Question 1

Which of the following statements is incorrect with regards to the acquisition analysis?

Accepted Answer

The incorrect statement is C. The fair value of the net identifiable assets and liabilities acquired is determined based on their individual fair values, not based on the post-acquisition equity in the subsidiary. The other statements are correct.

Question 2

Kerri Limited has two subsidiary entities, Emily Limited and Georgia Limited. Kerri Limited owns 100% of the shares in both entities. Details of the issued share capital are:

The consolidated share capital amount of the Kerri - Emily - Georgia group is:

Accepted Answer

The consolidated share capital is calculated by adding up the share capital of each subsidiary and the parent company. 
Kerri Limited share capital = $100,000
Emily Limited share capital = $80,000
Georgia Limited share capital = $20,000
Total consolidated share capital = $100,000 + $80,000 + $20,000 = $200,000. Therefore, the answer is C.

Question 3

Unity Limited acquired 100% of the share capital of Bellvista Limited. Bellvista had total shareholder's equity of $200 000. The book values of Bellvista Limited's assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $180 000, machinery $140 000. The tax rate is 30%. The fair value of the identifiable net assets is:

Accepted Answer

The fair value of the identifiable net assets is $270,000. This is calculated as follows:Fair value of buildings: $180,000Fair value of machinery: $140,000Total fair value of assets: $320,000Less: Book value of assets: $220,000Fair value of identifiable net assets: $270,000

Question 4

The pre-acquisition entries are used to:

Accepted Answer

Pre-acquisition entries are used to eliminate the investment in the subsidiary and the pre-acquisition equity of the subsidiary to avoid double counting in consolidated financial statements.

Question 5

Before undertaking the consolidation process, it may be necessary to make the following adjustments in relation to the individual statements if the parent and the subsidiary do not use the same accounting policies for like transactions in similar circumstances:

Accepted Answer

The subsidiary should adjust its financial statements to align with the parent's accounting policies to ensure consistency in the consolidated financial statements.

Question 6

Which of the following statements is incorrect?

Accepted Answer

The business combination valuation reserve is an account recorded in the parent company's records, not in the subsidiary's records.

Question 7

During the consolidation process, it may be necessary to make the following adjustments to the individual statements:

Accepted Answer

The consolidation worksheet is the document where the financial statements of the parent company and its subsidiaries are combined. Therefore, any necessary adjustments related to business combination valuation entries and pre-acquisition entries should be made in this worksheet to ensure accurate consolidation. Adjustments made in the individual journals of the parent and subsidiaries may not be reflected in the consolidated financial statements.

Question 8

In the case of a wholly owned subsidiary, if the fair value of the consideration transferred plus the fair value of the previously held interest is greater than the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary:

Accepted Answer

When the consideration transferred exceeds the net fair value of the identifiable assets, liabilities, and contingent liabilities, the excess is recognized as goodwill on consolidation.

Question 9

Unity Limited acquired 100% of the share capital of Bellvista Limited for $300 000. Bellvista had total shareholder's equity of $200 000. The book values of Bellvista Limited's assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $180 000, machinery $140 000. The tax rate is 30%. The acquisition analysis will determine:

Accepted Answer

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

Question 10

Which of the following statements is incorrect?

Accepted Answer

Consolidation adjusting entries are made in the consolidation worksheet to eliminate intercompany transactions and balances, and they do not affect the individual ledger accounts of the parent or subsidiaries directly.

Question 11

If a subsidiary's reporting date does not coincide with the parent entity's reporting date, adjustments must be made for the effects of significant transactions that occur between the two reporting dates provided the reporting dates differ by no more than:

Accepted Answer

If the reporting dates of the subsidiary and parent differ by more than three months, those adjustments are not required because the time difference is too great for meaningful events to occur.

Question 12

The business combination valuation entries are used to recognise:

Accepted Answer

Business combination valuation entries recognize fair value adjustments for assets and liabilities recorded at different carrying amounts, as well as the fair value of unrecorded assets and liabilities at the acquisition date.

Question 13

Water Limited acquired Boy Limited for a purchase consideration of $110 000. At acquisition date the fair value of the Boy Limited's land asset was $80 000 and the carrying amount was $60 000. 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 at acquisition date?

Accepted Answer

The appropriate adjustment to recognize the tax effect of the business combination revaluation of land at acquisition date is as follows:
I. No adjustment is needed as the difference between the fair value and carrying amount of the land is already recognized as a part of the purchase price allocation.
II. This adjustment is required to recognize the deferred tax liability that arises due to the revaluation of the land. The deferred tax liability is calculated as (fair value - carrying amount) x tax rate, which in this case would be (80,000 - 60,000) x 30% = $6,000.
III. No adjustment is needed for this.
IV. This adjustment is not applicable for tax effect recognition.

Question 14

The preparation of consolidated financial statements involves:

Accepted Answer

The preparation of consolidated financial statements involves adding together the financial statements of the parent and the subsidiaries. This process requires eliminating any intercompany transactions and balances to avoid double-counting. Adjusting entries may still need to be made in the accounting records of either the parent or subsidiaries to ensure consistent tax, accounting, and reporting treatments. Adding together the financial statements of the investor and the associate (A) is incorrect because this would only involve proportionate consolidation, not full consolidation. Adjusting entries in the accounting records of the subsidiary (B) or parent (D) may be required, but they are not the primary step in preparing consolidated financial statements.

