of White Ltd's balance sheet was as follows:
$\begin{array}{llcc}&\$\\ \text {Share capital } &1000000 \\ \text { Retained profits} &3000000\\ \text { Asset revaluation reserve } &500000\\\end{array}$


All assets and liabilities were recorded at their fair values.During May 20X1 White Ltd paid a total dividend of $1 000 000 out of profits earned before 1 January 20X1.
How much goodwill was acquired by Black Ltd under the partial method?

A)$500 000
B)$1 125 000
C)$1 625 000
D)$2 000 000

Question 5

Lillee Ltd acquired 60% of the issued share capital of Thompson Ltd on 1 February 20X1.Thompson Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}&000s \\ \text { Paid up capital } &\$4000\\ \text { Retained profits } &\$1000\\ \text { Asset revaluation reserve } &\$2000\\\end{array}$


If Lillee Ltd paid $8 000 000 for this acquisition what is the elimination entry if consolidated financial statements were prepared on 2 February 20X1? Under the full method the fair value of NCI is assessed as being $3 200 000.

A) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 2400 & \\\text { Retained profits } & 600 & \\\text { Asset revaluation reserve } & 1200 & \\\text { Goodwill } & 4200 & \\\text { Investment in Thompson Ltd } & & 8000 \\\text { NCI reserve } & & 400\end{array}$
B) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Goodwill } & 4200 & \\\text { Investment in Thompson Ltd } & & 8000 \\\text { NCI reserve } & & 3200\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Investment in Thompson Ltd } & & 7000\end{array}$
D) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ 000 \\\text { Paid up capital } & 2400 & \\\text { Retained profits } & 600 & \\\text { Asset revaluation reserve } & 1200 & \\\text { NCI reserve } & 3200 & \\\text { Investment in Thompson Ltd } & & 10200\end{array}$

Question 6

Kerry Ltd owns 70% of James Ltd.For the year ended 30 April 20X1, James Ltd reported a profit of $1 million.On 30 May 20X0, Kerry Ltd sold inventory to James Ltd for a $0.5 million profit.All of this inventory was sold by Kerry Ltd on 1 June 20X1.What is the NCI share of James Ltd's 20X1 profit?

A)$120 000
B)$150 000
C)$300 000
D)$450 000

Question 7

Black Ltd acquired 75 % of White Ltd on 1 January 20X1 by paying $5 000 000 cash.At that date, the equity section of White Ltd's balance sheet was as follows:
$\begin{array}{llcc}&\$\\ \text {Share capital } &1000000 \\ \text { Retained profits} &3000000\\ \text { Asset revaluation reserve } &500000\\\end{array}$


All assets and liabilities were recorded at their fair values.During May 20X1 White Ltd paid a total dividend of $1 000 000 out of profits earned before 1 January 20X1.AASB 127.38A was operational during this period.
What would be the balance of the account 'Investment in White Ltd' at 30 June 20X1?

A)$5 000 000
B)$4 000 000
C)$4 250 000
D)$2 125 000

Question 8

Lillee Ltd acquired 60% of the issued share capital of Thompson Ltd on 1 February 20X1.Thompson Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}&000s \\ \text { Paid up capital } &\$4000\\ \text { Retained profits } &\$1000\\ \text { Asset revaluation reserve } &\$2000\\ \text { } &\\ \text { } &\\\end{array}$

If Lillee Ltd paid $8 000 000 for this acquisition what is the elimination entry if consolidated financial statements were prepared on 2 February 20X1? Use the partial method.

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit } \$ \mathbf{0 0 0} & \text { Credit } \$ 000 \\\text { Paid up capital } & 2400 & \\\text { Retained profits } & 600 &\end{array}$

B) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Goodwill } & 1000 & \\\text { Investment in Thompson Ltd } & & 8000\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Investment in Thompson Ltd } & & 7000\end{array}$
D) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 24000 & \\\text { Retained profits } & 600& \\\text { Asset revaluation reserve } & 1200 & \\\text { Investment in Thompson Ltd } & & 7000\end{array}$

Question 9

Lillee Ltd acquired 60% of the issued share capital of Thompson Ltd on 1 February 20X1.Thompson Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}&000s \\ \text { Paid up capital } &\$4000\\ \text { Retained profits } &\$1000\\ \text { Asset revaluation reserve } &\$2000\\\end{array}$

Lillee Ltd paid $8 000 000 for this acquisition.For the year ended June 30 20X1 $500 000 of goodwill impairment was recognised under the partial method.For the 20X2 and 20X3 years no impairment was recognised.On June 30 20X3 the financial position was the same except that Thompson retained profits were $2 000 000.If consolidated financial statements were prepared on June 30 20X3, what balance sheet amount would be shown as NCI's share of retained profits?

