Question 1

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets,liabilities and contingent liabilities of the acquiree:
A)a gain on bargain purchase results
B)goodwill has been purchased and must be recognised
C)the difference is treated as a special equity reserve in the acquirer's accounting records
D)the difference is treated as a loss and immediately charged to profit or loss of the period in which the business combination occurred.

Accepted Answer

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree, it means that the acquirer has paid for more than the fair value of the identifiable assets and liabilities of the acquiree. This excess amount is recognized as goodwill, which represents the value of the synergies and other intangible benefits expected from the combination. Therefore, choice B is the correct answer. The other options are incorrect because a gain on bargain purchase (A) would only arise if the cost of the business combination is less than the fair value of the acquired net assets, while choice C is not a valid treatment under IFRS or GAAP. Finally, choice D is incorrect because the excess amount is not treated as a loss, but rather as goodwill.

Question 2

Eeny Limited has two subsidiary entities,Meeny Limited and Miney Limited.Eeny Limited owns 100% of the shares in both entities.Details of issued share capital are:
-Eeny Limited $100 000
-Meeny Limited $30 000
-Miney Limited $15 000
The consolidated share capital amount of the Eeny Meeny Miney group is:
A)$45 000
B)$55 000
C)$100 000
D)$145 000.

Accepted Answer

The consolidated share capital amount of the group is the sum of the share capital amount of all the entities, which is $100,000 + $30,000 + $15,000 = $145,000. Therefore, option C is the correct answer.

Question 3

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

Accepted Answer

The key principle of disclosing information about business combinations is to provide users with information that enables them to evaluate the nature and financial effect of the business combinations that occurred during the period. This information helps the users in making decisions, assessing risks, and understanding the financial position of the entity. Cost-effectiveness and avoiding giving an advantage to competitors are not the primary concerns for disclosure of information about business combinations. Moreover, the information should be provided for both the parent entity and its subsidiaries as they form a consolidated group.

Question 4

At the date of acquisition a subsidiary had recorded a dividend payable of $10 000.The consolidation adjustment needed at the date of acquisition in relation to this event is:
A)DR Dividend payable $10 000 CR Dividend receivable $10 000
B)DR Dividend revenue $10 000 CR Dividend declared $10 000
C)DR Shares in subsidiary $10 000 CR Dividend receivable $10 000
D)DR Cash $10 000 CR Shares in subsidiary $10 000.

Accepted Answer

At the date of acquisition, the parent company would not have received the dividend from its subsidiary. Therefore, the subsidiary would have recorded a dividend payable of $10,000. As per the consolidation process, this payable balance needs to be eliminated and adjusted with the dividend receivable. Thus, the consolidation adjustment needed is to debit the dividend payable account with $10,000 in the subsidiary's books and credit the dividend receivable account with the same amount in the parent company’s books. Hence, Choice A is the correct answer.

Question 5

In a business combination the revaluation of non-current assets in the records of the subsidiary means that the subsidiary has effectively adopted the:
A)parent-entity model of consolidation
B)proprietary model of accounting
C)cost model of accounting
D)revaluation model of accounting.

Accepted Answer

The revaluation of non-current assets is based on the revaluation model of accounting, which allows for the assets to be carried at their fair value. This model is consistent with IFRS Standards and is available as an accounting policy choice. Therefore, the adoption of the revaluation model indicates that the subsidiary is no longer using the cost model of accounting but instead, has adopted a revaluation model.

Question 6

On 1 July 20X6 Possum acquired a 100% interest in Echidna.At that time Echidna had goodwill of $5 000 recorded in its statement of financial position as a result of a previous business combination.The total goodwill arising on Possum's acquisition of Echidna was $12,000.The goodwill recognised on consolidation as a result of Possum's acquisition of Echidna is:
A)nil
B)$5 000
C)$7 000
D)$12 000

Accepted Answer

Goodwill arising from a previous business combination cannot be recognised as part of the goodwill arising on a subsequent acquisition. Therefore, the $5 000 goodwill recorded in Echidna's statement of financial position should not be included in the calculation of goodwill arising on Possum's acquisition. The remaining $7 000 is the goodwill recognised on consolidation as a result of Possum's acquisition of Echidna.

Question 7

When a parent entity has previously held an investment in a subsidiary prior to gaining control the effect on the consolidation process is as follows:
A)there is no impact
B)the change in the fair value of the previously held interest is recognised in profit or loss
C)the change in the fair value of the previously held interest is recognised in retained earnings
D)the change in the fair value of the previously held interest is recognised in other comprehensive income

Accepted Answer

The change in the fair value of the previously held interest is recognised in profit or loss because it is an unrealised gain or loss.

