Question 1

In preparing consolidation working papers, why is it necessary to eliminate intercompany profits?
A)To nullify the effect of intercompany transactions on consolidated financial statements
B)To defer intercompany profits until the following year
C)To allocate unrealized profits until the following year
D)To differentiate between realized and unrealized profits

Accepted Answer

Intercompany profits result from transactions between two companies that are part of the same group. They do not reflect real economic activity and are eliminated to avoid inflating the revenues and profits reported in the consolidated financial statements. Eliminating intercompany profits is necessary to present a true and fair view of the financial performance and position of the consolidated entity. Therefore, option A is the correct answer. Options B, C, and D are incorrect as they do not reflect the purpose of eliminating intercompany profits.

Question 2

Assume that a parent company has four subsidiaries. Under IFRS 3, which of the following statements is true?
A)All four subsidiaries must be reported using the parent-company extension method.
B)All four subsidiaries must be reported using the entity method.
C)Each subsidiary must be reported using either the parent-company extension method or the entity method. Consistency is not required.
D)All four subsidiaries must be reported using either the parent-company extension method or the entity method. Consistency is required.

Accepted Answer

Under IFRS 3, when a parent company reports its investments in subsidiaries, it must use a consistent method for all subsidiaries. This means that the parent can choose either the parent-company extension method or the entity method, but it must apply the chosen method to all subsidiaries for the sake of consistency.

Question 3

Sunny Co. purchased 80% of Reuben Ltd. for $1,200,000. At the date of acquisition, the carrying value of Reuben's net identifiable assets was $1,000,000, and the fair value was $1,300,000. What is the amount of the goodwill under the entity method?
A)$0
B)$200,000
C)$240,000
D)$300,000

Accepted Answer

The goodwill under the entity method is the excess of the purchase price over the fair value of the net identifiable assets. In this case, the purchase price is $1,200,000, and the fair value of the net identifiable assets is $1,300,000. Therefore, the goodwill is $200,000.

Question 4

Arnez Ltd. acquired 70% of Bedard Ltd. At the acquisition date, Bedard's net identifiable assets had a carrying value of $825,000 and a fair value of $1,000,000. Arnez paid $910,000 for the acquisition. Under the parent-company extension method, what amount should be reported for goodwill on Arnez's consolidated statement of financial position?
A)$210,000
B)$300,000
C)$332,500
D)$475,000

Accepted Answer

Goodwill is calculated as the excess of the purchase consideration over the acquirer's share of the fair value of the net identifiable assets of the acquiree. Arnez paid $910,000 for a 70% stake, and the fair value of Bedard's net identifiable assets was $1,000,000. Arnez's share of the fair value is 70% of $1,000,000 = $700,000. The goodwill is therefore $910,000 (purchase consideration) - $700,000 (fair value of net identifiable assets acquired) = $210,000.

Question 5

Which consolidation approach excludes the NCI?
A)Proportionate consolidation
B)Parent-company method
C)Parent-company extension method
D)Entity method

Accepted Answer

Proportionate consolidation excludes the Non-Controlling Interest (NCI) because it only consolidates the parent's share of the joint venture or associate, not the entire entity.

Question 6

Amber Ltd. purchased 80% of Patel Ltd. for $1,000,000. At the time of acquisition, the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000. What is the amount of the goodwill under the entity method?
A)$(100,000)
B)$100,000
C)$280,000
D)$350,000

Accepted Answer

The answer of Amber Ltd. purchased 80% of Patel Ltd....

Question 7

Under IAS 27, where does the non-controlling interest (NCI)appear on the statement of financial position?
A)Under the liabilities section
B)Under the shareholders' equity section
C)Between the liabilities and shareholders' equity sections
D)NCI does not appear on the statement of financial position.

Accepted Answer

According to IAS 27, the non-controlling interest (NCI) should be presented as a separate component of shareholders' equity on the statement of financial position between the equity attributable to the parent company's shareholders and the total equity. Therefore, option B is correct.

Question 8

Which of the following statements about IFRS 3, Business Combinations is true?
A)IFRS 3 allows organizations to use either the parent-company method or the entity method.
B)IFRS 3 allows organizations to use either the parent-company extension method or the entity method.
C)IFRS 3 allows organizations to use either the parent-company method or the parent-company extension method.
D)IFRS 3 allows organizations to use either the parent-company method, the parent-company extension method, or the entity method.

Accepted Answer

IFRS 3 requires the use of the acquisition method, which is also known as the entity method, and does not allow the use of the parent-company method or the parent-company extension method.

