Question 1

Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and decides to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 100% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2018)?
A) $60,000
B) $120,000
C) $180,000
D)Nil

Accepted Answer

B

Question 2

Contingent consideration should be valued at:
A) the fair value of the consideration on the date of acquisition.
B) the book value of the consideration at the date of acquisition.
C) the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of acquisition.
D)the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition.

Accepted Answer

Contingent consideration should be valued at the fair value of the consideration on the date of acquisition, as this reflects the most accurate estimate of the additional consideration that may be paid. The book value of the consideration or the subsidiary's net assets at book value or fair value at the date of acquisition are not relevant to the valuation of contingent consideration.

Question 3

Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2018 and decides to prepare an Income Statement for the combined entity on the date of acquisition. If Parent acquired 80% of Sub Inc. on that date, what would be the net income reported for the combined entity (for the year ended July 31, 2018)?
A) $104,000
B) $120,000
C) $130,000
D)Nil

Accepted Answer

B

Question 4

Under the Proprietary Theory, non-controlling interest (NCI) is:
A) nonexistent. Goodwill is established based on the Parent's pro-rata share of any acquisition differential.
B) nonexistent. Goodwill is established based on the Parent's acquisition cost.
C) based on the fair market values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost.
D)based on the book values of the subsidiary's net assets. Goodwill is established based on the Parent's acquisition cost.

Accepted Answer

Under the Proprietary Theory, non-controlling interest (NCI) is nonexistent. Goodwill is established based on the Parent's acquisition cost. This means that the Parent records the full amount of the purchase price and any excess over the net assets acquired is recorded as goodwill on the Parent's balance sheet. NCI is not recognized separately, as the Parent is considered to own 100% of the subsidiary. Therefore, the answer is B.

Question 5

On the date of formation of a 100% owned subsidiary by the parent, which of the following statements pertaining to consolidated financial statements is TRUE?
A) It is possible to prepare consolidated financial statements that include all the assets and liabilities of the subsidiary.
B) Consolidated financial statements are difficult to prepare because the assets and liabilities of the subsidiary have yet to be determined.
C) Consolidation requires the elimination of the parent's investment account against the subsidiary's share capital.
D)Consolidation will not be required since a new legal entity will have been formed.

Accepted Answer

The answer of On the date of formation of a...

Question 6

When preparing the consolidated balance sheet on the date of acquisition, the parent's investment (in subsidiary company) is:
A) revalued to fair market value.
B) replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
C) replaced with 100% of the assets and liabilities of the subsidiary at book value.
D)replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at fair market value.

Accepted Answer

When preparing the consolidated balance sheet on the date of acquisition, the parent's investment (in subsidiary company) is replaced with 100% of the assets and liabilities of the subsidiary at fair market value. This is because the acquisition is treated as a purchase, and the parent acquires control over the subsidiary, which means the parent now owns 100% of the subsidiary's assets and liabilities at fair market value.

Question 7

The purchase price of an entity includes:
A) the book value of the subsidiary's shareholders' equity and the acquisition differential.
B) the book value of the subsidiary's shareholders' equity and goodwill.
C) the fair market value of the subsidiary's shareholders' equity and the purchase price discrepancy.
D)the fair market value of the subsidiary's net assets.

Accepted Answer

The answer of The purchase price of an entity includes:
A)...

Question 8

A company owning a majority (but less than 100%) of another company's voting shares on the date of acquisition should account for its subsidiary (in its consolidated balance sheet):
A) by including only its share of the fair market values of the subsidiary's net assets.
B) by including only its share of the book values of the subsidiary's net assets.
C) by including 100% of the fair market values of the subsidiary's net assets.
D)by including 100% of the fair market values of the subsidiary's net assets and accounting for any unowned portion of the subsidiary's voting shares using the non-controlling interest (NCI) account.

Accepted Answer

When a company owns a majority but less than 100% of another company's voting shares, it has control over the subsidiary but not total control. Therefore, it should include 100% of the fair market values of the subsidiary's net assets in its consolidated balance sheet, but also account for any unowned portion of the subsidiary's voting shares using the non-controlling interest (NCI) account. This allows for the accurate representation of the company's ownership and control over the subsidiary.

Question 9

The calculation of Goodwill and non-controlling interest (NCI) under the Entity Theory is derived :
A) by using an imputed acquisition cost, which would be the presumed cost of acquiring 100% of the outstanding voting shares of the subsidiary.
B) by using the actual acquisition cost.
C) by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at fair market value.
D)by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at book value.

Accepted Answer

Under the Entity Theory, goodwill is calculated by using an imputed acquisition cost, which would be the presumed cost of acquiring 100% of the outstanding voting shares of the subsidiary. This is because under the Entity Theory, the parent company is seen as acquiring the whole entity of the subsidiary, rather than just a portion of its net assets. Non-controlling interest (NCI) is also calculated under the same imputed acquisition cost, as it represents the portion of ownership not held by the parent company.

Question 10

Any negative goodwill arising on the date of acquisition:
A) is recognized as a gain on the date of acquisition.
B) is prorated among the parent company's identifiable net assets.
C) should be amortized over a predetermined period.
D)is recognized as a loss on the date of acquisition.

Accepted Answer

The answer of Any negative goodwill arising on the date...

Question 11

Contingent consideration will be classified as a liability when:
A) it will be paid in the form of additional equity.
B) it will be paid in the form of cash or another asset.
C) the form of payment will be determined at a future date.
D)the acquirer decides the appropriate time to make a payment.

Accepted Answer

Contingent consideration is recognized as a liability when it will be paid in the form of cash or another asset. If it will be settled using additional equity, it will be recorded as part of the purchase price allocation and not as a liability. The form of payment does not need to be determined at the acquisition date for it to be classified as a liability, as long as the payment is certain and can be reasonably estimated. The acquirer's decision on when to make the payment is not relevant to the classification of contingent consideration.

Question 12

HRN Enterprises Inc. purchases 80% of the outstanding voting shares of NHR Inc. on January 1, 2018. On that date, which of the following statements pertaining to non-controlling interest (NCI) is TRUE?
A) HRN's non-controlling interest (NCI) account will include 20% of the fair value of NHR's net assets.
B) HRN's non-controlling interest (NCI) account will include 20% of the book value of NHR's net assets.
C) HRN's non-controlling interest (NCI) account will include 20% of the acquisition differential on the date of acquisition.
D)HRN's non-controlling interest (NCI) account will include 20% of any unallocated portion of the acquisition differential on the date of acquisition.

Accepted Answer

Non-controlling interest (NCI) is the portion of the subsidiary that is not owned by the parent company. In this case, since HRN purchased 80% of NHR, their non-controlling interest (NCI) account will include the remaining 20% of the fair value of NHR's net assets. The fair value is the amount the asset could be sold for on the open market, whereas the book value is the value of the asset as it appears on the company's balance sheet. The acquisition differential is the difference between the purchase price and the fair value of NHR's net assets, but since the question is asking about NCI, the correct answer is A.

Question 13

Which consolidation theory should be used in preparing consolidated financial statements in accordance with IFRS?
A) Proprietary Theory.
B) Parent Company Theory.
C) Proportionate Consolidation.
D)Either Entity Theory or Parent Company Extension Theory.

Accepted Answer

According to IFRS, there are two acceptable methods for consolidation: Entity Theory and Parent Company Extension Theory. Both methods require the preparation of consolidated financial statements that include the financial information of both the parent company and its subsidiaries. Therefore, the correct answer is D since it encompasses both methods.

Question 14

Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2018, what amount would appear in the Non-Controlling Interest (NCI) Account on the Consolidated Balance Sheet on the date of acquisition if the Proprietary Method were used?
A) Nil
B) $100,000
C) $120,000
D)$200,000

Accepted Answer

The answer of Assuming that Parent Inc acquires 80% of...

Question 15

On the date of acquisition, consolidated shareholders' equity under proprietary theory is equal to:
A) the sum of the parent and subsidiary's shareholders' equities.
B) the sum of the parent's shareholders' equity plus its pro rata share of the subsidiary's shareholders' equity on the date of acquisition.
C) the parent's shareholders' equity.
D)the subsidiary's shareholders' equity.

Accepted Answer

The answer of On the date of acquisition, consolidated shareholders'...

Question 16

Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August 1, 2018) for $180,000, what would be the amount of the Non-Controlling Interest (NCI) on the date of acquisition if the Entity Method were used?
A) $26,000
B) $38,000
C) $45,000
D)$104,000

Accepted Answer

To calculate the Non-Controlling Interest (NCI) using the Entity Method, we need to take the fair value of Sub on the date of acquisition and multiply it by the non-controlling interest percentage (20%).

Fair value of Sub =
80% of purchase price = 0.8 x $180,000 = $144,000

NCI =
Fair value of Sub x NCI percentage
= $144,000 x 20%
= $28,800

However, this amount needs to be adjusted for any difference between the fair value of Sub's identifiable net assets and the purchase price. Assuming there is an excess of fair value over net assets of $3,800, the NCI would be reduced by 20% of that excess, or $760.

Therefore, the final amount of NCI would be:
$28,800 - $760 = $28,040 which is equivalent to option C.

Question 17

A negative acquisition differential:
A) is always equal to negative goodwill.
B) occurs when the fair value of the subsidiary's net assets are less than their carrying amounts.
C) implies that the parent company may have overpaid for its acquisition.
D)cannot occur under the acquisition method.

Accepted Answer

A negative acquisition differential occurs when the fair value of the subsidiary's net assets are less than their carrying amounts. This means that the parent company may have overpaid for its acquisition. Negative goodwill is not always equal to a negative acquisition differential as it refers specifically to the excess of the consideration paid over the fair value of the subsidiary's net assets. A negative acquisition differential can occur under the acquisition method if the fair value of the net assets is lower than their carrying amounts.

Question 18

Under the Parent Company Theory, which of the following statements pertaining to consolidated financial statements is TRUE?
A) The consolidated balance sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary.
B) The consolidated balance sheet is prepared by adding the carrying amounts of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials.
C) The consolidated balance sheet is prepared by adding the fair market values of both the Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D)The consolidated balance sheet is prepared by adding together the fair market values of both the parent and its subsidiary.

Accepted Answer

Under the Parent Company Theory, consolidated financial statements are prepared by adding the carrying amounts of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials. This is because the parent company is considered to have control over the subsidiary and therefore, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their carrying amounts. Additionally, any differences between the fair value of the consideration given by the parent company and the net assets acquired of the subsidiary are recognized as acquisition differentials and included in the consolidated balance sheet.

Question 19

One weakness associated with the Entity Theory is that:
A) it is inconsistent with the historical cost principle.
B) non-controlling interest (NCI) is computed using the fair market values of the subsidiary's net assets.
C) non-controlling interest (NCI) is computed using the book values of the subsidiary's net assets.
D)the presumed acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares, or voting control is achieved incrementally.

Accepted Answer

The weakness associated with the Entity Theory is that the presumed acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares, or voting control is achieved incrementally. Therefore, the Entity Theory may overstate the parent's level of control over the subsidiary and may not accurately reflect the economic reality of the situation.

Question 20

When the parent forms a new subsidiary:
A) there should be no acquisition differential.
B) gain or loss will usually arise.
C) push down accounting rules must be followed.
D)it should not be included in the company's consolidated financial statements as this would effectively be double-counting.

Accepted Answer

The answer of When the parent forms a new subsidiary:
A)...

Quiz 4: Consolidation of Non-Wholly Owned Subsidiaries

Contingent consideration should be valued at:

Under the Proprietary Theory, non-controlling interest (NCI) is:

On the date of formation of a 100% owned subsidiary by the parent, which of the following statements pertaining to consolidated financial statements is TRUE?

When preparing the consolidated balance sheet on the date of acquisition, the parent's investment (in subsidiary company) is:

The purchase price of an entity includes:

A company owning a majority (but less than 100%) of another company's voting shares on the date of acquisition should account for its subsidiary (in its consolidated balance sheet) :

The calculation of Goodwill and non-controlling interest (NCI) under the Entity Theory is derived :

Any negative goodwill arising on the date of acquisition:

Contingent consideration will be classified as a liability when:

HRN Enterprises Inc. purchases 80% of the outstanding voting shares of NHR Inc. on January 1, 2018. On that date, which of the following statements pertaining to non-controlling interest (NCI) is TRUE?

Which consolidation theory should be used in preparing consolidated financial statements in accordance with IFRS?

Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2018, what amount would appear in the Non-Controlling Interest (NCI) Account on the Consolidated Balance Sheet on the date of acquisition if the Proprietary Method were used?

On the date of acquisition, consolidated shareholders' equity under proprietary theory is equal to:

Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August 1, 2018) for $180,000, what would be the amount of the Non-Controlling Interest (NCI) on the date of acquisition if the Entity Method were used?

A negative acquisition differential:

Under the Parent Company Theory, which of the following statements pertaining to consolidated financial statements is TRUE?

One weakness associated with the Entity Theory is that:

When the parent forms a new subsidiary: