Question 1

Jean Inc and John Inc had the following balance sheets on August 31, 2018: $\begin{array}{|l|l|l|l|} \hline & \text { Jean Inc. } & \text { John Inc. } & \text { John Inc. } \ \hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \ \hline \text { Cash } & \$ 1,200,000 & \$ 300,000 & \$ 300,000 \ \hline \text { Accounts Receivable } & \$ 400,000 & \$ 64,000 & \$ 64,000 \ \hline \text { Inventory } & \$ 240,000 & \$ 80,000 & \$ 60,000 \ \hline \text { Plant and Equipment (net) } & \$ 860,000 & \$ 256,000 & \$ 300,000 \ \hline \text { Trademark } & & \$ 20,000 & \$ 36,000 \ \hline \text { Total Assets } & \$ 2,700,000 & \$ 720,000 & \ \hline & & & \ \hline \text { Accounts Payable } & \$ 1,500,000 & \$ 300,000 & \$ 300,000 \ \hline \text { Bonds Pay able } & \$ 600,000 & \$ 240,000 & \$ 210,000 \ \hline \text { Common Shares } & \$ 500,000 & \$ 60,000 & \ \hline \text { Retained Earnings } & \$ 100,000 & \$ 120,000 & \ \hline \text { Total Labilities and Equiby } & \$ 2,700,000 & \$ 720,000 & \ \hline & & & \ \hline \end{array}$ On August 31^, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc's consolidated balance sheet on the date of acquisition using the Proprietary Theory.

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Question 2

Discuss the disclosure requirements for long term investments including accounting policies and non-controlling interest (NCI).

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Question 3

Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018: $\begin{array}{|l|l|l|l|}
\hline & \text { Keen Inc. } & \text { Lax Inc. } & \text { Lax Inc. } \
\hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \
\hline \text { Cash } & \$ 300,000 & \$ 80,000 & \$ 80,000 \
\hline \text { Accounts Receivable } & \$ 60,000 & \$ 24,000 & \$ 24,000 \
\hline \text { Inventory } & \$ 30,000 & \$ 54,000 & \$ 50,000 \
\hline \text { Plant and Equipment (net) } & \$ 310,000 & \$ 280,000 & \$ 300,000 \
\hline \text { Trademark } & & \$ 12,000 & \$ 16,000 \
\hline \text { Total Assets } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline \text { Accounts Payable } & \$ 150,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Bonds Payable } & \$ 400,000 & \$ 120,000 & \$ 100,000 \
\hline \text { Common Shares } & \$ 100,000 & \$ 60,000 & \
\hline \text { Retained Earnings } & \$ 50,000 & \$ 70,000 & \
\hline \text { Total Labilities and Equiby } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline
\end{array}$
 Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the consolidated balance sheet on the date of acquisition under the Entity Theory.

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Question 4

What value should be recorded as the fair value of a contingent consideration arising from a business acquisition when it is classified as a liability?
A) The undiscounted maximum amount that could be paid.
B) The discounted present value of the maximum amount that could be paid.
C) The undiscounted probabilistic estimate of the amount to be paid.
D)The discounted probabilistic estimate of the amount to be paid.

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Question 5

Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018: $\begin{array}{|l|l|l|l|}
\hline & \text { Keen Inc. } & \text { Lax Inc. } & \text { Lax Inc. } \
\hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \
\hline \text { Cash } & \$ 300,000 & \$ 80,000 & \$ 80,000 \
\hline \text { Accounts Receivable } & \$ 60,000 & \$ 24,000 & \$ 24,000 \
\hline \text { Inventory } & \$ 30,000 & \$ 54,000 & \$ 50,000 \
\hline \text { Plant and Equipment (net) } & \$ 310,000 & \$ 280,000 & \$ 300,000 \
\hline \text { Trademark } & & \$ 12,000 & \$ 16,000 \
\hline \text { Total Assets } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline \text { Accounts Payable } & \$ 150,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Bonds Pay able } & \$ 400,000 & \$ 120,000 & \$ 100,000 \
\hline \text { Common Shares } & \$ 100,000 & \$ 60,000 & \
\hline \text { Retained Earnings } & \$ 50,000 & \$ 70,000 & \
\hline \text { Total Labilities and Equiby } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline
\end{array}$
 Assume that the following draft balance sheet was prepared by a co-worker subsequent to Keen's 80% purchase of Lax Inc. for $240,000. Assuming this balance sheet is devoid of technical errors, what can be concluded about the balance sheet below?

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Question 6

X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000 worth of common shares. An agreement was drawn whereby X Company would pay 10% of any earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On that date, X's shares had a market value of $80 per share.
Required:
a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X) that you feel may be necessary to reflect Y's results under IFRS 3 Business Combinations. Assume that on the acquisition date no provision was made for the contingent consideration.
b) Assuming that the agreement called for Y's shareholders to be compensated for any decline in X's share price, what journal entries would be required under IFRS 3, if the market value of X's shares dropped to $64?

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Question 7

There are a number of theories of how financial statements should be prepared for non-wholly owned subsidiaries. Briefly discuss each theory and provide your reasoning to support the theory that is being adopted under IFRSs.

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Question 8

Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018: $\begin{array}{|l|l|l|l|}
\hline & \text { Keen Inc } & \text { Lax Inc } & \text { Lax Inc } \
\hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \
\hline \text { Cash } & \$ 300,000 & \$ 80,000 & \$ 80,000 \
\hline \text { Accounts Receivable } & \$ 60,000 & \$ 24,000 & \$ 24,000 \
\hline \text { Inventory } & \$ 30,000 & \$ 54,000 & \$ 50,000 \
\hline \text { Plant and Equipment (net) } & \$ 310,000 & \$ 280,000 & \$ 300,000 \
\hline \text { Trademark } & & \$ 12,000 & \$ 16,000 \
\hline \text { Total Assets } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline \text { Accounts Payable } & \$ 150,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Bonds Pay able } & \$ 400,000 & \$ 120,000 & \$ 100,000 \
\hline \text { Common Shares } & \$ 100,000 & \$ 60,000 & \
\hline \text { Retained Earnings } & \$ 50,000 & \$ 70,000 & \
\hline \text { Total Labilities and Equiby } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline
\end{array}$
 Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare the consolidated balance sheet on the date of acquisition under the Entity Theory.

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Question 9

Jean and John Inc had the following balance sheets on August 31, 2018: $\begin{array}{|l|l|l|l|} \hline & \text { Jean Inc. } & \text { John Inc. } & \text { John Inc. } \ \hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \ \hline \text { Cash } & \$ 1,200,000 & \$ 300,000 & \$ 300,000 \ \hline \text { Accounts Receivable } & \$ 400,000 & \$ 64,000 & \$ 64,000 \ \hline \text { Inventory } & \$ 240,000 & \$ 80,000 & \$ 60,000 \ \hline \text { Plant and Equipment (net) } & \$ 860,000 & \$ 256,000 & \$ 300,000 \ \hline \text { Trademark } & & \$ 20,000 & \$ 36,000 \ \hline \text { Total Assets } & \$ 2,700,000 & \$ 720,000 & \ \hline & & & \ \hline \text { Accounts Payable } & \$ 1,500,000 & \$ 300,000 & \$ 300,000 \ \hline \text { Bonds Pay able } & \$ 600,000 & \$ 240,000 & \$ 210,000 \ \hline \text { Common Shares } & \$ 500,000 & \$ 60,000 & \ \hline \text { Retained Earnings } & \$ 100,000 & \$ 120,000 & \ \hline \text { Total Labilities and Equiby } & \$ 2,700,000 & \$ 720,000 & \ \hline & & & \ \hline \end{array}$ On August 31^, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc.'s consolidated balance sheet on the date of acquisition using the Entity Theory.

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Question 10

A business combination involves a contingent consideration. It is considered 70% probable that a payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, how much interest expense should be recorded on the liability for the first year after acquisition?
A) $19,999
B) $24,500
C) $28,570
D)$35,000

Accepted Answer

To calculate the interest expense on the liability, we need to use the effective interest method. The formula for calculating interest expense is as follows:

Interest expense = Beginning liability balance x Effective interest rate

In this case, the beginning liability balance is $500,000 and the effective interest rate is 7%. However, since the payment is contingent and only 70% probable, we need to adjust the liability accordingly.

Adjusted liability = $500,000 x 70% = $350,000

Now we can calculate the interest expense:

Interest expense = $350,000 x 7% = $24,500

However, we need to prorate the interest expense for the first year since the liability is only outstanding for part of the year. If we assume that the acquisition date is January 1st, then the liability will only be outstanding for 9 months (from April 1st to December 31st).

Prorated interest expense = $24,500 x 9/12 = $18,375

Therefore, the answer is A) $19,999 (rounded to the nearest dollar), which is the prorated interest expense plus the accrual of interest for the remaining 3 months of the year:

Adjusted liability at end of year = $350,000 x (1 + 7%)^9/12 = $369,999
Accrued interest = $369,999 - $350,000 = $19,999

Question 11

If a business combination occurs and the consideration paid exceeds the fair value of the identifiable net assets of the subsidiary on the acquisition date and the parent acquires less than 100% of the outstanding common shares of the subsidiary, which consolidation method will result in the highest value for non-controlling interest on the acquisition date?
A) The proprietary theory.
B) The parent company theory.
C) The entity theory.
D)The parent company extension theory.

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Question 12

After the introduction of the entity method in Canada, many companies opted to value the non-controlling interest in subsidiaries based on the fair value of the subsidiary's identifiable net assets at the acquisition date instead of valuing the non-controlling interest at its fair value. That is, they opted to use the parent company extension approach rather than the entity method when preparing consolidated financial statements. What motivation might preparers of consolidated financial statements have that would cause them to have this preference?

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Question 13

Why might the fair value of the non-controlling interest in a subsidiary on the date that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?

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Question 14

Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of Minor Corporation on August 1, Year 1. The shares issued have a fair market value of $40. In addition, the merger agreement provides that if the market price of Major's shares is below $60 two years from the date of the merger, Major will issue additional shares to the former shareholders of Minor Corporation in an amount that will compensate them for their loss of value. On August 1, Year 3, the stock market price of major's shares is $55. In accordance with their agreement, Major Corporation issues an additional number of shares.
Required:
a) Prepare the journal entry to record the issuance of the shares.
b) Calculate the number of additional shares that Major Corporation will have to issue to the former shareholders of Minor Corporation.
c) Prepare the journal entry to record the transaction under IFRS 3 Business Combinations.
d) Are there any alternatives for recording the additional share issuance?
e) What would be the required disclosure for this series of events?

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Question 15

Keen Inc and Lax Inc had the following balance sheets on October 31, 2018: $\begin{array}{|l|l|l|l|}
\hline & \text { Keen Inc } & \text { Lax Inc } & \text { Lax Inc } \
\hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \
\hline \text { Cash } & \$ 300,000 & \$ 80,000 & \$ 80,000 \
\hline \text { Accounts Receivable } & \$ 60,000 & \$ 24,000 & \$ 24,000 \
\hline \text { Inventory } & \$ 30,000 & \$ 54,000 & \$ 50,000 \
\hline \text { Plant and Equipment (net) } & \$ 310,000 & \$ 280,000 & \$ 300,000 \
\hline \text { Trademark } & & \$ 12,000 & \$ 16,000 \
\hline \text { Total Assets } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline \text { Accounts Payable } & \$ 150,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Bonds Pay able } & \$ 400,000 & \$ 120,000 & \$ 100,000 \
\hline \text { Common Shares } & \$ 100,000 & \$ 60,000 & \
\hline \text { Retained Earnings } & \$ 50,000 & \$ 70,000 & \
\hline \text { Total Labilities and Equiby } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline
\end{array}$
 Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts for its investment using the cost method, prepare (under the Entity Theory):
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

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Question 16

In an inflationary economy, under which consolidation theory would total assets in the consolidated balance sheet at the acquisition date be greatest?
A) The proprietary theory.
B) The parent company theory.
C) The entity theory.
D)The parent company extension theory.

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Question 17

A business combination involves a contingent consideration. As a result, two years after the acquisition date, the acquirer was required to issue an additional 40,000 common shares at a time when the fair value of the common shares was $4 per share. What effect would this transaction have on the balance in the common shares account in the consolidated financial statements on the date of acquisition?
A) It would increase by $160,000.
B) It would not change.
C) It would decrease by $160,000.
D)It is not possible to determine the effect from the information provided.

Accepted Answer

The transaction occurred two years after the acquisition date, so it is not relevant to the original balance in the common shares account on the date of acquisition. Therefore, the balance in the common shares account in the consolidated financial statements on the date of acquisition would not be affected by this transaction.

Question 18

Keen Inc and Lax Inc had the following balance sheets on October 31, 2018: $\begin{array}{|l|l|l|l|}
\hline & \text { Keen Inc } & \text { Lax Inc } & \text { Lax Inc } \
\hline & \text { (carry ing value) } & \text { (carrying value) } & \text { (fair value) } \
\hline \text { Cash } & \$ 300,000 & \$ 80,000 & \$ 80,000 \
\hline \text { Accounts Receivable } & \$ 60,000 & \$ 24,000 & \$ 24,000 \
\hline \text { Inventory } & \$ 30,000 & \$ 54,000 & \$ 50,000 \
\hline \text { Plant and Equipment (net) } & \$ 310,000 & \$ 280,000 & \$ 300,000 \
\hline \text { Trademark } & & \$ 12,000 & \$ 16,000 \
\hline \text { Total Assets } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline \text { Accounts Payable } & \$ 150,000 & \$ 200,000 & \$ 200,000 \
\hline \text { Bonds Pay able } & \$ 400,000 & \$ 120,000 & \$ 100,000 \
\hline \text { Common Shares } & \$ 100,000 & \$ 60,000 & \
\hline \text { Retained Earnings } & \$ 50,000 & \$ 70,000 & \
\hline \text { Total Labilities and Equiby } & \$ 700,000 & \$ 450,000 & \
\hline & & & \
\hline
\end{array}$
 Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare (under the Entity Theory):
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

Accepted Answer

The answer of Keen Inc and Lax Inc had the...

Quiz 4: Consolidation of Non-Wholly Owned Subsidiaries

Discuss the disclosure requirements for long term investments including accounting policies and non-controlling interest (NCI).

What value should be recorded as the fair value of a contingent consideration arising from a business acquisition when it is classified as a liability?

There are a number of theories of how financial statements should be prepared for non-wholly owned subsidiaries. Briefly discuss each theory and provide your reasoning to support the theory that is being adopted under IFRSs.

Why might the fair value of the non-controlling interest in a subsidiary on the date that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?

In an inflationary economy, under which consolidation theory would total assets in the consolidated balance sheet at the acquisition date be greatest?