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Location on Student Resources > Chapter 13:
Site: Consolidation of financial statements >
Multiple Choice Questions
Date/Time February 22, 2018 at 7:37 AM (UTC/GMT)
Submitted:
1. Which of the following companies would qualify to be regarded as subsidiaries of

Alpha?
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
Your Answer: b & d
Considering each of the items:

(a) is an investment, as Alpha owns less than 20% of Beta’s shares
(b) is a Subsidiary – as Alpha owns more than 50% of Beta’s shares
(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
2. Which of the following would qualify a company to be regarded as a parent of another?
Your Answer: A parent should control the majority of the votes at subsidiary’s
shareholders’ meetings

(a) is Incorrect – the requirement is ‘control’, not the type of business
(b) is Incorrect – in order to obtain control, the parent company must own a majority
of the votes on the ordinary shares
(c) is Correct – see answer to (b) above
(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?
a) To be a subsidiary a parent should hold 100% of its equity shares

b) Consolidation merely addition together of two Statements of financial position
c) In consolidation a subsidiary and an associate are treated identically
d) Consolidated balance sheet excludes assets not owned by the group
Your Answer: a & d

Correct Answer: None

(a) is Incorrect – the parent needs only hold a majority of the voting shares of the
subsidiary (i.e. not all of them)
(b) is Incorrect – inter-company transactions must be eliminated, such as

intercompany payables/receivables and profit in stock eliminated. The consolidated
financial statements will include only the ordinary share capital of the parent, and the
parent’s share of the post acquisition profit of the subsidary. The consolidated financial
statements will include a ‘non-controlling interest’ – the value of shares in the
subsidiary not held by the parent company
(c) is Incorrect – an associated company is treated as a single item (usually under

investments) at cost plus share of post acquisition profits (less impairment). With a
subsidiary, many of the items in the statement of financial position (current assets,
current liabilities and non-current assets) are included with those of the parent
company (not as a single item).
(d) is Incorrect – assets owned by the ‘non-controlling iterest’ are included in the
Statement of financial position of the group
4. Which of the following statement(s) apply when consolidating statements of financial

position
a) All inter-company balances should be cancelled

b) The group share of the whole of subsidiary’s profit is included within group profit
c) Inter company profit should be eliminated unless it is realised by sale to an outsider
d) Subsidiary’s asset values need to be updated at the end of each accounting period
Your Answer: a & b

Correct Answer: a & c

(a) is Correct
(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?
a) the consolidated statement of financial position reports only parent’s goodwill

b) Any unrealized profit made by a subsidiary should be eliminated from its profit
c) An amount owed to each other within the group needs to be cancelled
d) Only the group portion of any unrealised profit need be eliminated.
Your Answer: c
Correct Answer: b & c

(a) is Incorrect – as the statement of financial position also includes the goodwill
relating to the non-controlling interest
(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
6. When preparing a consolidated statement of financial position the identifiable non

monetary assets of the subsidiary need to be fair valued for which of the following
reason / reasons?
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
Your Answer: a, c & d

Correct Answer: c & d
Considering each item:

(a) is Incorrect – this is not required by accounting standards
(b) is Incorrect – this is not necessary
(c) is Correct – so that the parent company can report those assets and liabilities at
the amount it cost to acquire them
(d) is Correct – in order to calculate goodwill at acquistion, it is necessary to use the

fair value of the identifiable assets and liabilities at acquisition
7. When preparing a consolidated Statement of financial position the identifiable non

monetary assets of the subsidiary need to be fair valued. Which of the following assets
of the subsidiary need to be fair valued?
a) Land and building appearing in the books of the subsidiary
b) Trade receivables reported on the subsidiary’s balance sheet
c) Brand name the cost relating to which the subsidiary has already fully written off
d) Inventory reported on the subsidiary’s statement of financial position
Your Answer: a, c & d

(a) is Correct – it is necessary to value land and buildings at acquisition, as they are
likely to be significantly different from the value in the subsidiary’s Statement of
financial position (SFP)
(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
8. Which of the following statements are incorrect with regard to preparation of a

consolidated statement of financial position?
a) Gain on fair valuation of a subsidiary’s asset is a pre-acquisition profit

b) Non controlling interest does not deserve any portion of fair valuation gain
c) If an asset is not reported in the subsidiary’s ledger it need not be fair valued
d) Gain on fair valuation of subsidiary’s asset inflates the cost of goodwill
Your Answer: a, b & c

Correct Answer: b, c & d

(a) is Correct – this gain is pre-acquistion
(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
(c) is Incorrect – if an asset or liability has a value, it should be reported in the

consolidated financial statements at fair value at acquisition, even if it has no value in
the subsidiary’s financial statements (see item (c) in 13.7)
(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?
a) Because an entity cannot make a profit against its own self

b) Because it is fashionable to do so
c) Because subsidiary’s assets needs to be reported at the amount each cost the group
d) Because the unsold goods may have to be returned to the party purchased from
Your Answer: a, b & c

Correct Answer: a & c

(a) is Correct – if inter-company profits were included in the consolidated financial
statements, it would overstate group profit
(b) is Incorrect – it is not ‘fashion’ but the correct treatment
(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%.
Your Answer: £81,000

Correct Answer: £108,000
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:
Cost of goods at £180,000 selling price = £180,000/1.2 = £150,000
Cost of goods at £45,000 selling price = £45,000/1.2 = £37,500
Profit on £180,000 goods = £180,000 x .2 / 1.2 = £30,000
Profit on £45,000 goods = £45,000 x .2 / 1.2 = £7,500
Total profit in stock = £30,000 + £7,500 = £37,500
13. When preparing a consolidated statement of financial position, pre-acquisition portion

of subsidiary’s retained earnings need to be frozen by off setting it from the cost of
investments. Which of the following is / are the reason for this?
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.
Your Answer: a & c
Considering each of the points:

(a) is Correct – the pre-acquisition profits were made before acquisition, so should be
set off against the cost of acquisition
(b) is Incorrect – it is not an ethical reason – the reason is in (a) above
(c) is Correct – the cost will include the subsidiary’s pre-acquisition profits
(d) is Incorrect – although the statement is correct, it is imprecise. Pre-acquisition

profits should be set against the cost of acquisition, and not included in post acquistion
group 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.
Your Answer: Cancel £60 from both receivable and payable

Correct Answer: Cancel £90 from parents receivable, £60 from subsidiary’s payable
and include £30 with cash
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
(b) is Incorrect - as it leaves £30 in the parent’s receivable balance
(c) is Incorrect – as it will leave a negative £30 in the subsidiary’s payable balance
(d) is Incorrect – as it leaves an ‘unbalance’ of £30, the difference between the

receivable balance of £90 and the payable balance of £60
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
(d) is Incorrect – only £450 is owed by companies outside the group
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: £130

Correct Answer: £215
Non-controlling interest = 100 shares x £1.80 = £180

Acquisition cost by parent 480
Non-controlling interest 75 x £1.80 135
-----
Total value 615
Net asset value of company
Equity & reserves 350
Gain on fair value 50
-----
(400)
-----
Goodwill 215
-----
17. Which of the following statements is / are correct with regard to accounting for
goodwill?
a) Goodwill needs to be written off as soon as it is identified.

b) Goodwill is reported continuously as an asset unless it is impaired
c) Goodwill should be amortised over an estimated useful life
d) Goodwill should be amortised over an estimated useful life not exceeding twenty
years
Your Answer: a
Correct Answer: b

(a) is Incorrect – many years ago this was an option, but now it is not allowed by
International Standards.
(b) Is Correct
(c) Is Incorrect – International Standards do not allow amortisation of goodwill
(d) Is Incorrect – International Standards do not allow amortisation of goodwill

(relating to acquisition of subsidiaries)
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
Your Answer: Gain on acquisition

Correct Answer: Negative goodwill
Negative goodwill is the correct term to use Considering each of the items:
(a) is Incorrect – as Goodwill must always be positive
(b) is Incorrect – it is not a gain on acquisition
(c) is Incorrect – ‘badwill’ is not an accounting term
(d) is Correct
19. How is a negative goodwill reported on the consolidated statement of financial

position?
Your Answer: Included fully in the Consolidated Retained Earnings
Negative goodwill is released to the income statement (and included in consolidated

retained earnings) at acquisition of the subsidiary. It is not included in reserves (as a
negative reserve). So, (c) is the correct answer Considering each of the items:
(a) is Incorrect – a negative asset cannot be included under ‘assets’
(b) is Incorrect – it is not a capital reserve

(c) is Correct
(d) is Incorrect – this is confusing/confused
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.
Your Answer: b & d

Correct Answer: c & d

(a) is Incorrect – the whole of the subsidiary’s sales, cost of sales and expenses are
included in the consolidated income statement (including that relating to the non-
controlling interest)
(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
21. When preparing a Consolidated Income Statement, inter-company transactions are

cancelled. Which one or more of the following would you say is the reason for this
step?
a) That is how it is expected to be done.

b) Otherwise group earnings can be inflated by one within the group earning from
another.
c) Otherwise the same amount is double counted both as an income and expense
d) Failure to do so would be bad for the group image
Your Answer: c & d

Correct Answer: b & c

(a) is Incorrct – it is not how it is ‘expected’ to be done, it is how it ‘should’ be done
(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?
a) That is how it is expected to be done

b) That is a legal requirement
c) Otherwise the group would appear to be doing poorly with adverse effect on share
price
d) To report the income generated by and expenses incurred by the group as a whole.
Your Answer: b & d

Correct Answer: d

(a) is Incorrect – it is not a case of ‘expected’. This is the way it ‘should’ be done. The
parent company has ‘control’ of the subsidiary, so the income statement should include
the sales, cost of sales and expenses of what it controls (it controls the whole of the
subsidiary, not part of it)
(b) is Incorrect – the explanation is in (a) above
(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.
Your Answer: After identifying the gross profit

Correct Answer: After identifying the profit for the year after tax
As explained in the answer to earlier parts, (d) is the correct answer
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.
Cost of 80% 300,000

NCI 20,000 x 1.45 29,000
-------------
Total value 329,000
Ordinary shares 100,000

Share Premium 20,000
Reserves 30,000
---------------
(150,000)
-------------
Goodwill 179,000
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.

Cost of 80% 300,000

NCI 20,000 x 1.45 29,000
-------------
Total value 329,000

Share premium 20,000
Reserves 60,000
Revaluation 80,000
---------------
(260,000)
-------------
Goodwill 69,000
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.

Cost of 80% 300,000

NCI 100,000 x 1.45 29,000
-------------
Total value 329,000

Reserves 50,000
Revaluation 80,000
Investment (30,000)
---------------
(220,000)
-------------
Goodwill 109,000
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.

Cost of 80% 300,000

NCI 100,000 x 1.45 29,000
-------------
Total value 329,000

Reserves (40,000)
Revaluation 100,000
---------------
(200,000)
-------------
Goodwill 129,000
28. Alpha paid £750,000 to acquire 60% of equity in Beta on 1st January 2010. Beta’s
Statement of financial position as at 31st December 2012 reports its Share capital as
£500,000, Share premium as £50,000, and Retained earnings as £320,000. Identify
the non controlling interest to be included in the consolidated statement of financial
position as at 31st December 2012 in each of the following independent situations:
Beta’s shares have a par value of £1 each.
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.

NCI (£750,000 x 40/60) at 1.1.10 500,000

Post acq profit 40% x (320,000 – 200,000) 48,000
---------------
NCI at 31.12.12 548,000
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.
NCI is calculated at the share price of 225p at 1.1.10

NCI £2.25 x 200,000 450,000
Post acq profit 40% x(320,000 – 160,000) 64,000
---------------
NCI at 31.12.12 514,000
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.

NCI £2.40 x 200,000 480,000

Post acq profit 40% x (320,000 – 180,000) 56,000
Profit in stock £10,000 x 40% (4,000)
---------------
NCI at 31.12.12 532,000
31. d) On 1st January 2010 Beta’s reported an accumulated loss of £120,000; though the
fair value of its non current assets exceeded their book value on that date by £50,000,
and Beta’s shares were quoted at 255p each.
NCI £2.55 x 200,000 510,000

Post acq profit 40% x (320,000 – (-120,000)) 176,000
---------------
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.

Note: depreciation of £15,000 a year for 2 years

Alpha 394,500
Beta post acq 80% x (240,000 – 90,000) 120,000
Additional depreciation 80% x £15,000 x 2 (24,000)
Negative goodwill (written back) 58,000
---------------
548,500
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.
Statement of financial position As at Alpha Beta

31.12.2012 £ £
Assets 400 300
Investment in Beta 400 -

800 300
Shares of £1 each 600 200
Retained earnings 200 100

800 300
a) Identify Beta’s goodwill as at 1st January 2008.
£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?

NCI at 1.1.08 (above) 90

Post acq 20% x (100 – 40) 12
Additional depreciation 20% x 4 x 5 (4)
-------
98
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%.
Identify the realised gross profit of the group.
Alpha Beta
sales £720,000 £325,000
Cost of sales (£480,000) (£190,200)

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.
Identify the realised gross profit of the group.
Alpha Beta
Sales 690,000 £495,000
Cost of sales (£420,000) (£284,600)
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.
Identify the consolidated group profit for the year.
Alpha Beta
Gross profit 690,000 £397,000
Expenses (£420,000) (£265,000)
Interest received £5,000 -
Interest paid - (£20,000)
Taxation (£58,000) (£25,000)

Alpha profit (690,000-420,000-58,000) 212,000

Beta profit (397,000-265,600-15,000-25,000)x80% 73,600
Profit in inventory 60,000x0.2/1.2x80% (8,000)
---------------
277,600
44. Individual Statements of income of Alpha and its 80% owned subsidiary Beta report
the information shown below.
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.
Identify the consolidated group profit for the year.
Alpha Beta
Gross profit 740,000 £496,000
Expenses (£440,000) (£276,600)
Interest received £7,000 -
Interest paid - (£21,000)
Taxation (£54,000) (£40,000)

Alpha profit (740,000-440,000-54,000) 246,000

Beta profit (496,000-276,600-14,000-40,000)x80% 132,320
Profit in inventory 40,000 x .25/1.25 (8,000)
Goodwill impairment 30,000 x 80% (24,000)
---------------
346,320
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?

Alpha (540,000 – 124,000) £416,000
46. b) What would be the balance b/f from previous years for the subsidiary?

Beta (297,000 – 96,000) £201,000
Post acquisition (201,000 – 120,000) £81,000
Post acquisition profit attributable to Parent £81,000 x £54,000
2/3
47. c) What would be the current year’s profit for the subsidiary

Subsidiary’s profit £96,000 x 2/3 £64,000
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
Your Answer: Profit for the year: £580,000; Dividend: £280,000

Correct Answer: Profit for the year: £760,000; Dividend: £200,000
Alpha profit 580,000

Beta profit £240 x 75% 180,000
---------------
Consolidated profit 760,000
Dividend (only the parent company) 200,000
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Site Title: Financial Accounting An Introduction Summary of Results

1. Which of the following companies would qualify to be regarded as subsidiaries of

Your Answer: b & d

Considering each of the items:

(b) is a Subsidiary – as Alpha owns more than 50% of Beta’s shares

2. Which of the following would qualify a company to be regarded as a parent of another?

Considering each of the items:

(c) is Correct – see answer to (b) above

a) To be a subsidiary a parent should hold 100% of its equity shares

Your Answer: a & d

Considering each of the items:

(b) is Incorrect – inter-company transactions must be eliminated, such as

(c) is Incorrect – an associated company is treated as a single item (usually under

4. Which of the following statement(s) apply when consolidating statements of financial

a) All inter-company balances should be cancelled

Your Answer: a & b

Considering each of the items:

a) the consolidated statement of financial position reports only parent’s goodwill

Considering each of the items:

6. When preparing a consolidated statement of financial position the identifiable non

Your Answer: a, c & d

Considering each item:

(b) is Incorrect – this is not necessary

(d) is Correct – in order to calculate goodwill at acquistion, it is necessary to use the

7. When preparing a consolidated Statement of financial position the identifiable non

Your Answer: a, c & d

Considering each of the items:

8. Which of the following statements are incorrect with regard to preparation of a

a) Gain on fair valuation of a subsidiary’s asset is a pre-acquisition profit

Your Answer: a, b & c

Considering each of the items:

(c) is Incorrect – if an asset or liability has a value, it should be reported in the

a) Because an entity cannot make a profit against its own self

Your Answer: a, b & c

Considering each of the items:

(b) is Incorrect – it is not ‘fashion’ but the correct treatment

Your Answer: £81,000

Cost of goods at £180,000 selling price = £180,000/1.2 = £150,000

Cost of goods at £45,000 selling price = £45,000/1.2 = £37,500

Profit on £180,000 goods = £180,000 x .2 / 1.2 = £30,000

Profit on £45,000 goods = £45,000 x .2 / 1.2 = £7,500

Total profit in stock = £30,000 + £7,500 = £37,500

13. When preparing a consolidated statement of financial position, pre-acquisition portion

Your Answer: a & c

Considering each of the points:

(b) is Incorrect – it is not an ethical reason – the reason is in (a) above

(d) is Incorrect – although the statement is correct, it is imprecise. Pre-acquisition

Your Answer: Cancel £60 from both receivable and payable

(b) is Incorrect - as it leaves £30 in the parent’s receivable balance

(d) is Incorrect – as it leaves an ‘unbalance’ of £30, the difference between the

(d) is Incorrect – only £450 is owed by companies outside the group

Your Answer: £130

Non-controlling interest = 100 shares x £1.80 = £180

a) Goodwill needs to be written off as soon as it is identified.

Considering each of the items:

(c) Is Incorrect – International Standards do not allow amortisation of goodwill

(d) Is Incorrect – International Standards do not allow amortisation of goodwill

Your Answer: Gain on acquisition

(b) is Incorrect – it is not a gain on acquisition

(c) is Incorrect – ‘badwill’ is not an accounting term

19. How is a negative goodwill reported on the consolidated statement of financial

Your Answer: Included fully in the Consolidated Retained Earnings