Question 1

Assume that the following draft balance sheet was prepared by a co-worker subsequent to Keen's 80% purchase of Lax Inc for $240,000. Assuming this balance sheet is devoid of technical errors, what can be concluded about the balance sheet below?

Accepted Answer

This balance sheet was prepared using the Proprietary Theory. There is no Non-Controlling Interest section on the Balance Sheet, and Keen's Consolidated Balance Sheet amounts (with the exception of the Shareholders' Equity Section) include Keen's book values and 80% of Lax's Fair Values.

Question 2

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2012 and decides to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 80% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2012)?

Accepted Answer

A)   $104,000
B)   $120,000
C)   $130,000
D)   Nil B

Question 3

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare: a) the journal entry that Keen Inc. would make to record the acquisition; b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

Accepted Answer

a)  b)

Question 4

Which statement about the differences between consolidation methods permitted under US GAAP and IFRS is true?

Accepted Answer

A)   IFRS and US GAAP both require the use of the entity theory.
B)   IFRS and US GAAP both require the use of the parent company extension theory.
C)   IFRS permits either the entity theory or the parent company extension theory; US GAAP requires the entity theory.
D)   IFRS permits either the entity theory or the parent company extension theory; US GAAP requires the parent company extension theory.

Question 5

When the parent forms a new subsidiary:

Accepted Answer

A)   there should be no acquisition differential.
B)   gain or loss will usually arise.
C)   push down accounting rules must be followed.
D)   it should not be included in the company's consolidated financial statements as this would effectively be double-counting.

Question 6

When the acquisition differential is calculated and allocated, what will the consequence be of a "bargain purchase"?

Accepted Answer

A)   The acquisition differential will always be negative.
B)   The goodwill balance will always be negative.
C)   The fair value of the assets will always have been overstated.
D)   Both the acquisition differential and goodwill balances will always be negative.

Question 7

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. What would be the amount of Non-Controlling Interest appearing on the Consolidated Balance Sheet on the date of acquisition (August 1, 2012), under the Parent Company Method, assuming once again that Parent purchased 80% of Sub Inc. for $180,000?

Accepted Answer

A)   $26,000
B)   $72,000
C)   $86,000
D)   The answer cannot be determined from the information given.

Question 8

The purchase price of an entity includes:

Accepted Answer

A)   the book value of the subsidiary's shareholders' equity and the acquisition differential.
B)   the book value of the subsidiary's shareholders' equity and goodwill.
C)   the fair market value of the subsidiary's shareholders' equity and the purchase price discrepancy.
D)   the fair market value of the subsidiary's net assets.

Question 9

Any negative goodwill arising on the date of acquisition:

Accepted Answer

A)   is recognized as a gain on the date of acquisition.
B)   is prorated among the parent company's identifiable net assets.
C)   should be amortized over a predetermined period.
D)   is recognized as a loss on the date of acquisition.

Question 10

A business combination involves a contingent consideration. It is considered 70% probable that a payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, what liability should be recorded for the contingent consideration on the acquisition date?

Accepted Answer

A)   $285,704
B)   $350,000
C)   $408,149
D)   $500,000

Question 11

When a contingent consideration arising from a business combination is classified as a liability, how is any difference between the original estimate of the amount to be paid and the actual amount paid accounted for if the difference arises due to a change in circumstances?

Accepted Answer

A)   As an adjustment to the consideration paid for the subsidiary.
B)   As an adjustment to an estimate included in the determination of net income.
C)   As a direct adjustment to consolidated retained earnings.
D)   As an adjustment to consolidated contributed surplus.

Question 12

Under the Proprietary theory, Non-Controlling Interest is:

Accepted Answer

A)   nonexistent. Goodwill is established based on the Parent's pro-rata share of any acquisition differential.
B)   nonexistent. Goodwill is established based on the Parent's acquisition cost.
C)   based on the fair market values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost.
D)   based on the book values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost.

Question 13

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming once again that the Proprietary Theory was applied, what would be the amount of Goodwill appearing on the Consolidated Balance Sheet on the Date of acquisition, assuming once again that Parent purchased 80% of Sub Inc. for $180,000 on August 1, 2012?

Accepted Answer

A)   $72,000
B)   $88,000
C)   Nil
D)   Cannot be determined from the information given.

Question 14

On August 31, 2012, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc for $400,000. Prepare Jean Inc's consolidated Balance Sheet on the date of acquisition using the Proprietary Theory.

Accepted Answer

The answer of   On August 31, 2012, Jean's...

Question 15

Non-Controlling Interest is presented under the Liabilities section of the Consolidated Balance Sheet using the:

Accepted Answer

A)   the Entity Theory.
B)   the Proprietary Theory.
C)   the Parent Company Theory.
D)   both the Parent Company Theory and the Proprietary Theory.

Question 16

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2012 and decides to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 100% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2012)?

Accepted Answer

A)   $60,000
B)   $120,000
C)   $180,000
D)   Nil

Question 17

When a contingent consideration arising from a business combination is classified as equity, how is any change in its fair value accounted for if the difference arises due to a change in circumstances?

Accepted Answer

A)   As an adjustment to the consideration paid for the subsidiary.
B)   As an adjustment to an estimate included in the determination of net income.
C)   As a memorandum entry indicating that additional shares had been issued.
D)   As an adjustment to consolidated contributed surplus.

Question 18

One weakness associated with the Entity Theory is that:

Accepted Answer

A)   it is inconsistent with the Historical Cost Principle.
B)   Non-Controlling Interest is computed using the fair market values of the subsidiary's net assets.
C)   Non-Controlling interest is computed using the book values of the subsidiary's net assets.
D)   the presumed acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares, or voting control is achieved incrementally.

Question 19

What value should be recorded as the fair value of a contingent consideration arising from a business acquisition when it is classified as a liability?

Accepted Answer

A)   The undiscounted maximum amount that could be paid.
B)   The discounted present value of the maximum amount that could be paid.
C)   The undiscounted probabilistic estimate of the amount to be paid.
D)   The discounted probabilistic estimate of the amount to be paid.

Question 20

Keen and Lax Inc had the following balance sheets on October 31, 2012:  Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare: a) the journal entry that Keen Inc. would make to record the acquisition; b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

Accepted Answer

The answer of Keen and Lax Inc had the following...

Exam 4: Consolidation of Non-Wholly Owned Subsidiaries