Question 15

The acquisition analysis calculates the fair value of the net identifiable assets and liabilities acquired based on the book value of the pre-acquisition equity of the subsidiary, adjusted for the following:

Accepted Answer

All of the options listed are correct in terms of adjustments that need to be made to calculate the fair value of the net identifiable assets and liabilities acquired in an acquisition analysis.

Question 16

The consolidation worksheet entries have an impact on:

Accepted Answer

The consolidation worksheet entries are used to eliminate intercompany transactions and balances between a parent company and its subsidiaries in order to create consolidated financial statements. Therefore, the impact of these entries is only on the consolidated financial statements and not on the individual statements of the parent or the subsidiaries.

Question 17

Sippy Ltd acquired 100% of the share capital of Downs Ltd when the carrying value of Downs Ltd's plant and machinery was $100 000. The fair value of the plant on acquisition date was $150 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that must be recognised on consolidation?

Accepted Answer

When Sippy Ltd acquired Downs Ltd, there was a difference between the carrying value ($100 000) of the plant and machinery and the fair value ($150 000) on acquisition date. This difference of $50 000 is called a "bargain purchase" or "negative goodwill".

To account for this, Sippy Ltd will record a gain on bargain purchase of $50 000 in its books. However, in accordance with accounting standards, the gain cannot be recognised as income. Instead, it must be recognised as a business combination valuation reserve (BCVR) on the consolidated statement of financial position.

The amount of the BCVR is equal to the gain on bargain purchase, which in this case is $50 000. Therefore, the correct answer is B ($35 000 after applying the 30% tax rate).

Question 18

Before undertaking the consolidation process, it may be necessary to make the following adjustments in relation to the individual statements if the end of the subsidiary's financial period does not coincide with the:

Accepted Answer

The subsidiary should align its financial statements with the parent's reporting period to ensure consistency and accuracy in the consolidation process.

Question 19

Unity Limited acquired 100% of the share capital of Bellvista Limited for $300 000. Bellvista had total shareholder's equity of $200 000. The book values of Bellvista Limited's assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $180 000, machinery $140 000. Also, Bellvista Limited has not previously recorded an internally generated trademark with a fair value of $30 000 and a contingent liability related to a guarantee with a fair value of $20 000. The tax rate is 30%. The acquisition analysis will determine:

Accepted Answer

The purchase price is $300,000. The fair value of net identifiable assets is $330,000 (Buildings $180,000 + Machinery $140,000 + Trademark $30,000 - Contingent Liability $20,000). Goodwill is calculated as Purchase Price - Fair Value of Net Identifiable Assets = $300,000 - $330,000 = -$30,000. However, since the question asks for goodwill, the correct calculation should be $300,000 - ($180,000 + $140,000 + $30,000 - $20,000) = $23,000.

Question 20

Susan Limited has two subsidiary entities, Rachel Limited and Rebecca Limited. Susan Limited owns 100% of the shares in both entities. Details of the cash accounts of each company are: Susan Limited $200 000, Rachel Limited $60 000, Rebecca Limited $30 000. The balance of the consolidated cash account of the Susan Limited group is:

Accepted Answer

The consolidated cash account balance of the Susan Limited group would include the cash balances of all entities within the group. Therefore, it would be the sum of Susan Limited's, Rachel Limited's, and Rebecca Limited's cash accounts: $200,000 + $60,000 + $30,000 = $290,000.

Quiz 27: Consolidation: Wholly Owned Entities

Which of the following statements is incorrect with regards to the acquisition analysis?

Kerri Limited has two subsidiary entities, Emily Limited and Georgia Limited. Kerri Limited owns 100% of the shares in both entities. Details of the issued share capital are: The consolidated share capital amount of the Kerri - Emily - Georgia group is:

The pre-acquisition entries are used to:

Before undertaking the consolidation process, it may be necessary to make the following adjustments in relation to the individual statements if the parent and the subsidiary do not use the same accounting policies for like transactions in similar circumstances:

Which of the following statements is incorrect?

During the consolidation process, it may be necessary to make the following adjustments to the individual statements:

In the case of a wholly owned subsidiary, if the fair value of the consideration transferred plus the fair value of the previously held interest is greater than the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary:

Which of the following statements is incorrect?

If a subsidiary's reporting date does not coincide with the parent entity's reporting date, adjustments must be made for the effects of significant transactions that occur between the two reporting dates provided the reporting dates differ by no more than:

The business combination valuation entries are used to recognise:

The preparation of consolidated financial statements involves:

The acquisition analysis calculates the fair value of the net identifiable assets and liabilities acquired based on the book value of the pre-acquisition equity of the subsidiary, adjusted for the following:

The consolidation worksheet entries have an impact on:

Before undertaking the consolidation process, it may be necessary to make the following adjustments in relation to the individual statements if the end of the subsidiary's financial period does not coincide with the: