ACCA FA · Chapter 13
Simple consolidated financial statements MCQs with Answers
12 multiple-choice questions on Simple consolidated financial statements for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IFRS 10 Consolidated Financial Statements, which combination of elements must an investor have to control an investee?
- A) Power over the investee, exposure or rights to variable returns, and the ability to use its power to affect those returns
- B) Ownership of at least 20% of the shares, power over operating policies, and a fixed return
- C) Significant influence, joint management, and a share of profits
- D) Ownership of all the investee's shares, a seat on its board, and a shared head office
Show answer & explanation
Answer: A) Power over the investee, exposure or rights to variable returns, and the ability to use its power to affect those returns
IFRS 10 defines control by three elements: power over the investee, exposure or rights to variable returns from involvement with it, and the ability to use that power to affect the amount of the returns. Control does not require 100% ownership. Significant influence (often 20% to 50%) indicates an associate, not a subsidiary.
Question 2
P acquired 80% of the ordinary shares of S for $640,000 cash. At the acquisition date, S had share capital of $300,000 and retained earnings of $380,000. The fair value of S's land was $50,000 higher than its carrying amount. Non-controlling interest is measured at its fair value of $150,000. What is the goodwill arising on acquisition?
- A) $56,000
- B) $110,000
- C) $96,000
- D) $60,000
Show answer & explanation
Answer: D) $60,000
Fair value of net assets acquired = $300,000 + $380,000 + $50,000 = $730,000. Goodwill = consideration $640,000 + NCI $150,000 - net assets $730,000 = $60,000. Omitting the fair value adjustment gives $110,000. Measuring NCI at its proportionate share (20% x $730,000 = $146,000) would give $56,000, but the question specifies fair value.
Question 3
P acquired 80% of S. Non-controlling interest was measured at $150,000 at the acquisition date. Since acquisition, S has made post-acquisition profits of $90,000. There has been no impairment of goodwill. What is the non-controlling interest in the consolidated statement of financial position?
- A) $240,000
- B) $168,000
- C) $222,000
- D) $150,000
Show answer & explanation
Answer: B) $168,000
NCI = NCI at acquisition + NCI share of post-acquisition profits = $150,000 + (20% x $90,000) = $150,000 + $18,000 = $168,000. Using 80% of post-acquisition profits gives $222,000, and adding all of them gives $240,000.
Question 4
P acquired 80% of S when S's retained earnings were $380,000. At the year end, P's retained earnings are $820,000 and S's are $470,000. Goodwill has been impaired by $10,000, and non-controlling interest is measured at fair value. What are the consolidated retained earnings?
- A) $884,000
- B) $882,000
- C) $892,000
- D) $1,186,000
Show answer & explanation
Answer: A) $884,000
S's post-acquisition profit = $470,000 - $380,000 = $90,000; P's share = 80% x $90,000 = $72,000. With NCI at fair value, the goodwill impairment is shared, so P's share = 80% x $10,000 = $8,000. Group retained earnings = $820,000 + $72,000 - $8,000 = $884,000. Charging the full $10,000 to the group gives $882,000.
Question 5
During the year, P sold goods to its subsidiary S for $120,000. P's revenue was $900,000 and S's revenue was $400,000 (both including intra-group sales where relevant). What is the consolidated revenue?
- A) $1,060,000
- B) $1,204,000
- C) $1,300,000
- D) $1,180,000
Show answer & explanation
Answer: D) $1,180,000
Intra-group sales must be eliminated, because the group cannot sell to itself. Consolidated revenue = $900,000 + $400,000 - $120,000 = $1,180,000. Simply adding both companies' revenue gives $1,300,000, and eliminating the sales twice gives $1,060,000.
Question 6
P sold goods to its subsidiary S for $60,000, at a mark-up of 25% on cost. At the year end, S still held 40% of these goods in inventory. What is the provision for unrealised profit?
- A) $4,800
- B) $6,000
- C) $24,000
- D) $12,000
Show answer & explanation
Answer: A) $4,800
Profit on the sale = $60,000 x 25/125 = $12,000. Unrealised profit on goods still held = 40% x $12,000 = $4,800, which is deducted from group inventory and from P's retained earnings (P is the seller). Treating 25% as a margin gives $60,000 x 25% x 40% = $6,000.
Question 7
At the year end, P's receivables are $85,000 and S's are $46,000. P's receivables include $7,000 due from S. S's payables show $5,000 owed to P, because S sent a cheque for $2,000 just before the year end which P did not receive until after it. What are the consolidated receivables?
- A) $124,000
- B) $122,000
- C) $126,000
- D) $131,000
Show answer & explanation
Answer: A) $124,000
The cash in transit is first recorded as if it had been received by P: Dr Cash $2,000, Cr Receivables $2,000, so P's intra-group receivable becomes $5,000, matching S's payable. Consolidated receivables = $85,000 + $46,000 - $2,000 - $5,000 = $124,000, which equals deducting the full $7,000 originally in P's books. Deducting only $5,000 gives $126,000.
Question 8
An investor holds 35% of the voting shares of an entity and has significant influence, but not control, over it. How should the investment be accounted for in the consolidated financial statements?
- A) Full consolidation, as a subsidiary
- B) By including 35% of each asset and liability line by line
- C) Using the equity method, as an associate
- D) At cost, with no adjustments
Show answer & explanation
Answer: C) Using the equity method, as an associate
Significant influence is the power to participate in financial and operating policy decisions without controlling them, and is presumed for holdings of 20% to 50%. Such an investee is an associate, which IAS 28 requires to be accounted for using the equity method rather than full consolidation.
Question 9
A group bought 30% of an associate for $200,000. Since acquisition, the associate has made profits of $80,000. There has been no impairment. At what amount should the investment in the associate appear in the consolidated statement of financial position?
- A) $216,000
- B) $200,000
- C) $280,000
- D) $224,000
Show answer & explanation
Answer: D) $224,000
Under the equity method, the investment is carried at cost plus the group's share of post-acquisition profits: $200,000 + (30% x $80,000) = $200,000 + $24,000 = $224,000. Adding all of the associate's profits gives $280,000, and leaving it at cost gives $200,000.
Question 10
P acquired 400,000 of S's 500,000 ordinary shares, issuing 2 new P shares for every 5 S shares acquired. On the acquisition date, the market value of a P share was $3.50. What is the fair value of the consideration?
- A) $560,000
- B) $1,400,000
- C) $160,000
- D) $700,000
Show answer & explanation
Answer: A) $560,000
Number of P shares issued = 400,000 x 2/5 = 160,000. Consideration at fair value = 160,000 x $3.50 = $560,000. Basing the calculation on all 500,000 S shares gives $700,000, and $160,000 is the number of shares issued rather than their value.
Question 11
P owns 75% of S. How are S's property, plant and equipment included in the consolidated statement of financial position?
- A) 100% of S's property, plant and equipment is added to P's, with the non-controlling interest shown in equity
- B) 75% of S's property, plant and equipment is added to P's
- C) S's property, plant and equipment is shown as a single-line investment
- D) Only P's property, plant and equipment is shown
Show answer & explanation
Answer: A) 100% of S's property, plant and equipment is added to P's, with the non-controlling interest shown in equity
Consolidation presents the group as a single economic entity under P's control, so 100% of the subsidiary's assets and liabilities are combined with the parent's. The 25% that is not owned is reflected by presenting a non-controlling interest within equity. A single-line investment is the equity method used for associates.
Question 12
P owns 45% of the voting shares of Q. Under an agreement with the other shareholders, P has the right to appoint or remove a majority of Q's board of directors. How should Q be treated in P's group financial statements?
- A) It should be excluded because P does not hold a majority of shares
- B) As an associate, because P owns less than 50%
- C) As a subsidiary, because P controls Q
- D) As a simple investment
Show answer & explanation
Answer: C) As a subsidiary, because P controls Q
Control does not depend solely on owning more than half of the shares. The right to appoint or remove a majority of the board gives P power over Q's relevant activities, so P controls Q, and Q must be consolidated as a subsidiary.