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Student name:__________ TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. The Conceptual Framework overrides IFRS Standards to ensure consistency with existing accounting policies. true false ASPE is often different than IFRS due to the cost of preparing financial statements to comply with complex standards being greater than the benefit received by users of those statements. true false The primary emphasis of the Conceptual Framework is the proper recognition of income and expenses. true false MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. In which of the following situations would professional judgment NOT be required in decision making? Recognition of revenue. The making of accounting estimates. Disclosure of information in the notes to the financial statements. Use of IFRS or ASPE for publicly traded companies in Canada. Which of the following statements pertaining to generally accepted accounting principles (GAAP) in Canada is CORRECT? CPA Canada harmonized its accounting standards with those of the United States. A Canadian company listed on a stock exchange in the United States (U.S.) is permitted to use U.S. GAAP instead of IFRS. Version 1

Rate-regulated public companies (e.g., pipelines) not registered with the U.S. Securities and Exchange Commission are required to use IFRS. Part I (i.e., IFRS) of the CPA Canada Handbook is only to be used by publicly accountable enterprises. Which of the following examples does NOT demonstrate the interrelationships of financial statement elements? A sale on account will increase assets and equity. Depreciation of equipment will decrease assets and decrease equity. The payment of a payable will decrease liabilities and increase assets. The contribution of capital will increase an asset and increase equity. Which of the following statements pertaining to GAAP for publicly accountable enterprises (PAEs) is correct? PAEs include not-for-profit organizations. Commencing in 2011, most Canadian PAEs are required to elect to report under either IFRS or ASPE on a prospective basis. PAEs include an entity, that as one of its primary businesses, holds assets in a fiduciary capacity for a broad group of outsiders. CPA Canada and the Financial Accounting Standards Board (FASB) harmonized the accounting standards of the United States and Canada for PAEs beginning in 1998. Which of the following statements pertaining to private enterprises (PEs) is INCORRECT? PEs may adopt either ASPE or IFRS but once a set of standards is adopted, the PEs are not permitted to apply some standards from ASPE and others from IFRS. The accounting standards for a PE are included in a separate part of the CPA Canada Handbook. PEs with annual revenues over $10,000,000, are required to report under IFRS. A PE is 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.

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Which of the following organizations are required to use only the IFRS (Part I) in Canada? All corporations, government agencies and private companies. Public companies and private companies whose shareholders' equity is in excess of $500,000,000 at any particular year-end. Public companies, private companies and not-for-profit organizations. Government business enterprises. Which of the following statements pertaining to Not-for-Profit-Organizations (NFPO) is INCORRECT? A government NFPO has the choice to follow either the 4200 series of the CPA Canada Public Sector Accounting (PSA) Handbook or the PSA Handbook without the 4200 series. A non-government NFPO has a choice to follow Part I (IFRS) or Part III of the CPA Canada Handbook. A government NFPO has a choice to follow Part I (IFRS) of the CPA Canada Handbook or the CPA Canada Public Sector Accounting Handbook. A non-government NFPO that applies Part III of the CPA Canada Handbook will also apply relevant sections from Part II (ASPE) of the CPA Canada Handbook. For which of the following types of organizations does the CPA Canada Handbook NOT provide specific accounting standards? Publicly accountable enterprises. Private enterprises. Not-for-profit organizations. Proprietorships. Which of the following is NOT a reason why a Canadian private company would elect to report under IFRS? The company is planning to go public in the near future. The company seeks comparability with public companies of a similar size.

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It is likely to be less expensive than reporting under ASPE. The company is a subsidiary of a Canadian public company. The current ratio measures: liquidity. solvency. profitability of assets. profitability of owners' investment. The formula for the return on equity ratio is: current assets - current liabilities current assets/current liabilities total debt/shareholders' equity net income/shareholders' equity The debt-to-equity ratio measures: liquidity. solvency. profitability of assets. profitability of owners' investment. Which of the following statements pertaining to the quality of financial statements or financial reporting is FALSE? The quality of financial statements is low if the financial statements faithfully represent what happened during the past period. The quality of financial reporting is based on how accurately the financial statements present the actual situation of the reporting entity.

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The quality of the financial statements is low if they provide useless and unreliable information to assess the prospects of future earnings. The quality of financial reporting is high if the investor is able to assess the likelihood of making a reasonable return with an acceptable level of risk. Sonic Ltd. acquired equipment on January 1, 2026 at a cost of $500,000. The equipment has an estimated useful life of 10 years and a residual value of $25,000. It is depreciated on a straightline basis and Sonic has a December 31 year-end. On December 31, 2026 and December 31, 2027, the equipment was appraised and determined to have a fair value of $565,000 and $570,000 respectively; its estimated useful life and residual value did not change. Which of the following statements is INCORRECT? Under ASPE, on December 31, 2027 the carrying amount of the equipment will be $427,500. Using IAS 16 will result in $12,500 of additional depreciation expense in 2027. Under IFRS, the revaluation surplus will cause IFRS-based shareholders’ equity to be $165,000 higher at the end of 2027. Under ASPE, the depreciation expense in 2026 is $47,500. A generic framework for case analysis is recommended not only for integration and analysis cases in an academic setting but can also be applied to business decision-making situations. Which of the following steps in a case analysis would NOT be appropriate? Identifying the needs of the users. Identifying and ranking the issues that must be addressed. Creating a list of alternatives that are relevant and viable to the situation. Providing all identified alternatives to the users in the final report. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. Describe the interrelationships of the financial statement elements and include an example.

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X Inc. and Y Inc. are virtually identical companies with identical cost structures and very similar business practices operating in the same lines of business. X Inc. and Y Inc. are both public companies based in Canada and follow IFRS. The following are the condensed income statements for both companies:

Sales: Less: Cost of Goods Sold Gross Margin Administrative Expenses Net Income

Required: Given the information provided, what are some possible causes for the differing results of these companies?

Briefly discuss the external users need for high-quality financial information.

Explain ways that management can mispresent the financial situation of a company.

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Provide the procedures used to analyze a company's financial statements to determine its future prospects.

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Answer Key Test name: Chapter 1 FALSE TRUE FALSE Although the titles balance sheet or income statement is recommended in IAS 1, it is not mandatory. Titles such as the statement of financial position or statement of profit or loss are permitted. D B C C C D C D C A D B A A

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Under ASPE, the depreciation expense is $47,500 per year [($500,000 - $25,000)/10 years]. The carrying amount on December 31, 2026 is $452,500 ($500,000 - $47,500). The carrying amount on December 31, 2027 is $405,000 ($452,500 - $47,500). Under IAS 16, depreciation expense in 2027 is $60,000 [($565,000 – 25,000)/9]; therefore, the difference between depreciation under ASPE vs IFRS is $12,500 ($60,000 - $47,500). The revaluation surplus for 2027 is $165,000 ($570,000 - $405,000). The revaluation surplus is reported in OCI each year and is accumulated as a separate component of shareholders’ equity. D The final report would not have a discussion of alternatives for each issue unless the issue was very contentious. Furthermore, if an alternative was dismissed or determined to be inappropriate, it would be redundant to provide arguments to the users in the final report. Short Answer Assets are equal to liabilities plus shareholders’ equity. The shareholders’ equity is most commonly made up of contributed capital and retained earnings. Retained earnings are cumulative and are increased by an entity’s net income (conversely, decreased by an entity’s net losses) and decreased by declared dividends. Net income, in simple terms, is revenues less expenses. As an example, when an expense is incurred, net income will decrease. A decrease to net income will decrease retained earnings which in turn decreases shareholders’ equity. If the expense is paid for with cash, cash will decrease which will result in a balanced balance sheet. Short Answer There could be many possible explanations for these differing results. Y Inc.'s net income is $100,000, compared to X Inc.'s $300,000. Conversely, Y Inc.'s sales are twice those of X Inc. What is particularly noteworthy is Y Inc.'s 20% gross margin compared to X Inc.'s 50% gross margin. This could be due to the accelerated depreciation (double-declining versus straight-line) on Y Inc.'s depreciable properties. Y Inc. could have also accelerated revenue recognition. Smoothing practices may have been applied to reduce Y Inc.'s income, and of course, its tax liability. Y Inc.'s income may have been further reduced by higher estimates (for example, bad debt expense, warranty costs, etc.) which are not necessarily be indicative of economic conditions. If Y Inc. has attempted to distort the real situation, it is possible that Y Inc. may have reported sales that never occurred or reported inventory that does not exist. Note: The above analysis is not exhaustive. Students may be able to identify other valid differences.

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Short Answer External users require high-quality financial information to enable them to assess the likelihood of making a reasonable return with an acceptable level of risk. It is important that the quality of the financial statements provide useful and reliable information to assess the prospects of future cash flows or future earnings. The users want the information to accurately represent what has happened during the past period. Distorting the real situation is not a faithful representation of the actual situation. The result is the external users are not able to make appropriate decisions as to whether to increase, decrease or maintain their level of participation with the reporting entity in their capacity as investor, creditor, supplier and/or customer. Short Answer Management can represent the financial situation of a company by • using an accounting method that does not match the actual situation, • managing earnings by increasing profits by recognizing revenue earlier than usual or delaying the recognition of an expense to a later period, • not following GAAP for certain transactions or • reporting fictious transactions. Note: Students may be able to provide other methods not listed above. Short Answer Procedures to analyze a company's financial statements: Perform common-size analysis and interpret the results. Review the accounting policies and estimates used by the company to ensure that they are appropriate. Adjust the financial statements, as necessary, to use appropriate accounting policies and estimates. Calculate the ratios for one or more periods. Compare the ratios to relevant benchmarks. Interpret the results of the analysis to determine whether they are better, worse or the same as the benchmark. Decide whether to increase, decrease or maintain the level of participation with the reporting entity.

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Student name:__________ TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. If an investor's ownership interest in a significant influence investment increases or decreases, all changes from accounting at fair value to the use of the equity method (or vice-versa) are to be handled prospectively. true false MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. Beginning on or after January 1, 2018, IFRS 9 requires all non-strategic investments to be reported using which of the following methods? Fair value Cost Historical Impaired value An investment in an associate is an investment in a corporation that allows the investor to exercise significant influence over the strategic operating and financing policies of the investee. allows the investor to exercise significant influence over only the financing policies of the investee. allows the investor to exercise significant influence over only the operating policies of the investee. allows the investor to exercise significant influence over all decision making for the investee. Which of the following is the primary factor used to distinguish between non-strategic investments and strategic investments? The rate of return. The amount paid for the investment. The level of influence over the strategic decisions of the investee company. Version 1

The length of time the investment is held by the investor. Which of the following statements is TRUE under IFRS 9? All unrealized gains and losses on equity investments flow through other comprehensive income (OCI). Unrealized gains and losses on fair value through profit and loss (FVTPL) investments are included in other comprehensive income (OCI). Unrealized gains and losses on equity investments may be included in other comprehensive income (OCI) only if management irrevocably elects to do so on initial acquisition. Cumulative gains or losses in accumulated other comprehensive income (AOCI) are transferred to net income when the equity investment is sold. Gains and losses on fair value through profit or loss (FVTPL) investments: are included in net income, regardless of whether they are realized or not. are included in net income only when the investment has become permanently impaired. are included in net income only when realized. are not recorded until the securities are sold. How are realized gains from the sale of fair value through other comprehensive income (FVTOCI) equity investments accounted for under IFRS 9? They are recycled to net income from accumulated other comprehensive income. They remain in accumulated other comprehensive income. They are transferred from accumulated other comprehensive income directly to retained earnings. They are transferred from net income to contributed surplus. Which of the following statements is TRUE regarding the equity method? The equity method is used for reporting gains or losses for non-strategic investments. The investor's share of the associate's dividends declared is reported in net income.

