Consolidated Financial Statements
Review Questions
Course Introduction
This course provides an in-depth examination of consolidated financial statements, focusing on the preparation, presentation, and interpretation of financial reports for group entities consisting of a parent company and its subsidiaries. Topics include the identification and analysis of group structures, the consolidation process, elimination of intercompany transactions, accounting for non-controlling interests, and issues related to associates and joint ventures. Emphasis is placed on applying relevant International Financial Reporting Standards (IFRS) or local standards to real-world scenarios, enabling students to analyze complex business combinations, assess their financial impacts, and ensure the transparency and reliability of consolidated financial disclosures.
Recommended Textbook
Modern Advanced Accounting in Canada9th Edition by Darrell Herauf
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Chapter 1: Conceptual and Case Analysis Frameworks for Financial Reporting
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Sample Questions
Q1) Starting in 2011, what is the definition of a private enterprise (PE) under Canadian GAAP?
A) A corporation that has no public shareholders.
B) A corporation that has less than 500 shareholders and is not listed on a stock exchange.
C) A corporation which is not profit oriented.
D) A profit oriented enterprise that has none of its issued and outstanding financial instruments traded in a public market and does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
Answer: D
Q2) The formula for the current ratio is:
A) current assets - current liabilities
B) current assets/current liabilities
C) total debt/shareholders' equity
D) net income/shareholders' equity
Answer: B
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Chapter 2: Investments in Equity Securities
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Q1) When an investment is accounted for using the Equity Method, how are the investor's share of the investee's income from non-operating sources (such as gains or losses from discontinued operations) to be accounted for by the investor?
A) Any such gains or losses are to be charged directly to Retained Earnings net of tax.
B) Any such gains or losses are included with the revenue and expenses from operations. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account.
C) Any such gains or losses are shown separately, net of tax, below income from operations on the investor's Income Statement. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account.
D) No specific accounting treatment is required. These items simply have to be disclosed in notes to the financial statements.
Answer: C
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Chapter 3: Business Combinations
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Q1) A Inc. is contemplating a business combination with B Inc. However, A Inc.'s management is uncertain as to whether it should purchase B's assets or a majority of B's voting shares. The fair market values of B's assets far exceed their book values. A's management should be advised that IN MOST CASES:
A) the purchase of B's shares would likely be the cheaper method of acquiring control; however, it would be less advantageous to the consolidated entity from tax standpoint. B) the purchase of B's shares would likely be the cheaper method of acquiring control. It would also be more advantageous to the consolidated entity from a tax standpoint.
C) the purchase of B's shares would likely be the costlier method of acquiring control; however, it would be more advantageous to the consolidated entity from a tax standpoint.
D) the purchase of B's shares would likely be the costlier method of acquiring control. It would also be less advantageous to the consolidated entity from a tax standpoint. Answer: A
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Page 5
Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Why might the fair value of the non-controlling 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?
Q2) Discuss the disclosure requirements for long term investments including accounting policies and non-controlling interest (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.
IFRS 3 Business Combinations requires that a reporting entity describe the basis for its assessment and any significant assumptions or judgments when the reporting entity has concluded that:
Q3) Which method presents the non-controlling interest (NCI) in in the Shareholders' Equity section of the balance sheet?
A) The fair value enterprise method.
B) The proportionate consolidation.
C) The parent company method.
D) The acquisition method.
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Page 6
Chapter 5: Consolidation Subsequent to Acquisition Date
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Q1) An impairment loss can be reversed when:
A) there is no indication that the impairment loss no longer exists or has been reduced and there has not been a change in the estimates used to determine the assets recoverable amount.
B) with the exception of goodwill, all intangible assets carrying values exceed their fair market values.
C) the intangible assets carrying values exceed their undiscounted future cash flows.
D) with the exception of goodwill, the recoverable amount is determined and compared to the carrying amount. If the recoverable amount is greater than the carrying amount then the impairment loss previously recorded is reversed.
Q2) Intangible assets with definite useful lives should be amortized:
A) over their useful lives.
B) over the time periods provided under IAS 36 Impairment of Assets which prescribes amortization periods for different classes of assets.
C) under the applicable capital cost allowance rates provided by the Canada Revenue Agency.
D) over two years.
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Chapter 6: Intercompany Inventory and Land Profits
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Q1) X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What effect (if any) would Y's unrealized profits on its sales to X have on the non-controlling interest account on the consolidated balance sheet?
A) There would be no effect.
B) There would be an increase to the non-controlling interest account for the amount of $72.
C) There would be a decrease to the non-controlling interest account for the amount of $48.
D) There would be an increase to the non-controlling interest account for the amount of $48
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Chapter 7: A Intercompany Profits in Depreciable Assets B
Intercompany
Bondholdings
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Q1) Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2020 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030.
There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used.
Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company.
During 2020, Paddy earned a net income of $80,000 and paid dividends of $20,000. What amount of interest expense, excluding amortization of the bond discount, (if any) would have to be eliminated in 2020 as a result of the intercompany sale of the bonds?
A) None
B) $12,000
C) $12,200
D) $14,400
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Page 9
Chapter 8: Consolidated Cash Flows and Changes in Ownership
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Q1) ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750.
ABC Inc. uses the equity method to account for its investment in 123 Inc. What would be the amount of the gain or loss on the sale of the 7,000 shares?
A) A loss of $12,250.
B) A loss of $70,000.
C) A gain of $12,250.
D) A gain of $57,750.
Q2) X owns 70% of Y, which in turn owns 25% of Z. X, also owns 20% of Z. Which of the following statements is correct?
A) X has direct control over Z.
B) X has indirect control over Z.
C) X has no control over Z.
D) X has contingent control over Z.
Page 10
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Chapter 9: Other Consolidation Reporting Issues
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Q1) ABC invested $30 million in cash in DEF Inc, which was determined to be an SPE whose primary beneficiary is ABC Inc. The balance sheet of DEF on the acquisition date January 1, 2020 is shown below (all figures in millions $$): \(\begin{array}{|l|r|r|}
\hline & \text { Book Value } & \text { Fair Value } \\
\hline \text { Cash } & \$ 30 & \$ 30 \\
\hline \text { Capital Assets } & \$ 90 & \$ 100 \\
\hline \text { Total Assets } & \$ 120 & \$ 130 \\
\hline \text { Liabilities } & \$ 50 & \$ 50 \\\hline \text { Owner's Equity } & \\
\hline \mathrm{ABC} & \$ 40 \\
\hline \text { Non-Controlling Interest: } & \$ 30 \\
\hline \text { Total Liabilities \& Equity: } & \$ 120 \\
\hline
\end{array}\) The fair value of DEF's non-controlling interest is $55.
Required: Prepare the journal entry required for consolidation purposes on the date of acquisition assuming current Canadian GAAP.
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11
Chapter 10: Foreign Currency Transactions
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Q1) On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. \[\begin{array} { | l | l | }
\hline \text { Transaction Date: Jaruaary } 1,2020 & \text { US } \$ 1 = \text { CDN } \$ 1.141 \\
\hline \text { Year-End Date: Jaruary } 31,2020 & \text { US } \$ 1 = \text { CDN } \$ 1.142 \\
\hline \text { Setternent Date: February 28, 2020 } & \text { US } \$ 1 = \text { CDN } \$ 1.145 \\
\hline
\end{array}\] The invoice price billed by CMI was US$120,000.
What is the amount of CMI's foreign exchange gain or loss at year-end?
A) CDN$120 loss
B) CDN$480 gain
C) CDN$120 gain
D) Nil; foreign exchange gains or losses are deferred to settlement
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Page 12
Chapter 11: Translation and Consolidation of Foreign Operations
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Q1) Which of the following statements is correct?
A) If a foreign currency weakens with respect to the Canadian dollar, both foreign operations with a functional currency that is the Canadian dollar and not the Canadian dollar, will show a foreign exchange gain.
B) If a foreign currency weakens with respect to the Canadian dollar, both foreign operations with a functional currency that is the Canadian dollar and not the Canadian dollar, will show a foreign exchange loss.
C) If a foreign currency weakens with respect to the Canadian dollar, a foreign operation with a functional currency that is not the Canadian dollar will show a foreign exchange gain while a foreign operation with a functional currency that is the Canadian dollar will show a foreign exchange loss.
D) If a foreign currency weakens with respect to the Canadian dollar, a foreign operation with a functional currency that is not the Canadian dollar will show a foreign exchange loss while a foreign operation with a functional currency that is the Canadian dollar will show a foreign exchange gain.
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Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) Do-Good Inc. is a not-for-profit organization that was formed on January 1, 2020. Do-Good has a December 31 year end. It has an accounting policy of capitalizing and amortizing its capital assets. On April 1, 2020, Do-Good purchased equipment costing $8,000. The equipment is estimated to have a useful life of 4 years, with no residual value at that time. This transaction was the only transaction that took place to date. The equipment was purchased from an unrestricted contribution of $8,000. What would be the balance in the General Fund on December 31, 2020?
A) $0
B) $6,000
C) $6,400
D) $8,000
Q2) Where should be endowment contributions presented in the financial statements of a not-for-profit organization under the deferral method?
A) They are reflected in the notes to the financial statements.
B) They are used to effect a reduction to a related expense account.
C) They are reflected in the statement of changes in net assets.
D) They are shown in the statement of operations.
Q3) Describe what fund accounting is and why is it used for not-for-profit organizations.
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