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Answer Key - Conso FS
Answer Key - Conso FS
Answer Key - Conso FS
a) Beta in which Alpha has 15% votes and a place on the board of directors
b) Delta in which Alpha has 52% votes but no place on the board of directors
c) Gamma in which Alpha has 25% shares and two places on the board of directors
d) Theta in which Alpha holds 100% votes and all places on the board of directors
(c) is an Associated company – as Alpha owns over 20% but less than 50% of Beta’s
shares and has directors on Beta’s board
(d) is a Subsidiary – as alpha owns all Beta’s shares So, ‘y’ is the correct answer
Your Answer: A parent should control the majority of the votes at subsidiary’s
shareholders’ meetings
(b) is Incorrect – in order to obtain control, the parent company must own a majority
of the votes on the ordinary shares
(d) is Incorrect – two companies may have the same directors, but ‘control’ involves
one company owning the majority of the voting shares of another
3
3. Which of the following statement(s) is / are correct with regard to preparation of
consolidated financial Statement?
(d) is Incorrect – assets owned by the ‘non-controlling iterest’ are included in the
Statement of financial position of the group
(b) is Incorrect – the ‘non-controlling interest’s’ share of the profit is deducted before
arriving at the group profit
(c) is Correct
(d) is Incorrect – the subsidiary’s asset values need only to be updated to fair value at
the date of acquisition (and not at subsequent year ends)
5. With regard to preparing consolidated statements of financial position which of the
following statements is / are correct?
Your Answer: c
Correct Answer: b & c
(b) is Correct
(c) is Correct
(d) is Incorrect – when the parent sells inventory to a subsidiary, all the profit on the
sale has to be eliminated from the consolidated financial statements. However, when a
subsidiary sells inventory to the parent company, only the group portion of the
unrealised profit is eliminated
a) To inform the acquired company what its assets are worth in the market
b) To comply with the practice followed over the years
c) To report each of the subsidiary’s assets at what it cost the group to acquire
d) To identify the amount paid for goodwill as the residual not attributed to other
assets
(c) is Correct – so that the parent company can report those assets and liabilities at
the amount it cost to acquire them
(b) is Incorrect – it is not necessary to value trade receivables, as the value in the
subsidiary’s SFP is likely to be very close to its fair value
(c) is Correct – the brand name is likely to have a market value, so it is important to
include this in the consolidated SFP, as this is part of the subsidiary’s assets which the
parent company has acquired
(d) is Correct – inventory in the subsidiary’s SFPmay be different from its fair value, so
the fair value of inventory at acquisition should be determined
(b) is Incorrect – the gain on fair valuation should be divided between the parent
company and the non-controlling interest in proportion to their relative shareholding
(d) is Incorrect – gain on fair valuation will reduce the goodwill. Also, using fair values
enables the goodwill to be correctly stated
9. When preparing a consolidated statement of financial position any profit made by one
member of the group against another should be eliminated unless it has been realised
by disposal to some one outside the group. Which of the following is / are the
reason(s) for this?
(c) is Correct – a profit on an internal sale would state the item (usually inventory) at
above the original cost to the group
(d) is Incorrect – the assumption is that the goods will eventually be sold to a third
party (outside the group) and not returned
10. A parent owns two third of the subsidiary’s equity. As at a year end the subsidiary’s
inventory includes goods sent to it by the parent invoiced at £360,000. Parent has
purchased these goods for £300,000. Which of the following are the correct entries for
eliminating unrealised profit?
Your Answer: Debit the subsidiary’s retained earnings and credit the subsidiary’s
inventory with £45,000
Correct Answer: Debit the parent’s retained earnings and credit the subsidiary’s
inventory with £60,000
As the parent company has sold the inventory to the subsidiary, the whole of the
£60,000 should be removed from the consolidated financial statement. The entries
would be to debit the parent’s retained earnings (as the parent company has not yet
made the profit on sale) and credit the subsidiary’s inventory (as this is where the
inventory is held) – So, answer (b) is correct
11. What is the amount of the unrealised profit to be eliminated if the parent’s year-end
inventory includes at £540,000 goods invoiced to it by its 60% owned subsidiary at
cost plus 25%.
The cost of the goods is £540,000/1.25 = £432,000 Profit on the sale is £432,000 x
25% = £108,000 This should be credited to inventory. NCI would be debited with 40%
(43,200) and Consolidated reserves would be debited with60% (64,800).
