Ch 5

Question 1

Is goodwill amortized annually on the consolidated financial statements?

Answer 1

False: Goodwill is not amortized under IFRS but tested for impairment annually.

Goodwill is written down only if its recoverable amount is less than its carrying amount.

Question 2

How is the acquisition differential calculated?

Answer 2

The acquisition differential is the difference between the purchase price of the subsidiary and the book value of the net assets acquired.

This differential is allocated to identifiable assets, liabilities, and goodwill.

Question 3

Under the cost method of accounting for an investment, when is income from the subsidiary recognized?

Answer 3

Income is recognized only when a dividend is declared.

This typically occurs when dividends are declared by the subsidiary.

Question 4

Is noncontrolling interest (NCI) recorded only when the parent owns 100% of the subsidiary?

Answer 4

False: NCI is recorded when the parent owns less than 100% of the subsidiary.

NCI represents the equity interest of minority shareholders.

Question 5

What do consolidated retained earnings reflect?

Answer 5

Consolidated retained earnings include the parent’s share of the subsidiary’s net income after acquisition.

This reflects the post-acquisition earnings of the subsidiary.

Question 6

Can an impairment loss for goodwill be reversed if the subsidiary’s value increases?

Answer 6

False: IFRS prohibits reversing goodwill impairment losses.

Increases in value are considered internally generated goodwill, which is not recognized.

Question 7

What must be done with all intercompany transactions when preparing consolidated financial statements?

Answer 7

All intercompany transactions must be eliminated.

This is to avoid double counting and reflects the parent and subsidiary as a single economic entity.

Question 8

Does the fair value of the subsidiary’s assets and liabilities only need to be determined on the acquisition date?

Answer 8

False: Fair values impact future periods through amortization, impairment, and other adjustments.

This means fair values determined at acquisition affect ongoing financial statements.

Question 9

Under the equity method, how is the parent company’s net income affected?

Answer 9

The parent company’s net income includes its share of the subsidiary’s profit or loss.

This reflects the subsidiary’s post-acquisition net income in the parent’s income statement.

Question 10

Are intangible assets with indefinite useful lives required to be tested for impairment annually?

Answer 10

True: They must be tested for impairment every year, regardless of indicators.

This is a requirement under IFRS.

Question 11

In consolidated financial statements, what happens to the parent’s investment account?

Answer 11

It is eliminated and replaced by the subsidiary’s net assets at fair value.

This reflects the single entity concept in consolidation.

Question 12

Does dividend income from a subsidiary appear on the consolidated income statement of the parent company?

Answer 12

False: Dividend income is eliminated in consolidation.

It represents an internal transfer within the consolidated entity.

Question 13

What is the definition of recoverable amount for impairment testing?

Answer 13

Recoverable amount is the higher of fair value less costs of disposal and value in use.

This ensures assets are carried at the most realistic recoverable value.

Question 14

Is noncontrolling interest shown as a liability on the consolidated balance sheet?

Answer 14

False: NCI is shown within shareholders’ equity.

It represents the portion of equity not attributable to the parent.

Question 15

If the parent uses the cost method for internal records, what must be done to consolidated retained earnings?

Answer 15

Consolidated retained earnings must be adjusted for the subsidiary’s earnings since acquisition.

This reflects the economic reality of the combined entity.