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Chapter 19: Consolidation: wholly owned sub-sidiaries

1. The preparation of consolidated financial statements involves:

a. adding together the financial statements of the investor and the associate.

b. adjusting entries in the accounting records of the subsidiary.

*c. adding together the financial statements of the parent and the subsidiaries. d. adjusting entries in the accounting records of the parent.

Correct answer: c

Learning Objective 19.1~ discuss the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet.

2. 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:

a. nine months. *b. three months. c. one month.

d. six months.

Correct answer: b

Learning Objective 19.1~ discuss the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet.

3. 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:

- Kerri Limited $200 000

- Emily Limited $60 000

- Georgia Limited $30 000

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

a. $230 000.

b. $90 000. *c. $200 000.

d. $290 000.

Correct answer: c

Learning Objective 19.2 ~ explain how a consolidation worksheet is used.

4. Which of the following statements is incorrect?

a. Where consolidated financial statements are prepared over a number of years, consolidation entries need to be made every time a consolidation worksheet is prepared.

*b. Consolidation adjusting entries affect the ledger accounts of the parent and subsidiaries.

c. A consolidation worksheet is used to help the process of adding together the financial statements of the parent and its subsidiaries.

d. There are no consolidated ledger accounts.

Correct answer: b

Learning Objective 19.2 ~ explain how a consolidation worksheet is used.

5. If the consideration transferred 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 purchased and must be recognised on consolidation.

c. the difference is treated as a special equity reserve in the acquirer’s accounting records.

d. the difference is immediately charged to profit or loss in the period in which the business combination occurred.

Correct answer: b

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

6. Which of the following statements is incorrect?

*a. The business combination valuation reserve is an account recorded in the subsidiary’s records.

b. The acquisition analysis may include the recognition of assets and liabilities not recognised in the subsidiary’s records.

c. The acquisition analysis will determine whether any goodwill or gain on bargain purchase has arisen as a part of the business combination.

d. An acquisition analysis is prepared at acquisition date to identify the identifiable assets and liabilities of the subsidiary at fair value.

Correct answer: a

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

7. Unity Limited acquired 100% of the share capital of Bellvista Limited. Bellvista had issued share capital 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:

*a. $270 000.

b. $220 000.

c. $320 000.

d. $200 000.

Correct answer: a

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

8. The pre-acquisition entry is necessary to:

a. avoid overstating the equity and net assets of the parent.

b. record the ‘Shares in subsidiary’ account in the parents records. *c. avoid overstating the equity and net assets of the group.

d. avoid understating the equity and net assets of the group.

Correct answer: c

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

9. 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?

a. $15 000 *b. $35 000 c. $50 000

d. $150 000

Correct answer: b

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

10. 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?

Deferred tax liability

$6 000

*b.

Deferred tax liability

$6 000

Deferred tax asset

$6 000

Deferred tax asset

$6 000

Correct answer: b

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

11. On 1 July 2014, Peter Limited acquired all the issued shares of Kerri Limited for $100 000 when the equity of Kerri Limited consisted of:

Share capital $70 000

Retained earnings 30 000

The pre-acquisition entry at 1 July 2014 is:

Shares in Kerri Limited

100 000

Retained earnings

30 000

Share capital

70 000

*b.

Retained earnings

30 000

Share capital

70 000

Shares in Kerri Limited

100 000

Retained earnings

70 000

Share capital

30 000

Shares in Kerri Limited

100 000

Goodwill

30 000

Share capital

70 000

Shares in Kerri Limited

100 000

Correct answer: b

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

12. At the date of acquisition, a subsidiary had recorded a dividend payable of $100 000. Assuming that the shares were acquired on a cum. div basis, the consolidation adjustment needed at the date of acquisition to eliminate the dividend is:

*a.

Dividend payable

$100 000

Dividend receivable

$100 000

Dividend revenue

$100 000

Dividend declared

$100 000

Shares in subsidiary

$100 000

Dividend receivable

$100 000

Dividend receivable

$100 000

Dividend payable

$100 000

Correct answer: a

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

13. On 1 July 2014 Good Ltd acquired a 100% interest in Life Ltd. At that time Life Ltd had goodwill of $10 000 recorded in its statement of financial position as a result of a previous business combination. The total goodwill arising on Good’s acquisition of Life was $24 000. The goodwill to be recognised on consolidation as a result of Good’s acquisition of Life is:

a. nil.

b. $10 000. *c. $14 000.

d. $24 000.

Correct answer: c

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

14. 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, Lemon Limited $60 000, Juice Limited $30 000. The balance of the consolidated cash account of the Susan Limited group is:

*a. $290 000.

b. $200 000.

c. $260 000.

d. $230 000.

Correct answer: a

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

15. When Wayne Ltd acquired 100% of the share capital of Carol Ltd, the carrying amount of Carol Ltd’s machinery was $200 000. The fair value of the machinery on acquisition date was $160 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that will be recognised on consolidation?

a. $40 000

b. $12 000 *c. $28 000

d. $160 000

Correct answer: c

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

16. 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.

Correct answer: b

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

17. The effect of the pre-acquisition entry is to eliminate the ‘Shares in subsidiary’ asset and the:

*a. equity of the subsidiary at the acquisition date. b. equity of the parent at the acquisition date.

c. net assets of the subsidiary at the acquisition date.

d. net assets of the parent at the acquisition date.

Correct answer: a

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

18. If a revaluation of the subsidiary’s assets is performed on consolidation, the subsidiary’s assets are carried into the consolidated statement of financial position at:

a. net present value.

b. current replacement cost.

c. historical cost. *d. fair value.

Correct answer: d

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

19. Easts Limited acquired 100% of the shares in Tigers Limited on a cum div. basis for $200 000. At acquisition date, the subsidiary had a declared dividend of $10 000. The pre-acquisition entry must include the following line:

a. DR Shares in subsidiary $190 000

b. CR Shares in subsidiary $200 000 *c. CR Shares in subsidiary $190 000 d. CR Shares in subsidiary $10 000

Correct answer: c

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

20. Hungry Limited acquired 100% of the share capital of Jane Limited for a purchase consideration of $320 000. At acquisition date, the net fair value of Jane Ltd’s assets, liabilities and contingent liabilities was $250 000 including goodwill with a carrying amount of $20 000. The company tax rate is 30%. The unrecorded amount of goodwill that must be recognised on the consolidation worksheet is:

a. $50 000. *b. $70 000.

c. $90 000.

d. $15 000.

Correct answer: b

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

21. Where the consideration transferred is less than the fair value of the identifiable net assets and contingent liabilities acquired, the item must be recognised in the consolidation worksheet as:

a. a transfer to the business combination valuation reserve.

b. goodwill.

c. an increase in the ‘Shares in subsidiary’ asset. *d. a gain on bargain purchase.

Correct answer: d

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

22. One year after acquisition date, the goodwill acquired was regarded as having become impaired by $40 000. The appropriate consolidation adjustment in relation to the impairment will include the following line:

a. DR Goodwill $40 000

b. CR Impairment expense $40 000

c. CR Business combination valuation reserve $40 000

*d. CR Accumulated impairment losses $40 000

Correct answer: d

Learning Objective 19.5 ~ prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from pre-acquisition equity.

23. 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 to post-acquisition retained earnings.

II Depreciation on non-current assets.

III Transfers from pre-acquisition retained earnings.

IV Bonus dividends paid from pre-acquisition equity.

a. I, II, III and IV

b. I, III and IV only

c. II and III only *d. III and IV only

Correct answer: d

24. Titans Ltd acquired 100% of Taylor Ltd on 1 July 2014. At acquisition date, Taylor Ltd had the following equity items:

- Retained earnings $48 000

- Share capital $66 000

- Business combination revaluation reserve $20 000

In the year following the acquisition, Taylor Ltd paid a bonus share dividend of $28 000 out of pre-acquisition retained earnings. The following consolidation adjustment is needed in the consolidation worksheet for 30 June 2015:

*a.

Share capital

$28 000

Bonus dividend paid

$28 000

Shares in subsidiary

$28 000

Share capital

$28 000

Bonus dividend paid

$28 000

Share capital

$28 000

Retained earnings

$28 000

Share capital

$28 000

Correct answer: a

25. At acquisition date, a wholly owned subsidiary had the following equity items:

- Retained earnings $28 000

- Share capital $60 000

- Business combination revaluation reserve $12 000

In the year following the acquisition, the subsidiary transferred $20 000 from preacquisition retained earnings to a general reserve account. At the reporting date following the reserve transfer, the following consolidation adjustment is needed:

Retained earnings

$20 000

General reserve

$20 000

General reserve

$20 000

Shares in subsidiary

$20 000

Shares in subsidiary

$20 000

Retained earnings

$20 000

*d.

