10. Consolidation

Question 1

What is the formula for goodwill under the full goodwill approach?

Answer 1

Goodwill = Consideration_transferred + Fair_value_of_non-controlling_interest - Net_fair_value_of_identifiable_assets_and_liabilities

Question 2

How is intragroup unrealized profit calculated?

Answer 2

Unrealized_profit = Intragroup_sale_price - Cost_of_goods_sold

Question 3

What does the recoverable amount for goodwill impairment represent?

Answer 3

Recoverable_amount = max(Value_in_use, Fair_value_less_costs_of_disposal)

Question 4

What is the purpose of equity accounting in consolidation?

Answer 4

To reflect the investor’s share of the associate’s net income and equity changes in their financial statements.

Question 5

What are the accounting entries to record goodwill under the full goodwill approach?

Answer 5

Goodwill / Consolidation_adjustments

Question 6

If the consideration transferred is $500,000, the fair value of the non-controlling interest is $200,000, and the net fair value of assets is $600,000, what is the goodwill using the full goodwill approach?

Answer 6

Goodwill = $500,000 + $200,000 - $600,000 = $100,000

Question 7

A parent sells inventory to its subsidiary for $50,000, and the cost of goods sold was $30,000. What is the unrealized profit?

Answer 7

Unrealized_profit = $50,000 - $30,000 = $20,000

Question 8

If an associate’s profit for the year is $40,000, and the investor owns 25%, what is the share of the associate’s profit recorded under the equity method?

Answer 8

Share_of_profit = $40,000 * 25% = $10,000

Question 9

If an asset was revalued upwards by $100,000 during consolidation, what is the accounting entry for the revaluation?

Answer 9

Asset_account / Revaluation_surplus

Question 10

A subsidiary’s inventory contains $10,000 of unrealized profit from intragroup sales. What is the elimination entry?

Answer 10

Unrealized_profit / Inventory

Question 11

A parent company acquires 80% of a subsidiary for $800,000, and the net fair value of identifiable assets is $900,000. Calculate goodwill using the partial goodwill approach.

Answer 11

Goodwill =- $800,000 - (80% * $900,000) = $80,000

Question 12

A subsidiary generates $100,000 in profit, with $40,000 distributed as dividends. The parent owns 60%. Calculate the equity value change under equity accounting.

Answer 12

Equity_value = Share_of_profit - Share_of_dividends = ($100,000 * 60%) - ($40,000 * 60%) = $60,000 - $24,000 = $36,000

Question 13

An asset was revalued to $150,000 from $120,000 during consolidation. What is the adjustment entry for depreciation if the additional value is depreciated over 10 years?

Answer 13

Depreciation_expense / Accumulated_depreciation = $30,000 / 10 = $3,000 annually

Question 14

A parent purchases goods costing $80,000 and sells them to a subsidiary for $100,000. At year-end, $50,000 worth of goods remain unsold. What is the unrealized profit elimination entry?

Answer 14

Unrealized_profit / Inventory = ($100,000 - $80,000) * ($50,000 / $100,000) = $20,000 * 50% = $10,000

Question 15

If goodwill was initially recognized at $200,000 and its recoverable amount drops to $150,000, what is the impairment entry?

Answer 15

Impairment_expense / Goodwill = $200,000 - $150,000 = $50,000

Question 16

What is the purpose of consolidated financial statements?

Answer 16

To present the financial position and performance of a group (parent and subsidiaries) as a single economic entity.

Question 17

What defines the scope of consolidation?

Answer 17

It includes entities where the parent has control, joint arrangements, or significant influence over financial and operating decisions.

Question 18

What are the key steps in the acquisition method of consolidation?

Answer 18

Identifying the acquirer, determining the acquisition date, measuring the consideration transferred, and recognizing identifiable assets, liabilities, and goodwill or bargain purchase.

Question 19

What is the difference between full goodwill and partial goodwill?

Answer 19

Full goodwill considers both the parent and non-controlling interest in goodwill calculation, while partial goodwill considers only the parent’s share.

Question 20

What does the term “uniformity of accounting policies” mean in consolidation?

Answer 20

All entities in the group must use consistent accounting policies for financial reporting.

Question 21

Why are intragroup transactions eliminated during consolidation?

Answer 21

To avoid double counting and ensure financial statements reflect external transactions only.

Question 22

What is goodwill impairment, and how is it tested?

Answer 22

Goodwill impairment occurs when the recoverable amount of goodwill is less than its carrying value. It is tested by comparing the carrying value to the recoverable amount.

Question 23

What does equity accounting represent in consolidation?

Answer 23

It reflects the investor’s share of the associate’s net income and equity changes in their financial statements.

Question 24

What is a bargain purchase in consolidation?

Answer 24

It occurs when the consideration transferred is less than the net fair value of identifiable assets and liabilities, resulting in a gain.

Question 25

How are reporting date differences handled in consolidation?

Answer 25

Adjustments are made to align the subsidiary’s financial statements with the parent’s reporting period.

Question 26

A parent company acquires a subsidiary for $1,000,000, and the net fair value of identifiable assets is $800,000. Calculate goodwill using the full goodwill approach if the non-controlling interest is $200,000.

Answer 26

Goodwill = $1,000,000 + $200,000 - $800,000 = $400,000

Question 27

If a subsidiary’s total assets are $500,000, and the parent owns 60%, what is the amount included in the parent’s consolidated balance sheet?

Answer 27

Total assets = 100% of subsidiary’s assets = $500,000 (parent consolidates all assets of the subsidiary).

Question 28

A parent sells goods costing $20,000 to a subsidiary for $25,000. At year-end, 40% of these goods remain unsold. Calculate the unrealized profit elimination.

Answer 28

Unrealized_profit = ($25,000 - $20,000) * 40% = $5,000 * 40% = $2,000

Question 29

An associate reports a profit of $60,000, and the investor owns 30%. Calculate the share of profit recorded by the investor.

Answer 29

Share_of_profit = $60,000 * 30% = $18,000

Question 30

If an asset was revalued upwards by $50,000 during consolidation, and the additional value is depreciated over 5 years, what is the annual depreciation adjustment?

Answer 30

Depreciation_expense / Accumulated_depreciation = $50,000 / 5 = $10,000 annually

Question 31

A subsidiary declares dividends of $50,000. The parent owns 80%. What is the dividend adjustment in equity accounting?

Answer 31

Share_of_dividends = $50,000 * 80% = $40,000

Question 32

A parent owns 75% of a subsidiary, and the subsidiary earns $100,000 in net profit. What is the amount attributable to the non-controlling interest?

Answer 32

Non_controlling_interest = $100,000 * 25% = $25,000

Question 33

During consolidation, a building is revalued from $300,000 to $400,000. What is the revaluation entry?

Answer 33

Building / Revaluation_surplus = $100,000

Question 34

If goodwill is initially $250,000, and its recoverable amount drops to $200,000, calculate the goodwill impairment and the adjustment entry.

Answer 34

Impairment_expense / Goodwill = $250,000 - $200,000 = $50,000

Question 35

A parent acquires 70% of a subsidiary for $700,000, and the net fair value of assets is $900,000. Calculate goodwill using the partial goodwill approach.

Answer 35

Goodwill = (70% * $900,000) - $900,000 = $630,000 - $900,000 = -$270,000 (bargain purchase applies).