Deck 12: Principles of Consolidation

Question 1

The purpose of consolidated financial statements is to:

A)eliminate the need for the parent and subsidiary to prepare their own financial statements
B)portray the information about a group of entities as a single economic entity under the control of a subsidiary
C)portray the information about a group of entities as a single economic entity under the control of a parent
D)none of the above

Answer 1

C

Question 2

AASB 127 requires disclosure of:

A)the nature of the relationship between the parent and a subsidiary where the parent does not own,directly or indirectly through subsidiaries,more than half the voting power
B)the reasons why the ownership,directly or indirectly through subsidiaries,of more than half of the voting or potential voting power of an investee does not constitute control
C)the nature and extent of any significant restriction on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances
D)all of the above

Answer 2

D

Question 3

Explain the main legislative requirements for group financial statements.

Answer 3

Section 295(2)of the Corporations Act 2001 states that,if required by the accounting standards,the four consolidated statements of comprehensive income,changes in equity,financial position,and cash flows are to be provided.Section 297 further states that: The financial statements and notes for a financial year must give a true and fair view of: (a)the financial position and performance of the company,registered scheme or disclosing entity and,(b)if consolidated financial statements are required,the financial position and performance of the consolidated entity.A consolidated entity is defined in the Corporations Act 2001 as "a company,registered management investment scheme or disclosing entity together with all the entities it is required by accounting standards to include in consolidated financial statements".AASB 127: Consolidated and Separate Financial Statements states that group accounts must be presented as one set of accounts.Paragraph 4 defines consolidated financial statements as "the financial statements of a group presented as those of a single economic entity".Further,para.12 requires that the "consolidated financial statements shall include all subsidiaries of the parent".

Question 4

Define control and identify factors that indicate control exists.

Question 5

According to AASB 127,control also exists when the parent owns half or less of the voting power of an entity when there is:

A)power over more than half of the voting rights by virtue of an agreement with other investors
B)power to govern the financial and operating policies of the entity under a statue or agreement
C)power to cast the majority of votes at meetings of the board of directors and control of the entity is by that board
D)all of the above

Question 6

Explain the entity concept of consolidation.

Question 7

Which of the following statements is correct?

A)where there is an agreement with other investors or a statute,control will only exist while the agreement is current
B)where there may be apathy on the part of shareholders who may not cast votes or attend annual general meetings,control can exist with less than 50 % ownership of issued shares
C)both A and B
D)professional judgment is never required to determine the existence of control

Question 8

Under which of the following does the group consist of the assets and liabilities of the parent company as well as all the assets and liabilities of subsidiaries?

A)entity concept
B)equity concept
C)group concept
D)proprietary concept

Question 9

A subsidiary is:

A)an entity that has control over another entity
B)an entity that is controlled by another entity
C)an entity likely to have users who rely on general purpose financial reports
D)none of the above

Question 10

An entity likely to have users who rely on general purpose financial reports is known as a:

A)parent company
B)holding company
C)consolidated entity
D)reporting entity

Question 11

Group structures arise for which of the following reasons?

A)a company may take over its competitors
B)a company may diversify by taking over companies in other types of businesses
C)a company may establish or separate out a part of its business into a controlled limited liability company
D)all of the above

Question 12

A gain on a bargain purchase arises when:

A)the purchase consideration is more than the fair value of the purchased assets and liabilities
B)the fair value of the purchased assets and liabilities is equal to the purchase consideration
C)the fair value of the purchased assets and liabilities is more than the purchase consideration
D)the present value of the purchased assets and liabilities is less than the purchase consideration

Question 13

A dividend attached to a share that has been purchased is known as a/an:

A)interim dividend
B)final dividend
C)cum dividend
D)ex dividend

Question 14

Which of the following statements is incorrect?

A)the consolidation process does not involve entries in the books of the parent entity
B)the consolidation process does not involve entries in the books of any of the subsidiaries being consolidated
C)the consolidation process involves entries being made in the books of the parent entity and each of the subsidiaries being consolidated
D)no consolidation entries are carried forward in the accounts of any of the individual legal entities making up the group

Question 15

Before the accounts of the parent and subsidiary can be added together to give the total net assets under the control of the economic entity,it is necessary to eliminate:

A)the parent's "Investment in subsidiary" asset account
B)the subsidiary's "Investment in parent" asset account
C)the equity in the subsidiary which the investment represents
D)both A and C

Question 16

AASB 127 defines control as:

A)the power to participate in the financial and operating policies of an entity so as to obtain benefits from its activities
B)the power to govern financial and operating policies of an entity so as to obtain benefits from its activities
C)the power to govern the financial but not the operating policies of an entity so as to obtain benefits from its activities
D)the power to have significant influence over the financial and operating policies of an entity so as to obtain benefits from its activities

Question 17

Which of the following is the final step in the process of consolidation?

A)prepare the consolidated financial statements using the worksheet and the NCI adjustments
B)calculate and prepare NCI adjustments
C)prepare entries for the elimination of intragroup transactions and balances
D)prepare the elimination of investment in subsidiary journal entry

Question 18

Which of the following statements is incorrect?

A)a single unit,or group,is often referred to as an "equitable entity"
B)the process of consolidation involves adding together the accounts of the controlling entity and the entities being controlled,after eliminating any intragroup shareholdings and intragroup transactions.
C)consolidated accounts provide the operating results and financial position of the entities as a single unit in their trading and dealings with entities outside the group.
D)a single unit,or group,is often referred to as an "economic entity"

Question 19

An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised is referred to as:

A)gain on bargain purchase
B)goodwill
C)discount on acquisition
D)none of the above

Question 20

Caloundra Ltd has all of its identifiable net assets recorded in its books at fair value.Bellvista Ltd acquired all of the issued share capital of Caloundra Ltd for $100 000.At the date of acquisition,the equity of Caloundra Ltd consisted of: $65 000 share capital and $20 000 retained earnings.The amount of goodwill acquired is:

A)$35 000
B)$15 000
C)$0
D)$80 000

Question 21

Summarise the steps in the consolidation process.

Question 22

Discuss reasons why group structures arise.

Question 23

Discuss the accounting requirements when a subsidiary's assets are not recorded at fair value at acquisition date.

Question 24

Provide justification for the preparation of consolidated financial statements.