Group Structures – Test Bank | 9th Edition

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Chapter 25 Testbank

1. Where separate entities in a group do not apply the same accounting methods, AASB 10 Consolidated Financial Statements prescribes adjustments to be made on consolidation to remove the effects of different accounting policies.

True   False

2. It is not possible for one entity to control another entity, under the AASB 10, definition without the controlling entity having an equity-ownership interest in the other entity.

True   False

3. Control can exist by virtue of direct ownership interests, indirect ownership interests, or perhaps a combination of the two.

True   False

4. The partition effect in relation to a group of companies arose when:

A. it was not permitted under the Corporations Law to consolidate an entity that was not a company.

B. the non-controlling shareholders in a number of companies controlled by a parent entity organised themselves to block the transfer of funds within a group.

C. companies in a group coordinated to transfer assets in such a way as to protect part of the group from being taxed, thus reducing the total tax owing for the group as a whole.

D. dividends were declared and paid in such a way as to manage cash reserves within a group.

5. A consolidated entity is defined as:

A. the company and its subsidiaries at the end of the financial year. Subsidiaries are companies and trusts as defined in terms of the Corporations Act

B. a combined entity constituted by a parent entity and its controlled entities

C. a trust or partnership registered as a management investment scheme and all the entities it controls at the end of the financial year

D. the parent company, non-controlling interests and subsidiaries owned by that parent company as at the end of the financial year

6. At acquisition date which of the following is not required to be recognised by the acquirer?

A. Liabilities assumed

B. Any non-controlling interest in the acquiree

C. Goodwill separately from the identifiable assets acquired

D. Retained earnings of the acquiree

7. What are the major consolidation concepts?

A. Entity, partnership and parent

B. Equity, control and ownership

C. Parent-entity, ownership and proprietary

D. Entity, parent-entity and proprietary

8. Which of the following statements about consolidation concepts is correct?

A. The entity concept requires the inclusion of all the parent entity assets and the proportionate share of the assets and liabilities of the subsidiaries where the proportion is based on the direct ownership of the capital of the subsidiary by parent companies within the group.

B. The proprietary concept includes all the assets and liabilities of the parent company and subsidiaries as assets and liabilities of the group. Non-controlling interest is treated as a liability of the group.

C. The parent-entity concept includes all assets and liabilities of the parent and its subsidiaries in the consolidated accounts. The non-controlling interest is treated as a liability of the group, rather than as part of equity.

D. The proprietary concept includes all the assets and liabilities of the parent company and subsidiaries as assets and liabilities of the group. Non-controlling interest is treated as a liability of the group; the parent-entity concept includes all assets and liabilities of the parent and its subsidiaries in the consolidated accounts. The non-controlling interest is treated as a liability of the group.

9. AASB 10 defines control as:

A. governing the financial, operating and sustainability policies of an entity so as to benefit from its activities

B. the capacity of an entity to dominate the decision making of another entity by virtue of a majority shareholding or controlling ownership interest in some form

C. the capacity and willingness to direct the decision making of another entity with respect to its financial and operating policies to improve the performance and position of the controlling entity

D. the power to govern the financial and operating policies of an entity so as to benefit from its activities

10. In what situation does an excess on acquisition arise and how does AASB 3 require it to be treated?

A. An excess arises when the fair value of the purchase consideration is greater than the nominal value of the assets purchased. AASB 3 requires an excess to be eliminated by recognising it as a gain in the period in which the entity was purchased.

B. An excess arises when the fair value of the purchase consideration is greater than the nominal value of the assets purchased. AASB 3 requires the fair values of the monetary assets acquired to be proportionately decreased until the excess is eliminated. If an excess balance remains, it must be recognised as an expense in the statement of comprehensive income.

C. An excess arises when the cost of acquisition exceeds the fair value of the identifiable net assets purchased. AASB 3 requires the equity of the purchased entity to be proportionately decreased until the excess is eliminated.

D. An excess arises when the fair value of the identifiable net assets acquired by the entity exceeds the fair value of the consideration paid. AASB 3 requires a reassessment of the identification and measurement of the identifiable net assets, and a reassessment of the measurement of the fair value of the consideration paid. If an excess remains after the reassessment it must be recognised as income in profit or loss.

11. Arthur Ltd acquires all the issued capital of Martha Ltd for a cash payment of $3 000 000 on 30 June 2025. The statement of financial position of Martha Ltd at purchase date is:

Assuming the assets are at fair value, what is the goodwill or excess on consolidation?

A. $500 000 goodwill

B. $1 580 000 excess

C. $510 000 goodwill

D. $495 000 excess

12. Which of the following statements is not correct in relation to consolidation accounting key terms?

A. A group comprises a parent and all of its subsidiaries.

B. Consolidated financial statements are financial statements of a group of entities presented as if that group was acting as a single economic entity.

C. A subsidiary is an entity that is controlled by another entity.

D. A parent is an entity that has more than one subsidiary.

13. The preparation of consolidated financial statements:

A. obviates the need for separate entities to prepare and release their own separate financial statements.

B. will eliminate the result derived from operations with parties external to the group of entities.

C. highlights income derived as a result of transactions within the group.

D. does not obviate the need for separate entities to prepare and release their own separate financial statements and should be done in accordance with AASB 10.

14. A subsidiary:

A. is excluded from consolidation because the investor is a venture capital organisation.

B. is not excluded from consolidation simply because the investor is a venture capital organisation.

C. is excluded from consolidation because its business activities are dissimilar from those of other entities within the group.

D. is not excluded from consolidation simply because the investor only has significant influence, and not control, over it.

15. Non-controlling interests are defined is AASB 10 as:

A. that portion of profit or loss and net assets of a subsidiary attributable to equity interests that are not owned directly by the parent.

B. that portion of net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.

C. that portion of profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.

D. the largest single shareholding, less 50 per cent, not owned, directly or indirectly through subsidiaries, by the parent.

16. 'Control' exists when the parent owns less than half of the voting power of an entity when:

A. all other shareholdings are widely dispersed.

B. other shareholders actively cooperate when exercising their votes.

C. the remaining investors act in unison to outvote the parent.

D. other shareholders in the entity are passive investors.

17. In determining control, 'potential voting rights':

A. are financial instruments that provide voting rights in themselves.

B. do not provide the holder the contractual right to 'step in' and obtain voting rights.

C. even if they are not currently exercisable, should be taken into account.

D. include those rights embedded in such instruments as share call options and share warrants, and which are currently exercisable.

18. Goodwill is:

A. an intangible asset, as defined in AASB 138.

B. future economic benefits arising from assets that are not capable of being separately recognised or individually identified.

C. determined as being the excess of the fair value of the identifiable net assets acquired over the cost of an acquisition.

D. recognised by the acquirer, at acquisition date, as an asset in its own books.

19. Which of the following statements is not true about gain on bargain purchases?

A. It is not commonly seen.

B. It is seen as an anomalous transaction because business entities and their owners generally do not knowingly and willingly sell assets or businesses at prices below their fair value.

C. It could occur through a forced liquidation or distress sale, for example, after the death of a founder or key manager.

D. It represents the gaining of control of an entity for an amount more than the fair value of the proportional share of the identifiable assets acquired and the liabilities.

20. As AASB 3 indicates, if at the date of acquisition the subsidiary's assets are not recorded at fair value we can either ___________ the identifiable assets in the accounting records of the subsidiary before consolidation, or recognise the necessary adjustments on consolidation.

A. revalue

B. reject

C. discount

D. None of the given answers are correct.

21. In undertaking revaluations, it is necessary to consider the requirements pertaining to revaluations as stipulated in AASB 116 Property, Plant and Equipment and AASB 138 _____________________.

A. Impairment of Assets

B. Intangible Assets

C. Joint Arrangements

D. None of the given answers are correct

22. Where non-current assets are revalued upwards, an adjustment for which of the following should also be made in accordance with AASB 112?

A. Deferred tax

B. Goodwill

C. Property tax

D. None of the given answers are correct.

23. Paragraph 63 of AASB 138 states: 'Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as _____________ .' (AASB 138)

A. intangible assets

B. impairment of assets

C. financial instruments

D. None of the given answers are correct.

24. If an organisation had expended considerable resources developing a particular publishing title, for example, a leading novel, then while the title would be considered an identifiable intangible asset, because it had been internally developed it ____ as an asset for financial statement purposes according to paragraph 63 of AASB 138.

A. could not be recognised

B. could be recognised

C. could be revalued

D. None of the given answers are correct.

25. Many internally generated intangible assets are not permitted to be recognised by the entity creating the asset by virtue of:

A. AASB 138

B. AASB 128

C. AASB 112

D. None of the given answers are correct.

26. Shareholders' funds that were in existence in an organisation before an entity acquired an ownership interest in that organisation are called:

A. pre-acquisition shareholders' funds

B. post-acquisition shareholders' funds

C. follow-up shareholders' funds

D. None of the given answers are correct.

27. The _____ shareholders' funds of the subsidiary are eliminated on consolidation (against the investment in the subsidiary).

A. pre-acquisition

B. post-acquisition

C. dividend

D. None of the given answers are correct.

28. Which of the following standards is referred to in relation to the disclosure of interest in other entities (in relation to subsidiaries and other entities)?

A. AASB 10

B. AASB 3

C. AASB 12

D. None of the given answers are correct

29. An entity shall disclose information that enables users of its consolidated financial statements to understand: (i) the composition of the group; and (ii) the interest that non-controlling interests have in the group's activities and cash flows (paragraph 12 of ____________).

A. AASB 10

B. AASB 3

C. AASB 12

D. None of the given answers are correct.

30. If an investor controls an investee, then it must consolidate the investee in accordance with:

A. AASB 10

B. AASB 3

C. AASB 12

D. None of the given answers are correct.

31. Define 'investment entities' as per AASB 10.

______________________________________________________________________________

32. Discuss the typical characteristics of an investment entity as per AASB 10.

______________________________________________________________________________

33. Provide some scenarios to illustrate the concept of control.

______________________________________________________________________________

34. Describe the concept of control and name the two different types.

______________________________________________________________________________

35. What is meant by pre-acquisition shareholders' funds?

______________________________________________________________________________

36. Discuss, with an example, how an investor has influence over an investee.

______________________________________________________________________________

37. Define 'joint venture' as per AASB 11.

______________________________________________________________________________

38. Define 'control over an investee' as per AASB 10.

______________________________________________________________________________

39. Discuss some of the disclosure requirements of AASB 12.

______________________________________________________________________________

Chapter 25 Testbank