Question 1

On 1 January 2021, Brisbane Ltd acquired all the issued shares in Sydney Ltd. At that date, the plant of Sydney Ltd had a fair value of $20 000 more than its carrying amount and an estimated useful life of 5 years. Sydney Ltd depreciates the plant on a straight-line basis. The plant was still in the business at 30 June 2022. The business combination valuation entries in relation to the plant as at 30 June 2022 will include:
I. Adjustments to the current depreciation expense
II. Adjustments to retained earnings (opening balance)
III. Transfers from business combination valuation reserve to retained earnings
IV. Adjustments to the plant account to recognise the fair value adjustment at acquisition date
A) I and IV only.
B) II and III only.
C) I, II and IV only.
D) I, II, III and IV.

Accepted Answer

I - Adjustments to the current depreciation expense will be necessary to reflect the fair value adjustment at acquisition. As the plant was still in use at 30 June 2022, the depreciation expense will need to be adjusted to reflect the increased carrying amount resulting from the fair value adjustment at acquisition.

II - Adjustments to retained earnings (opening balance) will also be required to reflect the fair value adjustment at acquisition. The adjustment will increase the opening balance of retained earnings.

III - Transfers from business combination valuation reserve to retained earnings will not be required as the business combination valuation reserve will have been fully transferred to retained earnings by 30 June 2022.

IV - Adjustments to the plant account to recognise the fair value adjustment at acquisition date will be necessary to reflect the increased carrying amount of the plant resulting from the fair value adjustment at acquisition.

Question 2

On 1 January 2022, Cowboys Ltd acquired all the issued shares in Magpies Ltd. At that date, the inventory of Magpies Ltd had a fair value of $20 000 more than its carrying amount. By 30 June 2022, 75% of the inventory was sold to an entity outside of the group. The business combination valuation consolidation adjustment against the inventory account as at 30 June 2022 will be:
A) DR $15 000
B) CR $10 500
C) CR $5 000
D) DR $5 000

Accepted Answer

The answer of On 1 January 2022, Cowboys Ltd acquired...

Question 3

On 1 January 2022, Lemon Ltd acquired all the issued shares in Meringue Ltd. At that date, Meringue Ltd recognised in the notes to its financial statements a contingent liability with regards to a loan guarantee that had a fair value of $30 000. The contingent liability was settled at 31 December 2022 by Meringue Ltd making a payment of $20 000. Ignoring the tax effect, the business combination valuation entries in relation to the contingent liability for the year ended 30 June 2023 will include:
I. Adjustments to expenses recognised on settlement
II. Transfers from business combination valuation reserve to retained earnings
III. Adjustments to the liability account to recognise the fair value adjustment at acquisition date
A) I only.
B) I, II and III only.
C) II, III and IV only.
D) I, II, III and IV.

Accepted Answer

I. Adjustments to expenses recognised on settlement - When the contingent liability is settled, the expenses recognized may need to be adjusted to reflect the actual settlement amount. This adjustment will impact the income statement and will be included in the business combination valuation entries.
II. Transfers from business combination valuation reserve to retained earnings - Any changes in the fair value of contingent liabilities recognized at the acquisition date are initially recognized in the business combination valuation reserve. Once the liability is settled, the fair value adjustment will be transferred from the reserve to retained earnings in the statement of changes in equity.
III. Adjustments to the liability account to recognise the fair value adjustment at acquisition date - The initial recognition of the contingent liability at acquisition date would have been at its fair value. Any changes in the fair value of the liability recognized at acquisition date will impact the liability account and will be included in the business combination valuation entries.

Therefore, the correct choice is B as it includes all the options mentioned above.

Question 4

At the date of acquisition, a subsidiary had recorded a dividend payable of $10 000. Assuming that the shares were acquired on a cum div. basis, the consolidation adjustment needed at the date of acquisition to eliminate the dividend is:
I. Dr Dividend payable $10 000
Cr Dividend receivable $10 000
II. Dr Dividend revenue $10 000
Cr Dividend declared $10 000
III. Dr Shares in subsidiary $10 000
Cr Dividend receivable $10 000
IV. Dr Dividend receivable $10 000
Cr Dividend payable $10 000
A) I.
B) II.
C) III.
D) IV.

Accepted Answer

When shares are acquired on a cum div. basis, the acquirer is entitled to the dividend. Therefore, the consolidation adjustment involves eliminating the dividend payable and recognizing a dividend receivable.