General reserve

$20 000

Retained earnings

$20 000

Correct answer: d

26. On 1 January 2012, Cowboys Ltd acquired all the issued shares in Tate Ltd. At that date, the inventory of Tate Ltd had a fair value of $10 000 more than its carrying amount. By 30 June 2013, 75% of the inventory was sold to an entity outside of the group. The business combination valuation consolidation adjustment against inventory in relation to the transaction as at 30 June 2013 will be:

a. a debit of $7500.

b. a credit of $5000.

c. a debit of $5000. *d. a debit of $2500.

Correct answer: d

27. Which of the following statements is correct?

a. AASB 3 Business Combinations requires that any revaluations of a subsidiary’s assets at acquisition date must be done in the consolidation worksheet.

b. The revaluation of non-current assets in the subsidiary’s records means that the subsidiary has adopted the cost model of accounting for those assets.

*c. Revaluations of assets such as goodwill and inventory are not permitted in the accounting records of the subsidiary.

d. Inventory can be revalued to an amount greater than its cost in the records of the subsidiary.

Correct answer: c

Learning Objective 19.6 ~ prepare the worksheet entries where the subsidiary revalues its assets at acquisition date.

28. Which of the following assets cannot be revalued above their cost in the accounting records of the subsidiary?

a. Inventory

b. Plant and equipment

c. Goodwill

*d. Both a and c

Correct answer: d

Learning Objective 19.6 ~ prepare the worksheet entries where the subsidiary revalues its assets at acquisition date.

29. According to AASB 3 Business Combinations, the key principle relating to the disclosure of information about business combinations is to disclose information that:

*a. enables financial statement 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 costeffective manner.

c. does not give an advantage to the competitors of a consolidated group.

d. provides financial statement users with information about the parent entity only.

Correct answer: a

Learning Objective 19.7 ~ prepare the disclosures required by AASB 3 and AASB 12.

30. In the case of a reverse acquisition, the subsidiary effectively becomes the acquirer and:

a. its assets and liabilities are measured at cost.

b. the parent’s assets and liabilities are measured at fair value.

*c. its assets and liabilities are measured at fair value. d. none of the above.

Correct answer: c

Learning Objective 19.8 ~ explain the consolidation procedures for a reverse acquisition.

True/false questions

31. Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances.

The statement is true. Where different policies are used, adjustments are made so that like transactions are accounted for under a uniform policy in the consolidated financial statements.

Learning Objective 19.1~ discuss the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet.

32. In preparing the consolidated financial statements, no adjustments are made in the accounting records of the individual entities that comprise the group.

The statement is true. The adjusting entries recorded in the columns of the consolidation worksheet do not affect the ledger accounts of the individual entities. Learning Objective 19.2 ~ explain how a consolidation worksheet is used.

33. An acquisition analysis is prepared at acquisition date to identify the fair values of the identifiable assets and liabilities of the parent.

The statement is false. An acquisition analysis is prepared to identify the fair values of the subsidiary’s identifiable assets and liabilities.

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

34. The acquisition analysis may result in the recognition of assets and liabilities that are not recognised in the subsidiary’s accounting records.

The statement is true. For example, the business combination may give rise to intangibles that could not be recognised by the subsidiary such as internally generated brands.

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

35. Where at acquisition date the parent holds shares in the subsidiary that it has previously acquired, this investment must be revalued to fair value at acquisition date.

The statement is true. Any resulting gain or loss must be recognised in profit or loss or other comprehensive income.

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

36. The main purpose of the pre-acquisition entry is to ensure no double counting of groupnet assets and equity.

The statement is true. The pre-acquisition entry eliminates the carrying amount of the parent’s investment in each subsidiary, along with the parent’s share of the pre-acquisition equity in each subsidiary.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

37. Business combination valuation adjustment entries record only the parent’s share of fair value adjustments relating to a subsidiary’s assets, liabilities and contingent liabilities.

The statement is false. Business combination valuation adjustment entries record the full amount of fair value adjustments relating to a subsidiary’s assets, liabilities and contingent liabilities, not just the parent’s share.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

38. When preparing the business combination valuation entries, there is no recognition of a deferred tax liability for goodwill.

The statement is true. The prohibition from recognition of a deferred tax liability is set out in paragraph 21 of AASB 112 Income Taxes. This is due to the fact that goodwill is a residual and the recognition of a deferred tax liability would increase its carrying amount. Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

39. Where a subsidiary has goodwill already recorded in their books at the date ofacquisition, such goodwill should be eliminated in full and then recognised on consolidation.

The statement is false. Where a subsidiary has recorded goodwill at the acquisition date, the incremental goodwill is the amount recognised on consolidation.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

40. Where an investment in a subsidiary is acquired on an ex.div basis, the fair value of the consideration paid should exclude the amount of the dividend.

The statement is false. The term ex.div denotes that the shares are being sold excluding any entitlement to dividends declared but not yet paid. In such cases no adjustment is required. Where an investment in a subsidiary is acquired on a cum.div basis the fair value of the consideration paid should exclude the amount of the dividend receivable.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

41. Where the carrying amount of a non-current asset is more than its fair value at the date of acquisition, the difference is reflected in the deferred tax liability in the business combination valuation entries.

The statement is false. Such fair value adjustments result in deductible temporary differences, which in turn result in deferred tax assets.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

42. If the fair value of a depreciable asset is greater than the carrying amount, in the years subsequent to the acquisition date the depreciation expense recorded in the books of the subsidiary will be greater than that for the group.

The statement is false. If the fair value is higher than the carrying amount, the group’s depreciation expense will be greater than that recorded in the subsidiary’s books.

43. A post acquisition transfer between retained earnings and a general reserve will result in a corresponding change to the pre-acquisition entry.

The statement is false. Only transfers of pre-acquisition balances result in a change to the preacquisition entry.

44. When inventory that has been subject to a fair value adjustment is sold, the effect on the business combination valuation adjustment in the year of sale includes a debit to cost of sales.

The statement is true. The debit originally made against inventory is transferred to the cost of sales account to reflect the sale of the inventory in the current year.

45. The ‘Transfer from business combination valuation reserve’ is an appropriation item that is closed to retained earnings at the end of each year.

The statement is true. This item is used to transfer amounts from the reserve account to retained earnings on the sale/realisation of assets and liabilities that were subject to fair value adjustments on acquisition.

46. The effect of a transfer of pre-acquisition retained earnings to a general reserve on the pre-acquisition entry is to reduce the debit adjustment against retained earnings.

The statement is true. A transfer out of retained earnings reduces retained earnings, hence reducing the amount to be eliminated against this account balance.

47. According to AASB 127 Separate Financial Statements, all dividends paid or payable by the subsidiary to a parent are recognised as revenue in the profit or loss of the parent.

The statement is true. In relation to dividends, there is no need to classify the equity of the subsidiary into pre-acquisition and post-acquisition equity.

48. AASB 3Business Combinations prohibits the revaluation of the assets of the subsidiary at acquisition date in the records of the subsidiary.

The statement is false. AASB 3 does not discuss whether the valuation of the assets of the subsidiary at acquisition date should be done in the consolidation worksheet or in the records of the subsidiary.

Learning Objective 19.6 ~ prepare the worksheet entries where the subsidiary revalues its assets at acquisition date.

49. AASB 12 Disclosure of Interests in Other Entities establishes the disclosures relating to a parent’s interests in subsidiaries

The statement is true. AASB 10 Consolidated Financial Statements does not specify any disclosure requirements.

Learning Objective 19.7 ~ prepare the disclosures required by AASB 3 and AASB 12.

50. A reverse acquisition occurs when the legal subsidiary in a business combination obtains control over the legal parent.

The statement is true. The usual circumstances creating a reverse acquisition is where the legal parent obtains ownership of the legal subsidiary’s equity but, as part of the exchange transaction, it issues enough voting equity as consideration for control of the combined entity to pass to the owners of the legal subsidiary.

Learning Objective 19.8 ~ explain the consolidation procedures for a reverse acquisition.

Chapter 19: Consolidation: wholly owned sub-sidiaries

True/false questions

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