Question 8

When preparing consolidated financial statements,adjustments for pre-acquisition equity and inter-entity transactions are recorded:
A)in the accounting records of the parent entity
B)in the accounting records of the subsidiary
C)on a consolidation worksheet
D)in the accounting records of the reporting entity.

Accepted Answer

Adjustments for pre-acquisition equity and inter-entity transactions are recorded on a consolidation worksheet when preparing consolidated financial statements. This worksheet eliminates any inter-company transactions between the parent and subsidiary and adjusts for any differences in accounting policies between the two entities. The adjustments are not recorded in the accounting records of either the parent or the subsidiary.

Question 9

In relation to pre-acquisition of a subsidiary entity,which of the following events can cause a change in the pre-acquisition entry subsequent to acquisition date?
I Transfers from post-acquisition retained earnings
II Dividends paid from pre-acquisition reserves
III Transfers from pre-acquisition retained earnings
IV Impairment of goodwill
A)I,II,III and IV
B)I,III and IV only
C)II and III only
D)III and IV only.

Accepted Answer

Transfers from pre-acquisition retained earnings can cause a change in the pre-acquisition entry after the acquisition date. Impairment of goodwill can also lead to a change in the pre-acquisition entry. However, transfers from post-acquisition retained earnings and dividends paid from pre-acquisition reserves are not related to the pre-acquisition entry and do not affect it. Therefore, options I and II can be eliminated. Thus, the correct option is D, which includes III and IV as correct choices.

Question 10

Parent Limited acquired 100% of a subsidiary on 1 July 20X7.At acquisition date the subsidiary had the following equity items:
-Retained earnings $24 000
-Share capital $33 000
-Business combination revaluation reserve $10 000
In the year following the acquisition the subsidiary paid a bonus dividend of $14 000 out of pre-acquisition retained earnings.The following consolidation adjustment is needed in the consolidation worksheet for 30 June 20X8:
A)DR Share capital $14 000 CR Bonus dividend paid $14 000
B)DR Shares in subsidiary 14 000 CR Share capital $14 000
C)DR Bonus dividend paid $14 000 CR Retained earnings $14 000
D)DR Retained earnings $14 000 CR Share capital $14 000.

Accepted Answer

The bonus dividend paid by the subsidiary out of pre-acquisition retained earnings reduces the retained earnings of the subsidiary and increases the share capital of the subsidiary. Therefore, the consolidation adjustment is to debit Share capital and credit Bonus dividend paid.

Question 11

One year after acquisition date,the goodwill acquired was regarded as having become impaired by $20 000.The appropriate consolidation adjustment in relation to the impairment will include the following line:
A)DR Goodwill $20 000
B)DR Share capital $20 000
C)CR Business combination valuation reserve $20 000
D)CR Accumulated impairment losses $20 000.

Accepted Answer

The answer of One year after acquisition date,the goodwill acquired...

Question 12

A Limited acquired B Limited for $110 000.At acquisition date the fair value of the B Limited's Land asset was $40 000 and the book value was $30 000.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 land?
A)DR Deferred tax liability $3 000
B)CR Deferred tax liability $3 000
C)DR Deferred tax asset $3 000
D)CR Deferred tax asset $3 000.

Accepted Answer

The answer of A Limited acquired B Limited for $110...

Question 13

On 1 July 20X6,P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:
The pre-acquisition entry at 1 July 20X6 is:
A)
B)
C)
D)

Accepted Answer

The pre-acquisition entry at 1 July 20X6 is to debit Investment in S Limited for $50 000 and credit Cash for $50 000 as the acquiring company, P Limited, paid cash to acquire all the issued shares of S Limited. Option B correctly reflects this journal entry. Option A incorrectly debits a liability account, Option C incorrectly credits Investment in P Limited, and Option D incorrectly debits the equity account of S Limited.

Question 14

Company X acquired Company Y when the carrying value of Company Y's plant was $50 000.The fair value of the plant on acquisition date was $65 000.The company tax rate was 30%.How much is the amount of the business combination valuation reserve that must be recognised?
A)$3 500
B)$10 500
C)$15 000
D)$65 000

Accepted Answer

The business combination valuation reserve is calculated as the difference between the fair value and the carrying value of the plant, multiplied by the tax rate: ($65,000 - $50,000) * 30% = $15,000 * 30% = $4,500. However, the reserve is the difference before tax, which is $15,000.

Question 15

On 1 January 20X2 A Ltd acquired all the issued shares in B Ltd.At that date the inventory of B Ltd had a carrying amount of $5 000 less than its fair value.The inventory was all sold by 30 June 20X4.At 30 June 20X5 the consolidation adjustment against inventory in relation to the transaction will be:
A)a debit of $5 000
B)a credit of $5 000
C)a debit of $3 500
D)nothing

Accepted Answer

The inventory was sold by 30 June 20X4, so by 30 June 20X5, there is no remaining inventory related to the acquisition that requires a consolidation adjustment.

Question 16

Entity A and Entity B agree to merge.The capital structure of each entity is:
Entity A - 100 ordinary shares
Entity B - 60 ordinary shares
Entity A issues 2.5 shares in exchange for each ordinary share of Entity B.All of Entity B's shareholders exchange their shares for Entity A shares.
Which of the following statement is correct?
A)Entity A is both the parent and the acquirer in the transaction.
B)Entity B is both the parent and the acquirer in the transaction.
C)Entity A is the parent and Entity B is the acquirer in the transaction.
D)Entity B is the parent and Entity A is the acquirer in the transaction.

Accepted Answer

Entity A is issuing new shares to acquire Entity B, therefore Entity A is the acquirer and Entity B is the target. Since Entity A's capital structure is larger than Entity B's, it is likely that Entity A will be the parent and Entity B will be the subsidiary after the merger.

Question 17

At acquisition date a wholly owned subsidiary had the following equity items:
-Retained earnings $14 000
-Share capital $30 000
-Business combination revaluation reserve $6000
In the year following the acquisition the subsidiary transferred $10 000 from pre-acquisition retained earnings,to a general reserve account.At the reporting date following the reserve transfer,the following consolidation adjustment is needed:
A)DR Retained earnings $10 000 CR General reserve $10 000
B)DR General reserve $10 000 CR Shares in subsidiary $10 000
C)DR Shares in subsidiary $10 000 CR Retained earnings $10 000
D)DR General reserve $10 000 CR Retained earnings $10 000.

Accepted Answer

The answer of At acquisition date a wholly owned subsidiary...

Question 18

Nelson Limited has two subsidiary entities,Poggi Limited and Holly Limited.Nelson Limited owns 100% of the shares in both entities.Details of issued share capital are:
-Nelson Limited $100 000
-Poggi Limited $30 000
-Holly Limited $15 000
The worksheet adjustment entry made in order to determine the amount of consolidated share capital is:
A)DR Share capital $145 000 CR Shares in subsidiaries $145 000
B)DR Share capital $100 000 CR Shares in subsidiaries $100 000
C)DR Share capital $45 000 CR Shares in Poggi Limited $30 000
CR Shares in Holly Limited $15 000
D)DR Share capital $145 000 CR Shares in Nelson Limited $100 000
CR Shares in Poggi Limited $30 000
CR Shares in Holly Limited $15 000

Accepted Answer

The answer of Nelson Limited has two subsidiary entities,Poggi Limited...

Question 19

For entities wanting to use the cost model of accounting,the revaluation of a subsidiary's assets would be undertaken in the:
A)subsidiary's records
B)parent entity's records
C)consolidation worksheet
D)notes to the consolidated financial statements.

Accepted Answer

The revaluation of a subsidiary's assets under the cost model is typically reflected in the consolidation worksheet, as it is part of the process of preparing consolidated financial statements.

Question 20

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 events that occur between the two reporting dates as long as the reporting dates differ by no more than:
A)one month
B)three months
C)four months
D)six months

Accepted Answer

According to Financial Accounting Standards Board (FASB), adjustments must be made if the subsidiary's reporting date is within three months of the parent entity's reporting date. If the difference in reporting dates is more than three months, then consolidated financial statements are not required.

Quiz 16: Consolidation: Wholly Owned Subsidiaries

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets,liabilities and contingent liabilities of the acquiree:

The key principle relating to the disclosure of information about business combinations is to disclose information that:

At the date of acquisition a subsidiary had recorded a dividend payable of $10 000.The consolidation adjustment needed at the date of acquisition in relation to this event is:

In a business combination the revaluation of non-current assets in the records of the subsidiary means that the subsidiary has effectively adopted the:

When a parent entity has previously held an investment in a subsidiary prior to gaining control the effect on the consolidation process is as follows:

When preparing consolidated financial statements,adjustments for pre-acquisition equity and inter-entity transactions are recorded:

One year after acquisition date,the goodwill acquired was regarded as having become impaired by $20 000.The appropriate consolidation adjustment in relation to the impairment will include the following line:

On 1 July 20X6,P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of: The pre-acquisition entry at 1 July 20X6 is:

Company X acquired Company Y when the carrying value of Company Y's plant was $50 000.The fair value of the plant on acquisition date was $65 000.The company tax rate was 30%.How much is the amount of the business combination valuation reserve that must be recognised?

For entities wanting to use the cost model of accounting,the revaluation of a subsidiary's assets would be undertaken in the:

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 events that occur between the two reporting dates as long as the reporting dates differ by no more than: