Question 1

When preparing consolidated financial statements, AASB 127 Consolidated and Separate Financial Statements is most closely based on the:

Accepted Answer

AASB 127 is based on the entity concept, which views the group as a single economic entity for financial reporting purposes.

Question 2

Which of the following statements is not correct:

Accepted Answer

A jointly controlled entity is typically accounted for using the equity method or proportionate consolidation, not full consolidation, unless specific conditions are met.

Question 3

The obligation to prepare and publish consolidated financial statements falls on the parent of a group, whether or not it is itself is a wholly owned subsidiary.

Accepted Answer

The obligation to prepare and publish consolidated financial statements falls on the parent of a group, regardless of whether it is a wholly owned subsidiary or not.

Question 4

Which of the following statements is most correct? In the context of consolidation:

Accepted Answer

Pyramiding in the context of consolidation refers to the structure where a parent company controls a subsidiary, which in turn may control another company, and so on, allowing the parent to control significant assets with a relatively small investment. This is because each level down the pyramid, the parent company needs only a majority of the controlling interest (often just over 50%) to control the subsidiary, which can then fully control its own subsidiaries with their assets, amplifying the parent's effective control over assets with less capital outlay.

Question 5

Which of the following statements is not correct?

Accepted Answer

The answer of Which of the following statements is not...

Question 6

Under the Corporations Act the members of a consolidated entity must all be companies registered under the Corporations Act.

Accepted Answer

The members of a consolidated entity can also include registered foreign companies and entities that are incorporated outside of Australia, but have a significant presence in Australia.

Question 7

What is the percentage of L Ltd's total interest in O Ltd?

Accepted Answer

L Ltd's total interest in O Ltd is 73%, as indicated by the choice A.

Question 8

Which of the following statements is most correct? In the context of corporate groups an example of horizontal integration would be when:

Accepted Answer

Horizontal integration refers to a situation where a company acquires or merges with another company that operates in the same industry and at the same stage of the production process. Thus, the only option that represents two companies operating within the same industry is A, where one television station acquires control over another television station. B represents vertical integration, where a company acquires a supplier or customer in the same value chain. C represents conglomerate diversification, where an investment bank acquires a company in a different industry. D represents an initial public offering (IPO), where a company goes public by listing its shares on a stock exchange.

Question 9

Company M controls company N.Both companies are large proprietary companies with no creditors and have annual turnover less than $2 million.Which statement is likely to be correct?

Accepted Answer

Both M and N are described as "large proprietary companies," which means they are separate legal entities and must prepare financial statements in accordance with accounting standards, making them accounting entities. Additionally, since M controls N, it is likely that M meets the definition of a reporting entity, which is a concept used to determine whether an entity's financial statements are required to be prepared in accordance with general purpose financial reporting frameworks. However, there is not enough information provided to determine whether N meets the definition of a reporting entity.

Question 10

Ralph Ltd owns 49% of Mika Ltd and governs the operating decisions of Mika Ltd; but Ralph Ltd does not govern the financial decisions of Mika Ltd.Under AASB 3 Business Combinations Ralph Ltd would:

Accepted Answer

Ralph Ltd would not consolidate Mika Ltd because, under AASB 3 Business Combinations, control is defined as having power over the investee, exposure, or rights to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns. Since Ralph Ltd does not govern the financial decisions of Mika Ltd, it does not have full control as required for consolidation.

Question 11

An indirect interest derives from holding shares in a subsidiary company's parent.

Accepted Answer

An indirect interest is indeed derived from holding shares in a subsidiary company's parent. This is because the value of the subsidiary company's shares will be affected by the performance of its parent, which in turn affects the value of the shares in the parent company.

Question 12

A owns 85% of B, 90% of C, 95% of D and 94% of E.B owns 3% of C and 1% of D.In which subsidiary does A have the greatest direct and indirect ownership?

Accepted Answer

To determine the greatest ownership by A, we need to calculate the total ownership A has in each subsidiary, including indirect ownership through other subsidiaries.

- A owns 85% of B
- A owns 90% of C, and B owns 3% of C, so A's total ownership in C is 90% + (85% x 3%) = 92.55%
- A owns 95% of D, and B owns 1% of D, so A's total ownership in D is 95% + (85% x 1%) = 95.25%
- A owns 94% of E, so no further calculation is needed.

Therefore, A has the greatest direct and indirect ownership in company D, with a total ownership of 95.25%.

Question 13

Can an economic entity not be a reporting entity?

Accepted Answer

The reporting entity test is not dependent upon whether an economic entity exists or not. Therefore, it is possible for an economic entity to not be a reporting entity if it does not meet the criteria of the reporting entity test.

Question 14

Which of the following statements in not correct:

Accepted Answer

A holding company is a company that owns a controlling interest in one or more other companies, but does not actively manage them. A nested subsidiary, on the other hand, refers to a subsidiary company that also has its own subsidiary companies.

Question 15

A company owned more than 50% by another must have its reports consolidated as part of a group.

Accepted Answer

The answer of A company owned more than 50% by...

Question 16

F Ltd owns 100% of G Ltd and 95% of H Ltd.H Ltd owns 90% of I Ltd and H Ltd owns 5% of J Ltd.F Ltd owns 10% of K Ltd and 10% of L Ltd.Which statement is most likely correct?

Accepted Answer

F Ltd owns 100% of G Ltd and 95% of H Ltd, so F is the parent entity of G and H. 
H Ltd owns 90% of I Ltd and 5% of J Ltd, so H is the parent entity of I and J. 
Therefore, F is the ultimate parent entity since it owns G and H, and H owns I and J. 
F also owns 10% of K Ltd and 10% of L Ltd, but there is no indication that K or L have any subsidiaries, so D is not correct. 
There is no information provided to suggest that G is a reporting entity, so B is not correct.

Question 17

M owns 20% of N, 100% of O, 90% of P and 25% of Q.R owns 55% of N and 70% of Q.Which statement is most likely correct?

Accepted Answer

Since R owns 55% of N and 70% of Q, both N and Q are under some control of R. Therefore, N, R, and Q can be considered a group. Option A is incorrect since N is under the control of M and R. Option C is incorrect since M only owns a portion of N and has complete control over O. Option D is too broad and cannot be concluded from the given information.

Question 18

The concept that underpins consolidations is:

Accepted Answer

The concept underpinning consolidations is the entity concept, which is implied by the functioning of AASB 127 (Consolidated and Separate Financial Statements) and was explicitly mentioned in its predecessor standards. This concept views the group of a parent and its subsidiaries as a single entity for financial reporting purposes, despite the separate legal entities involved.

Question 19

Joint control of a company does not satisfy the definition of control for the purpose of deciding when to prepare consolidated statements.

Accepted Answer

Joint control implies shared decision-making and does not grant any of the parties the ability to govern the financial and operating policies of an entity to benefit from its activities, which is required for control that leads to consolidation.

Question 20

What is the percentage of M Ltd's NCI interest in Z Ltd?

Accepted Answer

The answer of What is the percentage of M Ltd's...

Quiz 16: The Corporate Group