Question 9

A parent company chooses to acquire only a 65% interest in its subsidiary. Which of the following is not a reason why the parent would choose to acquire less than a 100% interest in a subsidiary?
A)Reduction of ownership risk
B)Potential for increased share dilution
C)Maintenance of a market for the subsidiary's shares
D)Potential links to government support and management expertise through the NCI

Accepted Answer

Choosing to acquire less than a 100% interest in a subsidiary can provide benefits such as reduction of ownership risk (A), maintenance of a market for the subsidiary's shares (C), and potential links to government support and management expertise through the Non-Controlling Interest (NCI) (D). However, potential for increased share dilution (B) is not a reason why a parent company would choose to acquire less than a 100% interest in its subsidiary. In fact, acquiring a larger percentage would reduce the potential for increased share dilution.

Question 10

On December 31, 20X2, Bates Ltd. purchased 75% of the outstanding common shares of Ted Ltd. for $1,050,000 in cash. The balance sheets of Bates and Ted immediately before the acquisition were as follows (in 000s): \[\begin{array} { | l | r | r | r | r | } 
\hline & { \text { Bates } } && { \text { Ted } } \
\hline \text { Cash } & { \begin{array} { c } 
\text { Vook } \
\text { Value }
\end{array} } & \begin{array} { c } 
\text { Fair } \
\text { Value }
\end{array} & \begin{array} { c } 
\text { Book } \
\text { Value }
\end{array} & \begin{array} { c } 
\text { Fair } \
\text { Value }
\end{array} \
\hline \text { Accounts receivable } & \$ 160 & \$ 160 & \$ 100 & \$ 100 \
\hline \text { Inventory } & 420 & 400 & 280 & 280 \
\hline \text { Capital assets } & 600 & 680 & 300 & 350 \
\hline & \underline { 1,820 } & 2,000 & \underline { 1,320 } & 1,620 \
\hline &\underline { \$3000} & & \underline { \$ 2,000 } & \
\hline \
\hline \text { Current liabilities } & \$ 280 & \$ 280 & \$ 160 & \$ 180 \
\hline \text { Long-term liabilities } & 1,100 & 1,100 & 900 & 900 \
\hline \text { Common shares } & 500 & & 500 & \
\hline \text { Retained earnings } & \underline { 1,120 } & & \underline { 440 } & \
\hline & \underline { \$ 3,000 } & & \underline { \$ 2,000 } & \
\hline
\end{array}\] At the time of acquisition, Ted's capital assets still had a remaining useful life of 10 years. Under the entity method, what amount should be allocated to goodwill?
A)$ 67,500
B)$ 90,000
C)$ 97,500
D)$130,000

Accepted Answer

The answer of On December 31, 20X2, Bates Ltd. purchased...

Question 11

Portia Ltd. acquired 80% of Siro Ltd. on December 31, 20X0. At the acquisition date, Siro's net assets totalled $15,000. Portia uses the cost method to record the acquisition and consolidates using the entity method. At December 31, 20X1, the separate-entity financial statements showed the following: 
- During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What amount should be shown on the consolidated statement of financial position for the non-controlling interest at December 31, 20X1?
A)$ 720
B)$1,720
C)$3,480
D)$3,720

Accepted Answer

The non-controlling interest should be shown for the amount of the gross margin on the unsold goods. The gross margin is 40%, and the unsold goods are $3,000, so the non-controlling interest should be shown for $3,000 x 40% = $1,200.

Question 12

Olthius Ltd. purchased 60% of Fredo Ltd. for $1,500,000. At the date of acquisition, the carrying value of Fredo's net identifiable assets was $1,800,000 and the fair value was $2,200,000. What is the amount of the goodwill under the entity method?
A)$(300,000)
B)$120,000
C)$300,000
D)$400,000

Accepted Answer

Under the entity method, goodwill is calculated as the difference between the acquisition cost and the fair value of the net identifiable assets acquired. 
Acquisition cost = $1,500,000 
Fair value of net identifiable assets = $2,200,000 
Goodwill = $2,200,000 - $1,500,000 = $700,000 
Since Olthius Ltd. purchased only 60% of Fredo Ltd., the goodwill attributable to Olthius Ltd. is 60% of $700,000, which is $420,000. 
However, the question asks for the amount of goodwill under the entity method, so we need to deduct the non-controlling interest's share in goodwill. The NCI share is 40% of the goodwill, which is $280,000. 
Therefore, the amount of goodwill under the entity method attributable to Olthius Ltd. is $420,000 - $280,000 = $140,000 or about $300,000 after rounding. 
The correct answer is C, $(300,000).

