Question 1

Cassius Ltd and Brutus Ltd agreed to merge by forming another company,Casca Ltd,which acquired all the issued capital of the two companies in a share exchange.Cassius Ltd was a much larger company than Brutus Ltd,with several large equity stakeholders,so that the board of Cassius Ltd emerged from the business combination with the power to dominate the operating and financial policies of the merged entity.Based on these facts:
A) Casca Ltd must be the acquiring entity because it acquired the issued capital of Cassius Ltd and Brutus Ltd.
B) Cassius Ltd is the acquiring entity because its management emerges as the dominant power in the merged entity.
C) neither Cassius Ltd nor Brutus Ltd can be the acquiring entity because their equity securities have been acquired by Casca Ltd.
D) none of the above.

Accepted Answer

Cassius Ltd is the acquiring entity because it emerged from the merger with the power to dominate the operating and financial policies of the merged entity. Casca Ltd is simply the new entity formed as a result of the merger, but it is not necessarily the acquiring entity.

Question 2

Assume that Scipio Ltd has a controlling interest in Africanus Ltd.As a result of this relationship:
A) the directors of Africanus Ltd have a fiduciary duty to act in the best interests of Scipio Ltd.
B) because of its controlling interest in Africanus Ltd, Scipio Ltd will take over the management of Africanus Ltd from the board of that company.
C) the board of Africanus Ltd will be dissolved as they no longer have any real power in Africanus Ltd.
D) none of the above.

Accepted Answer

Having a controlling interest in a subsidiary company does not necessarily mean that the parent company will take over the management of the subsidiary or dissolve the subsidiary's board of directors. The subsidiary company and its board of directors still have their own legal identity and fiduciary duties to act in the best interests of the company and its shareholders. However, the parent company may have more influence and voting power in the decision-making processes of the subsidiary company.

Question 3

If a parent loses control of a subsidiary during a financial year,that subsidiary's results are ignored for consolidation purposes.

Accepted Answer

The statement is incorrect. Even if a parent loses control of a subsidiary during a financial year, the subsidiary's results must be included in the consolidated financial statements for the portion of the year it was under the parent's control. However, the subsidiary's financials should be presented separately from the parent's financials in the consolidated financial statements.

Question 4

Ownership of more than 50% of the voting power will always represent control.

Accepted Answer

Control can be achieved through arrangements that do not involve owning more than 50% of the voting power, such as through contractual agreements, the ability to appoint key management personnel, or other means that ensure the ability to direct the relevant activities of an entity.

Question 5

Investments in associates (other than those classified as held for sale)will be measured at cost in the consolidated financial statements.

Accepted Answer

Investments in associates are initially recognized at cost in the consolidated financial statements, but subsequently they are measured using the equity method or fair value method depending on the level of influence and control over the associate.

Question 6

In the separate financial statements of a parent entity,investments not classified as held for sale are accounted for:
A) at cost.
B) at fair value.
C) at either cost or fair value.
D) not recorded.

Accepted Answer

Investments not classified as held for sale can be accounted for at either cost or fair value, depending on the accounting policy chosen by the parent entity. The choice between cost or fair value may depend on factors such as the nature and objective of the investment, the extent of the parent's influence over the investee, and the availability of reliable fair value measurements.

Question 7

What are the major criticisms of the control criterion applied to the definition of the group?

Accepted Answer

The answer of What are the major criticisms of the...

Question 8

A Ltd controls B Ltd who in turn controls C Ltd.B Ltd and the B Ltd group are not reporting entities.A Ltd is a reporting entity.Consolidated financial statements will be required to be prepared for:
A) the A group
B) the B group
C) both the A group and the B group.
D) none of the groups.

Accepted Answer

A Ltd is a reporting entity and it controls B Ltd, therefore it must prepare consolidated financial statements for the A group which includes A Ltd and its subsidiary B Ltd. B Ltd and the B group are not reporting entities and do not require separate consolidated financial statements. C Ltd is a subsidiary of B Ltd and would be included in the consolidated financial statements of B Ltd if it were a reporting entity.

Question 9

Control of a subsidiary must be actively exercised (i.e.,the capacity to control does not meet the definition of control).

Accepted Answer

The definition of control in accounting and financial reporting does not require active exercise; it is sufficient to have the capacity to control the subsidiary.

Question 10

In AASB 3,the indicia of an acquiring entity's power to control the other combining entities in a business combination do not include the power to:
A) exercise more than half of the voting rights in another entity through the site of the voting power or by virtue of an agreement with other investors.
B) appoint or remove a majority of the members of the governing body of the acquired entities.
C) cast the majority of votes at meetings of the governing body.
D) none of the above.

Accepted Answer

All options listed in the question are indicia of an acquiring entity's power to control the other combining entities in a business combination according to AASB 3. Therefore, the correct answer is D, none of the above.

Question 11

Company B is bound by contract to sell all its output to Company A.Company A is deemed to control Company B.

Accepted Answer

Control in a business context typically refers to the ability to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Simply having a contract to buy all of a company's output does not necessarily grant control over the company's financial and operating policies.

Quiz 1: Text Objectives and Introduction to Consolidation

Assume that Scipio Ltd has a controlling interest in Africanus Ltd.As a result of this relationship:

If a parent loses control of a subsidiary during a financial year,that subsidiary's results are ignored for consolidation purposes.

Ownership of more than 50% of the voting power will always represent control.

Investments in associates (other than those classified as held for sale)will be measured at cost in the consolidated financial statements.

In the separate financial statements of a parent entity,investments not classified as held for sale are accounted for:

What are the major criticisms of the control criterion applied to the definition of the group?

A Ltd controls B Ltd who in turn controls C Ltd.B Ltd and the B Ltd group are not reporting entities.A Ltd is a reporting entity.Consolidated financial statements will be required to be prepared for:

Control of a subsidiary must be actively exercised (i.e.,the capacity to control does not meet the definition of control).

In AASB 3,the indicia of an acquiring entity's power to control the other combining entities in a business combination do not include the power to:

Company B is bound by contract to sell all its output to Company A.Company A is deemed to control Company B.