CLASS EXERCISE CORPORATE REPORTING: FBC

Q1. Patula Co acquired 80% of Sanka Co on 1 October 20X5. At this date, some of Sanka Co’s
inventory had a carrying amount of $600,000 but a fair value of $800,000. By 31 December 20X5,
70% of this inventory had been sold by Sanka Co.
The individual statements of financial position at 31 December 20X5 for both companies show the
following: Patula Co Sanka Co
$’000 $’000
Inventories 3,250 1,940
What will be the total inventories figure in the consolidated statement of financial position of
Patula Co as at 31 December 20X5?
A $5,250,000 B $5,330,000 C $5,130,000 D $5,238,00

Q2. When a gain on a bargain purchase (negative goodwill) arises, IFRS 3 Business Combinations
requires an entity to first of all review the measurement of the assets, liabilities and consideration
transferred in respect of the combination. When the negative goodwill is confirmed, how is it then
recognised?
A It is credited directly to retained earnings B It is credited to profit or loss
C It is debited to profit or loss D It is deducted from positive goodwill

Q3. Which of the following will be treated as a subsidiary of Poulgo Co as at 31 December 20X7?
(1) The acquisition of 60% of Zakron Co’s equity share capital on 1 March 20X7. Zakron Co’s
activities are significantly different from the rest of the Poulgo group of companies
(2) The offer to acquire 70% of Unto Co’s equity share capital on 1 November 20X7. The
negotiations were finally signed off during January 20X8
(3) The acquisition of 45% of Speeth Co’s equity share capital on 31 December 20X7. Poulgo Co is
able to appoint three of the ten members of Speeth Co’s board
A 1 only B 2 and 3 C 3 only D 1 and 2
Q4.Parket Co acquired 60% of Suket Co on 1 January 20X7. The following extract has been taken
from the individual statements of profit or loss for the year ended 31 March 20X7:
Parket Co Suket Co
$’000 $’000
Cost of sales 710 480
Parket Co consistently made sales of $20,000 per month to Suket Co throughout the year. At the
year end, Suket Co held $20,000 of this in inventory. Parket Co made a mark-up on cost of 25% on all
sales to Suket Co. What is Parket Co’s consolidated cost of sales for the year ended 31 March
20X7?
A $954,000 B $950,000 C $774,000 D $766,000
Q5. Rooney Co acquired 70% of the equity share capital of Marek Co, its only subsidiary, on 1
January 20X6. The fair value of the non-controlling interest in Marek Co at acquisition was $1·1m. At
that date the fair values of Marek Co’s net assets were equal to their carrying amounts, except for a
building which had a fair value of $1·5m above its carrying amount and 30 years remaining useful
life. During the year to 31 December 20X6, Marek Co sold goods to Rooney Co, giving rise to an
unrealised profit in inventory of $550,000 at the year end. Marek Co’s profit after tax for the year
ended 31 December 20X6 was $3·2m.
What amount will be presented as the non-controlling interest in the consolidated statement of
financial position of Rooney Co as at 31 December 20X6?
A $1,895,000 B $1,495,000 C $1,910,000 D $1,880,000

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Q6. On 1 October 20X5, Anita Co purchased 75,000 of Binita Co’s 100,000 equity shares when Binita
Co’s retained earnings amounted to $90,000. On 30 September 20X7, extracts from the statements
of financial position of the two companies were:
Anita Co Binita Co
$’000 $’000
Equity shares of $1 each 125 100
Retained earnings 300 150
Total 425 250
What is the total equity attributable to the owners of Anita Co that should appear in Anita Co’s
consolidated statement of financial position as at 30 September 20X7?
A $125,000 B $470,000 C $345,000 D $537,500

Q7. Fork Co owns an 80% investment in Spoon Co which it purchased several years ago. The goodwill
on acquisition was valued at $1,674,000 and there has been no impairment of that goodwill since
the date of acquisition. On 30 September 20X4, Fork Co disposed of its entire investment in Spoon
Co, details of which are as follows:
$’000
Sales proceeds of Fork Co’s entire investment in Spoon Co 5,580
Cost of Fork Co’s entire investment in Spoon Co 3,720

Immediately before the disposal, the consolidated financial statements of Fork Co included the
following amounts in respect of Spoon Co: $’000
Carrying amount of the net assets (excluding goodwill) 4,464
Carrying amount of the non-controlling interests 900

What is the profit/loss on disposal (before tax) which will be recorded in Fork Co’s CONSOLIDATED
statement of profit or loss for the year ended 30 September 20X4?

A $1,860,000 profit B $2,016,000 profit C $342,000 profit D $558,000 loss

Q8. Consolidated financial statements are presented on the basis that the companies within the
group are treated as if they are a single economic entity.
Which of the following are requirements of preparing consolidated financial statements?
(1) All subsidiaries must adopt the accounting policies of the parent in their individual financial
statements
(2) Subsidiaries with activities which are substantially different to the activities of other members of
the group should not be consolidated
(3) All entity financial statements within a group should normally be prepared to the same
accounting year end prior to consolidation
(4) Unrealised profits within the group must be eliminated from the consolidated financial
statements
A (1) and (3) B (2) and (4) C (3) and (4) D (1) and (2)

Q9 Caddy Co acquired 240,000 of Ambel Co’s 800,000 equity shares for $6 per share on 1 October
20X4. Ambel Co’s profit after tax for the year ended 30 September 20X5 was $400,000 and it paid an
equity dividend on 20 September 20X5 of $150,000.

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On the assumption that Ambel Co is an associate of Caddy Co, what would be the carrying amount
of the investment in Ambel Co in the consolidated statement of financial position of Caddy Co as
at 30 September 20X5?
A $1,560,000 B $1,395,000 C $1,515,000 D $1,690,000

Q10. On 1 October 20X4, Pyramid Co acquired 80% of Square Co’s 9 million equity shares. At the
date of acquisition, Square Co had an item of plant which had a fair value of $3m in excess of its
carrying amount. At the date of acquisition it had a useful life of five years. Pyramid Co’s policy is to
value non-controlling interests at fair value at the date of acquisition. For this purpose, Square Co’s
shares had a value of $3·50 each at that date. In the year ended 30 September 20X5, Square Co
reported a profit of $8m.

At what amount should the non-controlling interests in Square Co be valued in the consolidated
statement of financial position of the Pyramid group as at 30 September 20X5?

A $26,680,000 B $7,900,000 C $7,780,000 D $12,220,000

Q11. Pact acquired 80% of the equity shares of Sact on 1 July 2014, paying $3·00 for each share
acquired. This represented a premium of 20% over the market price of Sact’s shares at that date.

Sact’s shareholders’ funds (equity) as at 31 March 2015 were:

$ $
Equity shares of $1 each 100,000
Retained earnings at 1 April 2014 80,000
Profit for the year ended 31 March 2015 40,000
120,000
220,000
––––––
The only fair value adjustment required to Sact’s net assets on consolidation was a $20,000 increase
in the value of its land. Pact’s policy is to value non-controlling interests at fair value at the date of
acquisition. For this purpose the market price of Sact’s shares at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.

What would be the carrying amount of the non-controlling interest of Sact in the consolidated
statement of financial position of Pact as at 31 March 2015?

A $54,000 B $50,000 C $56,000 D $58,000

Q12. Germane has a number of relationships with other companies. In which of the following
relationships is Germane necessarily the parent company?

(i) Foll has 50,000 non-voting and 100,000 voting equity shares in issue with each share
receiving the same dividend. Germane owns all of Foll’s non-voting shares and 40,000 of
its voting shares

(ii) Kipp has 1 million equity shares in issue of which Germane owns 40%. Germane also
owns $800,000 out of $1 million 8% convertible loan notes issued by Kipp. These loan
notes may be converted on the basis of 40 equity shares for each $100 of loan note, or
they may be redeemed in cash at the option of the holder

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 (iii) Germane owns 49% of the equity shares in Polly and 52% of its non-redeemable
preference shares. As a result of these investments, Germane receives variable returns
from Polly and has the ability to affect these returns through its power over Polly

A (i) only B (i) and (ii) only C (ii) and (iii) only D All three

Q13. Wilmslow acquired 80% of the equity shares of Zeta on 1 April 2014 when Zeta’s retained
earnings were $200,000. During the year ended 31 March 2015, Zeta purchased goods from
Wilmslow totalling $320,000. At 31 March 2015, one quarter of these goods were still in the
inventory of Zeta. Wilmslow applies a mark-up on cost of 25% to all of its sales.

At 31 March 2015, the retained earnings of Wilmslow and Zeta were $450,000 and $340,000
respectively. What would be the amount of retained earnings in Wilmslow’s consolidated
statement of financial position as at 31 March 2015?

A $706,000 B $542,000 C $498,000 D $546,000

Q14. IFRS requires extensive use of fair values when recording the acquisition of a subsidiary.
Which of the following comments, regarding the use of fair values on the acquisition of a
subsidiary, is correct?
A The use of fair value to record a subsidiary’s acquired assets does not comply with the historical
cost principle

B The use of fair values to record the acquisition of plant always increases consolidated post-
acquisition depreciation charges compared to the corresponding charge in the subsidiary’s own
financial statements

C Cash consideration payable one year after the date of acquisition needs to be discounted to
reflect its fair value

D Patents must be included as part of goodwill because it is impossible to determine the fair value of
an acquired patent, as, by definition, patents are unique

Q15. Johnson paid $1·2 million for a 30% investment in Treem’s equity shares on 1 August 2014.

Treem’s profit after tax for the year ended 31 March 2015 was $750,000. On 31 March 2015, Treem
had $300,000 goods in its inventory which it had bought from Johnson in March 2015. These had
been sold by Johnson at a mark-up on cost of 20%. Treem has not paid any dividends.

On the assumption that Treem is an associate of Johnson, what would be the carrying amount of
the investment in Treem in the consolidated statement of financial position of Johnson as at 31
March 2015?

A $1,335,000 B $1,332,000 C $1,300,000 D $1,410,000

Q16. Petre owns 100% of the share capital of the following companies. The directors are unsure of
whether the investments should be consolidated.

In which of the following circumstances would the investment NOT be consolidated?

A Petre has decided to sell its investment in Alpha as it is loss-making; the directors believe its
exclusion from consolidation would assist users in predicting the group’s future profits

B Beta is a bank and its activity is so different from the engineering activities of the rest of the group
that it would be meaningless to consolidate it

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C Delta is located in a country where local accounting standards are compulsory and these are not
compatible with IFRS used by the rest of the group

D Gamma is located in a country where a military coup has taken place and Petre has lost control of
the investment for the foreseeable future

Q17. Tazer, a parent company, acquired Lowdown, an unincorporated entity, for $2·8 million. A fair
value exercise performed on Lowdown’s net assets at the date of purchase showed:
$’000
Property, plant and equipment 3,000
Identifiable intangible asset 500
Inventory 300
Trade receivables less payables 200
4,000
How should the purchase of Lowdown be reflected in Tazer’s consolidated statement of financial
position?
A Record the net assets at their values shown above and credit profit or loss with $1·2 million

B Record the net assets at their values shown above and credit Tazer’s consolidated goodwill with
$1·2 million

C Write off the intangible asset ($500,000), record the remaining net assets at their values shown
above and credit profit or loss with $700,000

D Record the purchase as a financial asset investment at $2·8 million

Q18. On 1 January 2014, Viagem acquired 80% of the equity share capital of Greca.
Extracts of their statements of profit or loss for the year ended 30 September 2014 are:
$’000 $’000
Revenue 64,600 38,000
Cost of sales (51,200) (26,000)

Sales from Viagem to Greca throughout the year ended 30 September 2014 had consistently been
$800,000 per month. Viagem made a mark-up on cost of 25% on these sales. Greca had $1·5 million
of these goods in inventory as at 30 September 2014.

What would be the cost of sales in Viagem’s consolidated statement of profit or loss for the year
ended 30 September 2014?

A $59·9 million B $61·4 million C $63·8 million D $67·9 million

Q19. An associate is an entity in which an investor has significant influence over the investee.

Which of the following indicate(s) the presence of significant influence?

(i) The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
(ii) The investor has representation on the board of directors of the investee
(iii) The investor is able to insist that all of the sales of the investee are made to a subsidiary
of the investor

(iv) The investor controls the votes of a majority of the board members

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A (i) and (ii) only B (i), (ii) and (iii) C (ii) and (iii) only D All four