Deck 25: Consolidation: Principles and Accounting Requirements

Question 1

When preparing consolidated financial statements, adjustments for pre-acquisition equity and inter-entity transactions are recorded:

A) in the accounting records of the parent entity
B) in the accounting records of the subsidiary
C) on a consolidation worksheet
D) in the accounting records of the reporting entity.

Answer 1

C

Question 2

At acquisition date a wholly-owned subsidiary had the following equity items:
Retained earnings $14 000
Share capital $30 000
General reserve $ 6 000
In the year following the acquisition the subsidiary transferred $10 000 from pre-acquisition retained earnings, to the general reserve account. At the reporting date following the reserve transfer, the following consolidation adjustment is needed:

A)
$\text { DR } \quad \text { Retained earnings } \quad \$ 10000$
$\text { CR } \quad \text { General reserve } \quad \$ 10000$
B)
$\text { DR } \quad \text { General reserve } \quad \$ 10,000$
$\text { CR } \quad \text { Shares in subsidiary } \quad \$ 10,000$
C)
$\text { DR } \quad \text { Shares in subsidiary } \quad \$ 10,000$
$\text { CR } \quad \text { Retained earnings } \quad \$ 10,000$
D)
$\text { DR } \quad \text { General reserve } \quad \$ 10,000$
$\text { CR } \quad \text { Retained earnings } \quad \$ 10,000$

Answer 2

$\text { DR } \quad \text { General reserve } \quad \$ 10,000$
$\text { CR } \quad \text { Retained earnings } \quad \$ 10,000$

Question 3

Use the following information to answer questions
On 1 July 2008, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:
$\begin{array} { l l } \text { Share Capital } & \$ 35,000 \\\text { Retained Earnings } & \$ 15,000\end{array}$
During the year ended 30 June 2009, S Limited paid an interim dividend of $5 000 from profits earned before 1 July 2008.

-The pre-acquisition elimination entry at 30 June 2010 will be:

A) $\begin{array} { l l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 10,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & 45,000\end{array}$
B) $\begin{array} { c l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 15,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & 50,000\end{array}$
C) $\begin{array} { l l r l } \text { Opening Retained earnings } & \mathrm { Dr } & 10,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Dividends payable } & \mathrm { Dr } & 5,000 & \\\quad \text { Shares in S Limited } & \mathrm { Cr } & 50,000\end{array}$
D) $\begin{array} { l l l r } \text { Opening Retained earnings } & \mathrm { Dr } & 15,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & 45,000 \\\text { Dividends paid } & \mathrm { Cr } & 5,000\end{array}$

Answer 3

$\begin{array} { c l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 15,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & 50,000\end{array}$

Question 4

Nelson Limited has two subsidiary entities, Poggi Limited and Holly Limited. Nelson Limited owns 100% of the shares in both entities. Details of issued share capital are:
Nelson Limited $100 000
Poggi Limited $30 000
Holly Limited $15 000
The worksheet adjustment entry made in order to determine the amount of consolidated share capital is:

A) DR $\quad$ Share capital $\quad$$\$ 145,000$
CR $\quad$ Shares in subsidiaries $\quad \$ 145,000$
B) DR $\quad$ Share capital $\quad$$\quad$ $ 100,000
$\text { CR } \quad \text { Shares in subsidiaries } \quad \$ 100,000$
C) $\begin{array} { l r r r } \text { DR } & \text { Share capital } & \$ 45,000 & \\\text { CR } & \text { Shares in Poggi Limited } & & \$ 30,000 \\\text { CR } & \text { Shares in Holly Limited } & & \$ 15,000\end{array}$
D) $\begin{array}{llr}\text { DR } & \text { Share capital }&\$145,000\\\text { CR } & \text { Shares in Nelson Limited } & \$ 100,000 \\\text { CR } & \text { Shares in Poggi Limited } & \$ 30,000 \\\text { CR } & \text { Shares in Holly Limited } & \$ 15,000\end{array}$

Question 5

AASB 10 Consolidated Financial Statements defines a 'parent entity' and a 'subsidiary entity' as:
The original answer was (a), which I think is incorrect. The correct answer should be (c).
$$\begin{array} { | l | l | l | } \hline & \text { parent } & \text { Subsidiary } \\\hline \text { I } & \begin{array} { l } \text { An entity which owns more than } 40 \% \text { of } \\\text { the voting shares of another entity }\end{array} & \begin{array} { l } \text { An entity in which another entity owns } \\\text { more than 40\% of the voting shares }\end{array} \\\hline \text { II } & \begin{array} { l } \text { An entity which owns more than } 20 \% \text { of } \\\text { the voting shares of another entity }\end{array} & \begin{array} { l } \text { An entity which is owned partly by another } \\\text { entity }\end{array} \\\hline \text { III } & \text { An entity that has one or more subsidiaries } & \begin{array} { l } \text { An entity which is controlled by a parent } \\\text { entity }\end{array} \\\hline \text { IV } & \text { An entity that controls another entity } & \begin{array} { l } \text { An entity in which the parent entity owns } \\\text { more than } 20 \% \text { of the voting shares }\end{array} \\\hline\end{array}$$

A) I
B) II
C) III
D) IV

Question 6

In a business combination the revaluation of non-current assets in the records of the subsidiary means that the subsidiary has effectively adopted the:

A) parent-entity model of consolidation
B) proprietary model of accounting
C) cost model of accounting
D) revaluation model of accounting.

Question 7

In determining whether a parent-subsidiary relationship exists:

A) the nature of each entity's activities is relevant;
B) the nature of each entity's activities is not relevant;
C) share options exercisable within the next 12 months are considered when assessing control
D) potential voting rights are ignored when assessing control.

Question 8

One year after acquisition date, the goodwill acquired was regarded as having become impaired by $20 000. The appropriate consolidation adjustment in relation to the impairment will include the following line:

Question 9

Parent Limited acquired 100% of a subsidiary on 1 July 20X7. At acquisition date the subsidiary had the following equity items:
Retained earnings $24 000
Share capital $33 000
Business combination revaluation reserve $10 000
In the year following the acquisition the subsidiary paid a bonus dividend of $14 000 out of pre-acquisition retained earnings. The following consolidation adjustment is needed in the consolidation worksheet for 30 June 20X8:

A)
$\begin{array} { l r r r } \text { DR } & \text { Share capital } & \$ 14,000 \\\mathrm { CR } & \text { Bonus dividend paid } & \$ 14,000\end{array}$
B)
$\begin{array}{lll}\text { DR } & \text { Shares in subsidiary } & 14000\end{array}$
$\text { CR } \quad \text { Share capital } \quad \$ 14000$
C)
$\text { DR } \quad \text { Bonus dividend paid } \quad \$ 14000$
$\text { CR } \quad \text { Retained earnings } \quad \$ 14000$
D)
$\text { DR } \quad \text { Retained earnings } \quad \$ 14000$
$\text { CR\quad Share capital }\quad \$ 14000$

Question 10

Use the following information to answer questions
On 1 July 2008, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:
$\begin{array} { l l } \text { Share Capital } & \$ 35,000 \\\text { Retained Earnings } & \$ 15,000\end{array}$
During the year ended 30 June 2009, S Limited paid an interim dividend of $5 000 from profits earned before 1 July 2008.

-The pre-acquisition elimination entry at 30 June 2009 is:

A) $\begin{array} { c l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 10,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & 45,000\end{array}$
B) $\begin{array} { l l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 15,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & 50,000\end{array}$
C) $\begin{array} { l l r l } \text { Opening Retained earnings } & \mathrm { Dr } & 10,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Dividends payable } & \mathrm { Dr } & 5,000 & \\\quad \text { Shares in S Limited } & \mathrm { Cr } & 50,000\end{array}$
D) $\begin{array} { l l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 15,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Shares in S Limited } & \mathrm { Cr } & & 45,000 \\\text { Dividends paid } & \mathrm { Cr } & & 5,000\end{array}$

Question 11

The key characteristic that determines which entities financial statements should be combined into a set of consolidated financial statements is:

A) the existence of transactions between the entities
B) control
C) substance over form
D) access to the financial statements of each entity that is to be combined.

Question 12

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree:

A) a business combination gain on bargain purchase arises
B) goodwill has been purchased and must be recognised
C) the difference is treated as a special equity reserve in the acquirer's accounting records
D) the difference is treated as a loss and immediately charged to profit or loss of the period in which the business combination occurred.

Question 13

Which of the following events can cause a change in the pre-acquisition elimination entry
Subsequent to acquisition date?

A) Transfers from post-acquisition retained earnings
B) Dividends paid from pre-acquisition reserves
C) Transfers from pre-acquisition retained earnings
D) Impairment of goodwill

Question 14

When a dividend is paid by a wholly-owned subsidiary out of pre-acquisition equity, the parent entity recognises:
This is explained more in Chapter 26.

A) a reduction in the investment in the subsidiary
B) a decrease in share capital
C) an increase in dividend income
D) a decrease in dividend revenue.

Question 15

In a consolidated group of entities, control over the subsidiaries in the group:

A) may not be shared control
B) can be shared with other parties
C) can be less than 100% control
D) can be less than 50% control.

Question 16

Use the following information to answer questions
On 1 July 2008, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:
$\begin{array} { l l } \text { Share Capital } & \$ 35,000 \\\text { Retained Earnings } & \$ 15,000\end{array}$
During the year ended 30 June 2009, S Limited paid an interim dividend of $5 000 from profits earned before 1 July 2008.

-The pre-acquisition elimination entry at 1 July 2008 is:

A) $\begin{array} { l l l l } \text { Shares in S Limited } & \mathrm { Dr } & 50000 & \\\text { Opening Retained earnings } & \mathrm { Cr } & & 15000 \\\text { Share capital } & \mathrm { Cr } & & 35000\end{array}$
B) $\begin{array} { l l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 15000 & \\\text { Share capital } & \mathrm { Dr } & 35000 & \\\text { Shares in S Limited } & \mathrm { Cr } & & 50000\end{array}$
C) $\begin{array} { l l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 10000 & \\\text { Share capital } & \mathrm { Dr } & 35000 & \\\text { Shares in S Limited } & \mathrm { Cr } & & 45000\end{array}$
D) $\begin{array} { l l l l } \text { Opening Retained earnings } & \mathrm { Dr } & 15,000 & \\\text { Share capital } & \mathrm { Dr } & 35,000 & \\\text { Dividend paid } & \mathrm { Cr } & 5,000 \\\text { Shares in S Limited } & \mathrm { Cr } & 45,000\end{array}$

Question 17

For entities wanting to use the cost model of accounting, the revaluation of a subsidiary's assets would be undertaken in the:

A) subsidiary's records
B) parent entity's records
C) consolidation worksheet
D) notes to the consolidated financial statements.

Question 18

Company X acquired Company Y when the carrying value of Company Y's plant was $50 000. The fair value of the plant on acquisition date was $65 000. The company tax rate was 30%. How much is the amount of the business combination valuation reserve that must be recognised?

A) $65 000
B) $15 000
C) $10 500
D) $3 500.

Question 19

Eeny Limited has two subsidiary entities, Meeny Limited and Miney Limited. Eeny Limited owns 100% of the shares in both entities. Details of issued share capital are:
I changed the share capital figures because they are exactly the same as in Q10 of the SPQ.
Eeny Limited $150 000
Meeny Limited $45 000
Miney Limited $22 500
The consolidated share capital amount of the Eeny Meeny Miney Group is:

A) $60 000
B) $82 500
C) $150 000
D) $217 500.

Question 20

When a parent recognises a pre-acquisition dividend that is declared by a wholly-owned subsidiary it makes the following entry in its accounting records:
This is explained more in Chapter 26.

A)
$\begin{array} { l l l } \text { DR } & & \text { Dividend receivable } \\& \mathrm { CR } & \text { Dividend income }\end{array}$
B)
DR $\quad$ Dividend income
CR $\quad$ Dividend receivable
C)
DR $\quad$ Dividend receivable
$\quad$ CR $\quad$ Shares in subsidiary
D)
$\begin{array} { l l l } \text { DR } & \text { Shares in subsidiary } \\ \mathrm { CR } & \text { Dividend income. }\end{array}$

Question 21

Use the following information to answers
Edward Ltd acquires all issued shares in Jacob Ltd for $220 000 paid in cash. Equity of Jacob Ltd consists of $130 000 share capital and $45 000 retained earnings. At acquisition date, Jacob Ltd owns a block of land, which it initially purchased at $200 000. The fair value of the land is $240 000. The carrying amount of Jacob Ltd's property, plant and equipment is $130 000 with accumulated depreciation of $55 000. The fair value of the property, plant and equipment is $95 000.

-Which of the following statements is correct about the above business combination?

A) There is gain on bargain purchase of $45 000 to be recognised.
B) There is goodwill of $45 000 to be recognised.
C) There is gain on bargain purchase of $3000 to be recognised.
D) There is goodwill of $3000 to be recognised.

Question 22

All parent entities are required to present consolidated financial statements unless the following conditions apply to them:
$\begin{array}{|l|l|}\hline \text { I. } & \text { The parent is a wholly owned subsidiary. } \\\hline \text { II. } & \begin{array}{l}\text { The parent is a partly owned subsidiary and its owners do not object to the } \\\text { non-presentation of consolidated financial statements. }\end{array} \\\hline \text { III. } & \text { The parent's debt or equity securities are traded in a public market. } \\\hline \text { IV. } & \begin{array}{l}\text { The parent is not in the process of applying to issue any securities in a } \\\text { public market. }\end{array} \\\hline\end{array}$

A) I and II only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV.

Question 23

According to AASB 10 Consolidated Financial Statements, the following factors indicate the existence of control:
$$\begin{array} { | l | l | } \hline \text { I. } & \begin{array} { l } \text { The power to govern the financial policies of an entity so as to obtain } \\\text { benefits. }\end{array} \\\hline \text { II. } & \begin{array} { l } \text { Shared power in the govemance of financial and operating policies of } \\\text { another entity so as to obtain benefits. }\end{array} \\\hline \text { III. } & \begin{array} { l } \text { The power to goven the operating policies of an entity so as to obtain } \\\text { benefits. }\end{array} \\\hline \text { IV. } & \text { Ownership of more than } 50 \% \text { of the voting power in the subsidiary. } \\\hline\end{array}$$

A) I, II and III only
B) I, III and IV only
C) II and IV only
D) IV only.

Question 24

Truong Limited acquired 60% of the shares of Quang Limited through the Australian Securities Exchange. The share acquisition cost Truong Limited $500 000. As a result of the share acquisition, Truong Limited gained control over Quang Limited. In its accounting records, Truong will recognise:

A) an investment at a cost of $500 000
B) an investment with a market value of $300 000
C) an increase in share capital of $500 000
D) an increase in share capital of $300 000.

Question 25

Which of the followings is not the reason of preparing consolidated statements?

A) To show parent entity's accountability in managing the group's assets
B) To provide investors with relevant information
C) To provide investors with useful information for comparisons between entities
D) To achieve efficiency by producing only one set of financial statements for the whole group.

Question 26

Use the following information to answers
Edward Ltd acquires all issued shares in Jacob Ltd for $220 000 paid in cash. Equity of Jacob Ltd consists of $130 000 share capital and $45 000 retained earnings. At acquisition date, Jacob Ltd owns a block of land, which it initially purchased at $200 000. The fair value of the land is $240 000. The carrying amount of Jacob Ltd's property, plant and equipment is $130 000 with accumulated depreciation of $55 000. The fair value of the property, plant and equipment is $95 000.

-If the tax rate is 30%, what would be the amount of Business Combination Value Reserve that must be recognised at the acquisition date?

A) $42 000
B) $45 000
C) $52 500
D) $60 000

Question 27

On 1 March Black Ltd acquired all shares of White Ltd for $100 000. Black Ltd paid $60 000 cash and issued 10 000 shares to White Ltd as a consideration. Black Ltd's shares are trading in the market at $4 per share on 1 March. What are the journal entries recorded by Black Ltd at the acquisition date?

A) $\text { DR\quad Shares in White Ltd } \quad 100,000$
$\begin{array}{lll}\text { CR } & \text { Cash } & 100,000\end{array}$
B) $\text { DR Shares in White Ltd }\quad\quad\quad100,000$
$\begin{array}{lll}C R & \text { Cash } & 60000 \\C R & \text { Gain } & 40000\end{array}$
C) $\begin{array}{l}\text { DR Shares in White Ltd } \quad 100,000\\\begin{array} { l l l } \text { CR } & \text { Cash } & 60,000 \\\text { CR } & \text { Share Capital } & 40,000\end{array}\end{array}$
D) $\begin{array}{lll}\text { DR Cash } & & 60,000 \\\text { DR } & \text { Share Capital } & 40,000\\\text { CR} & \text { Shares in White Ltd } & 100,000\end{array}$

Question 28

Huey Limited and Dewey Limited are separate entities that jointly own Louie Limited. The consolidated financial statements of Huey Group would consist of financial statements of:

A) Huey Limited and Dewey Limited
B) Huey Limited and Louie Limited
C) Dewey Limited and Louie Limited
D) Huey Limited, Dewey Limited, and Louie Limited.

Question 29

In which of the following situations is an investor more likely to have power over an investee when the investor holds less than 50% of the investee's shares?

A) The remaining shares are held by a small number of shareholders.
B) The remaining shares are held by shareholders who majority live overseas.
C) Majority of remaining shareholders attend and vote at the annual general meeting.
D) Majority of remaining shareholders have concerns with environmental issues related to the investee's operations.

Question 30

Which of the following statements is incorrect according to AASB 12?

A) Information that enables users of consolidated financial statements to evaluate the consequences of losing control of a subsidiary must be disclosed.
B) Where a subsidiary's financial statements are dated differently from that of its parent, the group only needs to disclose the date used by the subsidiary.
C) An entity needs to disclose significant judgements and assumptions it has made where it controls another entity but holds less than half of voting rights of the other entity.
D) Any risks associated with an entity's interests in other entities must be disclosed.