Question 1

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

The calculation for the business combination valuation reserve is as follows:
Fair value of the plant - Carrying value of the plant = $65,000 - $50,000 = $15,000
Tax rate = 30%
Therefore, the amount of the business combination valuation reserve is $15,000 x 30% = $4,500. However, since the reserve is net of tax, the actual amount recognized is $4,500 - ($15,000 x 30%) = $10,500. Therefore, the correct answer is B.

Question 2

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 3

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 is to provide information that allows users to evaluate the nature and financial effect of business combinations during the reporting period. This helps users make informed decisions about the performance and financial position of the company. Option B is incorrect because it focuses on cost-effectiveness rather than providing relevant information to users. Option C is not a relevant consideration for disclosure requirements. Option D is incorrect because disclosure should cover both the parent entity and any other entities involved in the business combination.

Question 4

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 5

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 allows for the elimination of any inter-company transactions and ensures that the financial statements reflect the financial position and performance of the group as a whole. The adjustments are not recorded in the accounting records of the parent entity, subsidiary, or reporting entity as they are specific to the consolidation process.

Question 6

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 7

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 8

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 in the subsidiary's records means that the subsidiary has adopted the revaluation model of accounting, which is a departure from the cost model of accounting. This would result in the recognition of any increase or decrease in the fair value of the assets, which would impact the consolidated financial statements after the business combination.

Question 9

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:

Accepted Answer

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

Question 10

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 of $5000 less 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

The answer of On 1 January 20X2 A Ltd acquired...

Question 11

There is no recognition of a deferred tax item in respect to Goodwill because it is a residual amount and the recognition of a deferred tax item would:
A) decrease the carrying amount of Goodwill;
B) increase the carrying amount of Goodwill;
C) decrease the profit on consolidation;
D) increase the profit on consolidation.

Accepted Answer

The answer of There is no recognition of a deferred...

Question 12

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

Accepted Answer

Line-by-line presentation method shows each line item for every financial statement account across all companies being consolidated. This presentation method provides more detailed information and makes it easier for users to understand the financial position and performance of the consolidated entity.

Question 13

Leader Limited acquired 100% of the share capital of Follower Limited. Follower had issued share capital of $100 000. The book values of Follower Limited's assets were: Land $50 000, Equipment $60 000. The fair values of these assets were: Land $90 000, Equipment $70 000. The tax rate is 30%. The fair value of the identifiable net assets is:
A) $135 000;
B) $110 000;
C) $160 000;
D) $100 000.

Accepted Answer

The answer of Leader Limited acquired 100% of the share...

Question 14

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

The goodwill recognised on consolidation in the business combination valuation entry will be equal to the difference between the total goodwill arising on acquisition ($12,000) and the pre-acquisition goodwill of Echidna ($5,000). Therefore, the goodwill recognised on consolidation will be $7,000.

Question 15

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 needs to be adjusted to the fair value at acquisition date. The change in the fair value of the previously held interest is recognized in profit or loss.

Question 16

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 for significant events between the end of the subsidiary's reporting period and the end of the parent entity's reporting period must be made if the difference between these dates is no more than three months.

Question 17

A typical pre-acquisition consolidation worksheet entry to eliminate a parent entity's investment in a subsidiary would include the following entry:
A) DR Share capital of parent $X;
B) CR Share capital of subsidiary $X;
C) CR Shares subsidiary $X;
D) DR Shares of subsidiary $X.

Accepted Answer

The answer of A typical pre-acquisition consolidation worksheet entry to...

Question 18

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:
A) $45 000
B) $55 000
C) $100 000
D) $145 000.

Accepted Answer

The total share capital of both Meeny Limited and Miney Limited would be $100,000 assuming there is no other share capital issued.

Question 19

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

In this scenario, the acquirer has paid more than the fair value of the net identifiable assets acquired. This excess payment is considered as goodwill and must be recognized in the acquirer's accounting records. Option A is incorrect because a gain on bargain purchase occurs when the cost of the business combination is less than the fair value of the net identifiable assets acquired. Option C is incorrect because no special equity reserve is created in this scenario. Option D is incorrect because the excess payment is not treated as a loss, but as goodwill.

Question 20

Entity A and Entity B agree to merge. The capital structure of each entity is:
Entity A - 100 ordinary shares
Entity B - 60 ordinary shares
Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All of Entity B's shareholders exchange their shares for Entity A shares.
Which of the following statement is correct?
A) Entity A is both the parent and the acquirer in the transaction.
B) Entity B is both the parent and the acquirer in the transaction.
C) Entity A is the legal parent of the subsidiary Entity B and Entity B is the acquirer in the transaction.
D) Entity B is the parent and Entity A is the acquirer in the transaction.

Accepted Answer

Entity A is the legal parent of Entity B as it is issuing shares in exchange for Entity B's shares. However, Entity B's shareholders are exchanging their shares for Entity A shares, making Entity A the acquirer. Therefore, Entity A is the legal parent of the subsidiary Entity B, and Entity B is the acquired entity.

Quiz 24: Consolidation: Wholly Owned Subsidiaries

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?

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

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

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

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:

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

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:

There is no recognition of a deferred tax item in respect to Goodwill because it is a residual amount and the recognition of a deferred tax item would:

Consolidated financial statements are prepared using the following presentation method:

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:

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 typical pre-acquisition consolidation worksheet entry to eliminate a parent entity's investment in a subsidiary would include the following entry:

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:

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: