Ch19 tb leo 10e - Ch19 tb leo 10e PDF

Preview

Summary

Ch19 tb leo 10e...

Description

Chapter 19: Consolidation: wholly owned subsidiaries

Testbank to accompany

Company Accounting 10e by Ken Leo, Jeffrey Knapp, Sue McGowan & John Sweeting Prepared by

Peter Baxter

© John Wiley & Sons Australia, Ltd 2015

19.1

Testbank to accompany Company Accounting 10e

© John Wiley & Sons Australia, Ltd 2015

Chapter 19: Consolidation: wholly owned sidiaries

sub-

Multiple-choice questions 1.

The preparation of consolidated financial statements involves: a. b. *c. d.

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

nine months. three months. one month. 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.

© John Wiley & Sons Australia, Ltd 2015

19.2

Chapter 19: Consolidation: wholly owned subsidiaries

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. b. *c. d.

$230 000. $90 000. $200 000. $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. *b. c. d.

a gain on bargain purchase results. goodwill has been purchased and must be recognised on consolidation. the difference is treated as a special equity reserve in the acquirer’s accounting records. 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?

© John Wiley & Sons Australia, Ltd 2015

19.3

Testbank to accompany Company Accounting 10e

*a. b. c. d.

The business combination valuation reserve is an account recorded in the subsidiary’s records. The acquisition analysis may include the recognition of assets and liabilities not recognised in the subsidiary’s records. The acquisition analysis will determine whether any goodwill or gain on bargain purchase has arisen as a part of the business combination. 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. b. c. d.

$270 000. $220 000. $320 000. $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. b. *c. d.

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

© John Wiley & Sons Australia, Ltd 2015

19.4

Chapter 19: Consolidation: wholly owned subsidiaries

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. *b. c. d.

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

DR CR DR CR

Deferred tax liability Deferred tax liability Deferred tax asset Deferred tax asset

$6 000 $6 000 $6 000 $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 Retained earnings

$70 000 30 000

The pre-acquisition entry at 1 July 2014 is: a.

*b.

Shares in Kerri Limited Retained earnings Share capital

Dr Cr Cr

100 000

Retained earnings Share capital

Dr Dr

30 000 70 000

© John Wiley & Sons Australia, Ltd 2015

30 000 70 000

19.5

Testbank to accompany Company Accounting 10e

c.

d.

Shares in Kerri Limited

Cr

100 000

Retained earnings Share capital Shares in Kerri Limited

Dr Dr Cr

70 000 30 000

Goodwill Share capital Shares in Kerri Limited

Dr Dr Cr

30 000 70 000

100 000

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.

b. c. d.

DR

$100 000

CR

Dividend payable Dividend receivable Dividend revenue Dividend declared

$100 000

CR

Shares in subsidiary Dividend receivable

$100 000

CR

Dividend receivable Dividend payable

$100 000

CR

DR DR DR

$100 000 $100 000

$100 000 $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. b. *c. d.

nil. $10 000. $14 000. $24 000.

© John Wiley & Sons Australia, Ltd 2015

19.6

Chapter 19: Consolidation: wholly owned subsidiaries

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. b. c. d.

$290 000. $200 000. $260 000. $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. b. *c. d.

$40 000 $12 000 $28 000 $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. *b. c. d.

decrease the carrying amount of goodwill. increase the carrying amount of goodwill. decrease the profit on consolidation. 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:

© John Wiley & Sons Australia, Ltd 2015

19.7

Testbank to accompany Company Accounting 10e

*a. b. c. d.

equity of the subsidiary at the acquisition date. equity of the parent at the acquisition date. net assets of the subsidiary at the acquisition date. 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. b. c. *d.

net present value. current replacement cost. historical cost. 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. b. *c. d.

DR Shares in subsidiary $190 000 CR Shares in subsidiary $200 000 CR Shares in subsidiary $190 000 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:

© John Wiley & Sons Australia, Ltd 2015

19.8

Chapter 19: Consolidation: wholly owned subsidiaries

a. *b. c. d.

$50 000. $70 000. $90 000. $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. b. c. *d.

a transfer to the business combination valuation reserve. goodwill. an increase in the ‘Shares in subsidiary’ asset. 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. b. c. *d.

DR CR CR CR

Goodwill Impairment expense Business combination valuation reserve Accumulated impairment losses

$40 000 $40 000 $40 000 $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.

© John Wiley & Sons Australia, Ltd 2015

19.9

Testbank to accompany Company Accounting 10e

IV

Bonus dividends paid from pre-acquisition equity.

a. b. c. *d.

I, II, III and IV I, III and IV only II and III only III and IV only

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.

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. b.

c. d.

DR

Share capital Bonus dividend paid

$28 000

CR

$28 000

CR

Shares in subsidiary Share capital Bonus dividend paid Share capital

$28 000

CR

Retained earnings Share capital

$28 000

CR

DR

DR DR

$28 000 $28 000

$28 000 $28 000

Correct answer: a 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. 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:

© John Wiley & Sons Australia, Ltd 2015

19.10

Chapter 19: Consolidation: wholly owned subsidiaries

a. b.

c. *d.

DR

Retained earnings General reserve

$20 000

CR

General reserve Shares in subsidiary

$20 000

CR

Shares in subsidiary Retained earnings

$20 000

CR

General reserve Retained earnings

$20 000

CR

DR

DR DR

$20 000 $20 000 $20 000

$20 000

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. 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. b. c. *d.

a debit of $7500. a credit of $5000. a debit of $5000. a debit of $2500.

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.

27.

Which of the following statements is correct? a. b. *c. d.

AASB 3 Business Combinations requires that any revaluations of a subsidiary’s assets at acquisition date must be done in the consolidation worksheet. 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. Revaluations of assets such as goodwill and inventory are not permitted in the accounting records of the subsidiary. Inventory can be revalued to an amount greater than its cost in the records of the subsidiary.

Correct answer: c Learning Objectiv...