Chapter 15 - Consolidation: Controlled Entities: Review Questions

Tutorial Week 6 Moodle Questions and Solutions
Chapter 15 Consolidation: controlled entities

REVIEW QUESTIONS
1. What is a subsidiary?
A subsidiary is an entity that is controlled by another entity, a parent.
2. What is meant by the term control?
An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.
3. For what purposes are the consolidated financial statements prepared?
Possible objectives are:
- Supply of relevant information
- Supply of comparable information
- Accountability of management
- Reporting of risks and benefits
4. What are the key elements of control?
There are 3 key elements:
- Power over the investee
- Exposure or rights to variable returns from the parents involvement with the
subsidiary
- The ability to use the power over the subsidiary to affect the amount of the
parents returns.
Chapter 16 Controlled entities: the consolidation method

REVIEW QUESTIONS
1. Explain the purpose of the pre-acquisition entries in the preparation of consolidated
financial statements.
The purpose of the pre-acquisition entry is to:
- prevent double counting of the assets of the economic entity
- prevent double counting of the equity of the economic entity
- recognise any gain on bargain purchase
A simple example such as that below could be used to illustrate these points:
A Ltd has acquired all the issued shares of B Ltd. The balance sheets of both companies
immediately after acquisition are as follows:
Share capital
Reserves
Shares in B Ltd
Cash
$200
100
300
150
150
300
Share capital
Reserves
Cash
$100
50
150
-150
150
The balance of the Shares in B Ltd account can be changed to introduce goodwill/ gain
on bargain purchase amounts.
6. At the date the parent acquires a controlling interest in a subsidiary, if the carrying
amounts of the subsidiarys assets are not equal to fair value, explain why
adjustments to these assets are required in the preparation of the consolidated
financial statements.
AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary be
shown at fair value. The standard-setters believe that the fair value of the assets and
liabilities provides the most relevant information to users.
Even though the standard refers to an allocation of the cost of a business combination, the
standard does not require the identifiable assets and liabilities acquired to be recorded at
cost.
The only asset acquired that is not measured at fair value is goodwill.
The fair value approach is emphasised by the required accounting for any bargain
purchase on combination. It is not accounted for as a reduction in the fair values of the
identifiable assets and liabilities acquired such that these items are recorded at cost.
Instead, the fair values are unchanged and the excess is recognised as a gain.
8. What is the purpose of the business combination valuation entries?

The purpose of these entries is to make consolidation adjustments so that in the consolidate
balance sheet the identifiable assets, liabilities and contingent liabilities of the subsidiary are
reported at fair value. This is to fulfil step 3 of the acquisition method required to account for
business combinations by AASB 3.
PRACTICE QUESTIONS
QUESTION 16.1
PISCES LTD URSA LTD
Acquisition analysis at 1 July 2013:
Fair value of identifiable assets
and liabilities of Ursa Ltd
Consideration transferred
Goodwill
=
=
=
$200 000 + $50 000 + $20 000

+ $5 000 (1 30%) (BCVR inventory)
+ $10 000 (1 30%) BCVR plant)
$280 500
$283 000
$2 500
Business combination valuation entries at 30 June 2014

Accumulated depreciation
Plant
Deferred tax liability
Business combination valuation reserve
Dr
Cr
Cr
Cr
80 000
Depreciation expense
(1/5 x $10 000 p.a.)
Dr
Cr
2 000

Income tax expense
(30% x $2 000)
Dr
Cr
600
Cost of sales
Income tax expense
Transfer from business combination
valuation reserve
Dr
Cr
5 000
Cr
Goodwill
Business combination valuation entry
Dr
Cr
2 500
Retained earnings (1/7/13)

Share capital
General reserve
Shares in Ursa Ltd
Dr
Dr
Dr
Dr
Cr
20 000
200 000
50 000
13 000
Transfer from business combination valuation

reserve
Dr
Cr
3 500
70 000
3 000
7 000
2 000
600
1 500
3 500
2 500
Pre-acquisition entries at 30 June 2014
283 000
3 500
QUESTION 16.14
EQUULEUS LTD FORNAX LTD
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Fornax Ltd
Gain on bargain purchase
=
=
=
($10 000 + $2 000 + $1 500) (equity)

+ $2 000 (1 30%) (land)
+ $ 1 000 (1 30%) (plant)
+ $ 1 000 (1 30%) (inventory)
$16 300
$15 000
$1 300
Worksheet entries at 1 July 2015

1. Business combination valuation entries
Gain on sale of land/Carrying amount of land sold Dr
Income tax expense
Cr
valuation reserve
Cr
2 000
600
1 400
Accumulated depreciation plant

Plant
Dr
Dr
Cr
Cr
500
500
Depreciation expense plant

(1/5 x $1 000 p.a.)
Dr
Dr
Cr
200
200

Income tax expense
Dr
Cr
Cr
120
300
700
400
60
60

2. Pre-acquisition entries
At 1 July 2013:
Gain on bargain purchase
Share capital
General reserve
Shares in Fornax Ltd
Cr
Dr
Dr
Dr
Dr
Cr
1 300
1 500
10 000
2 000
2 800
15 000
At 30 June 2015:
Retained earnings (1/7/14) *
Share capital
General reserve
Dr
Dr
Dr
Dr
Cr
1 400
10 000
1 500
2 100
15 000
* = $1 500 - $1 300 + $500 (general reserve transfer) + $700 (BCVR)

valuation reserve
Dr
Cr
1 400
1 400
Equuleus
Ltd
3 200
Fornax
Ltd
1 800
Income tax expense
1 300
240
Profit
Retained earnings
(1/7/14)
1 900
1 500
1 560
2 100
3 400
500
2 900
3 600
0
3 660
25 000
8 000
-
10 000
3 000
-
35 900
1 500
(500)
1 000
36 900
5 000
41 900
16 660
300
200
500
17 160
1 300
18 460
3 000
300
3 000
15 000
8 600
17 000
(5 000)
41 900
4 000
360
2 000
5 100
8 000
(1 000)
18 460
Profit before tax
Transfer from BCVR

Dividend paid
Retained earnings
(30/6/15)
Share capital
General reserve
Business combination
valuation reserve
Other components
Increases/Decreases
Liabilities
Inventory
Cash
Financial assets
Land
Plant
Accum depreciation
1
1
Adjustments
Dr
Cr
2 000
200
600
60
Group
2 800
1
2
200
1 400
60
1 400
1 400
2
2
2
10 000
1 500
2 100
1
1
120
500
500
19 920
700
1 400
300
880
1
1
1
2
15 000
400
19 920
1 920
2 060
3 980
-500
3 480
25 000
9 500
-37 980
1 800
(300)
1 500
39 480
6 480
45 960
7 000
660
5 000
-13 700
25 500
(5 900)
45 960
FORNAX LTD
Consolidated Statement of profit or Loss and Other Comprehensive Income
for financial year ended 30 June 2015
Profit before income tax
Income tax expense
Profit for the period
Other comprehensive income:
Other components of equity: decrements
Comprehensive income for the period
$2 800
880
$1 920
(300)
$1 620
FORNAX LTD
Consolidated Statement of Changes in Equity
for financial year ended 30 June 2015
$1 620
Retained earnings balance at 1 July 2014

Dividend paid
Retained earnings balance at 30 June 2015
$2 060
1 920
(500)
$3 480
Share capital balance at 1 July 2014

Share capital balance at 30 June 2015
$25 000
$25 000
General reserve balance at 1 July 2014

General reserve balance at 30 June 2015
$9 500
$9 500
Other components of equity at 1 July 2014

Decreases
Other components of equity at 30 June 2015
$1 800
(300)
$1 500
FORNAX LTD
Consolidated Statement of Financial Position
as at 30 June 2015
Current Assets
Inventory
Financial assets
Cash
Total Current Assets
Non-current Assets
Property, plant and equipment:
Land
Plant
Accumulated depreciation Plant
Total Non-current Assets
Total Assets
13 700
25 500
(5 900)
33 300
$45 960
Equity
Share capital
Reserves: General reserve
Other components of equity
Retained earnings
Total Equity
Liabilities
Total Equity and Liabilities
$25 000
9 500
1 500
3 480
39 480
6 480
$45 960
$7 000
5 000
660
12 660
QUESTION 16.15
AURIGA LTD PERSEUS LTD
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Perseus Ltd
Goodwill
=
=
=
$100 000 + $35 000

+ $4 000 (1 30%) (inventory)
+ $10 000 (1 30%) (land)
+ $3 000 (1 30%) (plant)
- $5 000 (1 30%) (guarantee liability)
+ $6 000 (1 30%) (patent)
$147 600
$160 000
$12 400
1. Business combination valuation entries at 30 June 2016

Depreciation expense
Gain on sale of plant/Carrying amount of plant sold
Income tax expense
valuation reserve
(1/5 x $3 000 p.a.)
Dr
Dr
Cr
Dr
300
1 500
540
840
Cr
2 100
Patent
Dr
Cr
Cr
6 000
Amortisation expense - patent

Accumulated amortisation
Dr
Dr
Cr
1 000
2 000

Income tax expense
Dr
Cr
Cr
900

valuation reserve
Income tax expense
Gain on guarantee
Dr
Dr
Cr
3 500
1 500
Goodwill
Dr
Cr
12 400
1 800
4 200
3 000
300
600
5 000
12 400

2. Pre-acquisition entries
At 1/7/2013:
Share capital
Shares in Perseus Ltd
Dr
Dr
Dr
Cr
35 000
100 000
25 000
160 000
At 30 June 2016:
This entries are affected by:
- sale of land in March 2014 prior period
- sale of inventory by 30 June 2014 prior period
- sale of plant in January in current period
- settlement of guaranteed loan in current period
- transfer to general reserve of $20 000 in current period.
Retained earnings (1/7/15) *
Share capital
Shares in Perseus Ltd
Dr
Dr
Dr
Cr
44 800
100 000
15 200
Dr
3 500
160 000
* $35 000 + 70% ($4 000 + $10 000)

valuation reserve
(Settlement of loan)
Cr
3 500

valuation reserve
(Sale of plant)
Dr
Cr
2 100
General reserve
Transfer to general reserve
Dr
Cr
20 000
2 100
20 000
10
Auriga
Ltd
50 000
Perseus
Ltd
15 000
Tax expense
20 000
6 000
Profit
Retained earnings
(1/7/15)
30 000
37 000
9 000
45 000
67 000
20 000
20 000
47 000
150 000
12 000
-
54 000
20 000
20 000
34 000
100 000
20 000
-
209 000
14 000
154 000
0
217 500
14 000
6 000
20 000
0
0
6 000
20 000
14 000
14 000
28 000
(4 000)
10 000
239 000
19 000
25 000
283 000
(10 000
4 000
158 000
8 000
0
166 000
(14 000)
14 000
251 500
27 000
25 000
900
304 400
160 000
5 000
10 000
30 000
140 000
(62 000)
283 000
0
14 000
5 000
21 000
163 000
(37 000)
166 000
Profit before tax
Transfer from BCVR
Dividend paid
Tfer to gen reserve
Ret earn. (30/6/16)
Share capital
General reserve
Business comb.
valuation reserve
Asset reval surplus

(1/7/15)
Increment
Asset reval surplus
(30/6/16)
Other components
(1/7/15)
Losses
Other com (30/6/16)
Payables
Loan
Defer. tax liability
Shares in Perseus
Cash
Financial assets
Inventory
Plant & equipment
Accum depreciation
Goodwill
Patent
Accum amortisation
1
1
1
1
1
1
2
1
2
2
2
2
2
1
1
Adjustments
Dr
Cr
300
5 000
1 500
1 000
1 500
300
540
840
2 000
44 800
3 500
2 100
100 000
20 000
15 200
3 500
900
Group
1
67 200
1
1
26 660
600
2 100
3 500
1
2
20 000
4 200
12 400
2 100
1
1
2
1 800
160 000
3 000
215 540
12 400
6 000
215 540
40 540
34 960
-75 500
20 000
-20 000
55 500
150 000
12 000
--
0
19 000
15 000
51 000
303 000
(99 000)
12 400
6 000
(3 000)
304 400
11

AURIGA LTD
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for year ended 30 June 2016
Profit before income tax
Income tax expense
Other comprehensive income:
Other components of equity: losses on financial assets
Gains on revaluation of assets
$67 200
26 660
$40 540
(14 000)
6 000
$32 540
AURIGA LTD
Consolidated Statement of Changes in Equity
for year ended 30 June 2016
$32 540
Retained earnings balance at 1 July 2015

Dividend paid
Retained earnings balance at 30 June 2016
$34 960
40 540
(20 000)
$55 500
Share capital balance at 1 July 2015

Share capital balance at 30 June 2016
$150 000
$150 000
General reserve balance at 1 July 2015

General reserve balance at 30 June 2016
$42 000
$42 000
Asset revaluation surplus at 1 July 2015

Gains
Asset revaluation surplus at 30 June 2016
$14 000
6 000
$20 000
Other components of equity at 1 July 2015

Losses on financial assets
Other components of equity at 30 June 2016
$28 000
(14 000)
$14 000
12
AURIGA LTD
Consolidated Statement of Financial Position
as at 30 June 2016
Current Assets
Cash
Financial assets
Inventory
Total Current Assets
Non-current Assets
Property, plant, and equipment
Goodwill
Intangibles: Patent
Accumulated amortisation
Total Non-current Assets
Total Assets
Equity
Share capital
Reserves: General reserve
Asset revaluation surplus
Other components of equity
Retained earnings
Total Equity
Current Liabilities
Payables
Non-current Liabilities
Loan
Total Liabilities
Total Equity and Liabilities
$19 000
15 000
51 000
85 000
$303 000
(99 000)
6 000
(3 000)
204 000
12 400
__3 000
219 400
$304 400
$150 000
12 000
20 000
14 000
55 500
251 500
27 000
25 000
__900
52 900
$304 400
13

Chapter 15 - Consolidation: Controlled Entities: Review Questions

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Chapter 15 - Consolidation: Controlled Entities: Review Questions

Caricato da

Copyright:

Formati disponibili

Tutorial Week 6 Moodle Questions and Solutions