Consolidated Accounts
Problems
Ch 22 Review Questions
1. Explain how negative goodwill may arise and its accounting treatment.
2. Explain how the fair value is calculated for:
• Tangible non-current assets
• Inventories
• Monetary assets.
3. Explain why only the net assets of the subsidiary and not those of the parent are adjusted to fair value at the date of acquisition for the purpose of consolidated accounts.
4. Parent plc acquired Son plc at the beginning of the year. At the end of the year there were intangible asset reported in the Consolidated accounts for the value of a domain name and customer lists. These assets did not appear in either the Parent or Son’s Statements of Financial Position.
Required: Discuss why assets only appear in the consolidated accounts.
Exercises
Ch 22 – Questions 1-5 – Parent Ltd – p.569/597
Ch 22 – Question12 – Alpha Ltd – p.603
Ch 23 Review Questions
1. The 2006 accounts of Eybl International state:
Elimination of intra-group balances
Advances . . . arising in the course of business between the companies included in the consolidation . . . are eliminated.
(a) Discuss three examples of inter-company (also referred to as intra-group) accounts
(b) Explain what is meant by ‘have been eliminated’
(c) Explain what effect there could be on the reported group profit if inter-company transactions were not eliminated.
2. Explain why the non-controlling interest is calculated as at the year-end whilst goodwill is calculated at the date of acquisition.
3. Explain why pre-acquisition profits of a subsidiary are treated differently from post-acquisition profits.
4. Explain the effect of a provision for unrealised profit on a non-controlling interest:
(a) where the sale was made by the parent to the subsidiary and
(b) where the sale was made by the subsidiary to the parent.
Exercise
Ch 23 – Question 2 – Summer plc – p.616
Ch 24 Review Questions
1. Explain why the dividends deducted from the group in the statement of changes in equity are only those of the parent company.
2. Explain how unrealised profits arise from transactions between companies in a group and why it is important to remove them.
3. Explain why it is necessary to apportion a subsidiary’s profit or loss if the subsidiary is acquired partway through a financial year.
4. Explain why dividends paid by a subsidiary to a parent company are eliminated on consolidation.
5. Give five examples of intercompany income and expense transactions that will need to be eliminated on consolidation and explain why each is necessary.
6. A shareholder was concerned that following an acquisition the profit from operations of the parent and subsidiary were less than the aggregate of the individual profit from operations figures. She was concerned that the acquisition, which the directors had supported as improving earnings per share, appeared to have reduced the combined profits.
She wanted to know where the profits had gone.
Give an explanation to the shareholder.
Exercises
Ch 24 – Question 3 – Bill plc – p.631/632
Ch 24 – Question 5 – River plc – p.632/633
Ch 24 – Question 6 – Mars plc – p.633/634
Ch 24 – Question 9 – White and Brown – p.637
Ch 25 Review Questions
1. The following is taken from the notes to the 1999 Chugoku Electric Power Company, consolidated financial statements.
Equity method
Investments in four (three in 1998) affiliated companies (20% to 50% owned) are accounted for by the equity method and, accordingly, are stated at cost adjusted for equity in undistributed earnings and losses from the date of acquisition.
(a) What is another name (other than “affiliated”) for most companies which are 20% to 50% owned?
(b) What is meant by the words ‘equity method’ in the above statement?
(c) What are the entries in the statement of comprehensive income under the equity method of accounting?
(d) What are the differences between the equity method and consolidation?
2. Why are associated companies accounted for under the equity method rather than consolidated?
3. How does the treatment of intercompany unrealised profit differ between subsidiaries and associated companies?
4. IAS 28, para. 17, states:
The recognition of income on the basis of distributions received may not be an adequate measure of the income earned by an investor on an investment in an associate.
Explain why this may be so.
Exercise
Ch 25 – Question1 – Swish plc – p.648/649