AAT Level 4 - Professional Diploma in Accounting Consolidated Financial Statements Questions and Answers — Questions and Answers
Question 1: P plc acquired 80% of the ordinary share capital of S Ltd for £700,000. At the date of acquisition, the fair value of S Ltd's identifiable net assets was £650,000. The non-controlling interest (NCI) is to be valued using the proportionate share of net assets method. In accordance with FRS 102, what is the amount of goodwill that should be recognised in the consolidated statement of financial position?
- £50,000
- £180,000 (Correct answer)
- £130,000
- £70,000
Correct answer: £180,000
Goodwill is calculated as the sum of the consideration transferred and the value of the non-controlling interest at acquisition, less the fair value of the subsidiary's identifiable net assets. The NCI at acquisition is 20% of the net assets of £650,000, which is £130,000. Therefore, Goodwill = £700,000 (Consideration) + £130,000 (NCI) - £650,000 (Net Assets) = £180,000.
Question 2: At the year-end, Parent Ltd's inventory includes goods purchased from its wholly-owned subsidiary, Sub Ltd, for £30,000. Sub Ltd had originally produced these goods for £24,000. What is the correct consolidation adjustment required to eliminate the unrealised profit?
- Debit Group revenue £30,000, Credit Group cost of sales £30,000
- No adjustment is needed as the transaction was at arm's length
- Debit Group retained earnings £6,000, Credit Group inventory £6,000 (Correct answer)
- Debit Group inventory £6,000, Credit Group cost of sales £6,000
Correct answer: Debit Group retained earnings £6,000, Credit Group inventory £6,000
From the group's perspective, the inventory is overstated by the profit made by the subsidiary on the intra-group sale. The unrealised profit is £30,000 - £24,000 = £6,000. To eliminate this, the group's inventory must be reduced by £6,000, and the group's retained earnings (reflecting the seller's profit) must also be reduced by the same amount. The correct journal entry in the consolidation workings is Debit Group retained earnings and Credit Group inventory.
Question 3: A parent company acquires 70% of a subsidiary. At the reporting date, the subsidiary's statement of financial position shows equity of £500,000, which has increased from £400,000 at the date of acquisition due to post-acquisition profits. What is the value of the non-controlling interest (NCI) to be shown in the consolidated statement of financial position?
- £150,000 (Correct answer)
- £120,000
- £350,000
- £30,000
Correct answer: £150,000
The non-controlling interest represents the portion of the subsidiary's net assets not owned by the parent. At the reporting date, the NCI's share is their percentage ownership of the subsidiary's total equity. NCI percentage = 100% - 70% = 30%. Therefore, the NCI value is 30% of £500,000 = £150,000.
Question 4: According to FRS 102, which of the following statements best describes the appropriate accounting treatment for an investment in an associate in the consolidated financial statements?
- The associate's assets and liabilities are consolidated on a line-by-line basis.
- The investment is measured at fair value with changes recognised in profit or loss.
- The investment is accounted for using the equity method. (Correct answer)
- The investment is carried at cost less any impairment losses.
Correct answer: The investment is accounted for using the equity method.
An associate is an entity over which the investor has significant influence but not control. In the consolidated financial statements, FRS 102 requires such investments to be accounted for using the equity method. This involves initially recognising the investment at cost and subsequently adjusting it for the post-acquisition change in the investor's share of the associate's net assets.
Question 5: ParentCo sold a machine to its 100% subsidiary, SubCo, for £50,000 on the first day of the financial year. The machine had a carrying amount of £40,000 in ParentCo's books. The group depreciates these machines at 20% per annum on a straight-line basis. What is the net adjustment to reduce the carrying amount of non-current assets in the consolidated statement of financial position at the year-end?
- £10,000
- £2,000
- £8,000 (Correct answer)
- £12,000
Correct answer: £8,000
The initial unrealised profit on the sale is £50,000 - £40,000 = £10,000. SubCo will charge depreciation of 20% x £50,000 = £10,000. From the group's perspective, depreciation should have been 20% x £40,000 = £8,000. The excess depreciation charged is £2,000. This excess depreciation is a realisation of part of the initial unrealised profit. The remaining unrealised profit at year-end is £10,000 - £2,000 = £8,000. This is the amount by which the asset's carrying value is overstated in the consolidated accounts and requires adjustment.
Question 6: Under FRS 102, which of the following conditions is NOT, by itself, sufficient to establish that a parent entity has control over a subsidiary?
- Power over more than 50% of the voting rights through an agreement with other investors.
- The power to appoint or remove a majority of the members of the board of directors.
- Ownership of more than 50% of the entity's voting power.
- The ability to obtain significant economic benefits from the entity's activities. (Correct answer)
Correct answer: The ability to obtain significant economic benefits from the entity's activities.
Control under FRS 102 is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. While obtaining benefits is a necessary part of the definition, the ability to obtain them is not sufficient on its own; the parent must also have the 'power to govern' to establish control. The other options are all explicit examples of how power can be demonstrated.
AAT Level 4 - Professional Diploma in Accounting Consolidated Financial Statements Questions and Answers
P plc acquired 80% of the ordinary share capital of S Ltd for £700,000.
At the date of acquisition, the fair value of S Ltd's identifiable net assets was £650,000.
The non-controlling interest (NCI) is to be valued using the proportionate share of net assets method.
In accordance with FRS 102, what is the amount of goodwill that should be recognised in the consolidated statement of financial position?