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Testbank

to accompany

Applying International
Accounting Standards
by
Alfredson, Leo, Picker, Pacter & Radford

Prepared by
Victoria Wise

John Wiley & Sons Australia, Ltd 2005


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CHAPTER 17 Consolidated financial statements: wholly owned subsidiaries

Question 1

A Limited acquired B Limited for P110 000. At acquisition date the fair value of the B Limiteds
Land asset was P40 000 and the book value was P30 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 DR Deferred tax liability P3 000;


B CR Deferred tax liability P3 000;
C DR Deferred tax asset P3 000;
D CR Deferred tax liability P3 000.

Question 2

One year after acquisition date, the goodwill acquired was regarded as having become impaired
by P20 000. The appropriate consolidation adjustment in relation to the impairment will include
the following line:

A DR Goodwill P20 000;


B DR Share capital P20 000;
C CR Business combination valuation reserve P20 000;
D CR Accumulated impairment losses P20 000.

Question 3

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 from post-acquisition retained earnings.


II. Dividends paid from pre-acquisition reserves.
III. Transfers from pre-acquisition retained earnings.
IV. Impairment of goodwill.

A I, II, III and IV;


B I, III and IV only;
C II and III only;
D II, III and IV only.

Question 4

Applying International Accounting Standards Chapter 17


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When a dividend is paid by a wholly owned subsidiary out of pre-acquisition equity, the parent
entity recognises:

A a reduction in the investment in the subsidiary;


B a decrease in share capital;
C an increase in dividend income;
D a decrease in dividend revenue.

Question 5

When a parent recognises a pre-acquisition dividend that is declared by a wholly owned


subsidiary it makes the following entry in its accounting records:

A DR Dividend receivable
CR Dividend income;
B DR Dividend income
CR Dividend receivable;
C DR Dividend receivable
CR Shares in subsidiary;
D DR Shares in subsidiary
CR Dividend income.

Question 6

At reporting date, a parent entity had recorded a dividend receivable of P10 000 from a wholly
owned subsidiary, out of pre-acquisition equity. The consolidation adjustment needed in relation
to this event is:

A DR Dividend income P10 000


CR Dividend receivable P10 000;
B DR Dividend revenue P10 000
CR Retained earnings P10 000;
C DR Shares in subsidiary P10 000
CR Dividend receivable P10 000
D DR Cash P10 000
CR Shares in subsidiary P10 000.

Question 7

Parent Limited acquired 100% of a subsidiary on 1 July 20X5. At acquisition date the subsidiary
had the following equity items:

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Retained earnings P24 000


Share capital P33 000
Business combination revaluation reserve P10 000

In the year following the acquisition the subsidiary paid a bonus dividend of P14 000 out of pre-
acquisition retained earnings. The following consolidation adjustment is needed in the
consolidation worksheet for 30 June 20X6:

A DR Share capital P14 000


CR Bonus dividend paid P14 000;
B DR Shares in subsidiary P14 000
CR Share capital P14 000;
C DR Bonus dividend paid P14 000
CR Retained earnings P14 000;
D DR Retained earnings P14 000
CR Share capital P14 000.

Question 8

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

Retained earnings P14 000


Share capital P30 000
Business combination revaluation reserve P6 000

In the year following the acquisition the subsidiary transferred P10 000 from pre-acquisition
retained earnings, to a general reserve account. At the reporting date following the reserve
transfer, the following consolidation adjustment is needed:

A DR Retained earnings P10 000


CR General reserve P10 000;
B DR General reserve P10 000
CR Shares in subsidiary P10 000;
C DR Shares in subsidiary P10 000
CR Retained earnings P10 000;
D DR General reserve P10 000
CR Retained earnings P10 000.

Question 9

For entities wanting to use the cost model of accounting, the revaluation of a subsidiarys assets
would be undertaken in the:

A subsidiarys records;

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B parent entitys records;


C consolidation worksheet;
D notes to the consolidated financial statements.

Question 10

In a business combination the revaluation of non-current assets in the records of the subsidiary,
means that the subsidiary has effectively adopted the:

A parent-entity model of consolidation;


B proprietary model of accounting;
C cost model of accounting;
D revaluation model of accounting.

Question 11

The key principle relating to the disclosure of information about business combinations is to
disclose information that:

A enables users to evaluate the nature and financial effect of business combinations that
occurred during the period;
B enables the preparation of the consolidated financial statements in the most cost-
effective manner;
C does not give an advantage to the competitors of a business group;
D provides users with information about the parent entity only.

Question 12

A reverse acquisition occurs where a:

A subsidiary entity is controlled by a legal parent entity;


B subsidiary entity has control over a legal parent entity;
C parent entity controls a subsidiary through an ownership interest in another
subsidiary;
D parent entity has indirect control over the subsidiary.

Applying International Accounting Standards Chapter 17


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ANSWERS

1 B

2 D

3 D

4 A

5 C

6 C

7 A

8 D

9 C

10 D

11 A

12 B

Applying International Accounting Standards Chapter 17