CA Inter P1 · Chapter 8
Accounting Standards for Consolidated Financial Statements MCQs with Answers
10 multiple-choice questions on Accounting Standards for Consolidated Financial Statements for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under AS 21, control of an enterprise exists when the parent:
- A) Has significant influence over its financial and operating policies
- B) Owns 20% or more of the voting power
- C) Owns, directly or indirectly through subsidiaries, more than one-half of the voting power, or controls the composition of its board of directors
- D) Has joint control with another venturer under a contractual arrangement
Show answer & explanation
Answer: C) Owns, directly or indirectly through subsidiaries, more than one-half of the voting power, or controls the composition of its board of directors
AS 21 defines control as ownership of more than one-half of the voting power of an enterprise (directly or through subsidiaries), or control of the composition of its board of directors (or governing body) so as to obtain economic benefits. 20% ownership with significant influence indicates an associate (AS 23), and joint control indicates a joint venture (AS 27).
Question 2
Case: Hiranya Ltd acquired 80% of the equity shares of Sona Ltd for ₹13,00,000. On that date Sona Ltd had share capital of ₹10,00,000 and reserves of ₹4,00,000. Goodwill (cost of control) on consolidation under AS 21 is:
- A) ₹5,00,000
- B) -₹1,00,000
- C) ₹1,80,000
- D) ₹4,60,000
Show answer & explanation
Answer: C) ₹1,80,000
Parent's share of equity at the date of acquisition = 80% x (10,00,000 + 4,00,000) = 11,20,000. Goodwill = cost of investment 13,00,000 - 11,20,000 = ₹1,80,000.
Question 3
Case: Hiranya Ltd holds 80% of Sona Ltd. At the consolidated balance sheet date, Sona Ltd has share capital of ₹10,00,000 and total reserves of ₹7,00,000, of which ₹4,00,000 were pre-acquisition. Minority interest to be shown in the consolidated balance sheet under AS 21 is:
- A) ₹2,60,000
- B) ₹2,00,000
- C) ₹3,40,000
- D) ₹2,80,000
Show answer & explanation
Answer: C) ₹3,40,000
Minority interest is the minority's share of the subsidiary's net assets at the consolidated balance sheet date, including both pre- and post-acquisition reserves. MI = 20% x (10,00,000 + 7,00,000) = ₹3,40,000.
Question 4
Case: Jaldhara Ltd (the parent) sells goods to its 80% subsidiary at cost plus 25%. At the year end the subsidiary holds such goods invoiced at ₹2,50,000. Under AS 21, the unrealised profit to be eliminated from consolidated inventory is:
- A) ₹40,000
- B) ₹62,500
- C) ₹20,000
- D) ₹50,000
Show answer & explanation
Answer: D) ₹50,000
Profit included in the inventory = 2,50,000 x 25/125 = ₹50,000. AS 21 requires unrealised profits resulting from intragroup transactions included in assets such as inventory to be eliminated in full, so the entire 50,000 is eliminated, not just the parent's 80% share (40,000). Taking 25% of the invoice value (62,500) applies the mark-up on the wrong base.
Question 5
Case: Bhavya Ltd acquired 60% of Ketaki Ltd on 1 April for ₹9,00,000. In June, Ketaki Ltd paid a dividend of ₹1,00,000 entirely out of profits earned before 1 April. In Bhavya Ltd's books, the dividend received should be treated as:
- A) Capital reserve of ₹60,000
- B) A reduction in the cost of investment, which becomes ₹8,00,000
- C) A reduction in the cost of investment, which becomes ₹8,40,000
- D) Dividend income of ₹60,000 in the statement of profit and loss
Show answer & explanation
Answer: C) A reduction in the cost of investment, which becomes ₹8,40,000
Dividends received out of pre-acquisition profits are a return of part of the purchase price, not income. Bhavya's share = 60% x 1,00,000 = 60,000, credited to the investment account. Revised cost = 9,00,000 - 60,000 = ₹8,40,000. This also reduces the goodwill computed on consolidation.
Question 6
Under AS 21, when the financial statements of a subsidiary used in consolidation are drawn up to a reporting date different from that of the parent, the difference between the reporting dates should not be more than:
- A) Nine months
- B) Twelve months
- C) Three months
- D) Six months
Show answer & explanation
Answer: D) Six months
AS 21 permits use of the subsidiary's financial statements drawn up to a different reporting date provided the difference is not more than six months, with adjustments for the effects of significant transactions or events occurring between the two dates. (Under Ind AS 110 the corresponding limit is three months, a common source of confusion.)
Question 7
Case: Ankur Ltd acquired 30% of Bela Ltd, giving it significant influence, for ₹15,00,000 at the start of the year (no goodwill or capital reserve arose). Bela Ltd earned a profit of ₹8,00,000 and paid a dividend of ₹2,00,000 during the year. Under AS 23, the carrying amount of the investment in Ankur Ltd's consolidated financial statements at year end is:
- A) ₹17,40,000
- B) ₹16,80,000
- C) ₹15,00,000
- D) ₹18,00,000
Show answer & explanation
Answer: B) ₹16,80,000
Under the equity method, the investment is initially recorded at cost and adjusted for the investor's share of post-acquisition profits, while distributions received reduce the carrying amount. Carrying amount = 15,00,000 + 30% x 8,00,000 (2,40,000) - 30% x 2,00,000 (60,000) = ₹16,80,000.
Question 8
Case: Dhruv Ltd has an associate but no subsidiaries, and therefore does not prepare consolidated financial statements. In its separate financial statements, the investment in the associate should be accounted for:
- A) Using proportionate consolidation under AS 27
- B) At fair value through profit or loss
- C) Using the equity method under AS 23
- D) In accordance with AS 13, Accounting for Investments
Show answer & explanation
Answer: D) In accordance with AS 13, Accounting for Investments
AS 23 requires the equity method only when the investor prepares consolidated financial statements. In separate financial statements, investments in associates are accounted for as per AS 13, i.e., long-term investments at cost less any other-than-temporary decline in value.
Question 9
Under AS 27, an interest in a jointly controlled entity is reported in the venturer's consolidated financial statements using:
- A) Full consolidation with minority interest
- B) Proportionate consolidation
- C) The cost method
- D) The equity method
Show answer & explanation
Answer: B) Proportionate consolidation
AS 27 requires a venturer to report its interest in a jointly controlled entity in its consolidated financial statements using proportionate consolidation, combining its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with similar items. The equity method is used for associates under AS 23.
Question 10
Case: Pavan Ltd acquired 75% of Ruhi Ltd when Ruhi's reserves were ₹6,00,000. At the consolidated balance sheet date, Pavan's reserves are ₹20,00,000 and Ruhi's reserves are ₹10,00,000. Pavan's reserves include unrealised profit of ₹40,000 on goods sold by Pavan to Ruhi that remain in Ruhi's closing inventory. Consolidated reserves (attributable to the parent) under AS 21 are:
- A) ₹23,00,000
- B) ₹23,60,000
- C) ₹22,60,000
- D) ₹27,10,000
Show answer & explanation
Answer: C) ₹22,60,000
Parent's share of post-acquisition reserves of the subsidiary = 75% x (10,00,000 - 6,00,000) = 3,00,000; pre-acquisition reserves are taken to cost of control. Since the parent is the seller, the unrealised profit 40,000 is eliminated in full from the parent's reserves. Consolidated reserves = 20,00,000 + 3,00,000 - 40,000 = ₹22,60,000.