Deck 18: Acquisition Method Introduction and Substitution

Question 1

Petroni Ltd acquired all the issued share capital of Wallace Ltd on 1 April 20X1.Wallace Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc} &\text { 000s} & \\ \text { Paid up capital } &\$3000\\ \text {General reserve } &\$1000\\ \text { Retained profits } &\$500\\\end{array}$



What was the cost of acquisition (that is, the control date fair value of the consideration provided) to Petroni Ltd, if consolidation goodwill resulting from the business combination (purchased goodwill) of $500 000 was recognised in the consolidated financial statements prepared on 1 April 20X1?

A)$500 000
B)$5 000 000
C)$4 000 000
D)$4 500 000

Answer 1

$5 000 000

Question 2

Lee-Ann Ltd acquired all the voting shares in Pamela Ltd. At the time of the takeover the following amounts are relevant:
$\begin{array}{c}\begin{array}{lll} \text { Recorded by Pamela }\\ \text { Property}\\ \text { }\\ \text {Intangible patent }\\ \text { Accounts receivable }\\ \text { }\\ \text { Vehicles }\\ \text { }\\ \text { }\\ \text { }\\ \text { }\\ \text { Accum. depreciation }\\ \text { vehicles }\\ \text { Inventory }\\\end{array}\begin{array}{lll} \$\\ \text {7500 } \\ \text { }\\ \text { 0 }\\ \text {30000 }\\ \text { }\\120000\\\\\\\\\\24000\\\\85000\\\end{array}\begin{array}{lll} \text { Comments}\\ \text { valued at cost, fair value is \( \$ 90000 \). }\\ \text { Group policy is to use the revaluation model. }\\ \text { not recognised, but valued by Lee-Ann at \( \$ 30000 \) }\\ \text {estimated uncollectible debts are thought to be \( \$ 10000 \) }\\ \text { higher than those recorded.}\\ \text { straight line depreciation is used by Pamela. }\\ \text {Group policy is for reducing balance. }\\ \text {However, no other group member has }\\ \text { vehicles of this specialist kind and straight-line is thought to be a reasonable method. }\\ \text { Vehicles have ten year life. }\\ \text { vehicles purchased two years ago, no scrap value. }\\ \text { }\\ \text {discovered to be over-valued by \( \$ 10000 \), due to an erro }\\\end{array}\end{array}$



-With regard to the patent, which is the correct consolidation adjustment entry at control date?

A)Dr patent $30 000; credit asset revaluation reserve
B)Dr patent $30 000; credit fair value reserve
C)No adjustment entry required.
D)Dr patent $30 000; credit consolidated profit or loss

Answer 2

Dr patent $30 000; credit fair value reserve

Question 3

Lee-Ann Ltd acquired all the voting shares in Pamela Ltd. At the time of the takeover the following amounts are relevant:
$\begin{array}{c}\begin{array}{lll} \text { Recorded by Pamela }\\ \text { Property}\\ \text { }\\ \text {Intangible patent }\\ \text { Accounts receivable }\\ \text { }\\ \text { Vehicles }\\ \text { }\\ \text { }\\ \text { }\\ \text { }\\ \text { Accum. depreciation }\\ \text { vehicles }\\ \text { Inventory }\\\end{array}\begin{array}{lll} \$\\ \text {7500 } \\ \text { }\\ \text { 0 }\\ \text {30000 }\\ \text { }\\120000\\\\\\\\\\24000\\\\85000\\\end{array}\begin{array}{lll} \text { Comments}\\ \text { valued at cost, fair value is \( \$ 90000 \). }\\ \text { Group policy is to use the revaluation model. }\\ \text { not recognised, but valued by Lee-Ann at \( \$ 30000 \) }\\ \text {estimated uncollectible debts are thought to be \( \$ 10000 \) }\\ \text { higher than those recorded.}\\ \text { straight line depreciation is used by Pamela. }\\ \text {Group policy is for reducing balance. }\\ \text {However, no other group member has }\\ \text { vehicles of this specialist kind and straight-line is thought to be a reasonable method. }\\ \text { Vehicles have ten year life. }\\ \text { vehicles purchased two years ago, no scrap value. }\\ \text { }\\ \text {discovered to be over-valued by \( \$ 10000 \), due to an erro }\\\end{array}\end{array}$



-With regard to inventory, which is the correct consolidation adjustment entry at control date?

A)Dr inventory expense $10 000; credit inventory
B)Dr inventory expense $10 000; credit fair value reserve
C)Dr fair value reserve $10 000; credit inventory
D)No entry required

Answer 3

Dr inventory expense $10 000; credit inventory

Question 4

AASB 3 makes no attempt to explain the presence of goodwill when the share acquisition is first made.

Question 5

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } \text { Capital } & \$ 500000 \\\text { Reserves } & \$ 100000 \\\text { Retained profits } & \$ 150000 \\\text { Liabilities } & \$ 50000\end{array}$$
Suppose that Rose paid $850 000 for the shares in Jeanie, which of the following correctly describes the accounting procedures that will arise as a result of the business combination? Assume that the difference between the fair value of the consideration paid for Jeannie shares and the fair value of the net assets is due to the directors of Rose having overestimated the fair value of Jeannie assets.

A)The Rose Group will record a goodwill asset of $100 000 on its consolidation worksheet if prepared as at 1 July 20X3
B)Rose Ltd will record a goodwill asset of $100 000 in its ledger
C)The Rose Group will record a goodwill impairment expense of $100 000 on its consolidation worksheet if prepared as at 1 July 20X3
D)None of the above are appropriate

Question 6

Lee-Ann Ltd acquired all the voting shares in Pamela Ltd. At the time of the takeover the following amounts are relevant:
$\begin{array}{c}\begin{array}{lll} \text { Recorded by Pamela }\\ \text { Property}\\ \text { }\\ \text {Intangible patent }\\ \text { Accounts receivable }\\ \text { }\\ \text { Vehicles }\\ \text { }\\ \text { }\\ \text { }\\ \text { }\\ \text { Accum. depreciation }\\ \text { vehicles }\\ \text { Inventory }\\\end{array}\begin{array}{lll} \$\\ \text {7500 } \\ \text { }\\ \text { 0 }\\ \text {30000 }\\ \text { }\\120000\\\\\\\\\\24000\\\\85000\\\end{array}\begin{array}{lll} \text { Comments}\\ \text { valued at cost, fair value is \( \$ 90000 \). }\\ \text { Group policy is to use the revaluation model. }\\ \text { not recognised, but valued by Lee-Ann at \( \$ 30000 \) }\\ \text {estimated uncollectible debts are thought to be \( \$ 10000 \) }\\ \text { higher than those recorded.}\\ \text { straight line depreciation is used by Pamela. }\\ \text {Group policy is for reducing balance. }\\ \text {However, no other group member has }\\ \text { vehicles of this specialist kind and straight-line is thought to be a reasonable method. }\\ \text { Vehicles have ten year life. }\\ \text { vehicles purchased two years ago, no scrap value. }\\ \text { }\\ \text {discovered to be over-valued by \( \$ 10000 \), due to an erro }\\\end{array}\end{array}$



-With regard to accounts receivable, which is the correct consolidation adjustment entry at control date?

A)Dr bad debts expense $10 000; credit accounts receivable
B)Dr fair value reserve $10 000; credit allowance for doubtful debts
C)Dr bad debts expense $10 000; credit allowance for doubtful debts
D)No entry required

Question 7

Fiona Ltd obtained control of Belinda Ltd on 1 January 20X2.The following items may require attention for group data adjustments:
Belinda had shipped $50 000 of inventory to Fiona.As at control date Fiona had not received or recognised this shipment.
Fiona had made a $10 000 payment to Belinda for interest payment on an inter-company loan, but as of 1 January 20X2 Belinda had not received the payment.
The loan made from Fiona to Belinda was $100 000 and has a maturity date of 20X7.
The Fiona Group uses the revaluation model for property.Belinda's property needs to be revalued upwards $30 000, and Belinda has agreed to do so, but as of control date this had not been done.
Belinda has an intangible copyright asset which is not recognised by Belinda but has a fair value of $80 000.
The question refers to the consolidation worksheet prepared at control date.

-Assume that the worksheet uses both data adjustment and eliminations columns.The correct consolidation data adjustment entry in respect of all of these items is most likely:

A)
$\begin{array} { l l l } \text { Dr. Inventory } & \$ 50000 & \\\text { Dr. Property } & \$ 30000 & \\\text { Dr. Copyright } & \$ 80000 & \\\text { Cr. Asset revaluation reserve } & & \$ 30000 \\\text { Cr. Accounts payable } & & \$ 50000 \\\text { Cr. Fair value reserve } & & \$ 80000\end{array}$
B)
$\begin{array} { l l r } \text { Dr. Inventory } & \$ 50000 & \\\text { Dr. Property } & \$ 30000 & \\\text { Dr. Copyright } & \$ 80000 & \\\text { Cr. Asset revaluation reserve } & & \$ 30000 \\\text { Cr. Fair value reserve } & & \$ 130000\end{array}$
C)
$\begin{array} { l l r } \text { Dr. Property } & \$ 30000 & \\\text { Dr. Copyright } & \$ 80000 & \\\text { Cr Fair value reserve } & & \$ 110000\end{array}$
D)None of the above

Question 8

At the control date a consolidation goodwill asset may be justified as follows:
I)As an internal synergy of the acquiree
II)As a synergy of the newly formed group
III)As the cost of gaining control of the acquiree
IV)As the result of making a bad deal.

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

Question 9

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } \text { Capital } & \$ 500000 \\\text { Reserves } & \$ 100000 \\\text { Retained profits } & \$ 150000 \\\text { Liabilities } & \$ 50000\end{array}$$
Suppose that Rose paid $500 000 for the shares in Jeanie, which of the following correctly describes the accounting procedures that will arise as a result of the business combination?

A)The Rose Group will record a goodwill asset of $250 000 on its consolidation worksheet if prepared as at 1 July 20X3
B)Rose Ltd will record an impairment expense of $250 000 in its ledger
C)The Rose Group will record a bargain purchase revenue of $250 000 on its consolidation worksheet if prepared as at 1 July 20X3
D)None of the above are appropriate

Question 10

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } \text { Capital } & \$ 500000 \\\text { Reserves } & \$ 100000 \\\text { Retained profits } & \$ 150000 \\\text { Liabilities } & \$ 50000\end{array}$$
Suppose that Rose paid $850 000 for the shares in Jeanie, which of the following correctly describes the accounting procedures that will arise as a result of the business combination? Assume that the overpayment for Jeannie shares is due to the belief that Rose has created valuable internal synergies.

A)The Rose Group will record a goodwill asset of $100 000 on its consolidation worksheet if prepared as at 1 July 20X3
B)Rose Ltd will record a goodwill asset of $100 000 in its ledger
C)The Rose Group will record a goodwill impairment expense of $100 000 on its consolidation worksheet if prepared as at 1 July 20X3
D)None of the above are appropriate

Question 11

New Ltd acquired all the issued share capital of Orleans Ltd on 1 February 20X1.Orleans Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc}& \text {000s } & \\ \text {Paid up capital } &\$4000\\ \text {Retained profits } &\$1000\\ \text { Asset revaluation reserve } &\$2000\\\end{array}$


If New Ltd paid $8 000 000 for this acquisition what is the substitution elimination entry if consolidated financial statements were prepared on 1 February 20X1?

A) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \mathbf { \$ 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 \\\text { Retained profits } & 1000 \\\text { Asset revaluation reserve } & 2000 \\\text { Goodwill } & 1000\end{array}$
B) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Goodwill } & 1000 & \\\text { Investment in Orleans Ltd } & & 8000\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit } \$ \mathbf { 0 0 0 } & \text { Credit } \$ \mathbf { 0 0 0 } \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Investment in Orleans Ltd } & &7000\end{array}$

D) $\begin{array}{lrr}\text { Accounts } & \text { Debit } \$ \mathbf{0 0 0} & \text { Credit } \$ \mathbf{0 0 0} \\\text { Paid up capital } & 4000 & \\\text { Retained profits } & 1000 & \\\text { Asset revaluation reserve } & 2000 & \\\text { Acquisition expense } & 1000 & \\\text { Bank } & & 8000\end{array}$

Question 12

Curiosity Ltd acquired all the issued share capital of Cat Ltd on 1 July 20X1.Cat Ltd's shareholders equity (all at fair value) at that date was as follows:
$$\begin{array} { l r } & \mathbf { 0 0 0 } \mathrm { s } \\\text { Paid up capital } &\$4500\\\text { General reserve } & \$ 2000 \\\text { Asset revaluation reserve } & \$ 500 \\\text { General reserve } & \$1000 \\\text { Retained profits } & \$ 1500 \\\end{array}$$
At 1 July 20X1, Curiosity Ltd considered Cat Ltd had unrecorded licenses with a fair value of $1 500 000.What was the cost of acquisition (the fair value of the consideration paid) incurred by Curiosity Ltd, if $500 000 of consolidation goodwill from the business combination was recognised in the consolidated financial statements prepared on 1 July 20X1?

A)$11 500 000
B)$10 500 000
C)$10 000 000
D)$9 000 000

Question 13

Eagle Ltd acquired all the issued share capital of Rock Ltd on 1 May 20X1.Rock Ltd's shareholders equity (all at fair value) at that date was as follows:
$\begin{array}{llcc} &\text { 000s} & \\ \text { Paid up capital } &\$3000\\ \text {General reserve } &\$1000\\ \text { Retained profits } &\$500\\\end{array}$

What was the cost of acquisition incurred by Eagle Ltd, if the bargain purchase gain was $250 000?

A)$4 750 000
B)$3 750 000
C)$3 250 000
D)$4 250 000

Question 14

Fiona Ltd obtained control of Belinda Ltd on 1 January 20X2.The following items may require attention for group data adjustments:
Belinda had shipped $50 000 of inventory to Fiona.As at control date Fiona had not received or recognised this shipment.
Fiona had made a $10 000 payment to Belinda for interest payment on an inter-company loan, but as of 1 January 20X2 Belinda had not received the payment.
The loan made from Fiona to Belinda was $100 000 and has a maturity date of 20X7.
The Fiona Group uses the revaluation model for property.Belinda's property needs to be revalued upwards $30 000, and Belinda has agreed to do so, but as of control date this had not been done.
Belinda has an intangible copyright asset which is not recognised by Belinda but has a fair value of $80 000.
The question refers to the consolidation worksheet prepared at control date.
Assume that the worksheet uses both data adjustment and eliminations columns.With regard to the intra-group loan between Fiona and Belinda, the correct consolidation data adjustment entry would most likely be:

A)Dr loan receivable $10 000; Credit loan.
B)Dr loan $110 000; Cr loan $100 000, loan expense $10 000.
C)Dr loan receivable $10 000; Credit loan revenue.
D)No entry required.

Question 15

Lee-Ann Ltd acquired all the voting shares in Pamela Ltd. At the time of the takeover the following amounts are relevant:
$\begin{array}{c}\begin{array}{lll} \text { Recorded by Pamela }\\ \text { Property}\\ \text { }\\ \text {Intangible patent }\\ \text { Accounts receivable }\\ \text { }\\ \text { Vehicles }\\ \text { }\\ \text { }\\ \text { }\\ \text { }\\ \text { Accum. depreciation }\\ \text { vehicles }\\ \text { Inventory }\\\end{array}\begin{array}{lll} \$\\ \text {7500 } \\ \text { }\\ \text { 0 }\\ \text {30000 }\\ \text { }\\120000\\\\\\\\\\24000\\\\85000\\\end{array}\begin{array}{lll} \text { Comments}\\ \text { valued at cost, fair value is \( \$ 90000 \). }\\ \text { Group policy is to use the revaluation model. }\\ \text { not recognised, but valued by Lee-Ann at \( \$ 30000 \) }\\ \text {estimated uncollectible debts are thought to be \( \$ 10000 \) }\\ \text { higher than those recorded.}\\ \text { straight line depreciation is used by Pamela. }\\ \text {Group policy is for reducing balance. }\\ \text {However, no other group member has }\\ \text { vehicles of this specialist kind and straight-line is thought to be a reasonable method. }\\ \text { Vehicles have ten year life. }\\ \text { vehicles purchased two years ago, no scrap value. }\\ \text { }\\ \text {discovered to be over-valued by \( \$ 10000 \), due to an erro }\\\end{array}\end{array}$



