Deck 13: Business Combinations

Question 1

According to IAS 31,a jointly controlled entity is a corporation,partnership,or other entity in which two or more venturers have an interest.Which type of arrangement establishes joint control over the entity?

A) Commercial arrangement
B) Contractual arrangement
C) Tacit arrangement
D) Supply arrangement

Answer 1

B

Question 2

Which of the following examples is not a case in which the investing firm takes an active role in the decisions of the firm in which they have invested?

A) Lend resources to another corporate entity.
B) Enter into an active partnership with an existing firm.
C) Invest in marketable securities.
D) Acquire a controlling interest in an existing entity.

Answer 2

C

Question 3

What is the founding principle of full consolidation?

A) All assets and liabilities of the subsidiary are added to those of the parent.
B) The investment in the subsidiary is re-evaluated in the consolidated financial statements.
C) Only part of the assets and liabilities of the subsidiary are added to those of the parent.
D) None of these

Answer 3

A

Question 4

Given the following data:
∙ P owns directly 43% of C2;
∙ P owns directly 30% of C1;
∙ C1 owns directly 40% of C2;
What is the percentage of interest of the parent P over C2?

A) 82%
B) 55%
C) 43%
D) 40%

Question 5

According to IFRS 10 (new standard),control exists if,and only if,the investor has

A) Power over the investee
B) Exposure,or rights,to variable returns from its involvement with the investee
C) The ability to use its power over the investee to affect the amount of the investor's return
D) All of these

Question 6

Consolidated financial statements create a description of the financial position of an economic entity that is the agglomeration or conglomeration of diverse,and often distinct legal entities connected by relations of intercorporate investments or lending relationships.

Question 7

According to IAS 28,the existence of significant influence by an investor is usually evidenced by:

A) Representation on the board of directors or equivalent governing body of the investee.
B) Participation in the policy-making process.
C) Interchange of managerial personnel.
D) All of these

Question 8

When excess resources are created through operations,what can management decide to do to create value for the shareholders?

A) Invest in marketable securities.
B) Repurchase shares.
C) Issue large dividends.
D) All of these

Question 9

What is the term used for the contractually agreed sharing of control between two or more legal entities over a third economic activity?

A) Joint control
B) Control
C) Significant influence
D) Insignificant influence

Question 10

What is the term used for the power to govern the financial and operating policies of an entity alone so as to obtain benefits from its activities?

A) Significant influence
B) Control
C) Joint control
D) None of the previous answers

Question 11

According to IAS 27 (old standard),control is presumed to exist when the parent acquires more than what percentage of the voting rights of the entity?

A) 20%
B) 33%
C) 50%
D) 66%

Question 12

What is an entity called that is controlled by another entity?

A) A subsidiary
B) An associate
C) A joint venture
D) An affiliated company

Question 13

What is (are)the reason(s)for the lack of representativeness of the unconsolidated accounts of the parent company when the parent company is a pure holding?

A) The income statement of the holding company does not include any of the traditional items such as 'sales revenue','cost of goods sold' or 'purchases'.
B) Revenues are essentially comprised of "management fees" and "investment income" which is the sum of all dividends received.
C) The balance sheet of the holding company probably does not include any significant amounts under accounts receivable,accounts payable,and inventories.
D) All of these

Question 14

What is a contractual arrangement called where two or more parties undertake an economic activity that is subject to joint control?

A) Subsidiary
B) Parent company
C) Associate
D) Joint venture

Question 15

The nature of the relation existing between the parent company and the different group entities is a determinant of the way the financial statements of each of the individual group entities will be taken into account in the consolidation process to create the group financial statements.

Question 16

IAS 28 states that a substantial or majority ownership by another investor necessarily precludes an investor from having significant influence.

Question 17

Which of the following statements is not correct?

A) Percentage of control is the term used to reflect the degree of dependency in which a parent company holds its subsidiaries or associates.
B) The percentage of control is used to determine the consolidation method in establishing the consolidated financial statements.
C) The percentage of control held by a parent is always equal to the percentage of interest it holds in a given subsidiary or associate.
D) The percentage of interest is used in the process of consolidation of accounts and calculations to define majority and minority interests.

Question 18

According to IAS 28,if an investor holds,directly,or indirectly through subsidiaries,at least what percentage of the voting power of the investee,it is presumed that the investor does have significant influence,unless it can be demonstrated that this is not the case?

A) 20%
B) 33%
C) 50%
D) 66%

Question 19

What represents the claim held by the parent company over the shareholders' equity of its subsidiaries or associates?

A) Percentage of interest
B) Percentage of control
C) Percentage of stake
D) Percentage of voting rights

Question 20

According to IAS 27 (old standard),control also exists even when the parent owns one half or less of the voting power of an entity,if control can be evidenced by:

A) Power over more than one half of the voting rights by virtue of an agreement with other investors.
B) Power to govern the financial and operating policies of the other entity under a statute or an agreement.
C) Power to appoint or remove the majority of the members of the board of directors.
D) All of these

Question 21

What is the difference between the price paid and the book value of the equity of the subsidiary?

A) Difference arising on first consolidation.
B) Valuation difference.
C) Residual difference.
D) Price to book difference.

Question 22

Which of the following statements is not correct?

A) The consolidated income statement is the result of combining mechanically the parent and subsidiary income statements with the elimination of any intra-group transactions.
B) The elimination of intra-group transactions is mathematically automatic since the sales revenue recognized in one of the income statement is part of the costs incurred in the other's income statement.
C) The intra-group transactions affect the income of the consolidated entity.
D) It is critical to explicitly cancel out all intra-group transactions to avoid the risk of biasing operating ratios involving sales revenue and cost of sales separately (by artificially inflating the balances).

Question 23

If the percentage of interest of the parent is not 100%,who owns part of the assets and liabilities of the subsidiary?

A) Negligible shareholders.
B) Insignificant shareholders.
C) Non-controlling (minority)shareholders.
D) Third shareholders.

Question 24

Given the above data:
What is the rate of exchange of shares?

A) 2
B) 1/2
C) 4
D) 1/4

Question 25

Which concept is applied if one considers that the consolidated financial statements are established mainly for internal decision making-purposes?

A) Property concept.
B) Parent company concept.
C) Entity concept.
D) Parent company extension concept.

Question 26

In IFRS 10,non-controlling [minority] interests are defined as the equity in a subsidiary not attributable,directly or indirectly,to a parent.

Question 27

Given the above data:
What is the number of shares to issue in the merger?

A) 4 000
B) 3 000
C) 2 000
D) 1 000

Question 28

How are non-controlling [minority] interests reported in the financial statements?

A) Between shareholders' equity and liabilities.
B) As a part of liabilities of consolidated entity.
C) Included as a part of shareholders' equity.
D) All of these.

Question 29

When applying the full consolidation mechanism,the financial statements of the parent and its subsidiaries are combined on a line-by-line basis by adding together like items of assets,liabilities,equity,income and expenses.