Chapter 04 Consolidation of Non-Wholly Owned

Subsidiaries
Student: ___________________________________________________________________________

1. The purchase price of an entity includes:

A. the book value

shareholders'
differential.
B. the book value of the subsidiary's shareholders' equity a
C. the fair market value of the subsidiary's shareholders' e
discrepancy.
D. the fair market value of the subsidiary's net assets.

2. On the date of acquisition, consolidated

shareholders' equity is equal to:

A. the sum of the parent and

subsidiary's shareholders'
equities.
B. the sum of the parent's shareholders' equity plus its pro
shareholders' equity on the date of acquisition.
C. the parent's shareholders' equity.
D. the subsidiary's shareholders' equity.

3. When preparing the consolidated balance sheet

on the date of acquisition, the parent's investment
(in subsidiary company) is:

A. revalued to fair
market value.
B. replaced with 100% of the assets and liabilities of the su
C. replaced with 100% of the assets and liabilities of the su
D. replaced with the parent's pro rata share of the assets a
market value.

4. When the parent forms a new subsidiary:

A. there should be no
acquisition
differential.
 B. gain or loss will usually arise.
C. push down accounting rules must be followed.
D. it should not be included in the company's consolidated
effectively be double-counting.

5. Any negative goodwill arising on the date of

acquisition:

A. is recognized as a gain
on the date of acquisition.
B. is prorated among the parent company's identifiable ne
C. should be amortized over a predetermined period.
D. is recognized as a loss on the date of acquisition.

6. A company owning a majority (but less than 100%)

of another company's voting shares on the date of
acquisition should account for its subsidiary (in its
consolidated balance sheet):

A. by including only
market values o
assets.
B. by including only its share of the book values of the sub
C. by including 100% of the fair market values of the subsi
D. by including 100% of the fair market values of the subsi
any unowned portion of the subsidiary's voting shares u
account.

7. HRN Enterprises Inc. purchases 80% of the

outstanding voting shares of NHR Inc. on January
1, 2012. On that date, which of the following
statements pertaining to Non-Controlling Interest
is TRUE?

A. HRN's No
include 20
assets.
B. HRN's Non-Controlling Interest account will include 20%
assets.
C. HRN's Non-Controlling Interest account will include 20%
Date of Acquisition.
D. HRN's Non-Controlling Interest account will include 20%
acquisition differential on the Date of Acquisition.
8. Under the Proprietary theory, Non-Controlling
Interest is:

A. nonexiste
the Paren
differentia
B. nonexistent. Goodwill is established based on the Paren
C. based on the fair market values of the subsidiary's net a
on the Parent's acquisition cost.
D. based on the book values of the subsidiary's net assets
Parent's acquisition cost.

9. The calculation of Goodwill and Non-Controlling

Interest under the Entity Theory is derived :

A. by using
would be
of the out
subsidiar
B. by using the actual acquisition cost.
C. by using the actual acquisition cost less any uncontrolle
at fair market value.
D. by using the actual acquisition cost less any uncontrolle
at book value.

10. One weakness associated with the Entity Theory

is that:

A. it is inconsistent with the

Historical Cost Principle.
B. Non-Controlling Interest is computed using the fair mark
assets.
C. Non-Controlling interest is computed using the book va
D. the presumed acquisition cost may be unrealistic when
than 100% of the subsidiary's voting shares, or voting c

11. Under the Parent Company Theory, which of the

following statements pertaining to Consolidated
Financial Statements is TRUE?

A. The Cons
adding th
and its su
B. The Consolidated Balance Sheet is prepared by adding
 Parent and its subsidiary as well as the Parent's share o
C. The Consolidated Balance Sheet is prepared by adding
Parent and its subsidiary as well as the parent's share o
D. The Consolidated Balance Sheet is prepared by adding
the parent and its subsidiary.

12. On the date of formation of a 100% owned

subsidiary by the parent, which of the following
statements pertaining to Consolidated Financial
Statements is TRUE?

A. It is poss
Statemen
liabilities
B. Consolidated Financial Statements are difficult to prepa
the subsidiary have yet to be determined.
C. Consolidation requires the elimination of the parent's in
subsidiary's share capital.
D. None of the above.

13. Contingent consideration should be valued at:

A. the fair value of the

consideration on the date o
acquisition.
B. the book value of the consideration at the date of acquis
C. the acquirer's pro-rata share of the subsidiary's net ass
acquisition.
D. the acquirer's pro-rata share of the subsidiary's net ass
acquisition.

14. Contingent consideration will be classified as a

liability when:

A. it will be paid in the

form of additional
equity.
B. it will be paid in the form of cash or another asset.
C. the form of payment will be determined at a future date.
D. the acquirer decides the appropriate time to make a pay

15. Which consolidation theory should be used in

preparing consolidated financial statements in
accordance with IFRS?
 A. Proprietary
Theory.
B. Parent Company Theory.
C. Proportionate Consolidation.
D. Either Entity Theory or Parent Company Extension The

16. A negative acquisition differential:

A. is always equal to
negative goodwill.
B. occurs when the fair value of the subsidiary's net assets
C. implies that the parent company may have overpaid for
D. cannot occur under the acquisition method.

17. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assume that Parent Inc. purchased a controlling

interest in Sub Inc. on August 1, 2012 and decides
to prepare an Income Statement for the combined
entity on the date of acquisition. If Parent acquired
100% of Sub Inc. on that date, what would be the
net income reported for the combined entity (for
 the year ended July 31, 2012)?

A. $60,
000
B. $120,000
C. $180,000
D. Ni
l

18. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assume that Parent Inc. purchased a controlling

interest in Sub Inc. on August 1, 2012 and decides
to prepare an Income Statement for the combined
entity on the date of acquisition. If Parent acquired
80% of Sub Inc. on that date, what would be the
net income reported for the combined entity (for
the year ended July 31, 2012)?

