Question 1

If the end of a subsidiary's reporting period does not coincide with the end of the parent entity's reporting period, adjustments must be made for the effects of significant events that occur between these dates as long as the difference between the ends reporting periods differs by no more than:
A) one month
B) three months
C) four months
D) six months

Accepted Answer

According to IFRS 10, adjustments must be made for the effects of significant events that occur between the end of a subsidiary's reporting period and the end of the parent entity's reporting period if the difference between the ends of reporting periods is no more than three months. Therefore, the best choice is B.

Question 2

At the date of acquisition a subsidiary had recorded a dividend payable of $10 000. The consolidation adjustment needed at the date of acquisition in relation to this event is:
A) $\begin{array}{lrrr}
\text { DR } &\text { Dividend payable }& \$ 10,000 \
 \text { CR } &\text { Dividend receivable }& \$ 10,000 \
\end{array}$
B) $\begin{array} { l l l l } 
\text { DR } & \text { Dividend revenue }&\$ 10,000 \
\text { CR } &\text { Dividend declared }& \$ 10,000 & \
\end{array}$
C) $\begin{array}{lll}
\text { DR } & \text { Shares in subsidiary } & \$ 10,000\
\mathrm{CR} & \text { Dividend receivable } & \$ 10,000
\end{array}$
D) $\text { DR } \quad \text { Cash } \quad \$ 10,000$
$\text { CR } \quad \text { Shares in subsidiary } \quad \$ 10,000$

Accepted Answer

The correct adjustment for a dividend payable by a subsidiary at the date of acquisition involves recognizing a dividend receivable by the parent company (since the parent owns the subsidiary and is entitled to its dividends) and a corresponding dividend payable by the subsidiary. This ensures that the consolidation process accurately reflects the economic reality of the group's internal transactions, without overstating liabilities or assets.

Question 3

When a parent entity has previously held an investment in a subsidiary prior to gaining control the effect on the consolidation process is as follows:
A) there is no impact
B) the change in the fair value of the previously held interest is recognised in profit or loss
C) the change in the fair value of the previously held interest is recognised in retained earnings
D) the change in the fair value of the previously held interest is recognised in other comprehensive income

Accepted Answer

When a parent entity has previously held an investment in a subsidiary prior to gaining control, the fair value of the previously held interest is required to be remeasured to fair value at the acquisition date. The difference between the fair value and the carrying value of the previously held interest is recognised in profit or loss. This is known as a bargain purchase gain or loss. Therefore, there is an impact on the consolidation process, and the change in fair value is recognised in profit or loss.

Question 4

In relation to pre-acquisition of a subsidiary entity, which of the following events can cause a change in the pre-acquisition entry subsequent to acquisition date? 
I Transfers from post-acquisition retained earnings
II Bonus dividends paid from pre-acquisition equity
III Transfers from pre-acquisition retained earnings
IV Impairment of goodwill
A) I, II, III and IV
B) I, III and IV only
C) II and III only
D) III and IV only.

Accepted Answer

II and III only. Bonus dividends paid from pre-acquisition equity and transfers from pre-acquisition retained earnings can cause a change in the pre-acquisition entry subsequent to the acquisition date. These events adjust the initial understanding of the acquired entity's equity at the acquisition date. Transfers from post-acquisition retained earnings and impairment of goodwill, however, affect the financials post-acquisition and do not retroactively alter the pre-acquisition entries.

Question 5

On 1 January 20X2 A Ltd acquired all the issued shares in B Ltd. At that date the inventory of B Ltd had a carrying amount $5000 lower than its fair value. The inventory was all sold by 30 June 20X4. At 30 June 20X5 the consolidation adjustment against inventory in relation to the transaction will be:
A) a debit of $5000
B) a credit of $5000
C) a debit of $3500
D) nothing

Accepted Answer

Since all the inventory that had a carrying amount $5000 lower than its fair value was sold by 30 June 20X4, there would be no inventory left to adjust by 30 June 20X5. Therefore, no consolidation adjustment is required against inventory at that date.

Question 6

Consolidated financial statements are prepared using the following presentation method:
A) one-line;
B) line-by-line;
C) gross;
D) liquidation.

Accepted Answer

The line-by-line method presents each item on the individual company's financial statements separately and then combines them to show the consolidated totals. This method is the most commonly used presentation method for consolidated financial statements as it provides a clear and detailed view of the financial performance of the entire group.

Question 7

Company X acquired Company Y when the carrying value of Company Y's plant was $50 000. The fair value of the plant on acquisition date was $65 000. The company tax rate was 30%. How much is the amount of the business combination valuation reserve that must be recognised?
A) $3500
B) $10 500
C) $15 000
D) $65 000

Accepted Answer

According to the question, Company X acquired Company Y when the carrying value of Company Y's plant was $50 000, but the fair value of the plant on the acquisition date was $65 000. This means there is a difference of $15 000 (i.e. $65 000 - $50 000) which needs to be recognised as goodwill in the consolidated financial statements.

However, we are asked to calculate the amount of the business combination valuation reserve, which is the portion of goodwill that arises due to a difference between the fair value and carrying value of assets acquired in a business combination. This portion is not tax-deductible and recognised in equity as a separate reserve.

The formula for this reserve is:
Business Combination Valuation Reserve = (Fair value of assets acquired - Carrying value of assets acquired) x (1 - Tax rate)

Using the numbers given in the question, the calculation for the business combination valuation reserve would be:
Business Combination Valuation Reserve = ($65 000 - $50 000) x (1 - 0.30) = $10 500

Therefore, the correct answer is B) $10 500.

Question 8

On 1 July 20X6, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:
$\bullet$Share Capital $35 000
$\bullet$Retained Earnings $15 000
The pre-acquisition entry at 1 July 20X6 is:

A)$\begin{array}{lll}
\text { Shares in S Limited } & \mathrm{Dr} & 50,000 \
\text { Opening Retained earnings } & \mathrm{Cr} &15,000 \
\text { Share capital } & \mathrm{Cr} &35,000
\end{array}$

B)$\begin{array}{lll}
\text { Opening Retained earnings } & \mathrm{Dr} & 15,000 \
\text { Share capital } & \mathrm{Dr} & 35,000 \
\text { Shares in S Limited } & \mathrm{Cr} &50,000
\end{array}$

C)$\begin{array}{lll}
\text { Opening Retained earnings } & \mathrm{Dr} & 35,000 \
\text { Share capital } & \mathrm{Dr} & 15,000 \
\text { Shares in S Limited } & \mathrm{Cr} &50,000
\end{array}$

D)$\begin{array}{lll}
\text { Goodwill } & \mathrm{Dr} & 15,000 \
\text { Share capital } & \mathrm{Dr} & 35,000 \
\text { Shares in S Limited } & \mathrm{Cr} &50,000
\end{array}$

Accepted Answer

The answer of On 1 July 20X6, P Limited acquired...

Question 9

Nelson Limited has two subsidiary entities, Poggi Limited and Holly Limited. Nelson Limited owns 100% of the shares in both entities. Details of issued share capital are: 
$\bullet$Nelson Limited $100 000
$\bullet$Poggi Limited $30 000
$\bullet$Holly Limited $15 000
The worksheet adjustment entry made in order to determine the amount of consolidated share capital is:
A) $\text { DR \quad Share capital } \quad\quad \$ 145,000$
$\text { CR } \quad \text { Shares in subsidiaries } \quad \$ 145,000$
B) $\begin{array} { l c c c } 
\text { DR } & \text { Share capital } & \$ 100,000 & \
\text { CR } & \text { Shares in subsidiaries } & & \$ 100,000
\end{array}$
C) $\begin{array}{lll}\text { DR }&\text { Share capital }&\$45,000\
\text { CR } & \text { Shares in Poggi Limited } & \$ 30000 \
\text { CR } & \text { Shares in Holly Limited } & \$ 15000
\end{array}$
D) $\begin{array}{llr}\text { DR } & \text {Share capital }&145,000\
\text { CR } & \text { Shares in Nelson Limited } & \$ 100,000 \
\text { CR } & \text { Shares in Poggi Limited } & \$ 30,000 \
\text { CR } & \text { Shares in Holly Limited } & \$ 15,000
\end{array}$

Accepted Answer

The answer of Nelson Limited has two subsidiary entities, Poggi...

Question 10

One year after acquisition date, the goodwill acquired was regarded as having become impaired by $20 000. The appropriate consolidation adjustment in relation to the impairment will include the following line:
A) DR Goodwill $20 000
B) DR Share capital $20 000
C) CR Business combination valuation reserve $20 000
D) CR Accumulated impairment losses $20 000.

Accepted Answer

The answer of One year after acquisition date, the goodwill...

Question 11

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree:
A) a gain on bargain purchase results
B) goodwill has been acquired and must be recognised
C) the difference is treated as a special equity reserve in the acquirer's accounting records
D) the difference is treated as a loss and immediately charged to profit or loss of the period in which the business combination occurred.

Accepted Answer

When the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree, the difference is treated as goodwill and must be recognized as an asset on the acquirer's balance sheet. Therefore, choice B is the best option. Choice A is incorrect because a gain on bargain purchase would only arise if the cost of the business combination is less than the net fair value of the identifiable assets, liabilities, and contingent liabilities acquired. Choice C is also incorrect because special equity reserve is not a recognized accounting treatment for this situation. Similarly, choice D is incorrect because a loss would only arise if the net fair value of the identifiable assets, liabilities, and contingent liabilities is greater than the cost of the business combination.

Question 12

For entities wanting to use the cost model of accounting, the revaluation of a subsidiary's assets would be undertaken in the:
A) subsidiary's records
B) parent entity's records
C) consolidation worksheet
D) notes to the consolidated financial statements.

Accepted Answer

The answer of For entities wanting to use the cost...

Question 13

On 1 July 20X6 Possum acquired a 100% interest in Echidna. At that time Echidna had goodwill of $5000 recorded in its statement of financial position as a result of a previous business combination. The total goodwill arising on Possum's acquisition of Echidna was $12 000. The goodwill recognised on consolidation in the business combination valuation entry as a result of Possum's acquisition of Echidna is:
A) nil
B) $5 000
C) $7 000
D) $12 000

Accepted Answer

When a business combination occurs, the acquirer needs to allocate the purchase price to the assets acquired and liabilities assumed based on their fair values, with any excess recognised as goodwill. In this case, the total goodwill arising on Possum's acquisition of Echidna was $12,000, and Echidna had $5,000 of goodwill recorded in its statement of financial position. Therefore, the goodwill recognised on consolidation would be the difference between these two amounts, which is $7,000 [($12,000 - $5,000) = $7,000]. Therefore, the correct answer is option C.

Question 14

Parent Limited acquired 100% of a subsidiary on 1 July 20X7. At acquisition date the subsidiary had the following equity items: 
? Retained earnings $24 000
? Share capital $33 000
? Business combination revaluation reserve $10 000
In the year following the acquisition the subsidiary paid a bonus dividend of $14 000 out of pre-acquisition retained earnings. The following consolidation adjustment is needed in the consolidation worksheet for 30 June 20X8:
A) $\text { DR } \quad \text { Share capital } \quad \$ 14000$
$\begin{array}{lll}
\text { CR } & \text { Bonus dividend paid } & \$ 14000
\end{array}$
B) $\begin{array} { l r r r r } 
\text { DR } & & \text { Shares in subsidiary } & 14000 & \
& \text { CR } & \text { Share capital } & & \$ 14000
\end{array}$
C) $\begin{array} { l c c c c } 
\text { DR } & & \text { Bonus dividend paid } & \$ 14000 & \
& \text { CR } & \text { Retained earnings } & & \$ 14000
\end{array}$
D) $\begin{array} { l r r r } 
\text { DR } & \text { Retained earnings } & \$ 14000 & \
 \text { CR } & \text { Share capital } & \$ 14000
\end{array}$

Accepted Answer

The bonus dividend paid by the subsidiary out of pre-acquisition retained earnings reduces the retained earnings of the subsidiary and increases the share capital of the subsidiary.

Question 15

At acquisition date a wholly owned subsidiary had the following equity items: ? Retained earnings $14 000
? Share capital $30 000
? General reserve $6000
In the year following the acquisition the subsidiary transferred $10 000 from pre-acquisition retained earnings to general reserve. At the reporting date following the reserve transfer, the following consolidation adjustment is needed:
A)$\begin{array} { l c c c } 
\text { DR } &\text { Transfer to general reserve }& \$ 10,000  \
\mathrm { CR }& \text { General reserve }& \$ 10,000
\end{array}$
B) $\begin{array} { l l l l } 
\text { DR } & \text { General reserve } & \$ 10000 \
\text { CR } & \text { Shares in subsidiary } & \$ 10000
\end{array}$
C) $\begin{array}{lrr}
\text { DR } &  \text { Shares in subsidiary }&\$10,000 \
 \text { CR } & \text { Retained earnings }&\$10,000
\end{array}$
D)$\begin{array} { l l l l l } 
\text { DR }  & \text { General reserve } & \$ 10,000 & \
\text { CR } & \text { Transfer to general reserve } & \$ 10,000
\end{array}$

Accepted Answer

The answer of At acquisition date a wholly owned subsidiary...

Question 16

Eeny Limited has two subsidiary entities, Meeny Limited and Miney Limited. Eeny Limited owns 100% of the shares in both entities. Details of issued share capital are:
$\bullet$ Eeny Limited $100 000
$\bullet$ Meeny Limited $30 000
$\bullet$ Miney Limited $15 000
The consolidated share capital amount of the Eeny Meeny Miney group is:
A) $45 000
B) $55 000
C) $100 000
D) $145 000.

Accepted Answer

The consolidated share capital amount is the total share capital of the parent entity and its subsidiaries, which is $100 000 as Eeny Limited owns 100% of the shares in both Meeny Limited and Miney Limited.

Question 17

When preparing consolidated financial statements, adjustments for pre-acquisition equity and inter-entity transactions are recorded:
A) in the accounting records of the parent entity
B) in the accounting records of the subsidiary
C) on a consolidation worksheet
D) in the accounting records of the reporting entity.

Accepted Answer

Adjustments for pre-acquisition equity and inter-entity transactions are recorded on a consolidation worksheet when preparing consolidated financial statements. This is because these adjustments involve eliminating the effects of transactions between the parent and subsidiary entities, and reflecting the results of the business combination as if the entities had always been a single reporting entity. These adjustments are not recorded in the accounting records of either the parent or subsidiary entities, as they only apply when consolidating the financial statements of the group. Therefore, choice C, on a consolidation worksheet, is the best answer.

Question 18

The key principle relating to the disclosure of information about business combinations is to disclose information that:
A) enables users to evaluate the nature and financial effect of business combinations that occurred during the reporting period
B) enables the preparation of the consolidated financial statements in the most cost-effective manner
C) does not give an advantage to the competitors of a business group
D) provides users with information about the parent entity only.

Accepted Answer

The key principle for disclosure of information about business combinations is to enable users to evaluate the nature and financial effect of such combinations during the reporting period. This information should include the method used to determine the fair value of assets acquired and liabilities assumed, the goodwill recognized or loss incurred, and any contingencies related to the business combination. The disclosure should also include information about the acquired entity's assets, liabilities, and operations. The consolidated financial statements of the business combination should reflect this information for the period.

Question 19

A Limited acquired B Limited for $110 000. At acquisition date the fair value of the B Limited's Land asset was $40 000 and the book value was $30 000. If the company tax rate is 30%, which of the following is the appropriate adjustment to recognise the tax effect of the business combination revaluation of land?
A) DR Deferred tax liability $3 000
B) CR Deferred tax liability $3 000
C) DR Deferred tax asset $3 000
D) CR Deferred tax liability $3 000.

Accepted Answer

According to the tax effect accounting, the difference between the fair value and book value of the land asset represents a taxable temporary difference. As a result, a deferred tax liability needs to be recognized to account for the future tax consequences when the asset is disposed of. The deferred tax liability is calculated by multiplying the tax rate with the temporary difference, which in this case is $10 000 ($40 000 - $30 000). Therefore, the appropriate adjustment to recognize the tax effect is to credit deferred tax liability for $3 000 (30% of $10 000). Option B is the correct answer.

Question 20

In a business combination the revaluation of non-current assets in the records of the subsidiary means that the subsidiary has effectively adopted the:
A) parent-entity model of consolidation
B) proprietary model of accounting
C) cost model of accounting
D) revaluation model of accounting.

Accepted Answer

The revaluation of non-current assets is done under the revaluation model of accounting. This does not necessarily mean that the subsidiary has adopted the parent-entity model of consolidation, which involves the consolidation of financial statements of the parent and its subsidiaries. The proprietary model of accounting is not relevant in this context. The use of the cost model of accounting would not result in revaluation of assets.

Quiz 17: Consolidation: Wholly Owned Subsidiaries

If the end of a subsidiary's reporting period does not coincide with the end of the parent entity's reporting period, adjustments must be made for the effects of significant events that occur between these dates as long as the difference between the ends reporting periods differs by no more than:

At the date of acquisition a subsidiary had recorded a dividend payable of $10 000. The consolidation adjustment needed at the date of acquisition in relation to this event is:

When a parent entity has previously held an investment in a subsidiary prior to gaining control the effect on the consolidation process is as follows:

Consolidated financial statements are prepared using the following presentation method:

Company X acquired Company Y when the carrying value of Company Y's plant was $50 000. The fair value of the plant on acquisition date was $65 000. The company tax rate was 30%. How much is the amount of the business combination valuation reserve that must be recognised?

On 1 July 20X6, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of: $\bullet$ Share Capital $35 000 $\bullet$ Retained Earnings $15 000 The pre-acquisition entry at 1 July 20X6 is:

One year after acquisition date, the goodwill acquired was regarded as having become impaired by $20 000. The appropriate consolidation adjustment in relation to the impairment will include the following line:

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree:

For entities wanting to use the cost model of accounting, the revaluation of a subsidiary's assets would be undertaken in the:

When preparing consolidated financial statements, adjustments for pre-acquisition equity and inter-entity transactions are recorded:

The key principle relating to the disclosure of information about business combinations is to disclose information that:

In a business combination the revaluation of non-current assets in the records of the subsidiary means that the subsidiary has effectively adopted the: