Consolidation Practice question

MC Question 1 - June 2015

Germane has a number of relationships with other companies.

In which of the following relationships is Germane necessarily the parent company?

(i) Foll has 50,000 non-voting and 100,000 voting equity shares in issue with each share
receiving the same dividend. Germane owns all of Foll’s non-voting shares and 40,000 of
its voting shares
(ii) Kipp has 1 million equity shares in issue of which Germane owns 40%. Germane also owns
$800,000 out of $1 million 8% convertible loan notes issued by Kipp. These loan notes may
be converted on the basis of 40 equity shares for each $100 of loan note, or they may be
redeemed in cash at the option of the holder
(iii) Germane owns 49% of the equity shares in Polly and 52% of its non-redeemable
preference shares. As a result of these investments, Germane receives variable returns
from Polly and has the ability to affect these returns through its power over Polly
A (i) only
B (i) and (ii) only
C (ii) and (iii) only
D All three

MC Question 2 - December 2014

Petre owns 100% of the share capital of the following companies. The directors are unsure
of whether the investments should be consolidated.

In which of the following circumstances would the investment NOT be consolidated?

A Petre has decided to sell its investment in Alpha as it is loss-making; the directors believe
its exclusion from consolidation would assist users in predicting the group’s future profits
B Beta is a bank and its activity is so different from the engineering activities of the rest of the
group that it would be meaningless to consolidate it
C Delta is located in a country where local accounting standards are compulsory and these
are not compatible with IFRS used by the rest of the group
D Gamma is located in a country where a military coup has taken place and Petre has lost
control of the investment for the foreseeable future
MC Question 3 - September 2016 Specimen

An associate is an entity in which an investor has significant influence over the

investee.

Which of the following indicate(s) the presence of significant influence?

(i) The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
(ii) The investor has representation on the board of directors of the investee
(iii) The investor is able to insist that all of the sales of the investee are made to a
subsidiary of the investor
(iv) The investor controls the votes of a majority of the board members
A (i) and (ii) only
B (i), (ii) and (iii)
C (ii) and (iii) only
D All four

MC Question 4 - September 2016 Specimen

When a parent is evaluating the assets of a potential subsidiary, certain intangible assets
can be recognised separately from goodwill, even though they have not been recognised in
the subsidiary’s own statement of financial position.

Which of the following is an example of an intangible asset of the subsidiary which

may be recognised separately from goodwill when preparing consolidated financial
statements?
A A new research project which the subsidiary has correctly expensed to profit or loss but
the directors of the parent have reliably assessed to have a substantial fair value
B A global advertising campaign which was concluded in the previous financial year and
from which benefits are expected to flow in the future
C A contingent asset of the subsidiary from which the parent believes a flow of future
economic benefits is possible
D A customer list which the directors are unable to value reliably

MC Question 5

When a gain on a bargain purchase (negative goodwill) arises, IFRS 3 Business

Combinations requires an entity to first of all review the measurement of the assets,
liabilities and consideration transferred in respect of the combination.
When the negative goodwill is confirmed, how is it then recognised?
A It is credited directly to retained earnings
B It is credited to profit or loss
C It is debited to profit or loss
D It is deducted from positive goodwill

MC Question 6
IFRS requires extensive use of fair values when recording the acquisition of a subsidiary.
Which of the following comments, regarding the use of fair values on the acquisition
of a subsidiary, is correct?
A The use of fair value to record a subsidiary’s acquired assets does not comply with the
historical cost principle
B The use of fair values to record the acquisition of plant always increases consolidated post-
acquisition depreciation charges compared to the corresponding charge in the subsidiary’s
own financial statements
C Cash consideration payable one year after the date of acquisition needs to be discounted
to reflect its fair value
D Patents must be included as part of goodwill because it is impossible to determine the fair
value of an acquired patent, as, by definition, patents are unique

MC Question 7 - September 2016 Specimen

On 1 October 20X4, Pyramid Co acquired 80% of Square Co’s nine million equity shares.At
the date of acquisition, Square Co had an item of plant which had a fair value of $3m in
excess of its carrying amount.At the date of acquisition it had a useful life of five years.
Pyramid Co’s policy is to value non-controlling interests at fair value at the date of
acquisition. For this purpose, Square Co’s shares had a value of $3·50 each at that date. In
the year ended 30 September 20X5, Square Co reported a profit of $8m.

At what amount should the non-controlling interests in Square Co be valued in the

consolidated statement of financial position of the Pyramid group as at 30
September 20X5?
A $26,680,000
B $7,900,000
C $7,780,000
D $12,220,000

MC Question 8 - June 2015

Pact acquired 80% of the equity shares of Sact on 1 July 2014, paying $3·00 for each
share acquired. This represented a premium of 20% over the market price of Sact’s shares
at that date. Sact’s shareholders’ funds (equity) as at 31 March 2015 were:

$ $
Equity shares of $1 each 100,000
Retained earnings at 1 April 2014 80,000
Profit for the year ended 31 March 2015 40,000 120,000

220,000
The only fair value adjustment required to Sact’s net assets on consolidation was a
$20,000 increase in the value of its land. Pact’s policy is to value non-controlling interests
at fair value at the date of acquisition.
For this purpose the market price of Sact’s shares at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.

What would be the carrying amount of the non-controlling interest of Sact in the
consolidated statement of
financial position of Pact as at 31 March 2015?
A $54,000
B $50,000
C $56,000
D $58,000

MC Question 9 - September 2016 Specimen

Caddy Co acquired 240,000 of Ambel Co’s 800,000 equity shares for $6 per share on 1
October 20X4.Ambel Co’s profit after tax for the year ended 30 September 20X5 was
$400,000 and it paid an equity dividend on 20 September 20X5 of $150,000.

On the assumption that Ambel Co is an associate of Caddy Co, what would be the
carrying amount of the investment in Ambel Co in the consolidated statement of
financial position of Caddy Co as at 30 September 20X5?
A $1,560,000
B $1,395,000
C $1,515,000
D $1,690,000

Question 10 - June 2015

Johnson paid $1·2 million for a 30% investment in Treem’s equity shares on 1 August
2014. Treem’s profit after tax for the year ended 31 March 2015 was $750,000. On 31
March 2015, Treem had $300,000 goods in its inventory which it had bought from Johnson
in March 2015. These had been sold by Johnson at a mark-up on cost of 20%. Treem has
not paid any dividends.

On the assumption that Treem is an associate of Johnson, what would be the

carrying amount of the investment in Treem in the consolidated statement of
financial position of Johnson as at 31 March 2015?
A $1,335,000
B $1,332,000
C $1,300,000
D $1,410,000
MC Question 11 - December 2014 Specimen

The Caddy group acquired 240,000 of August’s 800,000 equity shares for $6 per share on
1 April 2014. August’s profit after tax for the year ended 30 September 2014 was $400,000
and it paid an equity dividend on 20 September 2014 of $150,000.

On the assumption that August is an associate of Caddy, what would be the carrying
amount of the investment in August in the consolidated statement of financial
position of Caddy as at 30 September 2014?
A $1,455,000
B $1,500,000
C $1,515,000
D $1,395,000
MC Question 12 - September 2016

Parket Co acquired 60% of Suket Co on 1 January 20X7. The following extract has been
taken from the individual statements of profit or loss for the year ended 31 March 20X7:

Parket Co Suket Co

$’000 $’000

Cost of sales 710 480

Parket Co consistently made sales of $20,000 per month to Suket Co throughout the year.
At the year end, Suket Co held $20,000 of this in inventory.Parket Co made a mark-up on
cost of 25% on all sales to Suket Co.

What is Parket Co’s consolidated cost of sales for the year ended 31 March 20X7?
A $954,000
B $950,000
C $774,000
D $766,000

MC Question 13 - September 2016

Rooney Co acquired 70% of the equity share capital of Marek Co, its only subsidiary, on 1
January 20X6. The fair value of the non-controlling interest in Marek Co at acquisition was
$1·1m. At that date the fair values of Marek Co’s net assets were equal to their carrying
amounts, except for a building which had a fair value of $1·5m above its carrying amount
and 30 years remaining useful life.

During the year to 31 December 20X6, Marek Co sold goods to Rooney Co, giving rise to
an unrealised profit in inventory of $550,000 at the year end.
Marek Co’s profit after tax for the year ended 31 December 20X6 was $3·2m.
What amount will be presented as the non-controlling interest in the consolidated
statement of financial position of Rooney Co as at 31 December 20X6?
A $1,895,000
B $1,495,000
C $1,910,000
D $1,880,000

MC Question 14 - September 2016 Specimen

A parent company sells goods to its 80% owned subsidiary during the financial year, some
of which remains in inventory at the year end.

What is the adjustment required in the consolidated statement of financial position

to eliminate any unrealised profit in inventory?
A DEBIT Group retained earnings
CREDIT Inventory
B DEBIT Group retained earnings
DEBIT Non-controlling interest
CREDIT Inventory
C DEBIT Group Inventory
CREDIT Group retained earnings
D DEBIT Inventory
CREDIT Group retained earnings
CREDIT Non-controlling interest

MC Question 14 - June 2015

Under certain circumstances, profits made on transactions between members of a group

need to be eliminated fromcthe consolidated financial statements under IFRS.
Which of the following statements about intra-group profits in consolidated financial
statements is/are correct?
(i) The profit made by a parent on the sale of goods to a subsidiary is only realised when
the subsidiary sells the goods to a third party
(ii) Eliminating intra-group unrealised profits never affects non-controlling interests
(iii) The profit element of goods supplied by the parent to an associate and held in year-
end inventory must be eliminated in full
A (i) only
B (i) and (ii)
C (ii) and (iii)
D (iii) only

MC Question 15 - December 2014 Specimen

Consolidated financial statements are presented on the basis that the companies within the
group are treated as if they are a single (economic) entity.

Which of the following are requirements of preparing group accounts?

(i) All subsidiaries must adopt the accounting policies of the parent
(ii) Subsidiaries with activities which are substantially different to the activities of other
members of the group should not be consolidated
(iii) All entity financial statements within a group should (normally) be prepared to the
same accounting year end prior to consolidation
(iv) Unrealised profits within the group must be eliminated from the consolidated financial
statements
A All four
B (i) and (ii) only
C (i), (iii) and (iv)
D (iii) and (iv)

MC Question 16 - December 2014 Specimen

On 1 January 2014, Viagem acquired 80% of the equity share capital of Greca.

Extracts of their statements of profit or loss for the year ended 30 September 2014 are:
Viagem Greca

$’000 $’000

Revenue 64,600 38,000

Cost of sales (51,200) (26,000)

Sales from Viagem to Greca throughout the year ended 30 September 2014 had
consistently been $800,000 per
month.
Viagem made a mark-up on cost of 25% on these sales.

Greca had $1·5 million of these goods in inventory as at 30 September 2014.

What would be the cost of sales in Viagem’s consolidated statement of profit or loss
for the year ended 30 September 2014?
A $59·9 million
B $61·4 million
C $63·8 million
D $67·9 million