Deck 26: Consolidation: Controlled Entities

Question 1

In determining the existence of power, together with size of the investor's voting interest, the following factors need to be examined in relation to the holders of the other shares in the investee:

A) the existence of contracts.
B) attendance at annual general meetings.
C) level of dilution and disorganization or apathy of the remaining shareholders.
D) all of the above factors need to be examined.

Answer 1

D

Question 2

When one entity controls another entity, the business combination results in which of the following types of relationship?

A) Investor-investee.
B) Parent-subsidiary.
C) Investor-associate.
D) Parent-child.

Answer 2

B

Question 3

Financial statements that combine the separate sets of financial statements for all entities within an economic entity are known as:

A) concise financial reports.
B) condensed financial reports.
C) combined financial statements.
D) consolidated financial statements.

Answer 3

D

Question 4

The entity that is represented by a single set of consolidated financial statements is the:

A) legal entity.
B) parent entity.
C) economic entity.
D) subsidiary entity.

Question 5

When preparing consolidated financial statements, what is the name given to the combined entities that are made up of a parent entity and all its subsidiary entities?

A) Consolidation
B) Combination
C) Associates
D) Group

Question 6

In the context of control, relevant activities are:

A) activities of the investee that significantly affect the investee's returns.
B) activities of the investor that significantly affect the investor's returns.
C) activities of the investor that significantly affect the investee's returns.
D) activities of the investor that are similar to the investee's activities.

Question 7

Reasons for the preparation of consolidated financial statements include:

A) Allowing comparison of the group with similar entities.
B) Supply of relevant information to investors in the parent entity.
C) Reporting of risks and benefits of the group as a single economic entity.
D) All of the options are correct.

Question 8

Which of the following is not one of the three elements of control according to AASB 10/IFRS 10 Consolidated Financial Statements?

A) The ability to use power over the investee to affect the amount of the investor's returns.
B) Exposure, or rights, to variable returns from involvement with the investee.
C) Dominating the decision making of the investee.
D) Power over the investee.

Question 9

In the context of control, examples of relevant activities include:

A) managing financial assets.
B) selling and purchasing goods and services.
C) determining a funding structure or obtaining funding.
D) all of the options are examples of relevant activities.

Question 10

For the purposes of consolidated financial statements, a group consists of:

A) an investor and its investees.
B) a parent entity and all its subsidiaries.
C) an entity that is controlled by a parent.
D) an entity that has one or more subsidiaries.

Question 11

A group may:

A) only have one parent.
B) have more than one parent.
C) have a few different sub-groups.
D) only have one parent, but it may have a few different sub-group.

Question 12

At balance date, Company K has 40% of the voting rights in Company L. In addition, Company K holds potential voting rights in Company L amounting to 8% that are currently exercisable, and a further 12% of voting rights in Company L that can be exercised in two years' time. Which of the following statements is correct?

A) Consolidated financial statements need not be prepared for Company K and L for the current year.
B) Consolidated financial statements must be prepared for Company K and L in the current year.
C) Consolidated financial statements must be prepared as Company K controls Company L at balance date.
D) Consolidated financial statements must be prepared as Company K has more than half of the voting rights in Company L at balance date.

Question 13

The consolidated financial statements reflect the effects of transactions:

A) with external parties to the group only.
B) between internal parties to the group only.
C) with some internal and external parties to the group.
D) both between internal parties and with external parties to the group.

Question 14

AASB 10/IFRS 10 Consolidated Financial Statements defines a 'parent' and a 'subsidiary' as which of the following? $\begin{array}{|l|l|l|}\hline & \text { Parent } & \text { Subsidiary } \\\hline \text { I. } & \text { An entity which is controlled by another entity. } & \text { An entity that controls one or more entities. } \\\hline \text { II. } & \text { An entity that controls one or more entities. } & \text { An entity which is controlled by another entity. } \\\hline \text { III. } & \begin{array}{l}\text { An entity which owns more than } 20 \% \text { of the voting } \\\text { shares of another entity. }\end{array} & \text { An entity which is owned partly by another entity. } \\\hline \text { IV. } & \text { An entity that has one or more subsidiaries. } & \text { An entity which is controlled by a parent entity. } \\\hline\end{array}$

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

Question 15

In a consolidated group of entities, control over the subsidiaries in the group:

A) requires 100% ownership of the subsidiaries' shares.
B) can exist where the rights are purely protective rights.
C) may not be shared control.
D) can be shared with other entities.

Question 16

With regards to the concept of control, power over an investee:

A) means the ability to significantly influence the investee.
B) is related to relevant activities of the investee.
C) arises from potential rights.
D) means directing the investee.

Question 17

The key characteristic that determines when consolidated financial statements should be prepared is:

A) control.
B) significant influence.
C) substance over form.
D) the existence of transactions between the entities.

Question 18

A subsidiary is an entity that:

A) is controlled by another entity.
B) exercises control over a parent entity.
C) has the power to control a parent entity.
D) has significant influence over a parent entity.

Question 19

Examples of rights that determine the existence of power include:

A) rights to direct the investee to enter into, or veto any changes to, transactions that affect the investee's returns.
B) rights to appoint, reassign or remove members of an investee's key management personnel
C) rights to appoint or remove another entity that participates in management decisions.
D) all of the options are correct.

Question 20

According to AASB 10/IFRS 10 Consolidated Financial Statements, which of the following factors indicate the existence of control? $\begin{array}{|l|l|}\hline \text { I. } & \text { Ownership of more than } 50 \% \text { of the voting rights in another entity. } \\\hline \text { II. } & \begin{array}{l}\text { Shared power in the governance of financial and operating policies of another } \\\text { entity so as to obtain benefits. }\end{array} \\\hline \text { III. } & \begin{array}{l}\text { Possessing existing rights that give the current ability to direct the relevant } \\\text { activities of another entity. }\end{array} \\\hline \text { IV. } & \begin{array}{l}\text { The power to have significant influence over the operating policies of an } \\\text { entity so as to obtain benefits. }\end{array} \\\hline\end{array}$

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

Question 21

Where the financial statements of a subsidiary are prepared at a date differing from that of the parent, the group must disclose:

A) the date used by the subsidiary.
B) the reason for the parent using a different date.
C) the reason for the subsidiary using a different date.
D) both the date used by the subsidiary as well as the reason for the subsidiary using a different date.

Question 22

Variable returns from an investee include:

A) fixed interest payments from a bond, as they expose the investor to the credit risk of the issuer of the bond, namely the investee
B) dividends from ordinary shares that will change based on the profit performance of the investee
C) fixed performance fees for management of the investee's assets, as they expose the investor to the performance risk of the investee.
D) all of the options are correct.

Question 23

The process of preparing consolidated financial statements requires that:

A) adjusting journal entries be recorded in the ledger accounts of the parent only.
B) adjusting journal entries be recorded in the ledger accounts of the subsidiaries only.
C) accruals of expenses and revenues be recorded directly into the retained earnings account of the parent entity.
D) no adjustments be made to the individual financial statements or ledger accounts of the entities in the group.

Question 24

The disclosure requirements in consolidated financial statements are included in which of the following accounting standards?

A) AASB 127/IAS 127 Separate Financial Statements.
B) AASB 10/IFRS 10 Consolidated Financial Statements.
C) AASB 12/IFRS 12 Disclosure of Interests in Other Entities.
D) AASB 10/IFRS 10 Consolidated Financial Statements and AASB 12/IFRS 12 Disclosure of Interests in Other Entities.

Question 25

When deciding whether or not one entity controls another entity:

A) the controlling entity must be actively involved in the decision making of the other entity.
B) the controlling entity must have exercised its power to control.
C) it is sufficient that the controlling entity has the capacity to control.
D) the controlling entity must have exerted its control over the financing policies of the other entity.

Question 26

North Bank has lent Sophie Limited $600 000. Part of the loan contract prevents Sophie from borrowing money in the future from other banks without the permission of North. As a result of this relationship:

A) North Bank is regarded as a parent entity of Sophie Limited.
B) Sophie Limited is regarded as a subsidiary of North Bank.
C) a parent-subsidiary relationship does not exist between these two parties.
D) a parent-subsidiary relationship exists between these two parties as North Bank is able to direct the relevant activities of Sophie Limited.

Question 27

In the context of control, the correct statement regarding rights is:

A) They must be protective rights.
B) They must be substantive rights.
C) They must arise from a legal contract.
D) They must arise as a result of future events.

Question 28

Merlion Limited is an entity listed in Singapore. Merlion Limited holds a 100% investment in Kookaburra Pty Ltd, an Australian based company, who in turn holds a 90% interest in Kangaroo Pty Ltd. Kookaburra Pty Ltd and the Kookaburra group (comprising Kookaburra and Kangaroo) are both non-reporting entities. Which of the following statements is correct?

A) Kookaburra Pty Ltd will be required to prepare consolidated financial statements as the ultimate Australian parent.
B) Kookaburra Pty Ltd will be required to prepare consolidated financial statements only if directed to do so by ASIC.
C) Kookaburra Pty Ltd will not be required to prepare consolidated financial statements as Merlion is a listed foreign entity.
D) Kookaburra Pty Ltd will not be required to prepare consolidated financial statements as they are a non-reporting entity.

Question 29

According to AASB 10/IFRS 10 Consolidated Financial Statements, all parent entities are required to present consolidated statements unless which of the following conditions apply to them?
I. The parent is a wholly owned subsidiary.
II. The parent's debt or equity securities are traded in a public market.
III. The parent is a partly owned subsidiary and its other owners do not object to the non-presentation of consolidated financial statements.
IV. The parent is not in the process of applying to issue any securities in a public market.

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

Question 30

The process of preparing consolidated financial statements requires that:

A) the individual financial statements of the parent and all its subsidiaries use uniform accounting practices for like transactions and other events in similar circumstances.
B) the subsidiaries must prepare, if practicable, financial information as of the same date and for the same period as the financial statements of the parent.
C) the individual financial statements of the parent and all its subsidiaries use uniform accounting policies for like transactions and other events in similar circumstances.
D) the individual financial statements of the parent and all its subsidiaries use uniform accounting policies for like transactions and other events in similar circumstances and that the subsidiaries must prepare, if practicable, financial information as of the same date and for the same period as the financial statements of the parent.

Question 31

An agent is:

A) a party primarily engaged to act for the benefit of another party and therefore does not control the investee when it exercises its decision-making authority.
B) a party primarily engaged to act for its own benefit.
C) a party primarily engaged to act for the benefit of another party.
D) a party primarily engaged to act for its own benefit and therefore controls the investee when it exercises its decision-making authority.

Question 32

Rights to variable returns from an investee include:

A) returns from denying or regulating access to a subsidiary's assets.
B) economies of scale.
C) remuneration from provision of services.
D) all of the options are correct.

Question 33

The equity in a subsidiary that is not attributable to a parent is known as a/an:

A) external interest.
B) attributable interest.
C) non-direct interest.
D) non-controlling interest.

Question 34

The process of preparing the combined financial statements of a group of entities is known as:

A) aggregation.
B) consolidation.
C) accumulation.
D) combination.

Question 35

A group of entities comprised of Mark Limited (parent entity), Roger Limited (subsidiary entity) and Graham Limited (subsidiary entity) have the following inventories balances. $\begin{array}{ll}\text { Mark Limited } & \$ 70,000 \\\text { Roger Limited } & \$ 32,000 \\\text { Graham Limited } & \$ 58,000\end{array}$ Which of the following amounts is shown as the consolidated inventories balance in the consolidated financial statements?

A) $70 000.
B) $20 000.
C) $160 000.
D) $90 000.

Question 36

According to paragraph 9 of AASB 12/IFRS 12 Disclosure of Interests in Other Entities, which of the following is an example of a situation where it is necessary to disclose significant judgements and assumptions in relation to subsidiaries?

A) where an entity is an agent or a principal.
B) where an entity controls another entity but it holds less than half of the voting rights of the other entity.
C) where an entity does not control another entity but it holds more than half of the voting rights in the other entity.
D) all of the options are correct.

Question 37

Summer Company is a listed public company and has a 60% controlling interest in Winter Company. Winter Company is the parent of Starlight Company. In which of the following situations will Winter Company not be required to prepare consolidated financial statements?

A) Where it is likely that there are external users dependant on the information.
B) If Winter Company prepares separate financial statements that comply with IFRS.
C) If the other owners of Winter Company have consented to the non-preparation of consolidated financial statements.
D) Winter Company would never be required to prepare consolidated financial statements.

Question 38

Protective rights include:

A) the right of a party holding a non-controlling interest in an investee to approve capital expenditure greater than that required in the ordinary course of business, or to approve the issue of equity or debt instruments.
B) the right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan repayment conditions.
C) a lender's right to restrict a borrower from undertaking activities that could significantly change the credit risk of the borrower to the detriment of the lender.
D) all of the options are correct.

Question 39

Under paragraph B23 of AASB 10/IFRS 10 Consolidated Financial Statements, factors to consider in assessing whether the rights over an investee are substantive include:

A) whether there are any barriers that prevent the investor from exercising them.
B) where more than one party is involved, whether there is a mechanism in place to enable those parties to practically exercise them.
C) whether the party or parties that hold the rights would benefit from the exercise of those rights.
D) all of the options are correct.

Question 40

According to paragraph 10 of AASB 12/IFRS 12 Disclosure of Interests in Other Entities, an entity shall disclose information that enables users of its consolidated financial statements to evaluate which of the following?
I. The consequences of losing control of a subsidiary.
II. The composition of the group.
III. The nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group.
IV. The interest that non-controlling interests have in the group's activities and cash flows.

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