Question 1

Little Company declared a dividend of $90,000 for the period ended 30 June 2005. Big Company owns 100 per cent of the equity of Little Company. Big Company accrues dividends when they are declared by its subsidiaries. What elimination entry would be required to prepare the consolidated financial statements for the group for the period ended 30 June 2005?
A) 
B) 
C) 
D) 
E) None of the given answers.

Accepted Answer

The elimination entry required to prepare the consolidated financial statements for the group for the period ended 30 June 2005 would be to eliminate the dividend declared by Little Company since Big Company owns 100% of the equity of Little Company. This can be achieved by debiting the investment in Little Company account and crediting the dividend income account. Choice B is the correct entry to eliminate the declared dividend.

Question 2

In the absence of an election to be a 'tax consolidated group', the Australian Tax Office assesses income earned by the individual legal entities in an economic group and does not take into consideration consolidation adjustments required for group accounts:

Accepted Answer

In the absence of an election to be a 'tax consolidated group', the Australian Tax Office assesses income earned by the individual legal entities in an economic group and does not take into consideration consolidation adjustments required for group accounts.

Question 3

If a subsidiary makes a dividend payment out of pre-acquisition earnings, the parent entity should consider whether its investment in the subsidiary is impaired.

Accepted Answer

If a subsidiary makes a dividend payment out of pre-acquisition earnings, it may indicate that the subsidiary is not generating enough profits to cover its own operations and investments, which may raise concerns about the value of the parent's investment in the subsidiary. The parent should consider whether the investment is impaired and if any adjustments to the carrying value of the investment need to be made.

Question 4

Company A owns 51 per cent of the issued capital of Company B and Company A owns 60 per cent of the issued capital of Company
C. Company A controls both B and
C. If Company A sells inventory for $500,000 to Company C and Company C sells it to Company B for $600,000 and Company B sells it to an entity external to the group for $700,000, the amount of sales revenue to be recorded for that inventory for the group of companies is $1,560,000:

Accepted Answer

The answer of Company A owns 51 per cent of...

Question 5

Intragroup profits are eliminated in consolidation to reduce consolidated profits.

Accepted Answer

The answer of Intragroup profits are eliminated in consolidation to...

Question 6

The level of equity ownership is not a factor in deciding what proportion of a transaction between entities in a group should be eliminated.

Accepted Answer

According to the accounting standard for consolidation, the proportion of a transaction to be eliminated is determined by the ownership percentage of the parent company in the subsidiary, not by the level of equity ownership of other entities in the group.

Question 7

The fact that consolidation worksheets start "afresh" each year means that the tax entry for eliminating unrealised profit in opening inventory requires a "Dr" to Deferred Tax Assets, rather than Income Tax Expense:

Accepted Answer

The answer of The fact that consolidation worksheets start "afresh"...

Question 8

If we simply aggregate the sales of the parent and subsidiary companies, without adjustment, when there have been intragroup sales, total income would be overstateD.

Accepted Answer

Intragroup sales involve transactions between companies that are part of the same group or parent company. These transactions are not made on market terms and do not involve external customers. If we add up the sales of both the parent and the subsidiary company without adjusting for these intragroup sales, the total income would be artificially inflated as there would be double counting of the same revenue. Therefore, to accurately reflect the true income of the group, we need to adjust for these intragroup sales.

Question 9

Intragroup transactions that are to be eliminated in the consolidated accounts include:
A) Inter-entity loans.
B) Inter-entity sales of non-current assets.
C) The payment of management fees to a member of the group.
D) The transfer of tax losses between entities in the group without consideration being paid.
E) All of the given answers.

Accepted Answer

All of the given answer choices are examples of intragroup transactions that need to be eliminated in the consolidated accounts. Inter-entity loans, inter-entity sales of non-current assets and the transfer of tax losses between entities without the payment of consideration can result in overstatement or understatement of group assets and liabilities, revenue and expenses. The payment of management fees to a member of the group can also result in the overstatement of expenses and understatement of revenues. As a result, these transactions need to be eliminated to present a true and fair view of the consolidated financial statements.

Question 10

Dividends may be identified as being paid out of pre-acquisition or post-acquisition profits by a subsidiary company. Where dividends are paid out of post-acquisition profits the investment in the subsidiary should be decreased by the amount of the dividend.

Accepted Answer

Dividends paid out of post-acquisition profits are considered a return on investment and are recorded as income in the investor's income statement, not as a decrease in the investment value on the balance sheet.

Question 11

AASB 127 "Consolidated and Separate Financial Statements" prescribes that intragroup balances, transactions, income and expenses be eliminated in full on consolidation. This requirement is consistent with the parent entity concept of consolidation.

Accepted Answer

The answer of AASB 127 "Consolidated and Separate Financial Statements"...

Question 12

Dividends paid between entities in the group should be:
A) Not permitted by the ultimate controlling entity because it does not make sense to exchange money between entities in the one economic group.
B) Reflected in the group accounts because it reflects the economic return the group earned by investing in the companies that form its operations.
C) Eliminated from the group accounts, but reflected in the individual legal entity accounts, since the group accounts reflect the many entities as one single economic entity.
D) Retained in the consolidated statements but disclosed separately as related-party transactions.
E) None of the given answers.

Accepted Answer

Dividends paid between entities in the group are eliminated from the group accounts for consolidation purposes since the group accounts should reflect the many entities as one single economic entity. However, they should still be reflected in the individual legal entity accounts.

Question 13

Question 1: Transactions between entities that form an economic group should be eliminated in proportion to the level of control between the parent entity and the subsidiary entity:

Accepted Answer

The answer of Question 1: Transactions between entities that form...

Question 14

Examples of intragroup transactions include:
A) Dividends payable to group members.
B) The payment of taxation.
C) The recognition of minority interests.
D) The sale of inventories to external parties.
E) None of the given answers.

Accepted Answer

Intragroup transactions refer to transactions that occur within a group of companies or entities. Dividends payable to group members is an example of an intragroup transaction since it involves the distribution of profits within the group.

Question 15

AASB 127 "Consolidated and Separate Financial Statements" prescribes that intragroup balances, transactions, income and expenses be eliminated in full on consolidation. This requirement is consistent with the economic entity concept of consolidation.

Accepted Answer

AASB 127 requires the elimination of intragroup balances, transactions, income and expenses in full on consolidation, which is in line with the economic entity concept of consolidation.

Question 16

Intragroup profits are eliminated in consolidation to exclude intragroup transactions in the parent entity's financial statements.

Accepted Answer

The answer of Intragroup profits are eliminated in consolidation to...

Question 17

Parent Ltd sells inventories to Child Ltd amounting to $200 000 during the financial year. The inventories are no longer in the hands of Child Ltd at year-end. Parent Ltd is no longer required to eliminate these intragroup transactions because these transactions have been realised by sale to external parties.

Accepted Answer

Intragroup transactions must be eliminated in the consolidated financial statements regardless of whether the inventories have been sold to external parties, to avoid overstating revenues and assets.

Question 18

The value of inventory on hand for the economic group at the end of the period will always equal the sum of the inventory on hand at the end of the period for each of the entities in the group:

Accepted Answer

The answer of The value of inventory on hand for...

Question 19

Companies in an economic entity may increase the level of consolidated sales reported by selling inventory between themselves.

Accepted Answer

Selling inventory between companies within the same economic entity does not increase consolidated sales because these transactions are eliminated in consolidation to avoid double counting of revenue.

Question 20

Intragroup sales of non-current assets results in the need to eliminate the effect of any profit or loss on sale in the period of the sale and, in the rest of the periods of the asset's life, any tax effects of the profit or loss, the depreciation and accumulated depreciation will have to be adjusted for the life of the asset, along with the tax effects of the adjustment to depreciation:

Accepted Answer

When intragroup sales of non-current assets occur, any profit or loss on sale in the period of sale must be eliminated. Additionally, any tax effects of the profit or loss must be eliminated in the remaining periods of the asset's life. This requires adjusting the depreciation and accumulated depreciation for the asset's life, and adjusting for the tax effects of the depreciation adjustment.

Quiz 29: Further Consolidation Issues I: Accounting for Intragroup Transact