Question 1

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

In accordance with IFRS, either Entity Theory or Parent Company Extension Theory could be used in preparing consolidated financial statements, depending on the circumstances. Entity Theory involves adding together the assets, liabilities, revenues, and expenses of the parent company and its subsidiaries to create consolidated financial statements. Parent Company Extension Theory involves treating the parent company as an extension of the subsidiary, and consolidating the subsidiary's financial statements with the parent company's financial statements. Proportionate Consolidation is not an acceptable consolidation method under IFRS. Proprietary Theory is not commonly used in practice.

Question 2

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

A

Question 3

The calculation of Goodwill and Non-Controlling Interest 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, the calculation of Goodwill and Non-Controlling Interest is based on the imputed acquisition cost, which assumes that the parent company acquired 100% of the outstanding voting shares of the subsidiary. Therefore, the imputed acquisition cost is used instead of the actual acquisition cost.

Question 4

On that date, which of the following statements pertaining to Non-Controlling Interest is TRUE?
A) HRN's Non-Controlling Interest account will include 20% of the fair value of NHR's net assets.
B) HRN's Non-Controlling Interest account will include 20% of the book value of NHR's net assets.
C) HRN's Non-Controlling Interest account will include 20% of the acquisition differential on the Date of Acquisition.
D) HRN's Non-Controlling Interest account will include 20% of any unallocated portion of the acquisition differential on the Date of Acquisition.

Accepted Answer

The answer of On that date, which of the following...

Question 5

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 implies that the parent company may have overpaid for its acquisition. It is not always equal to negative goodwill and can occur under the acquisition method.

Question 6

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) None of the above.

Accepted Answer

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

Question 7

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 the subsidiary company is replaced with 100% of the assets and liabilities of the subsidiary at fair market value. This is done to reflect the true value of the subsidiary's assets and liabilities at the date of acquisition. The fair market value of the subsidiary's assets and liabilities may differ from their book value, which is why the investment is replaced with their fair market value.

Question 8

One weakness associated with the Entity Theory is that:
A) it is inconsistent with the Historical Cost Principle.
B) Non-Controlling Interest is computed using the fair market values of the subsidiary's net assets.
C) Non-Controlling interest 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 Entity Theory assumes that the parent company has 100% control over the subsidiary, which may not be the case when the parent acquires less than 100% of the voting shares or achieves voting control incrementally. Therefore, the presumed acquisition cost may not be realistic, and adjustments may be needed to properly reflect the subsidiary's value and the non-controlling interest. Choices A and B are not relevant to the Entity Theory, and choice C is incorrect as the Non-Controlling Interest is computed using fair market values, not book values.

Question 9

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

The answer of Contingent consideration will be classified as a...

Question 10

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2012 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, 2012)?
A) $104,000
B) $120,000
C) $130,000
D) Nil

Accepted Answer

The answer of   The Net Incomes for Parent...

Question 11

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 purchase price of an entity includes the book value of the subsidiary's shareholders' equity and the acquisition differential, which is the difference between the purchase price and the fair market value of the net assets acquired. Goodwill is not included in the purchase price but is recognized as an intangible asset if it exists. Therefore, option A is the most accurate statement.

Question 12

Under the Proprietary theory, Non-Controlling Interest 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

The answer of Under the Proprietary theory, Non-Controlling Interest is:
A)...

Question 13

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, 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. This is because the Parent Company Theory assumes that the Parent Company controls the subsidiary, and therefore the Parent's financial statements should reflect the assets, liabilities, and equity of both the Parent and its subsidiary. The carrying amounts of the subsidiary are added, rather than the fair market values, because the theory assumes that the Parent Company has already accounted for any acquisition premiums or discounts at the time of the acquisition.

Question 14

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming that Parent Inc acquires 80% of Sub Inc on August 1, 2012, what amount would appear in the Non- Controlling Interest 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   The Net Incomes for Parent...

Question 15

On the date of acquisition, consolidated shareholders' equity 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

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 account.

Accepted Answer

When a company acquires a majority of another company's voting shares, it is considered to have control over the subsidiary. Therefore, the parent company should include 100% of the fair market values of the subsidiary's net assets in its consolidated balance sheet. However, since the parent company does not own 100% of the subsidiary, the remaining portion should be accounted for using the Non-Controlling Interest (NCI) account. This account reflects the ownership interest of outside shareholders in the subsidiary and is reported as a separate line item in the consolidated balance sheet. Therefore, choice D is the best answer.

Question 17

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 is valued at the fair value on the date of acquisition as it is an amount that may change based on future events or performance. Therefore, it should be valued at its current fair value rather than historical book value or net assets.

Question 18

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assume that Parent Inc. purchased a controlling interest in Sub Inc. on August 1, 2012 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, 2012)?
A) $60,000
B) $120,000
C) $180,000
D) Nil

Accepted Answer

The answer of   The Net Incomes for Parent...

Question 19

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August 1, 2012) for $180,000, what would be the amount of the Non-Controlling Interest 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

Step 1: Calculate the fair value of the net assets of Sub Inc.
Purchase Price = $180,000
Non-controlling interest = 20% (100% - 80%)
Fair value of net assets = $60,000 / 0.20 = $300,000
Goodwill = Purchase price - Fair value of net assets
Goodwill = $180,000 - $300,000 = $(120,000)

Step 2: Calculate NCI
NCI = Fair value of net assets x Non-controlling interest
NCI = $300,000 x 0.20 = $60,000

Step 3: Calculate the amount allocated to Parent Inc.
Amount allocated to Parent Inc. = Purchase price - NCI
Amount allocated to Parent Inc. = $180,000 - $60,000 = $120,000

Step 4: Calculate the Net Income attributable to NCI
Net Income attributable to NCI = Net Income of Sub Inc. x NCI %
Net Income attributable to NCI = $60,000 x 0.20 = $12,000

Step 5: Calculate the Non-Controlling Interest on the date of acquisition
Non Controlling Interest on the date of acquisition = NCI + Net Income attributable to NCI
Non Controlling Interest on the date of acquisition = $60,000 + $12,000 = $72,000

Therefore, the Non-Controlling Interest on the date of acquisition if the Entity Method were used is $45,000 (C).

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

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

Any negative goodwill arising on the date of acquisition:

The calculation of Goodwill and Non-Controlling Interest under the Entity Theory is derived :

On that date, which of the following statements pertaining to Non-Controlling Interest is TRUE?

A negative acquisition differential:

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:

One weakness associated with the Entity Theory is that:

Contingent consideration will be classified as a liability when:

The purchase price of an entity includes:

Under the Proprietary theory, Non-Controlling Interest is:

Under the Parent Company Theory, which of the following statements pertaining to Consolidated Financial Statements is TRUE?

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

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) :

Contingent consideration should be valued at:

When the parent forms a new subsidiary: