ACCA FR · Chapter 12
Consolidated statement of financial position MCQs with Answers
13 multiple-choice questions on Consolidated statement of financial position for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IFRS 10, an investor controls an investee when it has which of the following?
- A) Ownership of more than 50% of the investee's total share capital, including preference shares
- B) Significant influence over the investee's financial and operating policies
- C) The right to receive more than half of the investee's dividends
- D) Power over the investee, exposure or rights to variable returns from it, and the ability to use its power to affect those returns
Show answer & explanation
Answer: D) Power over the investee, exposure or rights to variable returns from it, and the ability to use its power to affect those returns
IFRS 10 defines control by three elements, all of which must be present: power over the investee, exposure or rights to variable returns, and the ability to use that power to affect the investor's returns. Holding most of the voting rights usually gives power, but control can also exist with less than 50%. Significant influence describes an associate, not a subsidiary.
Question 2
Puma Co bought 80% of Saker Co's equity shares, paying $5,000,000 in cash and issuing 1 million of its own $1 shares, which had a market value of $2.50 each. At acquisition, the non-controlling interest had a fair value of $1,600,000 and Saker Co's identifiable net assets had a fair value of $7,200,000. NCI is measured at fair value. What is the goodwill on acquisition?
- A) $1,740,000
- B) $400,000
- C) $1,900,000
- D) $300,000
Show answer & explanation
Answer: C) $1,900,000
Consideration = $5,000,000 + (1m x $2.50) = $7,500,000. Goodwill = consideration $7,500,000 + NCI at fair value $1,600,000 - net assets $7,200,000 = $1,900,000.
Question 3
Using the same facts as the Puma Co acquisition (consideration $7,500,000, Saker Co net assets at fair value $7,200,000, 80% acquired), what would goodwill be if NCI were measured at its proportionate share of identifiable net assets?
- A) $1,900,000
- B) $1,740,000
- C) $300,000
- D) $6,060,000
Show answer & explanation
Answer: B) $1,740,000
NCI at proportionate share = 20% x $7,200,000 = $1,440,000. Goodwill = $7,500,000 + $1,440,000 - $7,200,000 = $1,740,000. This equals the parent's goodwill only (consideration less 80% of net assets). It is lower than under the fair value method because no goodwill is attributed to the NCI.
Question 4
Lynx Co bought a subsidiary for: cash of $4,000,000 paid on acquisition; a further $3,000,000 payable two years after acquisition; and contingent consideration payable if profit targets are met, with an acquisition-date fair value of $500,000. Lynx Co's cost of capital is 10% a year. What is the total consideration for the goodwill calculation? (Use unrounded discount factors and round your final answer to the nearest dollar.)
- A) $7,500,000
- B) $6,979,339
- C) $6,479,339
- D) $7,227,273
Show answer & explanation
Answer: B) $6,979,339
Deferred consideration is measured at present value: $3,000,000 / 1.10^2 = $2,479,339 (unrounded discount factor, answer rounded to the nearest dollar). Contingent consideration is included at its acquisition-date fair value of $500,000, whether or not payment is probable. Total = $4,000,000 + $2,479,339 + $500,000 = $6,979,339.
Question 5
Ocelot Co paid $150,000 in legal and due diligence fees when acquiring a subsidiary. How should these costs be treated in the consolidated financial statements?
- A) Added to the consideration and so included in goodwill
- B) Capitalised as a separate intangible asset
- C) Deducted from the fair value of the subsidiary's net assets
- D) Expensed in consolidated profit or loss when incurred
Show answer & explanation
Answer: D) Expensed in consolidated profit or loss when incurred
IFRS 3 requires acquisition-related costs, such as legal, advisory, valuation and due diligence fees, to be expensed as incurred. They are not part of the consideration transferred and do not affect goodwill. Costs of issuing debt or equity securities are dealt with under IFRS 9 and IAS 32.
Question 6
Panther Co acquired 75% of Serval Co two years ago. At acquisition Serval Co's retained earnings were $3,000,000, and its plant had a fair value $300,000 above its carrying amount, with a remaining life of 5 years. Now Panther Co's retained earnings are $10,000,000 and Serval Co's are $4,500,000. There has been no impairment of goodwill and no intra-group trading. What are consolidated retained earnings?
- A) $11,125,000
- B) $11,035,000
- C) $13,375,000
- D) $11,380,000
Show answer & explanation
Answer: B) $11,035,000
Serval Co's post-acquisition retained earnings = $4,500,000 - $3,000,000 = $1,500,000, less extra depreciation on the fair value uplift ($300,000/5 x 2 years = $120,000) = $1,380,000. Group share = 75% x $1,380,000 = $1,035,000. Consolidated retained earnings = $10,000,000 + $1,035,000 = $11,035,000.
Question 7
During the year Jaguar Co sold goods to its 80% subsidiary for $800,000, at cost plus 25%. At the year end the subsidiary still held one quarter of these goods. What adjustment is needed for unrealised profit in the consolidated SFP?
- A) Reduce inventory by $40,000 and reduce group retained earnings by $40,000
- B) Reduce inventory by $50,000 and reduce group retained earnings by $50,000
- C) Reduce inventory by $40,000, charging $32,000 to group retained earnings and $8,000 to NCI
- D) Reduce inventory by $160,000 and reduce group retained earnings by $160,000
Show answer & explanation
Answer: A) Reduce inventory by $40,000 and reduce group retained earnings by $40,000
Goods still held = $800,000 x 1/4 = $200,000. With a mark-up of 25% on cost, the profit element is 25/125 of selling price: $200,000 x 25/125 = $40,000. The parent was the seller, so the whole adjustment is charged to group retained earnings, and none to NCI. Inventory is reduced by $40,000.
Question 8
During the year Civet Co, a 70%-owned subsidiary, sold goods to its parent for $600,000 at a gross margin of 20%. At the year end the parent still held goods bought from Civet Co for $150,000. NCI is 30%. What is the effect of the unrealised profit adjustment on NCI in the consolidated SFP?
- A) NCI is reduced by $30,000
- B) No effect on NCI; the adjustment is charged entirely to group retained earnings
- C) NCI is reduced by $9,000
- D) NCI is reduced by $36,000
Show answer & explanation
Answer: C) NCI is reduced by $9,000
Unrealised profit = $150,000 x 20% = $30,000. The subsidiary was the seller, so the adjustment reduces the subsidiary's post-acquisition profits and is shared between group and NCI. NCI share = 30% x $30,000 = $9,000. The group share of $21,000 reduces group retained earnings.
Question 9
At the year end Margay Co's records show a receivable from its subsidiary of $120,000. The subsidiary's records show a payable to Margay Co of $100,000. The difference is because the subsidiary sent a cheque just before the year end that Margay Co had not received. How is this treated on consolidation?
- A) Cancel $120,000 receivable against $100,000 payable and write off the $20,000 difference to retained earnings
- B) Include the $20,000 as a receivable in the consolidated SFP
- C) Add $20,000 cash in transit to group cash, then cancel the intra-group receivable and payable of $100,000
- D) Cancel $100,000 only and leave $20,000 in consolidated receivables
Show answer & explanation
Answer: C) Add $20,000 cash in transit to group cash, then cancel the intra-group receivable and payable of $100,000
Before intra-group balances are cancelled, items in transit are recorded as if they had arrived. The cash in transit of $120,000 - $100,000 = $20,000 is debited to cash and credited to the parent's receivable, which reduces it to $100,000. The matching intra-group balances of $100,000 are then cancelled, so nothing intra-group is left in the consolidated SFP.
Question 10
Ermine Co acquired 75% of Stoat Co. NCI was measured at its fair value of $2,400,000 at acquisition. Since then Stoat Co's retained earnings have increased by $2,000,000. Since acquisition, extra depreciation on fair value adjustments totals $100,000, unrealised profit on goods Stoat Co sold to Ermine Co still in inventory is $50,000, and goodwill has been impaired by $300,000. What is the NCI in the consolidated SFP?
- A) $2,862,500
- B) $2,787,500
- C) $2,900,000
- D) $2,800,000
Show answer & explanation
Answer: B) $2,787,500
NCI = fair value at acquisition $2,400,000 + 25% of adjusted post-acquisition profits [$2,000,000 - $100,000 - $50,000 = $1,850,000], which is $462,500, less 25% of the goodwill impairment ($75,000) = $2,787,500. Under the fair value method, goodwill impairment is shared between group and NCI in their ownership proportions.
Question 11
Where NCI is measured at its proportionate share of the subsidiary's identifiable net assets, how is an impairment of goodwill dealt with in the consolidated SFP?
- A) It is shared between group retained earnings and NCI in proportion to ownership
- B) It is charged in full against group retained earnings, with no effect on NCI
- C) It is charged in full against NCI
- D) It is debited to the revaluation surplus
Show answer & explanation
Answer: B) It is charged in full against group retained earnings, with no effect on NCI
Under the proportionate share method, goodwill in the consolidated SFP is the parent's goodwill only. Any impairment therefore belongs entirely to the parent's shareholders and is deducted from group retained earnings. Under the fair value method, the impairment is shared between the group and NCI.
Question 12
Under IFRS 3, what should an acquirer do if the fair value of the net assets acquired is higher than the total of the consideration transferred and the NCI (a 'bargain purchase')?
- A) Review the measurement of all amounts, and recognise any remaining excess as a gain in profit or loss
- B) Recognise the excess as negative goodwill, a deduction within non-current assets
- C) Credit the excess directly to group retained earnings
- D) Recognise the excess as deferred income and release it over five years
Show answer & explanation
Answer: A) Review the measurement of all amounts, and recognise any remaining excess as a gain in profit or loss
IFRS 3 first requires the acquirer to reassess whether it has correctly identified and measured all assets, liabilities, consideration and NCI. Any excess that remains is a bargain purchase gain, recognised in profit or loss on the acquisition date. Negative goodwill is not carried in the SFP.
Question 13
At the acquisition date, Sable Co (a newly acquired subsidiary) is being sued and has a present obligation arising from a past event. An outflow of resources is not probable, so Sable Co has not recognised a provision, but the obligation's fair value can be measured reliably. How is it treated in the consolidated financial statements?
- A) It is disclosed only, as IAS 37 does not allow contingent liabilities to be recognised
- B) It is ignored until the lawsuit is settled
- C) It is recognised as a liability at fair value, which reduces the net assets acquired and increases goodwill
- D) It is recognised as a provision only if the subsidiary had already recognised it
Show answer & explanation
Answer: C) It is recognised as a liability at fair value, which reduces the net assets acquired and increases goodwill
IFRS 3 requires contingent liabilities of the acquiree to be recognised at fair value at the acquisition date if they are present obligations from past events and their fair value can be measured reliably, even if an outflow is not probable. This is an exception to IAS 37. The liability reduces the fair value of identifiable net assets, which increases goodwill.