Consolidations and Mergers
Mock Exam
Course Introduction
This course examines the accounting principles, procedures, and financial reporting requirements associated with business combinations, consolidations, and mergers. Students will explore methods for preparing consolidated financial statements, including the treatment of goodwill, non-controlling interests, and intercompany transactions. The course emphasizes the legal, theoretical, and practical aspects of combining entities, and covers relevant topics such as acquisition methods, push-down accounting, and disclosure requirements. Through case studies and practical exercises, students will develop their ability to analyze complex corporate structures and prepare consolidated accounts in compliance with current standards and regulations.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Chapter 1: Setting the Stage
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Q1) Which of the following is true about the standards for publicly accountable enterprises in the CICA Handbook, Part I?
A)The standards are similar to U.S. GAAP.
B)The standards are adaptations of IFRS that have been tailored to Canadian circumstances.
C)The standards are similar to ASPE.
D)The standards are identical, word for word, to IFRS.
Answer: D
Q2) Both Canada and Japan have adopted IFRS even though the two countries differ in many ways. What is one area in which the two countries differ?
A)Corporate structure
B)Issuance of consolidated financial statements
C)Use of common law
D)Ability to select accounting policies
Answer: A
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Rudd Ltd. has a passive investment in Burke Ltd. Rudd has elected to treat Burke as a fair value through other comprehensive income (FVTOCI)investment under IFRS 9 Financial Instruments. Which of the following statements is true?
A)Dividends from Burke are reported as other comprehensive income in Rudd's statement of comprehensive income (SCI).
B)Dividends from Burke are reported as a line item on Rudd's statement of financial position.
C)Year-to-year changes in the fair value of the investment in Burke are reported as net income in Rudd's SCI.
D)Accumulated gains and losses in the fair value of investment in Burke should be reported as a separate component in Rudd's shareholders' equity on the statement of financial position.
Answer: D
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4
Chapter 3: Business Combinations
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Q1) Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. Which of the following statements is true?
A)Littman is now a subsidiary of Sya.
B)This is an intercorporate investment for Sya.
C)Sya does not need to prepare consolidated financial statements.
D)Sya should use the equity method to reflect its investment in Littman.
Answer: C
Q2) At December 31, 20X0, Crowe Company has 80,000 common shares outstanding while Dylan Inc. has 40,000 common shares outstanding. Crowe wishes to gain control over Dylan and will enter into a reverse takeover of Dylan to gain Dylan's listing on the stock exchange. In order to facilitate the reverse takeover, which of the following would have to occur?
A)Dylan would have to issue more than 40,000 shares.
B)Dylan would have to issue less than 40,000 shares.
C)Crowe would have to issue less than 80,000 shares.
D)Crowe would have to issue more than 80,000 shares.
Answer: A
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Page 5
Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the amount of the deferred tax liability on Castle's consolidated SFP?
A)$40,000
B)$60,000
C)$100,000
D)$280,000
Q2) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the effect of recognizing the deferred tax in accounting for the acquisition?
A)Increase in liabilities and goodwill
B)Decrease in liabilities and goodwill
C)Decrease in liabilities and increase in goodwill
D)Increase in liabilities and decrease in goodwill
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Bateman uses the equity method to record this investment and has properly reflected Thivan's dividend declaration on its books. What journal entry should Bateman make when it receives the dividends?
A) \[\begin{array} { | l | c | }
\hline \text { DR Cash } & 100,000 \\
\hline \text { CR Investment in Thivan } & 100,000 \\
\hline
\end{array}\]
B) \[\begin{array} { |l | c | }
\hline \text { DR Cash } & 100,000 \\
\hline \text { CR Dividend revenue } & 100,000 \\
\hline
\end{array}\]
C) \[\begin{array} { | l | c | }
\hline \text { DR Cash } & 100,000 \\
\hline \text { CR Dividends receivable } & 100,000 \\
\hline
\end{array}\]
D)No entry is required as the journal entry for dividends declared was already received.
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Sample Questions
Q1) At the time of acquisition, the fair values of these assets were higher than their carrying values and their tax bases. In Morin's consolidation each year, it must adjust for the deferred taxes that resulted from these temporary differences. Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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Sample Questions
Q1) How should goodwill acquired in a business combination be allocated?
A)Proportionately to assets
B)Proportionately to fair-value increments
C)To cash-generating units
D)It is not allocated.
Q2) Under IFRS, how often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q3) For private enterprises that have acquired goodwill in a business combination, how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
Q4) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Amber Ltd. purchased 80% of Patel Ltd. for $1,000,000. At the time of acquisition, the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000. What is the amount of the goodwill under the entity method?
A)$(100,000)
B)$100,000
C)$280,000
D)$350,000
Q2) Which of the following statements is true about a bargain purchase?
A)The purchase consideration paid by the parent for its share of the aquiree is less than the fair value of the shares.
B)The purchase consideration paid by the parent for its share of the aquiree is equal to the fair value of the shares.
C)The purchase consideration paid by the parent for its share of the aquiree is more than the fair value of the shares.
D)The purchase consideration paid by the parent for its share of the aquiree is less than the carrying value of the shares.
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Page 10
Chapter 5: Appendix A: Step Purchases
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Q1) Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
Q2) With respect to this addition purchase, which of the following is true?
A)On the consolidated statement of financial position, the goodwill balance will increase.
B)On the consolidated statement of financial position, the common shares balance will increase.
C)Frey must use the equity method to report the additional investment.
D)Frey should ignore any changes in the fair values of Sabo's net assets between January 1, 20X4, and January 1, 20X8.
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) When a subsidiary issues shares, ________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces the NCI
D)this may increase the NCI
Q2) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Pal Co. owns 70% of the outstanding common shares of Sadd Ltd. Sadd sold an asset to Pal at a loss. There is no evidence of impairment in the value of the asset sold to Pal. Which of the following statements about the loss is true?
A)The loss should not be eliminated because this is an upstream sale.
B)The loss should not be eliminated because there is no impairment in the value of the asset.
C)The loss should not be eliminated because Pal does not own 100% of Sadd.
D)The loss should be eliminated.
Q2) In calculating the non-controlling interest in earnings, what is one of the adjustments that must be made to the subsidiary's separate-entity earnings before the NCI percentage can be applied?
A)Adjust for only realized profits from upstream sales.
B)Adjust for only unrealized profits from upstream sales.
C)Adjust for both realized and unrealized profits from upstream sales.
D)Adjust for both realized and unrealized profits from downstream sales.
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Page 13
Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) A parent company owns a subsidiary's preferred and common shares. How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q2) Ngo Ltd.'s subsidiary has restricted shares. What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
Q3) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Soft Limited owns 70% of the shares of Hard Co. On January 1, 20X5, Hard Co. issued $1,000,000 bonds payable at 6%, due on December 31, 20X10. The bonds were issued for $907,542, representing a yield of 8%. The interest is paid annually on December 31. On January 1, 20X6, Soft purchased $300,000 face value of Hard bonds for $287,700 when the bonds were yielding 7%.
Required:
Both companies use the effective interest rate to amortize the bonds. Prepare the eliminating journal entries relating to the bonds as they would appear on the consolidated worksheet. The agency method is used. Calculate the consolidated bonds payable account at December 31, 20X6, assuming there are no other bonds outstanding.
Q2) A subsidiary has purchased some bonds from its parent company. Under the par-value method, the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Page 15
Chapter 7: Segment and Interim Reporting
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Q1) Rules for interim reporting require that comparative information be presented. What comparative information should the current statement of financial position include?
A)The same quarter, last year
B)The immediate preceding quarter
C)The year end, last year
D)As budgeted for the period
Q2) In Canada and the United States, at a minimum, how often are interim financial statements required to be issued?
A)Monthly
B)Bi-monthly
C)Quarterly
D)Semi-annually
Q3) Under IAS 34, companies generally should use the discreet approach for interim reporting. However, IAS 34 outlines exceptions to this rule. Explain what these exceptions are and how they are treated in interim reports. What argument does IAS 34 provide for this treatment?
Q4) Explain what entity-wide disclosures are required by a public company. Why is this disclosure required under IFRS 8, and how is this information useful?
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Page 16
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Which approach to foreign currency transactions does IFRS support?
A)One-transaction approach
B)Two-transaction approach
C)Economic theory approach
D)Rate theory approach
Q2) Chua has a June 30 year-end. What is the net exchange gain (loss)on the contract?
A)$(13,500)
B)$(6,000)
C)$6,000
D)$13,500
Q3) Required:
Assume that the forward contract is designated as a cash flow hedge, since the sale is highly probable. Prepare the journal entries to record the sales and the derivative. Use the gross method to record the journal entries. BCL reports under IFRS.
Q4) Required:
The company uses the net method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.
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17
Chapter 9: Reporting Foreign Operations
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Q1) Under the temporal method, which of the following items would be translated using the year-end spot rate?
A)Inventory
B)Land
C)Long-term debentures
D)Building
Q2) ISP has a wholly owned subsidiary in China. This subsidiary is self-sufficient and does not rely on ISP for financing and sales. How should foreign exchange gains on translation of the subsidiary's statements to Canadian dollars be reported on ISP's consolidated financial statements?
A)Gains should be reported under shareholders' equity.
B)Gains should be reported on the statement of financial position as deferred credits and amortized in a systematic and rational manner.
C)Gains from current net assets should be credited to income, and any gains from long-term nonmonetary assets should be deferred and amortized.
D)Gains from current monetary assets should be credited to income and any gains from long-term monetary assets should be deferred and amortized.
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) When is an obligation recorded under an encumbrance system?
A)When a purchase requisition is issued
B)When a purchase order is issued
C)When goods or services are received
D)When payment is made
Q2) For the 20X6 fiscal year, KU Care, a not-for-profit organization, received $300,000 in unrestricted donations and $175,000 in donations designated specifically for cancer research. $200,000 of the unrestricted donations and $100,000 of the restricted donations were expended in 20X6 for current operations and cancer research, respectively. KU did not set up a separate fund for the restricted donation. Under the deferral method, how much of the donations should be reported as revenue in the statement of operations for the 20X6 fiscal year?
A)$300,000
B)$375,000
C)$400,000
D)$475,000
Q3) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?
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Chapter 10: Appendix A: Fund Accounting
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Q1) The Khoo Music Society, a not-for-profit organization, is purchasing musical instruments to donate to some local schools. Khoo ordered the instruments on August 1, 20X1, and requested the following delivery schedule: \(\begin{array}{|l|c|c|}
\hline\text { September } 15,20 \mathrm{X} 1 & \text { woodwinds } & (\$ 3,000) \\
\hline \text { October } 15,20 \mathrm{X} 1 & \text { strings } & (\$ 5,000) \\
\hline \text { October } 31,20\mathrm{X} 1 & \text { brass } & (\$ 6,000) \\
\hline \text { November } 15,20\mathrm{X} 1 & \text { drums } & (\$ 6,000) \\
\hline
\end{array}\) Khoo uses an encumbrance system and has properly recorded the necessary journal entry at August 1, 20X1. At November 15, 20X1, which of the following accounts should be debited and which statement will be affected?
A)Estimated commitments/statement of operations
B)Encumbrances-instruments/statement of operations
C)Estimated commitments/statement of financial position
D)Encumbrances-instruments/statement of financial position
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Chapter 11: Public Sector Financial Reporting
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Q1) The federal government provided $500,000 to a university to develop and operate a bridging program for foreign-trained accountants. Which of the following statements about this government transfer is correct?
A)This is a non-exchange transaction with an eligibility criterion.
B)This is a non-exchange transaction with a stipulation criterion.
C)This is an exchange transaction with an eligibility criterion.
D)This is an exchange transaction with a stipulation criterion.
Q2) Which of the following is not a typical characteristic of a non-business organization?
A)No equity investors
B)May have restrictive funds
C)Relies on the sale of goods and services
D)Provision of collective goods and services
Q3) Which governments or government organizations are required to follow the PSA Handbook for financial reporting purposes?
A)Governments and government business enterprises
B)Governments and government not-for-profit organizations
C)Government business enterprises and government not-for-profit organizations
D)Government not-for-profit organizations and other government organizations
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