Deck 17: Consolidation: Wholly Owned Subsidiaries

Question 1

If the end of a subsidiary's reporting period does not coincide with the end of the parent entity's reporting period, adjustments must be made for the effects of significant events that occur between these dates as long as the difference between the ends reporting periods differs by no more than:

A) one month
B) three months
C) four months
D) six months

Answer 1

B

Question 2

At the date of acquisition a subsidiary had recorded a dividend payable of $10 000. The consolidation adjustment needed at the date of acquisition in relation to this event is:

A) $\begin{array}{lrrr}\text { DR } &\text { Dividend payable }& \$ 10,000 \\ \text { CR } &\text { Dividend receivable }& \$ 10,000 \\\end{array}$
B) $\begin{array} { l l l l } \text { DR } & \text { Dividend revenue }&\$ 10,000 \\\text { CR } &\text { Dividend declared }& \$ 10,000 & \\\end{array}$
C) $\begin{array}{lll}\text { DR } & \text { Shares in subsidiary } & \$ 10,000\\\mathrm{CR} & \text { Dividend receivable } & \$ 10,000\end{array}$
D) $\text { DR } \quad \text { Cash } \quad \$ 10,000$
$\text { CR } \quad \text { Shares in subsidiary } \quad \$ 10,000$

Answer 2

$\begin{array}{lrrr}\text { DR } &\text { Dividend payable }& \$ 10,000 \\ \text { CR } &\text { Dividend receivable }& \$ 10,000 \\\end{array}$

Question 3

When a parent entity has previously held an investment in a subsidiary prior to gaining control the effect on the consolidation process is as follows:

A) there is no impact
B) the change in the fair value of the previously held interest is recognised in profit or loss
C) the change in the fair value of the previously held interest is recognised in retained earnings
D) the change in the fair value of the previously held interest is recognised in other comprehensive income

Answer 3

B

Question 4

In relation to pre-acquisition of a subsidiary entity, which of the following events can cause a change in the pre-acquisition entry subsequent to acquisition date?
I Transfers from post-acquisition retained earnings
II Bonus dividends paid from pre-acquisition equity
III Transfers from pre-acquisition retained earnings
IV Impairment of goodwill

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

Question 5

On 1 January 20X2 A Ltd acquired all the issued shares in B Ltd. At that date the inventory of B Ltd had a carrying amount $5000 lower than its fair value. The inventory was all sold by 30 June 20X4. At 30 June 20X5 the consolidation adjustment against inventory in relation to the transaction will be:

A) a debit of $5000
B) a credit of $5000
C) a debit of $3500
D) nothing

Question 6

Consolidated financial statements are prepared using the following presentation method:

A) one-line;
B) line-by-line;
C) gross;
D) liquidation.

Question 7

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) $3500
B) $10 500
C) $15 000
D) $65 000

Question 8

On 1 July 20X6, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:
$\bullet$ Share Capital $35 000
$\bullet$ Retained Earnings $15 000
The pre-acquisition entry at 1 July 20X6 is:

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

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

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

D) $\begin{array}{lll}\text { Goodwill } & \mathrm{Dr} & 15,000 \\\text { Share capital } & \mathrm{Dr} & 35,000 \\\text { Shares in S Limited } & \mathrm{Cr} &50,000\end{array}$

Question 9

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:
$\bullet$ Nelson Limited $100 000
$\bullet$ Poggi Limited $30 000
$\bullet$ Holly Limited $15 000
The worksheet adjustment entry made in order to determine the amount of consolidated share capital is:

A) $\text { DR \quad Share capital } \quad\quad \$ 145,000$
$\text { CR } \quad \text { Shares in subsidiaries } \quad \$ 145,000$
B) $\begin{array} { l c c c } \text { DR } & \text { Share capital } & \$ 100,000 & \\\text { CR } & \text { Shares in subsidiaries } & & \$ 100,000\end{array}$
C) $\begin{array}{lll}\text { DR }&\text { Share capital }&\$45,000\\\text { CR } & \text { Shares in Poggi Limited } & \$ 30000 \\\text { CR } & \text { Shares in Holly Limited } & \$ 15000\end{array}$
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 10

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:

A) DR Goodwill $20 000
B) DR Share capital $20 000
C) CR Business combination valuation reserve $20 000
D) CR Accumulated impairment losses $20 000.

Question 11

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 gain on bargain purchase results
B) goodwill has been acquired 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 12

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 13

On 1 July 20X6 Possum acquired a 100% interest in Echidna. At that time Echidna had goodwill of $5000 recorded in its statement of financial position as a result of a previous business combination. The total goodwill arising on Possum's acquisition of Echidna was $12 000. The goodwill recognised on consolidation in the business combination valuation entry as a result of Possum's acquisition of Echidna is:

A) nil
B) $5 000
C) $7 000
D) $12 000

Question 14

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

Question 15

At acquisition date a wholly owned subsidiary had the following equity items: ? Retained earnings $14 000
? Share capital $30 000
? General reserve $6000
In the year following the acquisition the subsidiary transferred $10 000 from pre-acquisition retained earnings to general reserve. At the reporting date following the reserve transfer, the following consolidation adjustment is needed:

A) $\begin{array} { l c c c } \text { DR } &\text { Transfer to general reserve }& \$ 10,000 \\\mathrm { CR }& \text { General reserve }& \$ 10,000\end{array}$
B) $\begin{array} { l l l l } \text { DR } & \text { General reserve } & \$ 10000 \\\text { CR } & \text { Shares in subsidiary } & \$ 10000\end{array}$
C) $\begin{array}{lrr}\text { DR } & \text { Shares in subsidiary }&\$10,000 \\ \text { CR } & \text { Retained earnings }&\$10,000\end{array}$
D) $\begin{array} { l l l l l } \text { DR } & \text { General reserve } & \$ 10,000 & \\\text { CR } & \text { Transfer to general reserve } & \$ 10,000\end{array}$

Question 16

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:
$\bullet$ Eeny Limited $100 000
$\bullet$ Meeny Limited $30 000
$\bullet$ Miney Limited $15 000
The consolidated share capital amount of the Eeny Meeny Miney group is:

A) $45 000
B) $55 000
C) $100 000
D) $145 000.

Question 17

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.

Question 18

The key principle relating to the disclosure of information about business combinations is to disclose information that:

A) enables users to evaluate the nature and financial effect of business combinations that occurred during the reporting period
B) enables the preparation of the consolidated financial statements in the most cost-effective manner
C) does not give an advantage to the competitors of a business group
D) provides users with information about the parent entity only.

Question 19

A Limited acquired B Limited for $110 000. At acquisition date the fair value of the B Limited's Land asset was $40 000 and the book value was $30 000. If the company tax rate is 30%, which of the following is the appropriate adjustment to recognise the tax effect of the business combination revaluation of land?

A) DR Deferred tax liability $3 000
B) CR Deferred tax liability $3 000
C) DR Deferred tax asset $3 000
D) CR Deferred tax liability $3 000.

Question 20

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 21

There is no recognition of a deferred tax item in respect to Goodwill because it is a residual amount and the recognition of a deferred tax item would:

A) decrease the carrying amount of Goodwill;
B) increase the carrying amount of Goodwill;
C) decrease the profit on consolidation;
D) increase the profit on consolidation.

Question 22

A typical pre-acquisition consolidation worksheet entry to eliminate a parent entity's investment in a subsidiary would include the following entry:

A) DR Share capital of parent $X;
B) CR Share capital of subsidiary $X;
C) CR Shares subsidiary $X;
D) DR Shares of subsidiary $X.

Question 23

Leader Limited acquired 100% of the share capital of Follower Limited. Follower had issued share capital of $100 000. The book values of Follower Limited's assets were: Land $50 000, Equipment $60 000. The fair values of these assets were: Land $90 000, Equipment $70 000. The tax rate is 30%. The fair value of the identifiable net assets is:

A) $135 000;
B) $110 000;
C) $160 000;
D) $100 000.

Question 24

Which accounting standard established the disclosure requirements relating to a parent's interests in subsidiaries?

A) IFRS 3 Business Combinations
B) IFRS 10 Consolidated Financial Statements
C) IFRS 12 Disclosure of Interests in Other Entities
D) IAS 27 Separate Financial Statements

Question 25

The effect of the pre-acquisition entry is to eliminate the asset, 'Shares in subsidiary' and replace it with the:

A) net assets of the subsidiary;
B) profit of the subsidiary;
C) equity accounts of the subsidiary;
D) cash and cash equivalents held by the subsidiary.

Question 26

Excelsior Limited acquired 100% of the shares in Arthur Limited on a cum.div. basis for $100 000. At acquisition date the subsidiary had a declared dividend of $5000. The pre-acquisition entry must include the following line:

A) DR Shares in subsidiary $105 000;
B) DR Shares in subsidiary $100 000;
C) DR Shares in subsidiary $95 000;
D) DR Shares in subsidiary $5 000.

Question 27

Which of the following items cannot be revalued in the books of the subsidiary?

A) inventory
B) land
C) plant and equipment
D) goodwill

Question 28

Where a parent entity acquires an investment in a subsidiary for less than the fair value of the identifiable net assets and contingent liabilities acquired, it is necessary to recognise the item in the consolidation worksheet as a gain in bargain purchase and then to:

A) transfer it to a business combination valuation reserve account
B) goodwill;
C) investment in the shares of the subsidiary;
D) profit or loss.