Deck 29: Further Consolidation Issues II: Accounting for Non-Controlling Interests

Question 1

Buster Ltd owns 85 per cent of the issued capital of Rhymes Ltd.During the period ended 30 June 2016 the operating profit of Rhymes Ltd was $680 000.Buster Ltd bought goods for $540 000 from Rhymes.The goods cost Rhymes $400 000 and at the end of the period none of this inventory was still on hand.Rhymes paid Buster a management fee of $100 000 during the period.Goodwill on consolidation was impaired by $30 000.Rhymes paid a dividend of $40 000 at the end of the period. What is the non-controlling interest in the operating profit of Rhymes Ltd?

A) $87 000
B) $112 500
C) $102 000
D) $101 969

Answer 1

C

Question 2

Under the proprietary concept of consolidation,non-controlling interests are shown as a liability.

Answer 2

True

Question 3

Non-controlling interests arise when:

A) The parent entity does not control a subsidiary in the group.
B) The parent entity raises capital through preference shares that have the characteristics of debt to fund the subsidiary.
C) The subsidiary has owners of equity who are not owners through their ownership interest in the controlling parent entity.
D) The subsidiary has invested in other entities in which it does not have a controlling interest.

Answer 3

C

Question 4

Non-controlling interests are 'identified' and eliminated as part of the consolidation process.

Question 5

In preparing consolidated financial statements non-controlling interests are allocated on a 'line-by-line' basis.

Question 6

Finger Ltd purchased 75 per cent of the issued capital and in the process gained control over Nail Ltd on 1 July 2013.The fair value of the net assets of Nail Ltd at purchase was represented by:
$$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 3760000 \\\hline \text { Retained earnings } & 1320000 \\\hline & \$ 5080000 \\\hline\end{array}$$
Finger Ltd paid cash consideration of $4 000 000 for Nail Ltd.During the period ended 30 June 2015,Nail Ltd paid management fees of $540 000 to Finger Ltd and Nails had an operating profit of $980 000.Nails' opening retained earnings at the beginning of the period were $1 460 000.At the end of the period Nail Ltd declared a dividend of $90 000.There were no other inter-company transactions.Goodwill was determined to have been impaired by $19 000 during the period.Companies in the group accrue dividends when they are declared by subsidiaries.
For the period ended 30 June 2015,what consolidation journal entries are required and what is the non-controlling interest?

A)
$$\begin{array}{l}{ \text { Consolidation journal entries: } }\\\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Share capital } & 2820000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 990000 & \\\hline \mathrm { Cr } & \text { Investment in Wills Ltd } & & 3810000 \\\hline\\\hline \mathrm { Dr } & \text { Management fee revenue } & 540000 & \\\hline \mathrm { Cr } & \text { Management fee expense } & &540000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Dividend payable } & 90000 & \\\hline \mathrm { Cr } & \text { Dividend receivable } & &90000 \\\hline & & & \\\hline\end{array}\\\text { Non-controlling interest: }\\\begin{array} { | l | r | r | } \hline \text { Operating profit } & 245000 & \\\hline \text { Opening retained earnings } & 365000 & \\\hline \text { Share capital } & \underline{940000} & \\\hline \text { Total } & \underline{1550000} & \\\hline\end{array}\end{array}$$
B)
${\text { Consolidation journal entries: }} \\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Share capital } & 3760000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 1320000 & \\\hline \mathrm{Cr} & \text { Non-controlling interest } & & 1080000 \\\hline \mathrm{Cr} & \text { Investment in Wills Ltd } & & 4000000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Impairment loss } & 19000 & \\\hline \mathrm{Cr} & \text { Accumulated impairment loss } & & 19000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Management fee revenue } & 540000 & \\\hline \mathrm{Cr} & \text { Management fee expense } & & 540000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Dividend payable } & 67500 & \\\hline \mathrm{Cr} & \text { Dividend receivable } & & 67500 \\\hline\\\hline\end{array}$
$\begin{array}{l}\text { Non-controlling interest: }\\\begin{array}{|l|r|l|}\hline \text { Operating profit } & 245000 &\\\hline \text { Dividend } & \underline{22500} \\\hline \text { Total } & \underline{267500} \\\hline\end{array}\end{array}$
C)

D)

Question 7

Parties who are not part of the ownership of the parent entity in a group and who own capital in a company that is a controlled entity in that group are called outside financing interests.