A)$800 000
B)$400 000
C)$600 000
D)$300 000

Question 10

Lillee Ltd acquired 60% of the issued share capital of Thompson Ltd on 1 February 20X1.Thompson Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}&000s \\ \text { Paid up capital } &\$4000\\ \text { Retained profits } &\$1000\\ \text { Asset revaluation reserve } &\$2000\\ \text { } &\\ \text { } &\\\end{array}$


If Lillee Ltd paid $4 000 000 for this acquisition what is the elimination entry if consolidated financial statements were prepared on 2 February 20X1? Use the partial method.

A) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 2400 & \\\text { Retained profits } & 600 & \\\text { Asset revaluation reserve } & 1200 & \\\text { Goodwill } & & 200 \\\text { Investment in Thompson Ltd } & & 4000\end{array}$
B) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \mathbf { \$ 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Bargain purchase } & & \\\text { Investment in Thompson Ltd } & & 3000 \\&&4000\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \mathbf { \$ 0 0 0 } & \text { Credit } \mathbf { \$ 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & & 1000 \\\text { Investment in Thompson Ltd } & & 4000\end{array}$
D) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 2400 & \\\text { Retained profits } & 600 & \\\text { Asset revaluation reserve } & 1200 & \\\text { Bargain purchase } & & 200 \\\text { Investment in Thompson Ltd } & & 4000\end{array}$

Question 11

Black Ltd acquired 75 % of White Ltd on 1 January 20X1 by paying $5 000 000 cash.At that date, the equity section of White Ltd's balance sheet was as follows:
$\begin{array}{llcc}&\$\\ \text {Share capital } &1000000 \\ \text { Retained profits} &3000000\\ \text { Asset revaluation reserve } &500000\\\end{array}$


All assets and liabilities were recorded at their fair values.During May 20X1 White Ltd paid a total dividend of $1 000 000 out of profits earned before 1 January 20X1.AASB 127.38A was not operational.
What would be the balance of the account 'Investment in White Ltd' at 30 June 20X1?

A)$5 000 000
B)$4 000 000
C)$4 250 000
D)$2 125 000

Question 12

On 1 January 20X0, Zed Ltd acquired 90 % of the share capital of Ned Ltd for $900 000 cash.At that date, the equity section of Ned Ltd's balance sheet was as follows:
$\begin{array}{llcc}&\$\\ \text {Share capital } &700000 \\ \text { Retained profits} &50000\\ \text { Asset revaluation reserve } &100000\\\end{array}$

Assume all assets and liabilities were recorded at their fair values, except for a piece of equipment recorded at $50 000 but Zed Ltd considers it to have a fair value of $100 000. This equipment is not revalued by Ned Ltd. What was the difference on acquisition under the partial method?

A)Nil
B)$90 000 bargain purchase
C)$90 000 goodwill
D)$50 000 goodwill

Question 13

Stevie Ltd owns 75% of Wright Ltd.During the year ended 30 June 20X1 Stevie Ltd reported total sales of $10 000 000 and Wright Ltd reported total sales of $15 000 000.$2 000 000 of Stevie Ltd's sales were sales to Wright Ltd.Wright has sold all the assets from these sales from Stevie Ltd to external parties during this year.What is the total sales reported in the consolidated profit or loss account for this year?

A)$23 000 000
B)$25 000 000
C)$17 250 000
D)$18 750 000

Question 14

Kerry Ltd owns 70% of James Ltd.For the year ended 30 April 20X1, James Ltd reported a profit of $1 million.On 30 April 20X0, James Ltd had sold inventory to Kerry Ltd for a $0.5 million profit.All of this inventory was unsold by Kerry Ltd on 1 June 20X1.What is the consolidation adjustment (if any), to the NCI share of James Ltd's 20X1 profit as a result of this sale?

A)None, because all inventory was unsold
B)$150 000 decrease
C)$500 000 decrease
D)$150 000 increase

Question 15

Which of the following statements is correct?

A)The best NCI fair value measure might be the share price of the subsidiary at control date applied to the number of NCI shares but this would depend on any share trading in the subsidiary being liquid and active
B)If shares in a subsidiary are obtained by an exchange of equity, and there is no active liquid market for the subsidiary's shares, then the best available NCI fair value measure would be the quoted price of the parent's shares, applied to the NCI shares as if they had been obtained by the parent
C)If the shares in a subsidiary are obtained for cash 'privately', and there is no active liquid market for the subsidiary's shares, the estimate of the control date fair value of NCI becomes very subjective
D)All of the above statements are correct

Question 16

Lillee Ltd acquired 60% of the issued share capital of Thompson Ltd on 1 February 20X1.Thompson Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}&000s \\ \text { Paid up capital } &\$4000\\ \text { Retained profits } &\$1000\\ \text { Asset revaluation reserve } &\$2000\\\end{array}$


Lillee Ltd paid $8 000 000 for this acquisition.For the year ended June 30 20X1 $500 000 of goodwill impairment was recognised.For the 20X2 and 20X3 years no impairment was recognised.On June 30 20X3 the financial position was the same except that Thompson retained profits were $2 000 000.What is the balance sheet elimination entry for the goodwill impairment if consolidated financial statements were prepared on June 30 20X3? The partial method is used.

A) $\begin{array}{lrr}\text { Accounts } & \text { Debit } \$ \mathbf{0 0 0} & \text { Credit } \$ \mathbf{0 0 0} \\\text { Retained profits } & 500 & \\\text { Accumulated goodwill impairment } & & 500\end{array}$

B) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 8 0 0 } \\\text { Impairment expense } & 500 & \\\text { Accumulated goodwill impairment } & & 500\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Retained profits } & 300 & \\\text { Accumulated goodwill impairment } & & 300\end{array}$
D) $\begin{array}{lrr}\text { Accounts } & \text { Debit } \$ \mathbf{0 0 0} & \text { Credit } \$ \mathbf{0 0 0} \\\text { Retained profits } & 300 & \\\text { Goodwill } & & 300\end{array}$

Question 17

For the year ended 31 December 20X1, B Ltd reported a profit of $1 000 000; and B Ltd's 90-per-cent-owned subsidiary, C Ltd, reported a profit of $500 000.The only intra-group transaction during the year was a sale of inventory from C Ltd to B Ltd at a profit of $100 000.All of this inventory is unsold at 31 December 20X1.What is the formula to correctly calculate the NCI share of C Ltd's profit for this year?

A)$500 000 x 10%
B)$400 000 x 90%
C)$400 000 x 10%
D)$500 000 x 90%

Question 18

Paul Ltd owns 60% of John Ltd and both companies have a financial year end of 30 April.On 30 April 20X0, Paul Ltd sold a non-current asset to John Ltd for $1 million profit.The remaining useful life at sale date was 10 years.Both entities assume the same total useful life, zero residual amount and use straight-line depreciation.Paul Ltd is currently preparing the financial statements for the year ended 30 April 20X2.Profit for that year (unadjusted for consolidation matters) is Paul $5 million, John $3 million.What is the NCI share of John Ltd's profit for the financial year ended 30 April 20X2?

A)$1 240 000
B)$740 000
C)$800 000
D)$1 200 000

Question 19

Which of the following are situations where the subsidiary share price may not reliably be used to estimate the control date fair value of NCI

A)Cash is not used as the method of consideration
B)The subsidiary's share price is not quoted on an active or open securities market at control date
C)Neither the parent nor the subsidiary share price is quoted on an active or open securities market at control date
D)All of the above

Question 20

On 1 January 20X0, Zed Ltd acquired 90 % of the share capital of Ned Ltd for $900 000 cash.At that date, the equity section of Ned Ltd's balance sheet was as follows:
$\begin{array}{llcc}&\$\\ \text {Share capital } &700000 \\ \text { Retained profits} &50000\\ \text { Asset revaluation reserve } &100000\\\end{array}$


Assume all assets and liabilities were recorded at their fair values, except for a piece of equipment recorded at $50 000 but Zed Ltd considers it to have a fair value of $100 000. This equipment is not revalued by Ned Ltd.
The difference on acquisition is:

A)a larger amount of goodwill under the partial goodwill method compared with the full method
B)a larger amount of goodwill under the full goodwill method compared with the partial method
C)neither A nor B above because the difference is a bargain purchase
D)not conclusively comparable under the full or partial methods from the available information

Question 21

Any method to estimate the NCI's fair value has potential problems with assumptions that must be made about market conditions and knowledge.

Question 22

Dividends attributable to direct NCI are always included in the consolidation (that is, are not eliminated).

Question 23

If the entity concept was strictly followed in consolidation accounting standards the presentation of amounts in financial statements would require much less calculation and effort by accountants.

Question 24

Changes to the other comprehensive profit of partly owned subsidiaries will affect the NCI and must be included in the measurement of NCI.

Question 25

Given the same transaction being compared, consolidation goodwill will always be higher under the full method than the partial method.

Question 26

Company A owns 60% and controls Company B, which pays a dividend of $1 million of which Company A receives $600 000.Because intra-group transactions are eliminated in full, the whole $1 million dividend is eliminated from consolidated amounts of dividend revenue.

Question 27

Under the strict entity concept there should not be any apportionment of NCI in financial statement amounts.

Question 28

Before 2008 the full goodwill method was not allowed under IFRS.

Question 29

Under the full goodwill method all goodwill impairment is always allocated to the subsidiary.

Question 30

Under the basic rule, the NCI share of a partly owned subsidiary's profit is always the profit at reporting date multiplied by the NCI's fraction of ownership.