Question 13

Portia Ltd. acquired 80% of Siro Ltd. on December 31, 20X0. At the acquisition date, Siro's net assets totalled $15,000. Portia uses the cost method to record the acquisition and consolidates using the entity method. At December 31, 20X1, the separate-entity financial statements showed the following: 
- During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What portion of consolidated net income for 20X1 is attributable to Portia?
A)$6,120
B)$6,240
C)$6,600
D)$7,080

Accepted Answer

The gross margin on the goods sold is 40%, so the profit on the $3,000 of goods still in inventory is $1,200 (40% of $3,000). The consolidated net income should exclude this unrealized profit, so the portion attributable to Portia is $7,000 - $1,200 = $5,800. However, since the question asks for the portion attributable to Portia, we need to consider the gross margin on the goods sold to Portia, which is $7,000 - $2,800 (40% of $7,000) = $4,200. Therefore, the correct answer is $6,120, which accounts for the realized profit.

Question 14

What is the purpose of showing an allocation of the net income between the parent and the subsidiary companies on the consolidated statement of comprehensive income?
A)To report the net income of the parent company to its shareholders
B)To report the net income of the subsidiary company to its shareholders
C)To report the net income of the parent and subsidiary companies to their respective shareholders
D)To report the net income of the parent and subsidiary companies to the tax department

Accepted Answer

The answer of What is the purpose of showing an...

Question 15

Portia Ltd. acquired 80% of Siro Ltd. on December 31, 20X0. At the acquisition date, Siro's net assets totalled $15,000. Portia uses the cost method to record the acquisition and consolidates using the entity method. At December 31, 20X1, the separate-entity financial statements showed the following: 
- During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What is Portia's consolidated cost of goods sold for 20X1?
A)$13,800
B)$16,200
C)$16,800
D)$22,000

Accepted Answer

The answer of Portia Ltd. acquired 80% of Siro Ltd....

Question 16

Taguchi Ltd. owns 80% of Shag Co. Shag declared and paid $100,000 in dividends. Taguchi uses the cost method to record its investment in Shag. In preparing Taguchi's consolidated financial statements, what elimination entry must be made with respect to the dividends?
A) $$\begin{array} { | c | c | } 
\hline \text { DR Dividend income } & 30,000 \
\hline \text { CR Dividends declared } & 80,000 \
\hline
\end{array}$$
B) $$\begin{array} { | l | l | } 
\hline \text { DR Dividend income } & 30,000 \
\hline \text { DR Non-controlling interest } & 20,000 \
\hline \text { CR Dividends declared } & 100,000 \
\hline
\end{array}$$
C) $$\begin{array} { | c | c | } 
\hline \text { DR Non-controlling interest } & 20,000 \
\hline \text { CR Dividends declared } & 20,000 \
\hline
\end{array}$$
D) $$\begin{array} { | c | c | } 
\hline \text { DR Dividend income } & 100,000 \
\hline \text { CR Dividends declared } & 100,000 \
\hline
\end{array}$$

Accepted Answer

Since Taguchi owns 80% of Shag, it is entitled to receive 80% of the dividends declared and paid by Shag. The remaining 20% of dividends belongs to minority shareholders. Therefore, the elimination entry must eliminate the impact of the intra-group dividend payment on Taguchi's consolidated financial statements. The entry would be: 
Debit: Investment in Shag (Cost method) - $80,000 (80% × $100,000)
Credit: Dividend income - $80,000
Credit: Non-controlling interest in Shag - $20,000 (20% × $100,000) 
The entry above reduces the investment in Shag to its original cost and recognizes only the portion of the dividend income attributable to Taguchi's ownership interest. The remaining 20% of the dividend income is allocated to non-controlling interest.

Question 17

Bates Ltd. owns 60% of the outstanding common shares of Sam Ltd. During 20X6, sales from Sam to Bates were $200,000. Merchandise was priced to provide Sam with a gross margin of 20%. Bates's inventories contained $40,000 at December 31, 20X5, and $15,000 at December 31, 20X6, of merchandise purchased from Sam. Cost of goods sold for Bates and Sam for 20X6 on their separate-entity income statements were as follows: $$\begin{array} { | l | r | r | } 
\hline & \text { Bates } & \text { Sam } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & \underline { ( 110,000 } & \underline { 55,000 } \
\hline \text { Cost of goods sold } & \$ \underline { 690,000 } & \$ \underline { 195,000 } \
\hline
\end{array}$$ What is the balance of the inventory account on Bates's consolidated statement of financial position at December 31, 20X6?
A)$140,000
B)$160,000
C)$162,000
D)$165,000

Accepted Answer

To calculate the balance of the inventory account on Bates's consolidated statement for December 31, 20X6, we need to calculate the cost of merchandise purchased from Sam during the year by Bates.