A. $104,
000
B. $120,000
C. $130,000
 D. Ni
l

19. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming that Parent Inc acquires 80% of Sub Inc

on August 1, 2012, what amount would appear in
the Non-Controlling Interest Account on the
Consolidated Balance Sheet on the date of
acquisition if the Proprietary Method were used?

A. Nil
B. $100,000
C. $120,000
D. $200,000

20. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming that Parent Inc. purchased 80% of

Sub's voting shares on the date of acquisition
(August 1, 2012) for $180,000, what would be the
amount of the Non-Controlling Interest on the date
of acquisition if the Entity Method were used?

A. $26,
000
B. $38,000
C. $45,000
D. $104,000

21. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming once again that the Proprietary Theory

was applied, what would be the amount of
Goodwill appearing on the Consolidated Balance
Sheet on the Date of acquisition, assuming once
again that Parent purchased 80% of Sub Inc. for
$180,000 on August 1, 2012?

A. $72,
000
B. $88,000
C. Ni
l
D. Cannot be determined from the information given.

22. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming the Entity Theory was applied, what

would be the amount of Goodwill appearing on the
Consolidated Balance Sheet on the Date of
acquisition, assuming once again that Parent
purchased 80% of Sub Inc. for $180,000?

A. $88,
000
B. $130,000
C. $137,000
D. $138,000

23. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

The Shareholders' Equity section of Parent's

Consolidated Balance Sheet on the date of
acquisition would total what amount under the
Entity Method?

A. $140,
000
B. $185,000
C. $244,000
D. $270,000

24. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming Parent purchased 80% of Sub Inc. for

$180,000; the Assets section of Parent's
Consolidated Balance Sheet on the date of
acquisition (August 1, 2012) would total what
amount under the Entity Method?

A. $552,
000
B. $639,200
C. $651,000
D. $659,000

25. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

If Parent Company purchased 80% of Sub Inc. for

$180,000, the Liabilities section of Parent's
Consolidated Balance Sheet on the date of
acquisition (August 1, 2012) would total what
amount under GAAP after January 1, 2011?

A. $470,
000
B. $474,000
C. $500,000
D. $519,000

26. Parent and Sub Inc. had the following balance

sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

What would be the amount of Non-Controlling

Interest appearing on the Consolidated Balance
Sheet on the date of acquisition (August 1, 2012),
under the Parent Company Method, assuming
once again that Parent purchased 80% of Sub Inc.
for $180,000?

A. $26,
000
B. $72,000
C. $86,000
D. The answer cannot be determined from the information

27. Any goodwill on the subsidiary company's books

on the date of acquisition:

A. must be
revalued.
B. must be eliminated in preparing consolidated financial s
C. must be recorded as a loss on acquisition.
D. must be subject to an impairment test.

28. When the Non-Controlling Interest's share of the

subsidiary's goodwill cannot be reliably
determined, the method used to prepare
 consolidated financial statements is:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. the Parent Company Extension Theory.

29. The focus of the Consolidated Financial

Statements on the shareholders of the parent
company is characteristic of:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. both the Parent Company Theory and the Proprietary T

30. Non-Controlling Interest is presented in the

Shareholders' Equity section of the Balance Sheet
under:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. both the Parent Company Theory and the Proprietary T

31. Non-Controlling Interest is presented under the

Liabilities section of the Consolidated Balance
Sheet using the:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. both the Parent Company Theory and the Proprietary T

32. When a contingent consideration arising from a

business combination is classified as a liability,
how is any difference between the original
estimate of the amount to be paid and the actual
amount paid accounted for if the difference arises
 due to a change in circumstances?

A. As an adjustment to the
consideration paid for the
subsidiary.
B. As an adjustment to an estimate included in the determ
C. As a direct adjustment to consolidated retained earning
D. As an adjustment to consolidated contributed surplus.

33. When a contingent consideration arising from a

business combination is classified as a liability,
how is any change in its fair value as a result of
new information about the facts and
circumstances that existed at the acquisition date
accounted for if identified and measured within
one year subsequent to the acquisition date?

A. As an adjustment to the
consideration paid for the
subsidiary.
B. As an adjustment to an estimate included in the determ
C. As a direct adjustment to consolidated retained earning
D. As an adjustment to consolidated contributed surplus.

34. When a contingent consideration arising from a

business combination is classified as equity, how
is any change in its fair value accounted for if the
difference arises due to a change in
circumstances?

A. As an adjustment to the
consideration paid for the
subsidiary.
B. As an adjustment to an estimate included in the determ
C. As a memorandum entry indicating that additional share
D. As an adjustment to consolidated contributed surplus.

35. Which statement about the differences between

consolidation methods permitted under US GAAP
and IFRS is true?

A. IFRS and US GAAP both

require the use of the entit
theory.
 B. IFRS and US GAAP both require the use of the parent c
C. IFRS permits either the entity theory or the parent comp
requires the entity theory.
D. IFRS permits either the entity theory or the parent comp
requires the parent company extension theory.

36. IFRS permits several methods to be used to

determine the fair value of the non-controlling
interest in a subsidiary at the acquisition date.
Which of the following is NOT an appropriate
method to determine the fair value of the non-
controlling interest (NCI)?

A. The NCI may be valu

market value of the su
shares.
B. The NCI may be valued by determining the fair value of
independent business valuation and then deducting the
C. The NCI may be valued proportionately to the price paid
interest.
D. The NCI may be valued at the fair value of the subsidia

37. Which accounts on the consolidated balance

sheet will be different when the entity method is
used from when the parent company extension
theory is used?

A. The investme
the consolida
B. The goodwill balance and the consolidated retained ear
C. The goodwill balance and the non-controlling interest ba
D. The investment in subsidiary balance and the non-contr

38. If the non-controlling interest at acquisition is

based on the fair value of the subsidiary's
identifiable net assets, which consolidation theory
is being applied?

A. The
proprietary
theory.
B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.
39. When the acquisition differential is calculated and
allocated, what will the consequence be of a
"bargain purchase"?

A. The acquisition differential

will always be negative.
B. The goodwill balance will always be negative.
C. The fair value of the assets will always have been overs
D. Both the acquisition differential and goodwill balances w

40. A business combination involves a contingent

consideration. It is considered 70% probable that a
payment of $500,000 will become payable three
years after the acquisition date. Using a 7%
discount rate, what liability should be recorded for
the contingent consideration on the acquisition
date?

A. $285,
704
B. $350,000
C. $408,149
D. $500,000

41. A business combination involves a contingent

consideration. It is considered 70% probable that a
payment of $500,000 will become payable three
years after the acquisition date. Using a 7%
discount rate, how much interest expense should
be recorded on the liability for the first year after
acquisition?

A. $19,
999
B. $24,500
C. $28,570
D. $35,000

42. A business combination involves a contingent

consideration. As a result, two years after the
acquisition date, the acquirer was required to
issue an additional 40,000 common shares at a
time when the fair value of the common shares
was $4 per share. What effect would this
transaction have on the balance in the common
 shares account in the consolidated financial
statements on the date of acquisition?

A. It would
increase by
$160,000.
B. It would not change.
C. It would decrease by $160,000.
D. It is not possible to determine the effect from the inform

43. In an inflationary economy, under which

consolidation theory would total assets in the
consolidated balance sheet at the acquisition date
be greatest?

A. The
proprietary
theory.
B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.

44. What value should be recorded as the fair value of

a contingent consideration arising from a business
acquisition when it is classified as a liability?

A. The undiscounted maximum

amount that could be paid.
B. The discounted present value of the maximum amount
C. The undiscounted probabilistic estimate of the amount t
D. The discounted probabilistic estimate of the amount to b

45. If a business combination occurs and the

consideration paid exceeds the fair value of the
identifiable net assets of the subsidiary on the
acquisition date and the parent acquires less than
100% of the outstanding common shares of the
subsidiary, which consolidation method will result
in the highest value for non-controlling interest on
the acquisition date?

A. The
proprietary
theory.
 B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.

46. Keen and Lax Inc had the following balance sheets on October 31, 2012:

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare:
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

47. Keen and Lax Inc had the following balance sheets on October 31, 2012:
 Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts for its
investment using the cost method, prepare:
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

48. Keen and Lax Inc had the following balance sheets on October 31, 2012:

Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare:
 a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition date.

49. Keen and Lax Inc had the following balance sheets on October 31, 2012:

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare the Consolidated
Balance Sheet on the Date of Acquisition.

50. Keen and Lax Inc had the following balance sheets on October 31, 2012:
 Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the Consolidated
Balance Sheet on the Date of Acquisition.

51. Keen and Lax Inc had the following balance sheets on October 31, 2012:

Assume that the following draft balance sheet was prepared by a co-worker subsequent to
Keen's 80% purchase of Lax Inc for $240,000. Assuming this balance sheet is devoid of technical
errors, what can be concluded about the balance sheet below?
52. Jean and John Inc had the following balance sheets on August 31, 2012:

On August 31, 2012, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc for
$400,000.
 Prepare Jean Inc's consolidated Balance Sheet on the date of acquisition using the Proprietary
Theory.

53. Jean and John Inc had the following balance sheets on August 31, 2012:

On August 31, 2012, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc for
$400,000.

Prepare Jean Inc's consolidated Balance Sheet on the date of acquisition using the Entity
Theory.

54. Company A Inc. owns a controlling interest in Company B. which is located overseas. Company A
and B are in entirely different lines of business. Company A wishes to file a request allowing it to
not consolidate its financial statements with those of Company B. Assuming that Company A is
based in Canada, is this allowed? Explain.
55. X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000 worth
of Common Shares. An agreement was drawn whereby X Company would pay 10% of any
earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On
that date, X's shares had a market value of $80 per share.

Required:

a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X) that
you feel may be necessary to reflect Y's results under IFRS 3. Assume that on the acquisition
date no provision was made for the contingent consideration.
b) Assuming that the agreement called for Y's shareholders to be compensated for any decline in
X's share price, what journal entries would be required under IFRS 3, if the market value of X's
shares dropped to $64?

56. Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of
Minor Corporation on August 1, Year 1. The shares issued have a fair market value of $40. In
addition, the merger agreement provides that if the market price of Major's shares is below $60
two years from the date of the merger, Major will issue additional shares to the former
shareholders of Minor Corporation in an amount that will compensate them for their loss of value.
On August 1, Year 3, the stock market price of major's shares is $55. In accordance with their
agreement, Major Corporation issues an additional number of shares.

Required:

a) Prepare the journal entry to record the issuance of the shares.

b) Calculate the number of additional shares that Major Corporation will have to issue to the
former shareholders of Minor Corporation.
c) Prepare the journal entry to record the transaction under IFRS 3.
d) Are there any alternatives for recording the additional share issuance?
e) What would be the required disclosure for this series of events?
57. There are a number of theories of how financial statements should be prepared for non-wholly
owned subsidiaries. Briefly discuss each theory and provide your reasoning to support the theory
that is being adopted under IFRSs.

58. Discuss the disclosure requirements for long term investments including accounting policies and
NCI.

59. After the introduction of the entity method in Canada, many companies opted to value the
noncontrolling interest in subsidiaries based on the fair value of the subsidiary's identifiable net
assets at the acquisition date instead of valuing the noncontrolling interest at its fair value. That
is, they opted to use the parent company extension approach rather than the entity method when
preparing consolidated financial statements. What motivation might preparers of consolidated
financial statements have that would cause them to have this preference?

60. Why might the fair value of the noncontrolling interest in a subsidiary on the date that it is
acquired in a business combination not be proportionate to the price per share paid by the parent
company to acquire control? How do the IFRS recognize this?
 Chapter 04 Consolidation of Non-Wholly Owned
Subsidiaries Key
1. The purchase price of an entity includes:
(p. 151-152)

A. the book valu

shareholders'
differential.
B. the book value of the subsidiary's shareholders' equity a
C. the fair market value of the subsidiary's shareholders' e
discrepancy.
D. the fair market value of the subsidiary's net assets.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #1
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

2. On the date of acquisition, consolidated

(p. 151-152) shareholders' equity is equal to:

A. the sum of the parent and

subsidiary's shareholders'
equities.
B. the sum of the parent's shareholders' equity plus its pro
shareholders' equity on the date of acquisition.
C. the parent's shareholders' equity.
D. the subsidiary's shareholders' equity.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #2
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

3. When preparing the consolidated balance sheet

(p. 151-152) on the date of acquisition, the parent's investment
(in subsidiary company) is:

A. revalued to fair
market value.
B. replaced with 100% of the assets and liabilities of the s
C. replaced with 100% of the assets and liabilities of the su
D. replaced with the parent's pro rata share of the assets a
market value.
 Blooms Level: Remember
Difficulty: Easy
Hilton - Chapter 04 #3
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

4. When the parent forms a new subsidiary:

(p. 151-152)

A. there should be no
acquisition differential.
B. gain or loss will usually arise.
C. push down accounting rules must be followed.
D. it should not be included in the company's consolidated
effectively be double-counting.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #4
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

5. Any negative goodwill arising on the date of

(p. 161-162) acquisition:

A. is recognized as a gain on
the date of acquisition.
B. is prorated among the parent company's identifiable ne
C. should be amortized over a predetermined period.
D. is recognized as a loss on the date of acquisition.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #5
Learning Objective: 04-04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business combination.

6. A company owning a majority (but less than 100%)

(p. 155-159) of another company's voting shares on the date of
acquisition should account for its subsidiary (in its
consolidated balance sheet):

A. by including only
market values o
assets.
B. by including only its share of the book values of the sub
C. by including 100% of the fair market values of the subsi
D. by including 100% of the fair market values of the subs
for any unowned portion of the subsidiary's voting shar
account.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #6
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
7. HRN Enterprises Inc. purchases 80% of the
(p. 155-159) outstanding voting shares of NHR Inc. on January
1, 2012. On that date, which of the following
statements pertaining to Non-Controlling Interest
is TRUE?

A. HRN's Non
include 20%
assets.
B. HRN's Non-Controlling Interest account will include 20%
assets.
C. HRN's Non-Controlling Interest account will include 20%
the Date of Acquisition.
D. HRN's Non-Controlling Interest account will include 20%
acquisition differential on the Date of Acquisition.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #7
Learning Objective: 04-04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business combination.

8. Under the Proprietary theory, Non-Controlling

(p. 152-154) Interest is:

A. nonexisten
the Parent
differential
B. nonexistent. Goodwill is established based on the Pare
C. based on the fair market values of the subsidiary's net a
based on the Parent's acquisition cost.
D. based on the book values of the subsidiary's net assets
the Parent's acquisition cost.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #8
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

9. The calculation of Goodwill and Non-Controlling

(p. 155-159) Interest under the Entity Theory is derived :

A. by using an
would be th
of the outs
subsidiary.
B. by using the actual acquisition cost.
C. by using the actual acquisition cost less any uncontrolle
assets at fair market value.
D. by using the actual acquisition cost less any uncontrolle
 assets at book value.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #9
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

10. One weakness associated with the Entity Theory

(p. 155-159) is that:

A. it is inconsistent with the

Historical Cost Principle.
B. Non-Controlling Interest is computed using the fair mark
assets.
C. Non-Controlling interest is computed using the book va
D. the presumed acquisition cost may be unrealistic when
less than 100% of the subsidiary's voting shares, or vo
incrementally.

Blooms Level: Remember

Difficulty: Moderate
Hilton - Chapter 04 #10
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

11. Under the Parent Company Theory, which of the

(p. 154) following statements pertaining to Consolidated
Financial Statements is TRUE?

A. The Conso
by adding
Parent and
B. The Consolidated Balance Sheet is prepared by adding
Parent and its subsidiary as well as the Parent's share
C. The Consolidated Balance Sheet is prepared by adding
Parent and its subsidiary as well as the parent's share o
D. The Consolidated Balance Sheet is prepared by adding
both the parent and its subsidiary.

Blooms Level: Remember

Difficulty: Moderate
Hilton - Chapter 04 #11
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

12. On the date of formation of a 100% owned

(p. 155-158) subsidiary by the parent, which of the following
statements pertaining to Consolidated Financial
Statements is TRUE?

A. It is possib
Statements
 liabilities o
B. Consolidated Financial Statements are difficult to prepa
of the subsidiary have yet to be determined.
C. Consolidation requires the elimination of the parent's in
subsidiary's share capital.
D. None of the above.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #12
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

13. Contingent consideration should be valued at:

(p. 166-169)

A. the fair value of the

consideration on the date o
acquisition.
B. the book value of the consideration at the date of acqui
C. the acquirer's pro-rata share of the subsidiary's net ass
acquisition.
D. the acquirer's pro-rata share of the subsidiary's net ass
acquisition.

Blooms Level: Remember

Difficulty: Moderate
Hilton - Chapter 04 #13
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

14. Contingent consideration will be classified as a

(p. 166-169) liability when:

A. it will be paid in the

form of additional
equity.
B. it will be paid in the form of cash or another asset.
C. the form of payment will be determined at a future date.
D. the acquirer decides the appropriate time to make a pay

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #14
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

15. Which consolidation theory should be used in

(p. 155-160) preparing consolidated financial statements in
accordance with IFRS?

A. Proprietary
Theory.
B. Parent Company Theory.
 C. Proportionate Consolidation.
D. Either Entity Theory or Parent Company Extension The

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #15
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.

16. A negative acquisition differential:

(p. 162)

A. is always equal to
negative goodwill.
B. occurs when the fair value of the subsidiary's net asset
amounts.
C. implies that the parent company may have overpaid for
D. cannot occur under the acquisition method.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #16
Learning Objective: 04-04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business combination.

17. Parent and Sub Inc. had the following balance

(p. 155-159) sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assume that Parent Inc. purchased a controlling

interest in Sub Inc. on August 1, 2012 and decides
 to prepare an Income Statement for the combined
entity on the date of acquisition. If Parent acquired
100% of Sub Inc. on that date, what would be the
net income reported for the combined entity (for
the year ended July 31, 2012)?

A. $60,
000
B. $120,000
C. $180,000
D. Nil

Blooms Level: Apply

Difficulty: Easy
Hilton - Chapter 04 #17
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

18. Parent and Sub Inc. had the following balance

(p. 155-159) sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assume that Parent Inc. purchased a controlling

interest in Sub Inc. on August 1, 2012 and decides
to prepare an Income Statement for the combined
entity on the date of acquisition. If Parent acquired
80% of Sub Inc. on that date, what would be the
net income reported for the combined entity (for
the year ended July 31, 2012)?
 A. $104,
000
B. $120,000
C. $130,000
D. Nil

Blooms Level: Apply

Difficulty: Easy
Hilton - Chapter 04 #18
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

19. Parent and Sub Inc. had the following balance

(p. 152-153) sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming that Parent Inc acquires 80% of Sub Inc

on August 1, 2012, what amount would appear in
the Non-Controlling Interest Account on the
Consolidated Balance Sheet on the date of
acquisition if the Proprietary Method were used?

A. Nil
B. $100,000
C. $120,000
D. $200,000
 Blooms Level: Understand
Difficulty: Easy
Hilton - Chapter 04 #19
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

20. Parent and Sub Inc. had the following balance

(p. 155-159) sheets on July 31, 2012:

The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming that Parent Inc. purchased 80% of

Sub's voting shares on the date of acquisition
(August 1, 2012) for $180,000, what would be the
amount of the Non-Controlling Interest on the date
of acquisition if the Entity Method were used?

A. $26,
000
B. $38,000
C. $45,000
D. $104,000

Blooms Level: Remember

Difficulty: Moderate
Hilton - Chapter 04 #20
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

21. Parent and Sub Inc. had the following balance

(p. 152-153) sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming once again that the Proprietary Theory

was applied, what would be the amount of
Goodwill appearing on the Consolidated Balance
Sheet on the Date of acquisition, assuming once
again that Parent purchased 80% of Sub Inc. for
$180,000 on August 1, 2012?

A. $72,0
00
B. $88,000
C. Nil
D. Cannot be determined from the information given.

Blooms Level: Apply

Difficulty: Hard
Hilton - Chapter 04 #21
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

22. Parent and Sub Inc. had the following balance

(p. 155-159) sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming the Entity Theory was applied, what

would be the amount of Goodwill appearing on the
Consolidated Balance Sheet on the Date of
acquisition, assuming once again that Parent
purchased 80% of Sub Inc. for $180,000?

A. $88,0
00
B. $130,000
C. $137,000
D. $138,000

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #22
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

23. Parent and Sub Inc. had the following balance

(p. 155-159) sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

The Shareholders' Equity section of Parent's

Consolidated Balance Sheet on the date of
acquisition would total what amount under the
Entity Method?

A. $140,
000
B. $185,000
C. $244,000
D. $270,000

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #23
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

24. Parent and Sub Inc. had the following balance

(p. 155-159) sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

Assuming Parent purchased 80% of Sub Inc. for

$180,000; the Assets section of Parent's
Consolidated Balance Sheet on the date of
acquisition (August 1, 2012) would total what
amount under the Entity Method?

A. $552,
000
B. $639,200
C. $651,000
D. $659,000

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #24
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

25. Parent and Sub Inc. had the following balance

(p. 155-161) sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

If Parent Company purchased 80% of Sub Inc. for

$180,000, the Liabilities section of Parent's
Consolidated Balance Sheet on the date of
acquisition (August 1, 2012) would total what
amount under GAAP after January 1, 2011?

A. $470,
000
B. $474,000
C. $500,000
D. $519,000

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #25
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.

26. Parent and Sub Inc. had the following balance

(p. 154) sheets on July 31, 2012:
 The Net Incomes for Parent and Sub Inc for the
year ended July 31, 2012 were $120,000 and
$60,000 respectively.

What would be the amount of Non-Controlling

Interest appearing on the Consolidated Balance
Sheet on the date of acquisition (August 1, 2012),
under the Parent Company Method, assuming
once again that Parent purchased 80% of Sub Inc.
for $180,000?

A. $26,0
00
B. $72,000
C. $86,000
D. The answer cannot be determined from the information

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #26
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

27. Any goodwill on the subsidiary company's books

(p. 164) on the date of acquisition:

A. must be
revalued.
B. must be eliminated in preparing consolidated financial s
C. must be recorded as a loss on acquisition.
D. must be subject to an impairment test.
 Blooms Level: Remember
Difficulty: Easy
Hilton - Chapter 04 #27
Learning Objective: 04-04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business combination.

28. When the Non-Controlling Interest's share of the

(p. 159-161) subsidiary's goodwill cannot be reliably
determined, the method used to prepare
consolidated financial statements is:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. the Parent Company Extension Theory.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #28
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.

29. The focus of the Consolidated Financial

(p. 152-154) Statements on the shareholders of the parent
company is characteristic of:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. both the Parent Company Theory and the Proprietary T

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #29
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

30. Non-Controlling Interest is presented in the

(p. 155-159) Shareholders' Equity section of the Balance Sheet
under:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. both the Parent Company Theory and the Proprietary T

Blooms Level: Understand

Difficulty: Easy
Hilton - Chapter 04 #30
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
31. Non-Controlling Interest is presented under the
(p. 152-154) Liabilities section of the Consolidated Balance
Sheet using the:

A. the Entity
Theory.
B. the Proprietary Theory.
C. the Parent Company Theory.
D. both the Parent Company Theory and the Proprietary T

Blooms Level: Understand

Difficulty: Easy
Hilton - Chapter 04 #31
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

32. When a contingent consideration arising from a

(p. 166-168) business combination is classified as a liability,
how is any difference between the original
estimate of the amount to be paid and the actual
amount paid accounted for if the difference arises
due to a change in circumstances?

A. As an adjustment to the
consideration paid for the
subsidiary.
B. As an adjustment to an estimate included in the determ
C. As a direct adjustment to consolidated retained earning
D. As an adjustment to consolidated contributed surplus.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #32
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

33. When a contingent consideration arising from a

(p. 166-168) business combination is classified as a liability,
how is any change in its fair value as a result of
new information about the facts and
circumstances that existed at the acquisition date
accounted for if identified and measured within
one year subsequent to the acquisition date?

A. As an adjustment to the
consideration paid for the
subsidiary.
B. As an adjustment to an estimate included in the determ
C. As a direct adjustment to consolidated retained earning
D. As an adjustment to consolidated contributed surplus.
 Blooms Level: Remember
Difficulty: Easy
Hilton - Chapter 04 #33
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

34. When a contingent consideration arising from a

(p. 168) business combination is classified as equity, how
is any change in its fair value accounted for if the
difference arises due to a change in
circumstances?

A. As an adjustment to the
consideration paid for the
subsidiary.
B. As an adjustment to an estimate included in the determ
C. As a memorandum entry indicating that additional shar
D. As an adjustment to consolidated contributed surplus.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #34
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

35. Which statement about the differences between

(p. 171) consolidation methods permitted under US GAAP
and IFRS is true?

A. IFRS and US GAAP both

require the use of the entit
theory.
B. IFRS and US GAAP both require the use of the parent
C. IFRS permits either the entity theory or the parent com
requires the entity theory.
D. IFRS permits either the entity theory or the parent comp
requires the parent company extension theory.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #35
Learning Objective: 04-07 Identify some of the differences between IFRSs and ASPE involving consolidation of non-wholly owned subsidiaries.

36. IFRS permits several methods to be used to

(p. 155-159) determine the fair value of the non-controlling
interest in a subsidiary at the acquisition date.
Which of the following is NOT an appropriate
method to determine the fair value of the non-
controlling interest (NCI)?

A. The NCI may be valu

market value of the su
 shares.
B. The NCI may be valued by determining the fair value of
independent business valuation and then deducting the
C. The NCI may be valued proportionately to the price paid
interest.
D. The NCI may be valued at the fair value of the subsidia

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #36
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

37. Which accounts on the consolidated balance

(p. 155-159) sheet will be different when the entity method is
used from when the parent company extension
theory is used?

A. The investme
the consolida
B. The goodwill balance and the consolidated retained ear
C. The goodwill balance and the non-controlling interest b
D. The investment in subsidiary balance and the non-contr

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #37
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.

38. If the non-controlling interest at acquisition is

(p. 159-160) based on the fair value of the subsidiary's
identifiable net assets, which consolidation theory
is being applied?

A. The
proprietary
theory.
B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.

Blooms Level: Remember

Difficulty: Easy
Hilton - Chapter 04 #38
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.

39. When the acquisition differential is calculated and

(p. 161-162) allocated, what will the consequence be of a
"bargain purchase"?
 A. The acquisition differential
will always be negative.
B. The goodwill balance will always be negative.
C. The fair value of the assets will always have been overs
D. Both the acquisition differential and goodwill balances w

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #39
Learning Objective: 04-04 Explain the concept of negative goodwill and describe how it should be treated when it arises in a business combination.

40. A business combination involves a contingent

(p. 166-167) consideration. It is considered 70% probable that a
payment of $500,000 will become payable three
years after the acquisition date. Using a 7%
discount rate, what liability should be recorded for
the contingent consideration on the acquisition
date?

A. $285,
704
B. $350,000
C. $408,149
D. $500,000

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #40
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

41. A business combination involves a contingent

(p. 166-167) consideration. It is considered 70% probable that a
payment of $500,000 will become payable three
years after the acquisition date. Using a 7%
discount rate, how much interest expense should
be recorded on the liability for the first year after
acquisition?

A. $19,9
99
B. $24,500
C. $28,570
D. $35,000

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #41
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

42. A business combination involves a contingent

(p. 168) consideration. As a result, two years after the
 acquisition date, the acquirer was required to
issue an additional 40,000 common shares at a
time when the fair value of the common shares
was $4 per share. What effect would this
transaction have on the balance in the common
shares account in the consolidated financial
statements on the date of acquisition?

A. It would
increase by
$160,000.
B. It would not change.
C. It would decrease by $160,000.
D. It is not possible to determine the effect from the inform

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #42
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

43. In an inflationary economy, under which

(p. 170) consolidation theory would total assets in the
consolidated balance sheet at the acquisition date
be greatest?

A. The
proprietary
theory.
B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #43
Learning Objective: 04-06 Analyze and interpret financial statements involving consolidation of non-wholly owned subsidiaries.

44. What value should be recorded as the fair value of

(p. 166-168) a contingent consideration arising from a business
acquisition when it is classified as a liability?

A. The undiscounted maximum

amount that could be paid.
B. The discounted present value of the maximum amount
C. The undiscounted probabilistic estimate of the amount
D. The discounted probabilistic estimate of the amount to b

Blooms Level: Understand

Difficulty: Easy
Hilton - Chapter 04 #44
 Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

45. If a business combination occurs and the

(p. 155-159) consideration paid exceeds the fair value of the
identifiable net assets of the subsidiary on the
acquisition date and the parent acquires less than
100% of the outstanding common shares of the
subsidiary, which consolidation method will result
in the highest value for non-controlling interest on
the acquisition date?

A. The
proprietary
theory.
B. The parent company theory.
C. The entity theory.
D. The parent company extension theory.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #45
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

46. Keen and Lax Inc had the following balance sheets on October 31, 2012:
(p. 155-
159)

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare:
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition
date.
 a)

b)

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #46
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

47. Keen and Lax Inc had the following balance sheets on October 31, 2012:
(p. 155-
159)

Assuming that Keen Purchases 100% of Lax for a consideration of $100,000, and accounts for
its investment using the cost method, prepare:
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition
date.
 a)

b)

Note: This question differs from Question 51 in that a Negative Goodwill amount arises from
this combination. Under IFRS the negative Goodwill is treated as a gain on acquisition and is
charged to net income (and then to Retained Earnings) as follows:

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #47
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

48. Keen and Lax Inc had the following balance sheets on October 31, 2012:
(p. 155-
159)

Assuming that Keen Purchases 80% of Lax for a consideration of $240,000, prepare:
a) the journal entry that Keen Inc. would make to record the acquisition;
b) the elimination entry necessary to produce consolidated balance sheet on the acquisition
 date.

a)

b)

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #48
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

49. Keen and Lax Inc had the following balance sheets on October 31, 2012:
(p. 155-
159)

Assuming that Keen Inc. purchases 100% of Lax Inc. for $200,000, prepare the Consolidated
Balance Sheet on the Date of Acquisition.
 Blooms Level: Apply
Difficulty: Moderate
Hilton - Chapter 04 #49
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

50. Keen and Lax Inc had the following balance sheets on October 31, 2012:
(p. 155-
159)

Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the Consolidated
Balance Sheet on the Date of Acquisition.
 Blooms Level: Apply
Difficulty: Moderate
Hilton - Chapter 04 #50
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

51. Keen and Lax Inc had the following balance sheets on October 31, 2012:
(p. 152-
153)

Assume that the following draft balance sheet was prepared by a co-worker subsequent to
Keen's 80% purchase of Lax Inc for $240,000. Assuming this balance sheet is devoid of
technical errors, what can be concluded about the balance sheet below?
 This balance sheet was prepared using the Proprietary Theory. There is no Non-Controlling
Interest section on the Balance Sheet, and Keen's Consolidated Balance Sheet amounts (with
the exception of the Shareholders' Equity Section) include Keen's book values and 80% of
Lax's Fair Values.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #51
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

52. Jean and John Inc had the following balance sheets on August 31, 2012:
(p. 152-
154)
 On August 31, 2012, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc for
$400,000.

Prepare Jean Inc's consolidated Balance Sheet on the date of acquisition using the
Proprietary Theory.

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #52
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

53. Jean and John Inc had the following balance sheets on August 31, 2012:
(p. 155-
159)
On August 31, 2012, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc for
$400,000.

Prepare Jean Inc's consolidated Balance Sheet on the date of acquisition using the Entity
Theory.
 • Note that Jean's imputed acquisition cost of acquiring 100% of John Inc. would be
$400,000/0.9 or $444,444 (rounded).
• Goodwill would be calculated as follows:

Non-Controlling Interest would be 10% of John Inc.'s fair values including Goodwill:
i.e. 10% * ($250,000 + $194,444) = $44,444

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #53
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.

54. Company A Inc. owns a controlling interest in Company B. which is located overseas.
(p. 149- Company A and B are in entirely different lines of business. Company A wishes to file a
151)
request allowing it to not consolidate its financial statements with those of Company B.
Assuming that Company A is based in Canada, is this allowed? Explain.

Generally speaking, this practice is not allowed. IFRS requires that all subsidiaries be
consolidated, unless the subsidiary is subject to any long-term restrictions which prevent it
from transferring funds to the Parent, or if the nature of the Parent Company's control over the
subsidiary is temporary. IFRS describes control as the power to govern the financial and
operating policies of an enterprise so as to benefit from its activities. Although Control is
presumed to exist when a company owns more than 50% of the voting shares of another,
evidence of control may still exist without such a controlling interest.
It should be noted that some countries allow for exclusions for temporary control, non-
homogeneous subsidiaries, subsidiaries that are bankrupt or under reorganization or
subsidiaries that are immaterial in size. It should also be noted that the non-homogeneous
exclusion was used in the past, both in the United States and Canada.
N.B. The determination of control/significant influence, etc., is covered at length in Chapter 3.
However, its inclusion in this chapter is still, arguably, very relevant.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #54
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

55. X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000

(p. 166- worth of Common Shares. An agreement was drawn whereby X Company would pay 10% of
169)
any earnings in excess of $750,000 to Y's shareholders in the first year following the
acquisition. On that date, X's shares had a market value of $80 per share.

Required:
 a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X)
that you feel may be necessary to reflect Y's results under IFRS 3. Assume that on the
acquisition date no provision was made for the contingent consideration.
b) Assuming that the agreement called for Y's shareholders to be compensated for any decline
in X's share price, what journal entries would be required under IFRS 3, if the market value of
X's shares dropped to $64?

a)

b)

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #55
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

56. Major Corporation issues 1,000,000 common shares for all of the outstanding common shares
(p. 168- of Minor Corporation on August 1, Year 1. The shares issued have a fair market value of $40.
169)
In addition, the merger agreement provides that if the market price of Major's shares is below
$60 two years from the date of the merger, Major will issue additional shares to the former
shareholders of Minor Corporation in an amount that will compensate them for their loss of
value. On August 1, Year 3, the stock market price of major's shares is $55. In accordance
with their agreement, Major Corporation issues an additional number of shares.

Required:

a) Prepare the journal entry to record the issuance of the shares.

b) Calculate the number of additional shares that Major Corporation will have to issue to the
former shareholders of Minor Corporation.
c) Prepare the journal entry to record the transaction under IFRS 3.
d) Are there any alternatives for recording the additional share issuance?
e) What would be the required disclosure for this series of events?

a)

b) Additional shares (60,000,000/55 - 1,000,000) = 90,909.09

c)
 d) A memorandum entry indicating that additional shares were issued for no consideration.
e) Footnote disclosure for the amount and the reasons for the consideration and the
accounting treatment used.

Blooms Level: Apply

Difficulty: Moderate
Hilton - Chapter 04 #56
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

57. There are a number of theories of how financial statements should be prepared for non-wholly
(p. 151- owned subsidiaries. Briefly discuss each theory and provide your reasoning to support the
159)
theory that is being adopted under IFRSs.

There are four theories that have been put forward for the preparation of financial statements
under circumstances where the subsidiary is non-wholly owned and they are:

a) The Proprietary theory

b) The Parent Company theory
c) The Parent Company Extension theory
d) The Entity theory
The theory that was adopted under IFRS 3 was the Entity theory. The Entity theory views the
consolidated entity as having two distinct groups of shareholders: the controlling shareholders
and the non-controlling shareholders. All values are reflected at fair value of the subsidiary's
identifiable net assets with the balance recorded as goodwill. The issue becomes one of
determining the fair value of the fair value of the subsidiary's identifiable assets and liabilities
and the fair value of NCI. In addition, the Entity theory represents a departure form the
historical cost basis that has been used by accountants in the past as objective and verifiable.
But the reality is that fair value of each party constitutes their participation in the entity. And
arguably with a transaction having occurred in the shares of the subsidiary each of the
participants should have their participation re-valued at current market prices or valuations and
not historical cost.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #57
Learning Objective: 04-01 Explain the basic differences between the four theories of consolidation.

58. Discuss the disclosure requirements for long term investments including accounting policies
(p. 168) and NCI.

Companies should disclose their policies with regard to long-term investments. The general
presumptions regarding the factors that establish a control investment and noted that these
presumptions could be overcome in certain situations.
IAS 27 requires that a reporting entity describe the basis for its assessment and any significant
assumptions or judgments when the reporting entity has concluded that:
 (a) it controls an entity whose activities are directed through voting shares even though the
reporting entity has less than half of that entity's voting shares, and
(b) it does not control an entity whose activities are directed through voting shares even
though the reporting entity is the dominant shareholder with voting rights.
IFRS 3 requires that a reporting entity disclose the following for each business combination in
which the acquirer holds less than 100 percent of the equity interests in the acquiree at the
acquisition date:

a) The amount of the NCI in the acquiree recognized at the acquisition date and the
measurement basis for that amount; and;
b) For each NCI in an acquiree measured at fair value, the valuation techniques and key
model inputs used for determining that value.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #58
Learning Objective: 04-05 Account for contingent consideration based on its classification as a liability or equity.

59. After the introduction of the entity method in Canada, many companies opted to value the
(p. 155- noncontrolling interest in subsidiaries based on the fair value of the subsidiary's identifiable net
159)
assets at the acquisition date instead of valuing the noncontrolling interest at its fair value.
That is, they opted to use the parent company extension approach rather than the entity
method when preparing consolidated financial statements. What motivation might preparers of
consolidated financial statements have that would cause them to have this preference?

Using the parent company extension approach results in total assets being lower (because
only the parent's share of the goodwill arising from the business acquisition is recorded). In
addition, only the parent's share of any goodwill impairment would be recorded in future years.
As a result, the net income would be the same or higher when the parent company extension
approach is used and the total assets is lower, so the return on assets would be higher making
the results look better than if the entity method had been applied.

Blooms Level: Analyze

Difficulty: Moderate
Hilton - Chapter 04 #59
Learning Objective: 04-06 Analyze and interpret financial statements involving consolidation of non-wholly owned subsidiaries.

60. Why might the fair value of the noncontrolling interest in a subsidiary on the date that it is
(p. 155- acquired in a business combination not be proportionate to the price per share paid by the
160)
parent company to acquire control? How do the IFRS recognize this?

Reasons why the fair value of the noncontrolling interest might not be proportionate to the
price paid by the parent include:

• there may be synergies to the controlling interest that do not benefit the noncontrolling
interest in the subsidiary;
• often a premium is paid to achieve control;
• the acquisition may have taken place at different prices in a series of purchases, not as a
single purchase on the acquisition date.
IFRS recognizes this by permitting both the entity method and the parent company extension
methods of valuing the noncontrolling interest at acquisition. The standards allow the NCI to
be valued based either on its fair value or on the basis of the fair value of the subsidiary's
identifiable net assets at acquisition.

Blooms Level: Understand

Difficulty: Moderate
Hilton - Chapter 04 #60
Learning Objective: 04-02 Prepare a consolidated balance sheet using the entity theory.
Learning Objective: 04-03 Prepare a consolidated balance sheet using the parent company extension theory.
Chapter 04 Consolidation of Non-Wholly Owned
Subsidiaries Summary