Question 5

Flagstone Limited acquired 100% of the shares in Pebbles Limited on a cum div. basis for $700 000. At acquisition date, the Pebbles Limited had a declared dividend of $80 000. The pre-acquisition entry must include the following line:
A) Dr Shares in subsidiary $620 000
B) Cr Shares in subsidiary $620 000
C) Cr Shares in subsidiary $80 000
D) Cr Shares in subsidiary $780 000

Accepted Answer

The pre-acquisition entry should include the cost of acquisition which is $700 000 and the dividend declared by Pebbles Limited, which is $80 000. Thus, the entry should be: 
Dr Investment in subsidiary $700 000
Cr Cash $700 000
Cr Dividend income $80 000 (to record the dividend received from the subsidiary) 
Cr Shares in subsidiary $620 000 (to eliminate the share capital of Pebbles Limited)

Question 6

At the end of any period after acquisition, the business combination entries prepared for the assets and liabilities that were not recorded at fair value at acquisition date and that are sold, fully depreciated or settled during the current period include:
A) no adjustments are required.
B) adjustments to the asset or liability account, recognising also the tax effects.
C) adjustments to the asset and liability account and to the gains on sale or to expenses generated by depreciation, amortisation or impairment losses or settlement of liabilities, recognising also the tax effects.
D) adjustments to the gains on sale or to expenses generated by depreciation, amortisation or impairment losses or settlement of liabilities, recognising also the tax effects.

Accepted Answer

Adjustments are made to the gains on sale or expenses related to depreciation, amortisation, impairment losses, or settlement of liabilities, while also recognizing the tax effects.

Question 7

On 1 July 2021, Pineapple Limited acquired all the issued shares of Melon Limited for $250 000 when the equity of Melon Limited consisted of: Bhare capital$\quad$$\quad$$\$ 130,000$
Retained earrings$\quad$120,000 The pre-acquisition entry at 1 July 2021 is:
a. $\begin{array}{lll}\text { Shares in Melon Limited }&\mathrm{Dr}&250,000\
\text { Retained eamings } & \mathrm{Cr} && 120,000 \
\text { Share capital } & \mathrm{Cr} && 130,000
\end{array}$

b.$\begin{array}{lll}
\text { Retained earnings } & \mathrm{Dr} & 120,000 \
\text { Share capital } & \mathrm{Dr} & 130,000 \
\text { Shares in Melon Limited } & \mathrm{Cr} &&250,000
\end{array}$

c.$\begin{array}{lll}
\text { Retained earnings } & \mathrm{Dr} & 130,000 \
\text { Share capital } & \mathrm{Dr} & 120,000 \
\text { Shares in Melon Limited } & \mathrm{Cr} &&250,000
\end{array}$

d.$\begin{array}{lll}
\text { Goodwill } & \text { Dr } & 120,000 \
\text { Share capital } & \text { Dr } & 130,000 \
\text { Shares in Melon Timited } & \mathrm{Cr} &&250,000
\end{array}$

Accepted Answer

The answer of On 1 July 2021, Pineapple Limited acquired...

Question 8

On 1 July Walter Ltd acquired 100% of the share capital of Kristoff Ltd. At that date, the carrying amount of Kristoff Ltd's machinery was $300 000. The fair value of the machinery on acquisition date was $330 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that will be recognised on consolidation?
A) $21 000
B) $30 000
C) $33 000
D) $9 000

Accepted Answer

The fair value adjustment for the machinery is $30,000 ($330,000 - $300,000). The deferred tax liability on this adjustment is $9,000 ($30,000 x 30%). The business combination valuation reserve is the fair value adjustment minus the deferred tax liability: $30,000 - $9,000 = $21,000.

Question 9

On 1 January 2021, Brisbane Ltd acquired all the issued shares in Sydney Ltd. At that date, the plant of Sydney Ltd had a fair value of $20 000 more than its carrying amount and an estimated useful life of 5 years. Sydney Ltd depreciates the plant on a straight-line basis. The plant was sold to external parties on 31 December 2022. The business combination valuation entries in relation to the plant for the year ended 30 June 2023 will include:
I. Adjustments to the current depreciation expense
II. Adjustments to retained earnings (opening balance)
III. Transfers from business combination valuation reserve to retained earnings
IV. Adjustments to the plant account to recognise the fair value adjustment at acquisition date
A) III only.
B) I, and III only.
C) I, II, III and IV.
D) I, II and III only.

Accepted Answer

Since the plant was sold on 31 December 2022, there would be no current depreciation expense adjustments for the year ended 30 June 2023 (I). Adjustments to retained earnings (opening balance) (II) and transfers from business combination valuation reserve to retained earnings (III) would be necessary to reflect the disposal of the plant and the realization of the fair value adjustment made at acquisition. Adjustments to the plant account to recognize the fair value adjustment at acquisition date (IV) would have been made at the acquisition date, not in the year ended 30 June 2023.

Question 10

Rose Ltd acquired on a cum div. basis all of shares in Petal Ltd for $140 000. At the date of acquisition, Trout Ltd had recorded a dividend payable of $40 000 and a total shareholders' equity of $110 000. Assuming all the identifiable assets in Petal Ltd were recorded at fair value at acquisition date, the consolidation worksheet entries will have to recognise:
A) a goodwill of $140 000.
B) a goodwill of $40 000.
C) a goodwill of $10 000.
D) a gain on bargain purchase of $10 000.

Accepted Answer

Since the acquisition was made on a cum div. basis, Rose Ltd would not have recorded the dividend payable of $40 000. Therefore, the net assets acquired would only be $110 000. However, Rose Ltd acquired Petal Ltd for $140 000, resulting in a gain on bargain purchase of $10 000 (i.e. $140,000 - $110,000). Hence, the consolidation worksheet entries will recognise a gain on bargain purchase of $10,000, rather than a goodwill.

Question 11

Which of the following statements regarding pre-acquisition entries prepared after acquisition date is incorrect?
A) They are adjusted for transfers between post-acquisition equity accounts.
B) They include the pre-acquisition entry prepared at acquisition date adjusted for the effects of all the transfers between pre-acquisition equity accounts and changes in the investment account up to the beginning of the current period.
C) They reverse the transfers between pre-acquisition equity accounts and changes in the investment account that happen in the current period.
D) They are adjusted for the changes in the investment account recognised by the parent in the subsidiary.

Accepted Answer

Pre-acquisition entries prepared after the acquisition date are adjusted for transfers between pre-acquisition equity accounts and changes in the investment account up to the beginning of the current period. They also reverse any transfers between pre-acquisition equity accounts and changes in the investment account that happen in the current period. They are also adjusted for the changes in the investment account recognized by the parent in the subsidiary. Therefore, statement A is incorrect as it mentions "transfers between post-acquisition equity accounts" which is not relevant to pre-acquisition entries prepared after the acquisition date.

Question 12

At the date of acquisition 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 profit on consolidation.
B) increase the profit on consolidation.
C) increase the carrying amount of goodwill.
D) decrease the carrying amount of goodwill.

Accepted Answer

Goodwill is a residual amount calculated after recognizing all identifiable assets and liabilities, including deferred taxes. Recognizing a deferred tax item for goodwill would increase its carrying amount, as it would adjust the net assets to reflect the tax effects, thereby increasing the residual amount identified as goodwill.

Question 13

The pre-acquisition entry is necessary to:
A) avoid overstating the equity and net assets of the group.
B) avoid understating the equity and net assets of the group.
C) avoid overstating the equity and net assets of the parent.
D) record the 'shares in subsidiary' account in the parent's records.

Accepted Answer

The pre-acquisition entry is necessary to avoid overstating the equity and net assets of the group. Without this entry, the parent's equity would be overstated by the value of the subsidiary's equity that existed before the acquisition. This is because the parent is only entitled to the equity that it acquired in the subsidiary, not the equity that existed before the acquisition. By eliminating the pre-acquisition equity of the subsidiary, the equity and net assets of the group are properly stated.

Question 14

Prince Limited acquired 100% of the share capital of Charming Limited for a purchase consideration of $190 000. At acquisition date, the net fair value of Charming Limited's assets, liabilities and contingent liabilities was $175 000 including goodwill with a carrying amount of $5 000. The company tax rate is 30%. The unrecorded amount of goodwill that must be recognised on the consolidation worksheet is:
A) $5 000.
B) $10 000.
C) $15 000.
D) $20 000.

Accepted Answer

The formula to calculate the goodwill that must be recognised on the consolidation worksheet is: 
Goodwill = Purchase consideration - Net fair value of identifiable assets and liabilities 
= $190,000 - $175,000 
= $15,000 
Since there is already $5,000 of goodwill with a carrying amount, only the unrecorded amount of goodwill needs to be recognised on the consolidation worksheet, which is $10,000 (Option C).

Question 15

On 1 January 2022, Cowboys Ltd acquired all the issued shares in Dragon Ltd. At that date, the plant of Dragon Ltd had a fair value of $10 000 more than its carrying amount and an estimated useful life of 5 years. Dragon Ltd depreciates the plant on a straight-line basis. The plant was sold during the year ended on 30 June 2023. The business combination valuation consolidation adjustment against plant in relation to the transaction as at 30 June 2023 will be:
A) a debit of $10 000.
B) a credit of $10 000.
C) a debit of $2 000.
D) there is no adjustment entry recorded against the plant account.

Accepted Answer

The answer of On 1 January 2022, Cowboys Ltd acquired...

Question 16

On 1 January 2022, Cowboys Ltd acquired all the issued shares in Magpies Ltd. At that date, the inventory of Magpies Ltd had a fair value of $20 000 more than its carrying amount. By 30 June 2022, 75% of the inventory was sold to an entity outside of the group. The business combination valuation consolidation adjustment for inventories as at 30 June 2023 will include:
A) a debit to inventories of $15 000.
B) a debit to cost of sales of $5 000.
C) a debit to inventories of $15 000 and a debit to cost of sales of $5 000.
D) a credit to inventories of $15 000 and a debit to cost of sales $5 000.

Accepted Answer

By 30 June 2022, 75% of the inventory was sold, leaving 25% unsold. The adjustment for the unsold inventory is 25% of $20,000, which is $5,000. This amount is debited to cost of sales to adjust the carrying amount to fair value.

Question 17

On 1 July 2019 Debbie Ltd acquired a 100% interest in Stefan Ltd. At that date Stefan Ltd had goodwill of $6 000 recorded in its statement of financial position as a result of a previous business combination. The total goodwill arising on Debbie's acquisition of Stefan was $16 000. The goodwill to be recognised on consolidation as a result of Debbie's acquisition of Stefan is:
A) nil.
B) $6 000.
C) $7 000.
D) $10 000.

Accepted Answer

Goodwill on consolidation is calculated based on the acquisition date values and does not take into account previously recorded goodwill in the acquiree's financial statements. Therefore, the entire $16,000 goodwill arising from Debbie's acquisition of Stefan is recognized, not just the incremental difference or the previously recorded amount.

Question 18

The effect of the pre-acquisition entry is to eliminate the 'Shares in subsidiary' asset and the:
A) net assets of the subsidiary at the acquisition date.
B) equity of the parent at the acquisition date.
C) equity of the subsidiary at the acquisition date.
D) net assets of the parent at the acquisition date.

Accepted Answer

The pre-acquisition entry eliminates the 'Shares in subsidiary' asset and the equity of the subsidiary at the acquisition date to avoid double counting in consolidated financial statements.

Question 19

One year after acquisition date, acquired goodwill was regarded as having become impaired by $10 000. The appropriate consolidation adjustment in relation to the impairment will include the following line:
A) DR Goodwill $10 000
B) CR Impairment loss $10 000
C) CR Accumulated impairment losses $10 000
D) CR Business combination valuation reserve $10 000

Accepted Answer

Impairment losses on goodwill are recognised in the consolidated financial statements by debiting goodwill and crediting the accumulated impairment losses account. This accumulated impairment losses account is a contra account to goodwill and reduces the carrying amount of goodwill to its recoverable amount. Therefore, the appropriate consolidation adjustment in this scenario would be to credit the accumulated impairment losses account by $10 000.

Question 20

Where the consideration transferred is less than the fair value of the identifiable net assets and contingent liabilities acquired, the difference must be recognised in the consolidation worksheet as:
A) a transfer to the business combination valuation reserve.
B) an increase in the 'Shares in subsidiary' asset.
C) a gain on bargain purchase.
D) goodwill.

Accepted Answer

A gain on bargain purchase occurs when the consideration transferred is less than the fair value of the identifiable net assets and contingent liabilities acquired. This gain is recognized in the consolidation worksheet as a separate item, and is not included in goodwill or any other account.

Quiz 27: Consolidation: Wholly Owned Entities

Flagstone Limited acquired 100% of the shares in Pebbles Limited on a cum div. basis for $700 000. At acquisition date, the Pebbles Limited had a declared dividend of $80 000. The pre-acquisition entry must include the following line:

At the end of any period after acquisition, the business combination entries prepared for the assets and liabilities that were not recorded at fair value at acquisition date and that are sold, fully depreciated or settled during the current period include:

Which of the following statements regarding pre-acquisition entries prepared after acquisition date is incorrect?

At the date of acquisition 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:

The pre-acquisition entry is necessary to:

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

One year after acquisition date, acquired goodwill was regarded as having become impaired by $10 000. The appropriate consolidation adjustment in relation to the impairment will include the following line:

Where the consideration transferred is less than the fair value of the identifiable net assets and contingent liabilities acquired, the difference must be recognised in the consolidation worksheet as: