Question 1

On January 1, 2013 Paisley Ltd. Acquired 100% of the issued shares of Plaid Incorporated. The fair value of the consideration paid was measured at $460,000. At this date, records of Plaid Incorporated included the following information:
 $\begin{array}{ll}
\text { Share Capital } & \$ 200,000 \
\text { Retained Eamings } & \$ 80,000 \
\text { Goodwill } & \$ 20,000
\end{array}$ As at January 1, 2013, all the identifiable assets and liabilities of Plaid were recorded in the subsidiary's books at fair value except for the following assets:
 $$\begin{array} { l l l } 
& \text { Carrying Amount } & \text { Fair Value } \
 \text { Inventory } & \$ 60,000 & \$ 90,000 \
\text { Land } & \$ 100,000 & \$ 125,000
\end{array}$$ The inventory was all sold by December 31, 2013. The land is still remaining with Plaid as at December 31, 2013. Goodwill has not been deemed to be impaired. The tax rate is 40%.
The summarized financial statements of both entities as at December 31, 2013 are shown below.
Required:.
Prepare the consolidated financial statements of Paisley Ltd. As at December 31, 2013.\(\begin{array}{lll}&\text { Paisley Ltd. }&\text { Plaid Incorporated }\\hline
\text { Revenues } & \$ 950,000 & \$ 725,000 \
\text { Expenses } & \$ 430,000 & \$ 375,000 \
\text { Profit before tax } & \$ 520,000 & \$ 350,000 \
\text { Income tax expense } & \$ 200,000 & \$ 150,000 \
\text { Profit for the period } & \$ 320,000 & \$ 200,000 \
\text { Retained eamings } 1 / 1 / 2013 & \$ 150,000 & \$ 80,000 \
\text { Retained eamings } 12 / 31 / 2013 & \$ 470,000 & \$ 280,000 \
\text { Share capital } & \$ 300,000 & \$ 200,000\\
\text { Deferred tax liabilities } & \$ 15,000 & \$ 10,000 \
\text { Other liabilities } & \$ 200,000 & \$ 175,000 \
\text { Total liabilities } & \$ 215,000 & \$ 185,000 \
\text { Total equity and liabilities } & \$ 985,000 & \$ 665,000 \
& & \
\text { Cash } & \$ 175,000 & \$ 90,000 \
\text { Inventory } & \$ 225,000 & \$ 110,000 \
\text { Financial assets } & \$ 40,000 & \$ 65,000 \
\text { Land } & - & \$ 100,000\\text { Investment in Plaid Incorporated } & \$ 460,000 & - \
\text { Intangible assets } & \$ 85,000 & \$ 280,000 \
\text { Goodwill } & - & \$ 20,000 \
\text { Total assets } & \$ 985,000 & \$ 665,000
\end{array}\)

Accepted Answer

The answer of On January 1, 2013 Paisley Ltd. Acquired...

Question 2

Kayla Ltd. owns 100% of Milos Ltd. Kayla records its investment at cost. Kayla received $300,000 in dividends from Milos. What adjustment should Kayla make on its consolidated financial statements with respect to the dividends?

Accepted Answer

Kayla should decrease its Dividend income (Kayla) by $300,000 to reflect the dividends received from Milos. Milos should also decrease its Dividends declared by the same amount since it is the company that paid out the dividends. No adjustment should be made to the Investment in Milos since it is recorded at cost and not affected by dividends.

Question 3

Before undertaking the consolidation process, describe the adjustments that may be necessary in relation to the content of the financial statements of the subsidiary.

Accepted Answer

The answer of Before undertaking the consolidation process, describe the...

Question 4

Which of the following statements regarding consolidated financial statements at the date of acquistion is FALSE?

Accepted Answer

At the date of acquisition, there is no need to prepare a consolidated statement of income as the subsidiary's results are only included in the consolidated statement of income from the date of acquisition onwards. The other options are true statements regarding the preparation of consolidated financial statements at the date of acquisition.

Question 5

What adjustments are typically needed when consolidated financial statements are prepared at the acquisition date?

Accepted Answer

The answer of What adjustments are typically needed when consolidated...

Question 6

Fair value adjustments (FVAs)are used to recognize the identifiable assets and liabilities of the subsidiary at fair values and goodwill measured as a residual amount. What happens to the fair value adjustments subsequent to the acquisition date?

Accepted Answer

The answer of Fair value adjustments (FVAs)are used to recognize...

Question 7

What values should be used for the assets, liabilities, and shareholders' equity to start the consolidation process?

Accepted Answer

Carrying values are used for both the parent and the subsidiary companies because they represent the historical cost of the assets and liabilities.

Question 8

Carson Company purchased 100% of the outstanding common shares of Towson Company on December 31, 2011 for $170,000. At that date, Towson had $100,000 of outstanding common stock and retained earnings of $30,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000. The capital assets had a remaining useful life of eight years as of the acquisition date and have no salvage value. Inventory turns over four times a year. Both companies pay tax at the rate of 30%. It is now 2014 and Carson has been very pleased with how profitable its investment in Towson has been. On Carson's consolidated financial statements at December 31, 2014, what balance should be reported for goodwill?

Accepted Answer

The answer of Carson Company purchased 100% of the outstanding...

Question 9

Regarding the Acquisition Analysis, describe pre-acquisition adjustments and what they aim to accomplish.

Accepted Answer

The answer of Regarding the Acquisition Analysis, describe pre-acquisition adjustments...

Question 10

When performing the fair value adjustment process, which of the following is true?

Accepted Answer

During the fair value adjustment process, the deferred income tax is reversed on the same basis as the fair value adjustment is written off. This means that any changes in fair value will have a corresponding impact on deferred taxes, which need to be adjusted accordingly. Option B is incorrect because the deferred income tax recognized during the acquisition analysis may change as a result of fair value adjustments. Option C and D are incorrect because fair value adjustments may need to be reversed in future periods if the underlying assets or liabilities undergo further changes in fair value. Additionally, fair value adjustments are not always written off through comprehensive income over a period of 5 years, as this will depend on the nature of the asset or liability and how it is accounted for under accounting standards.

Question 11

Since taxes are paid by the individual companies, the CCA claim for the acquiree is based on the amount recorded in the records of the ____________.

Accepted Answer

Since the CCA claim is based on the amount recorded in the records of the acquiree, it means that the tax liabilities and related assets are transferred to the acquirer following the acquisition. Therefore, the CCA claim should be based on the records of the acquiree.

Question 12

When the parent has previously held equity interest in the subsidiary, in accordance with IFRS 3.42, the parent revalues the previously held investment to fair value, recognizing the increment in ___________________.

Accepted Answer

Under IFRS 3.42, when a parent acquires control of a subsidiary and has previously held an equity interest in the subsidiary, the parent revalues its previously held equity interest to its fair value at the acquisition date. The difference between the fair value and the carrying amount of the previously held equity interest is recognized in net income.

Question 13

The starting point for the preparation of the consolidated financial statements is:

Accepted Answer

The starting point for preparing consolidated financial statements is the individual financial statements of each company within the group, including both the parent and subsidiary companies, as of the reporting date.

Question 14

On January 1, 2012 Finn Ltd. Acquired 75% of the shares of Ewe Corporation for $10 per share in cash. The equity of Ewe as at that date was:
 $\begin{array}{lll}
\text { Share capital-20,000 shares }&\$ 20,000 \
\text { Retained earnings}&\$ 50,000\
\end{array}$
 Finn had previously acquired 25% of the shares of Ewe for $10,000. The fair value of this investment as at January 1, 2012 was $50,000.
At the acquisition date all of the identifiable assets and liabilities of Ewe were recorded at fair value except for a plant and inventory, whose carrying amounts were $15,000 and $5,000 respectively less than their fair value. All of the inventory was subsequently sold during 2012 and the plant had a remaining useful life at the acquisition date of 5 years. The tax rate is 40%.
Ewe had been actively researching a new process, which is part of the reason why Finn acquired the remaining outstanding shares of Ewe. Finn estimated the value of this intangible to be $10,000 and that it would have an indefinite useful life.
Required: Prepare the acquisition analysis and the consolidation adjustments of Finn and Ewe as at December 31, 2013.

Accepted Answer

The answer of On January 1, 2012 Finn Ltd. Acquired...

Question 15

Goodwill recorded by the subsidiary at the acquisition date is?

Accepted Answer

Goodwill recorded by the subsidiary at the acquisition date is deducted from the net fair value of the identifiable assets and liabilities of the subsidiary when performing the acquisition analysis. This is because the parent company has already recognized the total goodwill of the acquisition in its consolidated financial statements. Therefore, the subsidiary's recognized goodwill needs to be adjusted to reflect the fair value of the identifiable assets and liabilities of the subsidiary. Goodwill is not amortized over a fixed period; instead, it is tested annually for impairment.

Question 16

In a business combination that occurred 2 years ago, there was a fair value adjustment due to land as the fair value was greater than its recorded book value by $20,000. The company's tax rate is 40%. What is the required adjustment upon consolidation this year?

Accepted Answer

When there is a fair value adjustment due to land in a business combination, it results in a deferred tax liability, which must be recognized upon consolidation. The increase in carrying value of land by $20,000 will result in an increase in the deferred tax liability of $8,000 (40% of $20,000). Therefore, the required adjustment upon consolidation this year is to increase the carrying value of land by $20,000 and increase the deferred tax liability of $8,000.

Quiz 3: Consolidation: Wholly Owned Subsidiaries