12. Subsidiary’s inventory at the year end included £180,000 purchased from its parent.
Further goods invoiced by the parent at £45,000 were in transit. The parent invoices
the subsidiary at cost plus 20%. The amount of unrealised profit that needs to be
eliminated from the parent’s retained earnings would be:
Your Answer: £30,000
Correct Answer: £37,500
a) That portion of profit has been paid for by the parent as part of its investment
b) It is not ethical for the parent to claim profits made before a company became a
subsidiary
c) To establish the true cost to the parent of acquiring the subsidiary’ s goodwill
d) Otherwise group profits are inflated by acquiring subsidiary’s with high retained
earnings.
(c) is Correct – the cost will include the subsidiary’s pre-acquisition profits
14. Any amount owed by one member of a group to another need to be cancelled when
preparing the consolidated statement of financial posiition. As at the year-end the
parent’s receivable includes £90 due from the subsidiary; whereas the subsidiary
reports that it owes only £60 to the parent. The difference has arisen because of cash
in transit. Which is the correct way of dealing with the situation when preparing the
consolidated statement of financial position.
The cash in transit is from the subsidiary to the parent company. In the group financial
statements, the correct treatment is to leave the subsidiary’s financial statements
unchanged and make the changes to the parent’s financial statements. There is a
difference in the intercompany balances of £30. Both intercompany balances should be
set to zero and the £30 cash in transit added to the parent’s cash balance. Considering
each of the items:
(a) is Correct – as explained above
(c) is Incorrect – as it will leave a negative £30 in the subsidiary’s payable balance
15. As at the year end the parent’s statement of financial position reports rent receivable
as an asset at £600 and this includes £150 due from the subsidiary. Subsidiary reports
rent payable as £150. Which of the following will be included in the consolidated
statement of financial position?
Your Answer: Rent receivable as an asset at £450 and rent payable as a current
liability at £150
Correct Answer: Rent receivable as an asset at £450 and report nothing within
Current liabilities as rent payable
The £150 rent due from the subsidiary and £150 rent payable by the subsidiary will be
cancelled, leaving £450 rent receivable in the group financial statements – this is
answer (c) Considering the other items:
(a) is Incorrect – only £450 is owing by companies outside the group, and the £150
owing by the subsidiary to the parent company should not be included in the
consolidated financial statements
(b) is Incorrect – the asset of £450 is correct. However, the rent payable of £150
should not be included in the consolidated financial statements, as it is an inter-
company transation
(c) is Correct
16. The parent paid £480 to acquire 75% of 300 ordinary shares issued by the subsidiary
on 1st January 2012 when shares in the subsidiary were quoted at 180p per share and
the equity and reserves of the subsidiary were reported as £350 and fair valuation of
its assets identified a gain of £50. What is the goodwill of the subsidiary on this date?
Your Answer: a
Correct Answer: b
(b) Is Correct
18. If the capital and reserves, including fair valuation gain of a subsidiary is £5,400 and
the parent acquires the whole of it for £4,000, the difference of £1,400 would be
known as
Negative goodwill is the correct term to use Considering each of the items:
(a) is Incorrect – as Goodwill must always be positive
(d) is Correct
20. With regard to preparing consolidated income statement which of the following
statements are correct?
a) Only the group portion of subsidiary’s sales, cost of sales and expenses are
included.
b) Non controlling interest is identified immediately after consolidating operating profit
c) Consolidated movement of equity includes only the parent company’s dividend
d) Only the group portion of the subsidiary’s post acquisition profit in brought forward
in the consolidated movement of equity.
(b) is Incorrect – the non-controlling interest is included after profit after tax
(c) is Correct – dividends paid by the subsidiary relating to the parent company are
excluded on consolidation. Dividends paid by the subsidiary to non-controlling
shareholders are included as a deduction in the income statement in the figure of the
profit relating to the non-controlling interest
(d) is Correct – pre-acquisition profits of the subsidiary are included in the cost of
control calculation and in calculating goodwill. Post acquisition profits are included in
the group income statement
(b) is Correct – it eliminates sales and profits generated within the group, otherwise it
would overstate these items in the consolidated income statement
(c) is Correct
(d) is Incorrect – like (a) this is the wrong reason. It is not a matter of ‘image’. It is
wrong as failure to do so would overstate profit and turnover.
22. Though a subsidiary is only partly owned, the whole of the subsidiary’s sales, cost of
sale and expenses are aggregated with those of the parent to report the group’s
income and expenses. Which one or more of the following is/ are the justification for
this?
(c) is Incorrect – it is not a matter of the group doing ‘poorly’. The share of the profit
due to the non-controlling interest is deducted after the profit after tax, giving the
profit attributable to the shareholders of the parent company
(d) is Correct
23. For identifying the group profit for the current year at which of the following points is
the profit relating to non controlling interest removed.
24. Alpha paid £300,000 on 1.1.2010 to acquire 80% of Beta. On that date Beta had in
issue one hundred thousand ordinary shares of £1 each issued at 120p each. But
quoted on this date at 145p. Identify the goodwill in Beta in each of the following
alternative situations.
a) On 1.1.2010 Beta's retained earnings were £30,000 and the fair value of its
identifiable assets the same as their book value.
Your Answer: £200,000
Correct Answer: £179,000
25. Alpha paid £300,000 on 1.1.2010 to acquire 80% of Beta. On that date Beta had in
issue one hundred thousand ordinary shares of £1 each issued at 120p each. But
quoted on this date at 145p. Identify the goodwill in Beta in each of the following
alternative situations.
b) On 1.1.2010 Beta's retained earnings were £60,000 and the fair value of their
identifiable assets £80,000 more than their book value.
26. Alpha paid £300,000 on 1.1.2010 to acquire 80% of Beta. On that date Beta had in
issue one hundred thousand ordinary shares of £1 each issued at 120p each. But
quoted on this date at 145p. Identify the goodwill in Beta in each of the following
alternative situations.
c) On 1.1.2010 Beta's earnings were £50,000 and while their non current assets had a
fair value £80,000 more than the book value, the investments held by Beta had a fair
value £30,000 less than the book value.
27. Alpha paid £300,000 on 1.1.2010 to acquire 80% of Beta. On that date Beta had in
issue one hundred thousand ordinary shares of £1 each issued at 120p each. But
quoted on this date at 145p. Identify the goodwill in Beta in each of the following
alternative situations.
d) On 1.1.2010 Beta had an accumulated loss of £40,000, though its non current
assets had a fair value which exceeded the book value by £120,000.
a) On 1st January 2010 Beta’s retained earnings were £200,000 and the fair value of
Beta’s identifiable non monetary assets were equal to the book value. The value of non
controlling interest on the date of acquisition is to be identified on the basis of price
paid by Alpha to acquire control.
29. b) On 1st January 2010 Beta’s retained earnings were £160,000 , the fair value of its
non current assets exceeded their book value by £100,000 and Beta’s shares were
quoted at 225 p each.
30. c) On 1st January 2010 Beta’s retained earnings were £180,000, the fair value of its
non current assets were £90,000 more than the book value and Beta’s shares were
quoted at 240p each. As at 31st December 2012 £10,000 of profits reported by Beta is
unrealized because they related to sales made to Alpha.
32. As at 31st December 2012 the retained earnings reported in their own Statement of
income by Alpha was £394,500 and by Beta £240,000. Identify the consolidated
retained earnings as at 31st December 2012 on each of the following independent
scenarios.
a) Alpha acquired 75% of Beta’s equity on 1st January 2008 when Beta’s retained
earnings were £80,000.
Alpha 394,500
Beta post acq (75% x (240,000 – 80,000)) 120,000
---------------
514,500
33. b) Alpha acquired 90% of Beta’s equity on 1st January 2010 when Beta’s retained
earnings were £120,000; and during the year ended 31st December 2012, an
unrealised profit of £20,000 had to be eliminated from Alpha’s retained earnings.
Ignore fair valuation adjustments.
Alpha 394,500
Beta post acq (90% x (240,000 – 120,000) 108,000
Less: Profit in inventory (20,000)
---------------
482,500
34. c) Alpha acquired 80% of Beta’s equity on 1st January 2010 when Beta’s retained
earnings were £180,000. During the year ended 31st December 2012 an unrealised
profit of £20,000 had to be eliminated from Beta’s retained earnings.
Alpha 394,500
Beta post acq 80% x (240,000 – 180,000) 48,000
Less: profit in stock 80% x £20,000 (16,000)
---------------
426,500
35. d) Alpha acquired 60% of Beta’s equity on 1st January 2010 when Beta’s retained
earnings were £140,000. During the year ended 31st December 2012 an unrealised
profit of £20,000 had to be eliminated from Beta’s retained earnings and £10,000
written off as impairment of goodwill.
Alpha 394,500
Beta post acq 60% x (240,000 – 140,000) 60,000
Less: profit in stock 60% x £20,000 (12,000)
Less: goodwill impairment 60% x £10,000 (6,000)
---------------
436,500
36. e) Alpha acquired 80% of Beta’s equity on 1st January 2011 when Beta reported a
retained loss of £90,000. Fair valuation, recognized at acquisition was £120,000 and,
as a result, an additional depreciation needs to be written off at £5,000 per annum.
