Deck 27: Consolidation: Wholly Owned Entities

Question 1

In the case of a wholly owned subsidiary, if the fair value of the consideration transferred plus the fair value of the previously held interest is greater than the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary:

A) goodwill has been purchased and must be recognised on consolidation.
B) the difference is treated as a special equity reserve in the acquirer's accounting records.
C) the difference is immediately charged to profit or loss in the period in which the business combination occurred.
D) a gain on bargain purchase results.

Answer 1

A

Question 2

The pre-acquisition entries are used to:

A) eliminate the investment in the subsidiary and the pre-acquisition equity of the subsidiary.
B) eliminate the investment in the subsidiary and the post-acquisition equity of the subsidiary.
C) eliminate the pre-acquisition equity of the subsidiary.
D) eliminate the post-acquisition equity of the subsidiary.

Answer 2

A

Question 3

Before undertaking the consolidation process, it may be necessary to make the following adjustments in relation to the individual statements if the parent and the subsidiary do not use the same accounting policies for like transactions in similar circumstances:

A) the parent will prepare its own financial statements using the same accounting policies as the subsidiary.
B) the subsidiary will prepare its own financial statements using accounting policies that are negotiated with the parent.
C) the subsidiary will prepare its own financial statements using the same accounting policies as the parent.
D) all of the options are incorrect.

Answer 3

C

Question 4

Which of the following statements is incorrect?

A) Where consolidated financial statements are prepared over a number of years, consolidation entries need to be made every time a consolidation worksheet is prepared.
B) A consolidation worksheet is used to help the process of adding together the financial statements of the parent and its subsidiaries.
C) Consolidation adjusting entries affect the ledger accounts of the parent and subsidiaries.
D) There are no consolidated ledger accounts.

Question 5

If a subsidiary's reporting date does not coincide with the parent entity's reporting date, adjustments must be made for the effects of significant transactions that occur between the two reporting dates provided the reporting dates differ by no more than:

A) 1 months.
B) 3 months.
C) 6 month.
D) 9 months.

Question 6

Before undertaking the consolidation process, it may be necessary to make the following adjustments in relation to the individual statements if the end of the subsidiary's financial period does not coincide with the:

A) the subsidiary will prepare its own financial statements as at the end of the parent's financial period.
B) the parent will prepare its own financial statements as at the end of the subsidiary's financial period.
C) the parent will prepare its own financial statements as at 30 June if the end of the parent's reporting period is not 30 June.
D) the subsidiary will prepare its own financial statements as at 30 June if the end of the parent's reporting period is not 30 June.

Question 7

Leather Limited acquired 100% of the share capital of Vinyl Limited for $235 000. Vinyl had total shareholder's equity of $200 000. The book values of Vinyl Limited's assets were: buildings $150 000, machinery $80 000. The fair values of these assets were: buildings $180 000, machinery $90 000. Also, Vinyl Limited has not previously recorded an internally generated trademark with a fair value of $40 000 and a contingent liability related to a warranty with a fair value of $10 000. The tax rate is 30%. The acquisition analysis will determine:

A) a goodwill of $35 000.
B) a goodwill of $14 000.
C) a gain on bargain purchase of $21 000.
D) a gain on bargain purchase of $14 000.

Question 8

During the consolidation process, it may be necessary to make which of the following adjustments to the individual statements?

A) pre-acquisition entries only.
B) business combination valuation entries and pre-acquisition entries in the consolidation worksheet.
C) business combination valuation entries only.
D) business combination valuation entries and pre-acquisition entries in the individual journals of the parent and the subsidiaries.

Question 9

Papa Limited has two subsidiary entities, Mumma Limited and Junior Limited. Papa Limited owns 100% of the shares in both entities. Details of the cash accounts of each company are: Papa Limited $160 000, Mumma Limited $85 000, Junior Limited $12 500. The balance of the consolidated cash account of the Papa Limited group is:

A) $97 500
B) $160 000
C) $257 500
D) $62 500

Question 10

Kansas Limited has two subsidiary entities, Emma Limited and Goldie Limited. Kansas Limited owns 100% of the shares in both entities. Details of the issued share capital are: $\begin{array}{lr}\text { Kansas Limited } & \$ 300000 \\\text { Emma Limited } & \$ 90000 \\\text { Goldie Limited } & \$ 75000\end{array}$ The consolidated share capital amount of the Kansas - Emma - Goldie group is:

A) $135 000
B) $465 000
C) $165 000
D) $300 000

Question 11

Which of the following statements is incorrect?

A) The business combination valuation reserve is an account recorded in the subsidiary's records.
B) The acquisition analysis may include the recognition of assets and liabilities not recognised in the subsidiary's records.
C) The acquisition analysis will determine whether any goodwill or gain on bargain purchase has arisen as a part of the business combination.
D) An acquisition analysis is prepared at acquisition date to identify the identifiable assets and liabilities of the subsidiary at fair value.

Question 12

Breeze Limited acquired Zephyr Limited for a purchase consideration of $140 000. At acquisition date the fair value of Zephyr Limited's furniture asset was $40 000 and the carrying amount was $35 000. If the company tax rate is 30%, which of the following is the appropriate adjustment to recognise the tax effect of the business combination revaluation of furniture at acquisition date?

A) DR Deferred tax asset $3 500
B) CR Deferred tax asset $3 500
C) DR Deferred tax liability $3 500
D) CR Deferred tax liability $3 500

Question 13

Stairwell Limited acquired 100% of the share capital of Bannister Limited for $237 500. Bannister had total shareholder's equity of $200 000. The book values of Bannister Limited's assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $120 000, machinery $125 000. The tax rate is 30%. The acquisition analysis will determine:

A) a goodwill of $37 500.
B) a goodwill of $20 000.
C) a gain on bargain purchase of $12 500.
D) a gain on bargain purchase of $37 500.

Question 14

The business combination valuation entries are used to recognise:

A) the fair value of the assets not recorded in the subsidiary's accounts at acquisition date.
B) the fair value of the liabilities not recorded in the subsidiary's accounts at acquisition date.
C) the fair value adjustments for assets and liabilities that were recorded in the subsidiary's accounts at acquisition date based on carrying amounts different from fair value.
D) all of the options are correct.

Question 15

Oceania Limited acquired 100% of the share capital of Broadwater Limited. Broadwater had total shareholder's equity of $250 000. The book values of Broadwater Limited's assets were: buildings $150 000, machinery $90 000. The fair values of these assets were: buildings $180 000, machinery $100 000. The tax rate is 30%. The fair value of the identifiable net assets is:

A) $280 000
B) $278 000
C) $210 000
D) $222 222

Question 16

Which of the following statements regarding the acquisition analysis is incorrect?

A) It determines whether there is goodwill on acquisition or a gain on bargain purchase.
B) It is considered the first step in the consolidation process.
C) It calculates and compares the fair value of the consideration transferred with the fair value of the net identifiable assets and liabilities acquired.
D) It calculates the fair value of the net identifiable assets and liabilities acquired based on the value of the post-acquisition equity in the subsidiary.

Question 17

The consolidation worksheet entries have an impact on:

A) the consolidated financial statements.
B) the individual statement of the parent.
C) the individual statement of the subsidiaries.
D) the individual statements of the parent and its subsidiaries.

Question 18

Forrest Ltd acquired 100% of the share capital of Desert Ltd when the carrying value of Desert Ltd's equipment was $75 000. The fair value of the equipment on acquisition date was $90 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that must be recognised on consolidation?

A) $15 000
B) $10 500
C) $3 500
D) $90 000

Question 19

The acquisition analysis calculates the fair value of the net identifiable assets and liabilities acquired based on the book value of the pre-acquisition equity of the subsidiary, adjusted for the following:

A) previously recorded goodwill in the subsidiary at acquisition date
B) fair value adjustments for the assets and liabilities that were recorded in the subsidiary's accounts at acquisition date based on carrying amounts different from fair value
C) the fair value of the assets and liabilities not recorded in the subsidiary's accounts at acquisition date
D) all of the options are correct

Question 20

The preparation of consolidated financial statements involves:

A) adjusting entries in the accounting records of the parent.
B) adjusting entries in the accounting records of the subsidiary.
C) together the financial statements of the investor and the associate.
D) adding together the financial statements of the parent and the subsidiaries.

Question 21

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.

Question 22

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

Question 23

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.

Question 24

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.

Question 25

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

Question 26

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.

Question 27

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: The pre-acquisition entry at 1 July 2021 is:

Question 28

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

Question 29

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.

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

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.

Question 37

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.

Question 38

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.

Question 39

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

Question 40

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.

Question 41

According to AASB 3 Business Combinations, the key principle relating to the disclosure of information about business combinations is to disclose information that:

A) does not give an advantage to the competitors of a consolidated group.
B) provides financial statement users with information about the parent entity only.
C) enables financial statement users to evaluate the nature and financial effect of business combinations that occurred during the reporting period.
D) enables the preparation of the consolidated financial statements in the most cost-effective manner.

Question 42

Which of the following statements is incorrect?

A) All assets can be revalued in the subsidiary's accounts.
B) The fair value adjustments may be made via the consolidation worksheet or in the actual records of the subsidiary.
C) If the assets can be revalued in the subsidiary accounts, the increase in value will be recognised as part of the pre-acquisition equity in asset revaluation surplus.
D) If the assets are revalued in the consolidation worksheet, the increase in value will be recognised as part of the pre-acquisition equity in the business combination valuation reserve.

Question 43

Which of the following events can cause a change in the pre-acquisition entry subsequent to acquisition date? I. Depreciation on non-current assets.
II. Transfers to post-acquisition retained earnings.
III. Transfers from pre-acquisition retained earnings.
IV. Bonus dividends paid from pre-acquisition equity

A) III and IV only.
B) I, II, III and IV.
C) I, III and IV only.
D) II and III only.

Question 44

If a revaluation of the subsidiary's assets is performed on consolidation, the subsidiary's assets are carried into the consolidated statement of financial position at:

A) current replacement cost.
B) net present value.
C) fair value.
D) historical cost.

Question 45

At acquisition date, a wholly owned subsidiary had the following equity items. Retairled earmirgs $\quad$$\quad$$\$ 27,500$
BHare capital $\quad$$\quad$$\quad$$\$ 40,000$ In the year following the acquisition, the subsidiary transferred $5 000 from pre-acquisition retained earnings to a general reserve account. At the reporting date following the reserve transfer, which of the following consolidation adjustments is needed?
I. Dr Retained earnings $5 000
Cr General reserve $5 000
II. Dr General reserve $5 000
Cr Transfer to general reserve $5 000
III. Dr General reserve $5 000
Cr Shares in subsidiary $5 000
IV. Dr Shares in subsidiary $5 000
Cr Retained earnings $5 000

A) I.
B) II.
C) III.
D) IV.

Question 46

Which of the following statements is correct?

A) Revaluations of assets such as goodwill and inventory are not permitted in the accounting records of the subsidiary.
B) Inventories can be revalued to an amount greater than its cost in the records of the subsidiary.
C) AASB 3 Business Combinations requires that any revaluations of a subsidiary's assets at acquisition date must be done in the consolidation worksheet.
D) The revaluation of non-current assets in the subsidiary's records means that the subsidiary has adopted the cost model of accounting for those assets.

Question 47

In the periods after acquisition, the gain on bargain purchase will be recognised in the pre-acquisition entries as:

A) no adjustment is necessary.
B) a credit to gain for the current period.
C) a debit to retained earnings (closing balance).
D) a decrease in the amount debited to retained earnings (opening balance).

Question 48

Turtles Ltd acquired 100% of Dove Ltd on 1 July 2021. At acquisition date, Dove Ltd had the following equity items: Retairyed earTings $\quad$$\quad$$\$ 120,000$
Share capital $\quad$$\quad$$\quad$$\quad$$\$ 200,000$ In the year following the acquisition, Dove Ltd paid a bonus share dividend of $30 000 out of pre-acquisition retained earnings. Which of the following consolidation adjustments is needed in the consolidation worksheet for 30 June 2022?
I. Dr Shares in subsidiary $30 000
Cr Share capital $30 000
II. Dr Bonus dividend paid $30 000
Cr Share capital $30 000
III. Dr Share capital $30 000
Cr Bonus dividend paid $30 000
IV. Dr Retained earnings $30 000
Cr Share capital $30 000

A) I.
B) II.
C) III.
D) IV.

Question 49

Which of the following assets cannot be revalued above their cost in the accounting records of the subsidiary?
I. Goodwill
II. Inventories
III. Land and buildings
IV. Plant and equipment

A) I, III and IV.
B) II, III and IV.
C) I and III.
D) I and II.