-With regard to property, which is the correct consolidation adjustment entry at control date?

A)Dr property $15 000; credit asset revaluation reserve
B)Dr property $15 000; credit fair value reserve
C)No adjustment entry required.
D)Dr property $15 000; credit consolidated profit or loss

Question 16

Lee-Ann Ltd acquired all the voting shares in Pamela Ltd. At the time of the takeover the following amounts are relevant:
$\begin{array}{c}\begin{array}{lll} \text { Recorded by Pamela }\\ \text { Property}\\ \text { }\\ \text {Intangible patent }\\ \text { Accounts receivable }\\ \text { }\\ \text { Vehicles }\\ \text { }\\ \text { }\\ \text { }\\ \text { }\\ \text { Accum. depreciation }\\ \text { vehicles }\\ \text { Inventory }\\\end{array}\begin{array}{lll} \$\\ \text {7500 } \\ \text { }\\ \text { 0 }\\ \text {30000 }\\ \text { }\\120000\\\\\\\\\\24000\\\\85000\\\end{array}\begin{array}{lll} \text { Comments}\\ \text { valued at cost, fair value is \( \$ 90000 \). }\\ \text { Group policy is to use the revaluation model. }\\ \text { not recognised, but valued by Lee-Ann at \( \$ 30000 \) }\\ \text {estimated uncollectible debts are thought to be \( \$ 10000 \) }\\ \text { higher than those recorded.}\\ \text { straight line depreciation is used by Pamela. }\\ \text {Group policy is for reducing balance. }\\ \text {However, no other group member has }\\ \text { vehicles of this specialist kind and straight-line is thought to be a reasonable method. }\\ \text { Vehicles have ten year life. }\\ \text { vehicles purchased two years ago, no scrap value. }\\ \text { }\\ \text {discovered to be over-valued by \( \$ 10000 \), due to an erro }\\\end{array}\end{array}$



-With regard to vehicles, which is the correct consolidation adjustment entry at control date?

A)Dr accumulated depreciation $1200; credit depreciation expense
B)Dr accumulated depreciation $1200; credit fair value reserve
C)Dr accumulated depreciation $24 000; credit vehicles
D)No entry required

Question 17

Led Ltd acquired 100% of Zeppelin Ltd on 30 June 20X0 by paying $6 million cash and incurring $1 million legal fees.At that date the net assets of Zeppelin Ltd was as follows:
$$\begin{array} { l r r } & \text { Recorded amount } & \text { Fair value } \\\text { Total assets } & \$ 9 \text { million } & \$ 10 \text { million } \\\text { Total liabilities } & \$ 1 \text { million } & \$ 1 \text { million } \\\text { Net assets } & \$ 8 \text { million } & \$ 9 \text { million }\end{array}$$
Total assets comprise buildings of $6 million, equipment of $3 million and accounts receivable of $1 million.All these figures are fair values.What is the recorded amount of buildings in Led group's consolidated financial statements for the year ended 30 June 20X0?

A)$6 million
B)$3 million
C)$2 million
D)$4.66 million

Question 18

Fiona Ltd obtained control of Belinda Ltd on 1 January 20X2.The following items may require attention for group data adjustments:
Belinda had shipped $50 000 of inventory to Fiona.As at control date Fiona had not received or recognised this shipment.
Fiona had made a $10 000 payment to Belinda for interest payment on an inter-company loan, but as of 1 January 20X2 Belinda had not received the payment.
The loan made from Fiona to Belinda was $100 000 and has a maturity date of 20X7.
The Fiona Group uses the revaluation model for property.Belinda's property needs to be revalued upwards $30 000, and Belinda has agreed to do so, but as of control date this had not been done.
Belinda has an intangible copyright asset which is not recognised by Belinda but has a fair value of $80 000.
The question refers to the consolidation worksheet prepared at control date.
With regard to property, the correct consolidation data adjustment entry would be:

A)Dr property $30 000; Credit asset revaluation reserve.
B)Dr property $30 000; Credit fair value reserve.
C)No entry required.
D)None of the above.

Question 19

Fiona Ltd obtained control of Belinda Ltd on 1 January 20X2.The following items may require attention for group data adjustments:
Belinda had shipped $50 000 of inventory to Fiona.As at control date Fiona had not received or recognised this shipment.
Fiona had made a $10 000 payment to Belinda for interest payment on an inter-company loan, but as of 1 January 20X2 Belinda had not received the payment.
The loan made from Fiona to Belinda was $100 000 and has a maturity date of 20X7.
The Fiona Group uses the revaluation model for property.Belinda's property needs to be revalued upwards $30 000, and Belinda has agreed to do so, but as of control date this had not been done.
Belinda has an intangible copyright asset which is not recognised by Belinda but has a fair value of $80 000.
The question refers to the consolidation worksheet prepared at control date.
The consolidation adjustment entry for inventory would be:

A)Dr inventory $50 000; Cr accounts payable
B)Dr inventory $50 000; Cr fair value reserve
C)Dr inventory $50 000; Cr retained profits
D)No entry required

Question 20

Fiona Ltd obtained control of Belinda Ltd on 1 January 20X2.The following items may require attention for group data adjustments:
Belinda had shipped $50 000 of inventory to Fiona.As at control date Fiona had not received or recognised this shipment.
Fiona had made a $10 000 payment to Belinda for interest payment on an inter-company loan, but as of 1 January 20X2 Belinda had not received the payment.
The loan made from Fiona to Belinda was $100 000 and has a maturity date of 20X7.
The Fiona Group uses the revaluation model for property.Belinda's property needs to be revalued upwards $30 000, and Belinda has agreed to do so, but as of control date this had not been done.
Belinda has an intangible copyright asset which is not recognised by Belinda but has a fair value of $80 000.
The question refers to the consolidation worksheet prepared at control date.
With regard to the copyright asset, the correct consolidation data adjustment entry is:

A)Dr copyright $80 000; Credit asset revaluation reserve
B)Dr copyright $80 000; Credit fair value reserve
C)No entry required
D)None of the above

Question 21

'Cost of Control' is the most likely conceptual explanation for recognised goodwill, put forward by AASB 3 and other related Australian accounting standards.

Question 22

When the control date fair value of the identifiable net assets is included in the consolidation by means of a data adjustment, the associated tax effects are also included.

Question 23

Rod Ltd acquired 100% of Stewart Ltd on 1 October 20X0 by paying $80 million cash and incurring $5 million legal fees.At that date the fair value of Stewart Ltd's equity was $70 million.
The difference on acquisition is $10 million goodwill.

Question 24

Goodwill does not result in recognition of DTA or DTL.

Question 25

The purpose of the substitution elimination is to remove the parent's investment in the company against the subsidiary's equity amounts.

Question 26

Assets that can not be recognised by a subsidiary will be represented in the consolidated working papers by a data adjustment that includes a credit to fair value reserve.

Question 27

The substitution elimination must only be made taking into account the subsidiary's equity amounts as at control date.

Question 28

SOS Ltd acquired all the assets and liabilities of Police Ltd for a total cost of acquisition (control date fair value of the consideration paid) of $1 000 000.The fair value of these assets at acquisition date was $900 000 and the fair value of the liabilities was $100 000.Police Ltd controls Roxanne Ltd.
SOS Ltd will record goodwill of $200 000 in its consolidated financial statements.