Question 1

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 sustain its operations and growth. As a result, the parent entity should reassess the value of its investment and determine whether it has been impaired, which means that the investee's fair value has declined below its carrying value. This impairment loss should be recognized in the parent's financial statements, which may impact its profitability and solvency ratios. Therefore, it is critical for the parent entity to monitor the performance and financial position of its subsidiaries regularly to ensure that they are creating value and contributing to the group's overall strategy and objectives.

Question 2

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 are sales between companies within the same group, and when we aggregate the sales of both the parent and subsidiary companies without adjusting for these internal sales, it can lead to double counting of revenue and overstatement of total income. Therefore, the statement is true.

Question 3

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

Intragroup sales of non-current assets require the elimination of any profit or loss on sale in the period of sale and the tax effects of the profit or loss, as well as adjusting depreciation and accumulated depreciation for the life of the asset and the tax effects of the adjustment to depreciation.

Question 4

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 5

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. So, the statement is true.

Question 6

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 should be eliminated from the group accounts because the group accounts reflect the many entities as one single economic entity. However, they should be reflected in the individual legal entity accounts. This is because dividends represent a transfer of profits within the group, which does not reflect any economic benefit to the group as a whole.

Question 7

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 requirement to eliminate intragroup balances, transactions, income, and expenses in full on consolidation is consistent with the economic entity concept, not the parent entity concept.

Question 8

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 are transactions between entities that belong to the same group. Dividends payable to group members are an example of an intragroup transaction. The other options are not examples of intragroup transactions.

Question 9

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

To eliminate the impact of intercompany dividend, we need to reduce the dividend declared by Little Company from the equity of Big Company. As Big company owns 100% of Little Company, we need to eliminate 100% of the impact. Therefore, the elimination entry would be: 
DR Investment in Little Company (Asset) $90,000
CR Dividend Income (Revenue) $90,000
This entry would be made by Big Company in its books to eliminate the impact of the dividend declared by Little Company. Therefore, option B is the correct answer.

Question 10

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 options are examples of intragroup transactions that need to be eliminated in the consolidated accounts in order to avoid double counting of assets, liabilities, revenues, and expenses. Inter-entity loans, inter-entity sales of non-current assets, the payment of management fees, and the transfer of tax losses between entities in the group are all examples of intragroup transactions that require elimination in consolidation.

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 economic entity concept of consolidation.

Accepted Answer

The statement is correct. AASB 127 requires intragroup transactions to be eliminated in full on consolidation, which is consistent with the economic entity concept of consolidation.

Question 12

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 13

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 14

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 sales revenue for the group should only include the final sale to an external entity, which is $700,000. Internal sales between Company A, B, and C are eliminated in consolidated financial statements.

Question 15

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

In consolidated financial statements, intercompany transactions are eliminated in full, not in proportion to the level of control.

Question 16

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 17

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

The proportion of a transaction between entities in a group to be eliminated is based on the nature of the transaction and not the level of equity ownership.

Question 18

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 19

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 20

Intragroup profits are eliminated in consolidation to reduce consolidated profits.

Accepted Answer