Question 8

AASB 101 Presentation of Financial Statements requires a separate line item on the face of the statement of financial position showing the non-controlling interest in equity.

Question 9

When a subsidiary company that has a non-controlling interest (NCI)declares a dividend,the treatment in the consolidated statement of financial position of dividends not paid is:

A) The non-controlling interest portion of the dividend owing should be eliminated along with the parent entity's share, leaving a zero balance in dividends payable.
B) The NCI's portion should be deducted from the non-controlling interest's share in equity. There should be no dividend amounts remaining in the consolidated statement of financial position, but the amount owed to the NCI should be disclosed separately.
C) The amount owing to NCI as a dividend payable should be included in the consolidated statement of financial position as a current liability.
D) The amount of dividends payable to both the parent entity and the NCI will be reflected in the consolidated statement of financial position.

Question 10

Non-controlling interests are shown as equity,that is,as contributors of equity capital to the economic entity.

Question 11

Only dividends payable to the parent entity are eliminated against dividends receivable in the accounts of the parent entity.

Question 12

On 1 July 2015 Harry Ltd purchased 80 per cent of the issued share capital of Wills Ltd and has control of Wills.The fair value of the net assets of Wills Ltd on that date was represented as follows:
$$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 2000000 \\\hline \text { Retained earnings } & 500000 \\\hline & \$ 2500000 \\\hline\end{array}$$
Harry Ltd paid cash consideration of $2 500 000 for Wills.Wills Ltd made an operating profit of $350 000,there were no intragroup transactions during the period ended 30 June 2016.Goodwill had been determined to have been impaired during the year by $25 000.What consolidation journal entries are required for the period and what is the non-controlling interest in equity as at 30 June 2016?

A)
$$\begin{array}{l}{ \text { Consolidation journal entries: } }\\\begin{array} { | c | l | r | r |} \hline \mathrm { Dr } & \text { Share capital } & 1600000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 400000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\\hline \mathrm { Cr } & \text { Investment in Wills Ltd } & & 2500000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 25000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 25000 \\\hline & & & \\\hline\end{array}\\\text { Non-controlling interest: }\\\begin{array} { | l | r | r | } \hline \text { Operating profit } & 70000 & \\\hline \text { Opening retained earnings } & 100000 & \\\hline \text { Share capital } & \underline{400000} & \\\hline \text { Total } & \underline{570000} & \\\hline\end{array}\end{array}$$
B)
$\text { Consolidation journal entries: } \\\begin{array}{|c|l|r|r|}\hline \mathrm{Dr} & \text { Share capital } & 2000000 & \\\hline \mathrm{Dr} & \text { Retained earnings } & 500000 & \\\hline \mathrm{Cr} & \text { Investment in Wills Ltd } & & 2500000 \\\hline & & & \\\hline\end{array}$
$\begin{array}{l}\text { Non-controlling interest: }\\\begin{array}{|l|r|r|}\hline \text { Retained earnings } & 100000 & \\\hline \text { Share capital } & \underline{400000} & \\\hline \text { Total } & \underline{500000} & \\\hline\end{array}\end{array}$
C)
$$\begin{array}{l}{ \text { Consolidation journal entries: } }\\\begin{array} { | c | l | r | r |} \hline \mathrm { Dr } & \text { Share capital } & 1600000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 400000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\\hline \mathrm { Cr } & \text { Investment in Wills Ltd } & & 2500000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 25000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 25000 \\\hline & & & \\\hline\end{array}\\\text { Non-controlling interest: }\\\begin{array} { | l | r | r | } \hline \text { Operating profit } & 65000 & \\\hline \text { Opening retained earnings } & 100000 & \\\hline \text { Share capital } & \underline { 400000 } & \\\hline \text { Total } & \underline { 565000 } & \\\hline\end{array}\end{array}$$
D)
$$\begin{array}{l}{ \text { Consolidation journal entries: } } \\\begin{array} { | c | l | r | r |} \hline \mathrm { Dr } & \text { Share capital } & 1600000 & \\\hline \mathrm { Dr } & \text { Retained earnings } & 400000 & \\\hline \mathrm { Dr } & \text { Goodwill } & 500000 & \\\hline \mathrm { Cr } & \text { Investment in Wills Ltd } & & 2500000 \\\hline & & & \\\hline \mathrm { Dr } & \text { Impairment loss } & 25000 & \\\hline \mathrm { Cr } & \text { Accumulated impairment loss } & & 25000 \\\hline & & & \\\hline\end{array}\\\text { Non-controlling interest: }\\\begin{array} { | l | r | r | } \hline \text { Operating profit } & 68750 & \\\hline \text { Opening retained earnings } & 100000 & \\\hline \text { Goodwill } & 125000 & \\\hline \text { Share capital } & \underline { 400000 } & \\\hline \text { Total } & \underline { 693750} & \\\hline\end{array}\end{array}$$

Question 13

Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Question 14

In calculating the proportion of a subsidiary's profit that is attributable to owners who are not part of the group,all adjustments to the group's profit should be treated as affecting the calculation for the outside owners.

Question 15

AASB 101 Presentation of Financial Statements requires an entity to disclose separately in the statement of comprehensive income,profit or loss for the period attributable to non-controlling interests and owners of the parent.

Question 16

Non-controlling interests are allocated on a 'line-by-line' basis throughout the statement of comprehensive income.

Question 17

Using full goodwill method,share of goodwill attributable to the non-controlling interests is recognised in the statement of financial position as part of non-controlling interest in equity.

Question 18

Where the parent entity holds less than 100 per cent interest in a subsidiary,AASB 10 requires the remaining shareholders' interests in what items to be disclosed?

A) the subsidiary's share capital and reserves
B) the subsidiary's profit or loss
C) the subsidiary's current and non-current assets
D) the subsidiary's share capital and reserves and the subsidiary's profit or loss

Question 19

AASB 10 Consolidated and Separate Financial Statements prescribes that non-controlling interests be presented in the consolidated statement of financial position as a liability.

Question 20

One of the steps in preparing consolidated financial statements is working out the amounts to be attributed to non-controlling interests to determine the amount to be eliminated in the consolidation process.

Question 21

Groucho Ltd purchased 60 per cent of the issued capital and in the process gained control over Marx Ltd on 1 July 2014.The fair value of the net assets of Marx Ltd at purchase was represented by:
$$\begin{array} { | l | r |} \hline\text { Share capital } & \$ 2140000 \\\hline \text { Retained earnings } & 840000 \\\hline & \$ 2980000 \\\hline\end{array}$$
Groucho Ltd paid cash consideration of $1 850 000 for Marx Ltd.During the period ended 30 June 2015,Marx Ltd paid management fees of $200 000 to Groucho Ltd and Marx had an operating profit of $530 000.Marx Ltd paid a dividend of $100 000 during the period.Groucho purchased inventory from Marx during the period for $80 000.The inventory cost Marx Ltd $56 000 and at the end of the period Groucho had 50 per cent of that inventory still on hand.Goodwill has been determined to have been impaired by $6200 during the period.Companies in the group use perpetual inventory systems and accrue dividends when they are declared by subsidiaries.Ignore tax implications.
For the period ended 30 June 2015,what consolidation journal entries are required and what is the non-controlling interest?

A)

B)

C)

D)

Question 22

There is no adjustment for things such as management fees when determining non-controlling interest,because:

A) They are not a material item.
B) They do not involve non-controlling interest.
C) They are considered to be realised.
D) They relate only to the parent entity.

Question 23

Which of the following statements is incorrect with regards to non-controlling interests in subsidiaries?

A) A non-controlling interest is defined as equity in a subsidiary not attributable, directly or indirectly, to a parent.
B) Under the entity concept, if subsidiaries are partly owned by the parent entity, both the parent entity and the non-controlling interests will have an ownership interest in the subsidiary's profits, dividend payments, and share capital and reserves.
C) Under the entity concept, non-controlling interests will be shown as a liability.
D) Under the proprietary concept, non-controlling interests will be shown as a liability.

Question 24

In adjusting for intragroup transactions prior to calculating non-controlling interests,describe the treatment of:
(a)intragroup service and interest payments; and (b)intragroup sales of inventory and non-current assets.

Question 25

On 1 July 2012,Han Solo Ltd acquired 80 per cent of the share capital of Chewbacca Ltd for $500 000,which represented the fair value of the consideration paid,when the share capital and reserves of Chewbacca Ltd were:
$$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 300000 \\\hline \text { Revaluation surplus } & \$ 100000 \\\hline \text { Retained earnings } & \underline{\$ 100000} \\\hline &\underline{ \$ 500000 }\\\hline\end{array}$$
All assets of Chewbacca Ltd were recorded at fair value at acquisition date,except for machinery that had a fair value $20 000 greater than its carrying amount.The cost of the equipment was $40 000 and it had accumulated depreciation of $10 000.The tax rate is 30 per cent.
Under the full goodwill method,what is the amount of fair value adjustment and goodwill,respectively,on 1 July 2012 for non-controlling interests in Chewbacca Ltd?

A) $ 2800; zero
B) $11 200; zero
C) $ 2 800; $22 200
D) $11 200; $88 800

Question 26

Green Ltd purchased 90 per cent of the issued capital and in the process gained control over Maroon Ltd on 1 July 2015.The fair value of the net assets of Maroon Ltd at purchase was represented by:
$$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 3220000 \\\hline \text { Retained earnings } & 740000 \\\hline & \$ 3960000 \\\hline\end{array}$$
Green Ltd paid cash consideration of $3 700 000 for Maroon Ltd.During the period ended 30 June 2017,Maroon Ltd paid management fees of $100 000 to Green Ltd and Maroon had an operating profit of $405 000.Maroon Ltd declared a dividend of $98 000 during the period.Green purchased inventory from Maroon during the period ended 30 June 2017 for $100 000.The inventory cost Maroon Ltd $85 000 and at the end of the period Green had 35 per cent of that inventory still on hand.Maroon's opening retained earnings for the period ended 30 June 2017 was $810 000.Goodwill has been determined to have been impaired by $13 600.Companies in the group use perpetual inventory systems and accrue dividends when they are declared by subsidiaries.There were no other inter-company transactions.Ignore tax implications.
For the period ended 30 June 2017,what consolidation journal entries are required and what is the outside equity interest?

A)

B)

C)

D)

Question 27

After eliminating the dividend payable to the parent,the balance of the dividend payable to the non-controlling interest will be:

A) eliminated as well.
B) included within the consolidated financial statements.
C) recognised as an expense in the consolidated financial statements.
D) transferred into a non-controlling interest reserve account.

Question 28

Which of the following is not one of the stages used to determine non-controlling interest?

A) the non-controlling interest in the current period's profit or loss
B) the non-controlling interest in share capital at the date of acquisition of the subsidiary by the parent entity
C) the non-controlling interest in the goodwill at acquisition
D) the non-controlling interest in reserves at the date of acquisition of the subsidiary by the parent entity

Question 29

As prescribed in AASB 10,which of the following statements is incorrect with regards to non-controlling interests in subsidiaries?

A) Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.
B) Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests.
C) Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
D) All of the given statement are correct.

Question 30

The disclosure of non-controlling interests in the (a)comprehensive income statement; and (b)statement of financial position is as follows:

A) (a) profit or loss attributable to non-controlling interest in the notes; (b) non-controlling interest in equity as a separate line item
B) (a) profit or loss attributable to non-controlling interest on the face; (b) non-controlling interest in equity as part of share capital
C) (a) profit or loss attributable to non-controlling interest in the notes; (b) non-controlling interest in equity as part of share capital
D) (a) profit or loss attributable to non-controlling interest on the face; (b) non-controlling interest in equity as a separate line item

Question 31

Which of the following statements is incorrect with regards to non-controlling interests in subsidiaries?

A) The requirement to eliminate the effects of intragroup transactions does not hold when there are non-controlling interests.
B) The non-controlling interest's share in the dividends paid or proposed by the subsidiary is not eliminated on consolidation.
C) The non-controlling interest's share of the profits of the subsidiary is calculated after adjustments to eliminate income and expenses of the subsidiary that are realised from the economic entity's perspective.
D) Management fees paid in an intragroup transaction are considered realised when determining non-controlling interests in a subsidiary.

Question 32

Which of the following statements is incorrect with regards to non-controlling interests in subsidiaries?

A) A non-controlling interest is defined as a liability in a subsidiary not attributable, directly or indirectly, to a parent.
B) Under the entity concept, if subsidiaries are partly owned by the parent entity, both the parent entity and the non-controlling interests will have an ownership interest in the subsidiary's profits, dividend payments, and share capital and reserves.
C) Under the entity concept, non-controlling interests will be shown as equity.
D) Under the proprietary concept, non-controlling interests will be shown as equity.

Question 33

Calculating goodwill for a subsidiary that has a non-controlling interest involves:

A) Taking the parent entity's share of the fair value of the identifiable net assets of the subsidiary and deducting it from the fair value of the consideration paid.
B) Dividing the fair value of the consideration paid for the subsidiary by the percentage ownership of the parent entity and deducting the fair value of the identifiable net assets of the subsidiary from that amount.
C) Taking the book value of equity of the subsidiary and deducting the fair value of the consideration paid for the subsidiary.
D) Dividing the fair value of the identifiable net assets of the subsidiary by the percentage ownership of the parent entity and deducting this amount from the fair value of the consideration paid.

Question 34

Which of the following situations,involving eliminations as part of the consolidation process,would not have implications for the calculation of non-controlling interest?

A) the sale of a non-current asset by the subsidiary to the parent
B) the payment of a management fee by the subsidiary to the parent
C) the sale of inventory by the parent to the subsidiary
D) the payment of a management fee by the subsidiary to the parent and the sale of inventory by the parent to the subsidiary

Question 35

Calculating the non-controlling interest (NCI)in the operating profit and opening retained earnings of a subsidiary is done by:

A) taking the operating profit and opening retained earnings figures of the subsidiary and multiplying them by the percentage ownership held by the NCI.
B) adjusting the operating profit and opening retained earnings of the subsidiary for any intragroup transactions and multiplying them by the percentage ownership held by the NCI.
C) adjusting the operating profit of the subsidiary for any unrealised profit or expense of the subsidiary as a result of any intragroup transactions and multiplying both this and the opening retained earnings by the percentage ownership held by the NCI.
D) adjusting the opening retained earnings and the operating profit for any unrealised profit or expense of the subsidiary as a result of intragroup transactions and multiplying this by the percentage ownership held by the NCI.

Question 36

Detail three situations where the presence of non-controlling interests means that elimination journal entries would not be the same as they would be if the subsidiary was 100 per cent owned.

Question 37

Acquirer Limited purchased 75 per cent of Subby Limited for $45 000.The fair value of identifiable assets was $95 000,and the fair value of liabilities and contingent liabilities amounted to $47 000.According to AASB 10,what would be the amount of 'goodwill allocated to non-controlling interests of Subby Limited'?

A) $3000
B) $9000
C) $12 000
D) ($3000)

Question 38

On 1 July 2012,Han Solo Ltd acquired 80 per cent of the share capital of Chewbacca Ltd for $400 000,which represented the fair value of the consideration paid,when the share capital and reserves of Chewbacca Ltd were:
$$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 300000 \\\hline \text { Revaluation surplus } & \$ 100000 \\\hline \text { Retained earnings } & \underline{\$ 100000} \\\hline &\underline{ \$ 500000 }\\\hline\end{array}$$
All assets of Chewbacca Ltd were recorded at fair value at acquisition date,except for equipment that had a fair value $20 000 greater than its carrying amount.The cost of the equipment was $40 000 and it had accumulated depreciation of $10 000.The tax rate is 30 per cent.
Using the partial goodwill method,what is the amount of fair value adjustment and goodwill,respectively,on 1 July 2012 for non-controlling interests in Chewbacca Ltd?

A) $ 2800; zero
B) $11 200; 22 200
C) $ 2 800; $22 200
D) $11 200; $88 800

Question 39

Which of the following statements is incorrect with regards to non-controlling interests in subsidiaries?

A) The requirement to eliminate the effects of intragroup transactions holds whether or not there are non-controlling interests.
B) The non-controlling interest's share in the dividends paid or proposed by the subsidiary is eliminated on consolidation.
C) The non-controlling interest's share of the profits of the subsidiary is calculated after adjustments to eliminate income and expenses of the subsidiary that are unrealised from the economic entity's perspective.
D) Management fees paid in an intragroup transaction are considered realised when determining non-controlling interests in a subsidiary.

Question 40

Describe the two options in measuring the non-controlling interest.

Question 41

Discuss the three elements considered when calculating non-controlling interests.

Question 42

Discuss how share capital and reserves are determined at the date of the acquisition and post-acquisition changes in share capital and reserves.

Question 43

Differentiate 'full goodwill method' from the 'partial goodwill method' in the presence of non-controlling interests in a subsidiary.Discuss the implications of permitting the use of either method in business combinations.

Question 44

Describe the three steps involved in preparing consolidated financial statements.