Topic_9_Practice_Questions_Solutions

Topic_9_Practice_Questions_Solutions - 1 Week 9 20 Sept(JK...

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1 Week 9 20 Sept. (JK) Lecture Topic 9 Consolidation: Introduction and Basics Acquisition analysis for business combination o Allocation of cost of business combination o Measurement of goodwill or excess Explain the meaning of control and identify the group subject to consolidation Prepare the pre-acquisition entries for the investment asset in the subsidiary Fair value adjustments on consolidation including tax consequences Prepare basic consolidation worksheet o Line-by-line aggregation o Eliminations and adjustments Practice Questions: Picker et al, Ch.22 DQ1, DQ2, DQ3, DQ4, DQ5 Picker et al, Ch.23 DQ1, DQ2, DQ5, DQ6 Exercise 23.1 Exercise 23.10 Problem 23.3 Chapter 22 – Controlled entities: the consolidation method DISCUSSION QUESTIONS 1. What is a subsidiary? A subsidiary is an entity [including entities other than companies such as partnerships] that is controlled by another entity [the parent] 2. What is meant by the term “control”? Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Discuss: - power criterion - capacity vs actual control - factors indicating control - the benefits criterion - the link between the 2 criteria 3. Why should control be the key criterion for consolidation? Choice of criterion should be based on its application producing the most relevant reliable information to users of financial statements.
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2 Need to consider the objectives of preparing the consolidated financial statements - see Question 4 below. There should be a link between the purpose of the statements and the consolidation criterion. 4. For what purposes are the consolidated financial statements prepared? Possible objectives are: - to show all the assets under the control of the parent’s management; possible link between assets being controlled benefits and the consolidation control criterion. - economic responsibility of parent management - accountability of parent management - assessment of performance of parent management See section 22.3.5 of the text. 5. What factors could be considered in determining when one entity controls another? Factors relate to determining the ability of the parent to control the board of directors of the subsidiary: - percentage ownership of the parent in the subsidiary - shareholder blocks within the non-controlling interest (NCI) - friendly parties such as banks in the NCI - dispersion of the NCI geographically - interest groups such as green groups in the NCI - historical attendance at AGM [annual general meeting] - proxy votes - performance of parent management and support of shareholders
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3 Chapter 23 – Consolidation: wholly owned subsidiaries DISCUSSION QUESTIONS 1. Explain the purpose of the pre-acquisition entries in the preparation of consolidated financial statements.
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Topic_9_Practice_Questions_Solutions - 1 Week 9 20 Sept(JK...

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