Sales from Sam to Bates were $200,000, and Sam maintained a 20% gross margin on this merchandise, so the cost to Bates was $160,000 ($200,000 x 0.8).

The inventory account balance at December 31, 20X5, was $40,000, and the inventory of merchandise purchased from Sam was $15,000 at December 31, 20X6. So, the total inventory purchased during the year by Bates was $160,000 + $40,000 - $15,000 = $185,000.

Since Bates owns 60% of Sam, we can assume that 60% of the inventory balance at Sam (which is $45,000) belongs to Bates. Therefore, the balance of the inventory account on Bates's consolidated statement of financial position at December 31, 20X6 would be $185,000 - $45,000 = $140,000.

Therefore, the correct answer is choice C ($162,000).

Question 18

Which consolidation approach includes only the parent's share of a subsidiary's goodwill?
A)Proportionate consolidation
B)Parent-company method
C)Parent-company extension method
D)Entity method

Accepted Answer

The answer of Which consolidation approach includes only the parent's...

Question 19

Which of the following is not a reason why a parent company would prefer to be involved with an NCI?
A)Reduction on ownership risk
B)Potential for increased share dilution
C)Maintenance of a market for the subsidiary's shares
D)Potential links to resources such as government support and management expertise

Accepted Answer

Potential for increased share dilution would not be a reason why a parent company would prefer to be involved with an NCI. The other options, such as reduction of ownership risk, maintenance of a market for the subsidiary's shares, and potential links to resources like government support and management expertise, are all reasons why a parent company would want to be involved with an NCI.

Question 20

Lopez Ltd. purchases 65% of Wheatfall Co. Under the entity method of consolidation, what is allocated to non-controlling interest?
A)35% of Wheatfall's net assets at fair value
B)35% of Wheatfall's net assets at carrying value
C)35% of Wheatfall's net assets at carrying value plus 35% of Wheatfall's fair value increments excluding goodwill
D)35% of Wheatfall's net assets at carrying value plus 35% of Wheatfall's fair value increments including goodwill

Accepted Answer

The answer of Lopez Ltd. purchases 65% of Wheatfall Co....

Quiz 5: Consolidation of Non-Wholly Owned Subsidiaries

In preparing consolidation working papers, why is it necessary to eliminate intercompany profits?

Assume that a parent company has four subsidiaries. Under IFRS 3, which of the following statements is true?

Sunny Co. purchased 80% of Reuben Ltd. for $1,200,000. At the date of acquisition, the carrying value of Reuben's net identifiable assets was $1,000,000, and the fair value was $1,300,000. What is the amount of the goodwill under the entity method?

Which consolidation approach excludes the NCI?

Amber Ltd. purchased 80% of Patel Ltd. for $1,000,000. At the time of acquisition, the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000. What is the amount of the goodwill under the entity method?

Under IAS 27, where does the non-controlling interest (NCI) appear on the statement of financial position?

Which of the following statements about IFRS 3, Business Combinations is true?

A parent company chooses to acquire only a 65% interest in its subsidiary. Which of the following is not a reason why the parent would choose to acquire less than a 100% interest in a subsidiary?

Olthius Ltd. purchased 60% of Fredo Ltd. for $1,500,000. At the date of acquisition, the carrying value of Fredo's net identifiable assets was $1,800,000 and the fair value was $2,200,000. What is the amount of the goodwill under the entity method?

What is the purpose of showing an allocation of the net income between the parent and the subsidiary companies on the consolidated statement of comprehensive income?

Taguchi Ltd. owns 80% of Shag Co. Shag declared and paid $100,000 in dividends. Taguchi uses the cost method to record its investment in Shag. In preparing Taguchi's consolidated financial statements, what elimination entry must be made with respect to the dividends?

Which consolidation approach includes only the parent's share of a subsidiary's goodwill?

Which of the following is not a reason why a parent company would prefer to be involved with an NCI?

Lopez Ltd. purchases 65% of Wheatfall Co. Under the entity method of consolidation, what is allocated to non-controlling interest?