Alpha 394,500
Beta post acq 80% x (240,000 – (-90,000)) 264,000
Additional depreciation 80% x £5,000 x 2 (8,000)
---------------
650,500
37. f) Alpha acquired 80% of Beta’s equity on 1st January 2011 when Beta’s retained
earnings were £90,000. Fair valuation gain was £100,000 and, as a result the
additional depreciation that needs to be written off £15,000. Negative goodwill on
acquisition of Beta was £58,000.
38. Draft Statements of financial position are stated below. Alpha acquired 160 shares in
Beta for £400 on 1st January 2008 when Beta’s retained earnings were £40, the fair
valuation of its non current assets £80 more than the book value and Beta’s shares
were quoted at 225p each. Based on fair value Beta should have written off additional
depreciation of £4 per year.
£000 £000
Cost to Alpha 400
NCI 40 x £2.25 90
--------
490
Ordinary shares 200
Retained earnings 40
Revaluation 80
--------
320
-------
Goodwill 170
39. b) At what amount will non controlling interest be reported on the Consolidated
statement of financial position as at 31st December 2012?
40. c) What is the amount of consolidated retained earnings reported in the consolidated
statement of financial position as at 31st December 2012?
Alpha 200
Beta post acq 80% x (100 – 40) 48
Additional depreciation 80% x 4 x 5 (16)
-------
232
41. Trading particulars of Alpha and its 75% controlled subsidiary Beta are shown below.
During the year Alpha sold goods to Beta for £90,000 and a third of these goods
remain unsold with Beta by the year end. Alpha invoices goods to Beta at cost plus
20%.
Alpha Beta
sales £720,000 £325,000
Gross profit
Alpha (720,000 – 480,000) 240,000
Beta (325,000 – 190,200) 134,800
Stock profit (90,000/3 x 0.2/1.2) (5,000)
---------------
369,800
Note: the gross profit includes all the turnover and gross profit of the subsidiary
(the profit attributable to the NCI is taken out in the NCI’s share of the profit, after the
profit after tax)
42. Trading particulars of Alpha and its 60% controlled subsidiary Beta are shown below.
During the year Alpha sold goods to Beta for £84,000 at cost plus a third. As at the
year end £16,000 of the goods sent by Alpha remained unsold with Beta while goods
invoiced at £8,000 remained in transit.
Alpha Beta
Sales 690,000 £495,000
Gross profit
Alpha (690,000 – 420,000) 270,000
Beta (495,000 – 284,600) 210,400
Stock profit ((16,000+8,000) x 0.33/1.33) (6,000)
---------------
474,400
43. Individual Statements of income of Alpha and its 80% owned subsidiary Beta report
the information shown below.
A fourth of the interest paid by Beta was received by Alpha. During the current year
Beta has invoiced goods for £210,000 to Alpha at cost plus a fifth. £60,000 of these
goods remained unsold with Alpha by the year end.
Alpha Beta
Gross profit 690,000 £397,000
A third of the interest paid by Beta was received by Alpha. During the current year
Alpha has invoiced goods for £180,000 to Beta at cost plus a fourth. £40,000 of these
goods remained unsold with Beta by the year end. During the year goodwill in Beta
was impaired by £30,000.
Alpha Beta
Gross profit 740,000 £496,000
45. The individual Statements of financial position of the parent and the subsidiary, as at
31st December 2012 reports their retained earnings as £540,000 and £297,000
respectively. The profit after tax in the year ended 31st December 2012 was £124,000
for the parent and £96,000 for the subsidiary. Parent acquired two third of the equity in
the subsidiary on 1st January 2010 when the subsidiary’s retained earnings were
£120,000. Assume that no dividends were declared or paid by either company in the
year 2012. In the Consolidated statement of changes in equity for the year ended 31st
December 2012:
a) What would be the balance b/f from previous years for the parent?
46. b) What would be the balance b/f from previous years for the subsidiary?
47. c) What would be the current year’s profit for the subsidiary
48. The end portion of the individual Statements of income of Alpha and its subsidiary Beta
are shown below. Alpha acquired 75% of Beta three year’s earlier. Identify the amounts
that should be reported on the Consolidated changes in equity as (a) the consolidated
profit for the current year and (b) dividend declared.
Alpha Beta
Profit after taxation £580 £240
Dividend declared (£200) (£80)
Retained profit £380 £160
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