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The investor's investment in the associate changes in direct relation to the changes taking place in the associate's equity accounts. The equity method reports unrealized gains and losses on revaluations to fair value in net income. What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28 Investments in Associates and Joint Ventures? 25% or more 1% to 20% 20% to 50% 50% or more Which of the following methods uses procedures closest to those used in preparing consolidated financial statements? The fair value through profit or loss (FVTPL) approach The cost method The fair value through other comprehensive income (FVTOCI) approach The equity method Which of the following is NOT a possible indicator of significant influence? The investor can elect members to the Board of Directors. The investor has the right to participate in the policy-making process. The investor has engaged in numerous intercompany transactions with the associate. The associate's new CEO was previously CEO of the investor company. Which of the following statements is CORRECT? Significant influence is only possible if the investor owns more than 50% of the voting shares of the associate. An ownership interest between 20% and 50% always implies significant influence. Version 1

An ownership interest of greater than 0% but less than 10% can never imply significant influence. Significant influence is possible even if the investor owns less than 20% of the voting shares of the associate. The difference between the investor's cost and the investor's percentage of the carrying amount of the associate’s identifiable net assets is known as: goodwill. the acquisition differential. the fair value increment. the excess book value. The amount an investor is willing to pay in excess of the fair value of the company’s identifiable net assets is: pro-rated across the company's identifiable net assets. charged to retained earnings. reported as goodwill. written offby the investor during the year following the acquisition. When are gains on intercompany transfers of assets between an investor and an associate recognized as part of investment income that is accounted for by the investor under the equity method? In the period when the intercompany transfer takes place. In the period(s) when the assets are sold to outside entities or consumed by the purchaser. They are never recognized. They are recognized only when the investment in the associate is sold. ___________ Investments are classified as current if they are actively traded and intended by management to be sold within one year.

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fair value through profit or loss (FVTPL) cost method equity method fair value through other comprehensive income (FVTOCI) When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency and profitability, the real economic situation is ________ for the four different methods. completely different identical almost similar except for the equity method almost similar except for the fair value methods Which of the following reporting requirements under Accounting Standards for Private Enterprises (ASPE) is permitted for non-strategic investments in equity instruments? If the equity instruments are quoted in an active market, they are reported at fair value, and any changes in fair value are reported in OCI. If the equity instruments are quoted in an active market, they are reported using either the equity method or cost method. If the equity instruments are not quoted in an active market, they are reported at cost less any reduction for impairment. An election to measure equity investments at fair value are not permitted under ASPE. When reporting under the Accounting Standards for Private Enterprises (ASPE), which of the following statements is true where the investor has significant influence over the investee? If the investee's equity securities are traded in an active market, the investor is permitted to use the cost method, equity method or elect to use fair value. The investor is permitted to use either the cost method or equity method regardless of whether the investee's equity shares are traded in an active market or not.

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If the investee's equity securities are not traded in an active market, the investor is permitted to use the cost method. The investor may irrevocably elect to account for such investments at fair value with all fair value changes reported in other comprehensive income. Which of the following statements is correct when an investment changes from significant influence to FVTPL? The equity method will continue to be used until the entire investment is sold. On the date of change, the investor is required to remeasure at fair value any investment the investor retains in the former associate. When the investor loses significant influence, the change in reporting method is accounted for retrospectively. The investor will, on a prospective basis, account for its remaining investment using the cost method. Using the equity method, what would be the carrying value of X's Investment in Y at the end of 2024? $100,000 $98,800 $118,000 $80,800 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? Any such gains or losses are to be charged directly to retained earnings net of tax. 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 is added to or deducted from the investment account.

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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 is added to or deducted from the investment account. No specific accounting treatment is required. These items are only required to be disclosed in notes to the financial statements. If the investor sells part of its investment in an associate reported by the equity method, which of the following is used to calculate the gain or loss on the sale of these shares? The average carrying amount of the investment The FIFO method The LIFO method The specific identification method If an investment reported by the equity method suffers an impairment loss and the value in use of the investment subsequently recovers, which of the following is the appropriate treatment? It may be revalued to fair value with the revaluation gain adjusted to goodwill. If the recoverable amount increases in subsequent periods, the impairment loss can be reversed. It may be revalued to fair value with the revaluation gain going to net income, even if the recorded gain will exceed the original impairment loss. None of the choices are correct. Once an investment has been written down, it cannot subsequently be written up. If an investor is reporting in compliance with the International Financial Reporting Standards (IFRS) and has an investment with significant influence over the investee, what are the disclosure requirements for the investor if the investment is in shares which are actively traded on an exchange? The investment must be reported at fair value through profit and loss (FVTPL). The investment must be reported at fair value through other comprehensive income (FVTOCI). The investment must be reported using the equity method with the fair value disclosed in the notes to the financial statements. The investment must be reported using the cost method. No additional disclosure is required. Version 1

How does the accounting for other comprehensive income differ between the International Financial Reporting Standards (IFRS) and the Accounting Standards for Private Enterprises (ASPE)? Under IFRS, realized gains are transferred from other comprehensive income to net income when realized; under ASPE, realized gains are transferred from other comprehensive income directly to retained earnings. Under ASPE, realized gains are transferred from other comprehensive income to net income when realized; under IFRS, realized gains are transferred from other comprehensive income directly to retained earnings. There is no difference between accounting for other comprehensive income under IFRS and under ASPE. Other comprehensive income does not exist under ASPE. Which of the following statements is true regarding an investment in associate that meets the criteria to be classified as held for sale? The investment in associate is to be reported as a non-current asset. The intention of management is to recover the carrying value of the investment through continued operations. The sale of the investment in associate must be highly probable. The investment in associate is to be measured at fair value. In the situation where an investor's share of an associate's losses exceeds the carrying amount of the investment, which of the following is a true statement? After the investor's interest is reduced to zero, any additional losses will, on a pro-rata basis, reduce the value of other investments the investor may have in the associate. After the investor's interest is reduced to zero, any additional losses will be recognized as a gain in the computation of net income. After the investor's interest is reduced to zero, any additional losses will reduce any existing trade receivables, trade payables or any long-term receivables for which adequate collateral exists.

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After the investor's interest is reduced to zero, any additional losses will be recognized as a liability to the extent the investor has legal obligations on behalf of the associate. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. On January 1, 2026, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc.'s outstanding voting shares. Joyce has significant influence over Mark and reports the investment using the equity method. Mark's earnings for 2026 and 2027 were $100,000 and $200,000, respectively. Mark declared and paid dividends in the amount of $20,000 and $10,000 during 2026 and 2027, respectively. Required: Calculate the balance in the Investment in Mark Inc. account as at December 31, 2027.

X Ltd. (X) purchased 40% of Y Ltd. (Y) on January 1, 2026, for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2026 and 2027 showed the following:

Income (loss) before income taxes Income tax expense (recovery) Net income (loss) Other comprehensive income (net of tax) Comprehensive income

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At December 31, 2026, the fair value of the investment was $440,000 and at December 31, 2027, the fair value of the investment was $433,000. Required: Prepare X's journal entries for 2026 and 2027, assuming that this is a non-strategic investment and is accounted for at fair value through profit and loss (FVTPL).

YYC Ltd. (YYC) purchased 40% of YEG Ltd. (YEG) on January 1, 2026, for $600,000. The fair value of YEG’s identifiable net assets was $1,400,000 on January 1, 2026. The excess payment was attributed to goodwill. There were no goodwill impairment losses in 2026 and 2027. YYC was able to exercise significant influence over the strategic operating and financing policies of YEG. YYC uses the equity method to report its investment in YYC. YEG paid dividends of $150,000 in each year. YEG's income statements for 2026 and 2027 showed the following

Income before income taxes Income tax expense Net income Other comprehensive income (loss) (net of tax) Comprehensive income

At December 31, 2026, the fair value of the investment was $620,000 and at December 31, 2027, the fair value of the investment was $625,000. Required: 1. Prepare YYC's journal entries for 2026 and 2027. 2. Calculate the balance in the Investment in YEG account as of December 31, 2027.

Abbot Corporation (Abbot) has made a series of investments in Pine Corp. (Pine), one of its major customers. Abbot has a December 31 year end. The management of Abbot has been

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impressed by the products produced and sold by Pine and its market success. These investments are only going to be held for a short period of time. The market price of Pine stock on December 31, 2026 and 2023, was $200 and $250, respectively, per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the share purchases and sales that Abbot entered in 2026 and 2027: Date March 31, 2026 June 30, 2026 September 30,2026 September 30,2026

Assume that Abbot accounts for its investment in Pine at fair value through profit and loss (FVTPL). Required: a) Prepare the journal entries to record the transactions in 2026 and 2027 with respect to Abbot's investment in Pine. b) How would Abbot disclose the investment in Pine on its balance sheet?

Abbot Corporation (Abbot) has made a series of investments in Pine Corp. (Pine), one of its major customers. Abbot has a December 31 year end. The management of Abbot has been impressed by the products produced and sold by Pine and its market success. These investments are only going to be held for a short period of time. The market price of Pine stock on December 31, 2026 and 2027, was $200 and $250, respectively, per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the share purchases and sales that Abbot entered in 2026 and 2027:

March 31, 2026 June 30, 2026 September 30, 2026 September 30, 2027

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Assume that Abbot accounts for its investment in Pine at fair value through other comprehensive income (FVTOCI). Required: a) Prepare the journal entries to record the transactions in 2026 and 2027 with respect to Abbot's investment in Pine. b) How would Abbot disclose the investment in Pine on its balance sheet?

Pry Corporation (Pry) acquired 20,000 of the 100,000 outstanding common shares of Syrt Company (Syrt) on January 1, 2026, for cash consideration of $200,000. During 2026, Syrt had net income of $120,000 and paid dividends of $80,000. At the end of 2026, shares of Syrt were trading for $11 each. Pry has a December 31 year end for all years. During 2027, Syrt had a net loss of $60,000 and paid dividends of $40,000. Net income for the first half of the year was $80,000 and the net loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2027, Pry sold 5,000 shares of Syrt for a consideration of $12 per share. At the end of 2027, the share price of Syrt had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.) Required: Provide journal entries for Pry for all transactions relating to its investment in Syrt for the year 2027 if it accounts for its investment in Syrt as a fair value through profit and loss (FVTPL) investment.

On January 1, 2026, Black Corporation (Black) purchased 15,000 of the 100,000 (15%) outstanding shares of White Corporation (White) for cash consideration of $498,000. From Black's perspective, White is a fair value through profit or loss (FVTPL) investment. The fair

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value of Black's investment was $525,000 at December 31, 2026. On January 1, 2027, Black purchased an additional 30% of White's shares for cash consideration of $1,110,000. The second share purchase allowed Black to exert significant influence over White. During the two years, White reported the following results:

2026 2027

Required: With respect to this investment, prepare Black's journal entries for both 2026 and 2027.

Dragon Corporation (Dragon) acquired a 7% interest in the outstanding shares of Slayer Inc. (Slayer) on January 1, 2025, at a cost of $200,000. Dragon was a private company and reported in compliance with the Accounting Standards for Private Enterprises (ASPE). Dragon accounted for Slayer, whose shares are not publicly traded, using the cost method. Slayer reported net income and made dividend payments to its shareholders as noted below. On December 31, 2027, Slayer declared bankruptcy because of a series of losses as noted.

2025 2026 2027

Required: (a) Prepare the journal entries that Dragon would make in 2022, 2026 and 2027. (b) Prepare the general ledger account for Dragon's investment in Slayer at all relevant dates.

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Ronen Corporation owns 35% of the outstanding voting shares of Western Communications Inc. over which it exerts significant influence. The carrying value of its investment as at October 31, 2022 was $3,750,000. Ronen has now designated its investment in Western as fair value through profit or loss (FVTPL) because of the open market purchase of a 55% interest in Western by Overhaul Corp. Western is in financial distress. The market value of Ronen's 35% interest is now $2,000,000. Required: a) What is the accounting result of a change from the equity method of accounting to FVTPL? b) Do any journal entries need to be recorded by Ronen because of this change? If so, what is the entry?

Past Corporation (Past) acquired 22,000 of the 100,000 outstanding common shares of Stomp Company (Stomp) on January 1, 2026, for cash consideration of $240,000. Both Past and Stomp have December 31 year ends. During 2026, Stomp had net income of $160,000 and paid dividends of $55,000. At the end of 2026, shares of Stamp Company were trading for $14 each. During 2027, Stomp Company had a net loss of $60,000 and paid dividends of $40,000. Net income for the first half of the year was $80,000 and the net loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2027, Past sold 5,000 shares of Stomp for a consideration of $16 per share. At the end of 2027, the share price of Stomp had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.) Required: Provide journal entries for Past for all transactions relating to its investment in Stomp for the year 2027 if it accounts for its investment in Stomp using the equity method. Round all calculations to nearest dollar.

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One of the changes introduced in IFRS 9 Financial Instruments was that realized gains on investments valued at fair value with revaluations through other comprehensive income were to be taken to retained earnings without being recycled through net income. Briefly explain how this eliminated one possible method of earnings management that previously allowed companies' discretion in managing net income.

SECTION BREAK. Answer all the part questions. On January 1, 2025, X Inc. (X) purchased 12% of the voting shares of Y Inc. (Y) for cash of $100,000. X has the ability to exercise significant influence over the strategic operating and financing policies of Y. X uses the cost method for internal recording purposes and the equity method for external reporting purposes. Y's net income and declared dividends for the following three years are as follows:

2025 2026 2027

Using the cost method, which of the following entries would have to be made to record X's acquisition of Y's shares on January 1, 2025?

Investment in Y Cash

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Investment in Y Cash

No entry required. Using the cost method, which of the following entries would have to be made to record X's share of Y's net income for 2025?

Investment in Y Investment income

No entry required. Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2025?

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Dividend income receivable Dividend income

Dividend income receivable Investment in Y

Investment in Y Dividend income

No entry required. Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2026?

Dividend income receivable Dividend income

Dividend income receivable Investment in Y

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Dividend income receivable Dividend income Investment in Y

No entry required. Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2027?

Investment in Y Dividend income

Dividend income receivable Investment in Y

Dividend income receivable Dividend income

No entry required. Using the cost method, what would be the carrying value of X's Investment in Y at the end of 2027? $100,000 $98,800

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$90,000 $91,200 Using the equity method, which of the following entries would have to be made to report X's acquisition of Y's shares?

Investment in Y Cash

Investment in Y Goodwill

No entry required. Using the equity method, which of the following entries would have to be made to record X's share of Y's net income for 2025?

Investment in Y Equity method income

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Investment in Y Equity method income

No entry required. Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2025?

Dividend income receivable Dividend income

Dividend income receivable Investment in Y

Investment in Y Dividend income

No entry required.

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Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2026?

Dividend income receivable Dividend income

Dividend income receivable Investment in Y

Dividend income receivable Dividend income Investment in Y

No entry required. Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2027?

Dividend income receivable Dividend income

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Dividend income receivable Investment in Y

Dividend income receivable Dividend income Investment in Y

No entry required. Post Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2026, for cash consideration of $200,000. During 2026, Stamp Company had net income of $120,000 and paid dividends of $80,000. Post Corporation has a December 31st year end. At the end of 2026, shares of Stamp Company were trading for $11 each. Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What entry will the company make to record the dividends received from Stamp Company for 2026?

Cash Dividend income

Cash Investment in Stamp Company

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Cash OCI-unrealized gain

No entry required. Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What entry will the company make at December 31, 2026, to record the revaluation of the investment?

Investment in Stamp Company Unrealized gain (net income)

Investment in Stamp Company Unrealized gain (OCI)

Unrealized loss (net income) Investment in Stamp Company

No entry required. Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What will the balance in the Investment in Stamp Company be as at December 31, 2026? $200,000 $208,000

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$220,000 $240,000 Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What entry will the company make at December 31, 2026, to record the revaluation of the investment?

Investment in Stamp Company Unrealized gain (net income)

Investment in Stamp Company OCI-Unrealized gain

Unrealized loss (net income) Investment in Stamp Company

No entry required. Assume Post Corporation does not have significant influence and reports its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What entry will the company make to record the dividends received from Stamp Company for 2026?

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Cash Dividend income

Cash Investment in Stamp Company

Cash OCI-Unrealized Gain

No entry required. Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What will the balance in the Investment in Stamp Company be as at December 31, 2026? $200,000 $208,000 $220,000 $240,000 Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What entry will the company make to record the dividends received from Stamp Company for 2026?

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Cash Dividend income

Cash Investment in Stamp Company

Cash OCI-Unrealized gain

No entry required. Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What entry will the company make to record the revaluation of the investment at December 31, 2026?

Investment in Stamp Company Unrealized gain (net income)

Investment in Stamp Company OCI-Unrealized gain

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Unrealized loss (net income) Investment in Stamp Company

Investment in Stamp Company Equity method income

Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What will the balance in the Investment in Stamp Company be at December 31, 2026? $200,000 $208,000 $220,000 $240,000 Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What entry will the company make to record the dividends received from Stamp Company for 2026?

Cash Dividend Income

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Cash OCI-Unrealized gain

Cash Investment in Stamp Company

No entry required. Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What entry will the company make to record the revaluation of the investment at December 31, 2026?

Investment in Stamp Company Unrealized gain (net income)

Investment in Stamp Company OCI-Unrealized gain

Unrealized loss (net income) Investment in Stamp Company

No entry required.

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Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What will the balance in the Investment in Stamp Company be at December 31, 2026? $200,000 $208,000 $220,000 $240,000 Ocean Enterprises Inc. (Ocean) acquired 15% of the 100,000 outstanding common shares of Whale Ltd. (Whale) on January 1, 2026, for a cash consideration of $180,000 and a further 10% of the company's common shares a year later for $130,000. On July 1, 2027, Ocean sold half of its holding in Whale for proceeds of $175,000. Whale earned income of $150,000 in 2026 and $180,000 in 2027 (evenly over both years) and paid a regular semi-annual dividend of $40,000 on June 30th and December 31st of each year. Ocean does not have significant influence over Whale. The company's shares were trading for $13 at the end of 2026 and $11.75 at the end of 2027. Assume Whale has classified the investment as fair value through profit and loss (FVTPL). Prepare dated journal entries for Ocean for 2026 to account for its investment in Whale and any related income therefrom.

Assume Whale has classified the investment as fair value through profit and loss (FVTPL). Prepare dated journal entries for Ocean for 2027 to account for its investment in Whale and any related income therefrom.

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Assume Whale has classified the investment as fair value through other comprehensive income (FVTOCI). Prepare dated journal entries for Ocean for 2027 to account for its investment in Whale and any related income therefrom.

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Answer Key Test name: Chapter 2 TRUE A A C C A C C C D D D B C B A FVTPL investments are classified as current assets if they are actively traded and intended by management to be sold within one year. Otherwise, they are classified as noncurrent assets. B When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency, and profitability, the real economic situation is identical for the four different methods. C C Version 1

B B Under the equity method, the carrying value of the Investment in Y at December 31, 2024, is calculated as follows: $100,000 + [0.12(50,000 + $70,000 + $30,000 - $20,000 - $80,000 - $60,000)] = $98,800. Alternatively: Acquisition Share of net income 2025 Share of dividends paid 2025 Balance, Dec.31, 2025 Share of net income 2026 Share of dividends paid 2026 Balance, Dec.31, 2026 Share of net income 2027 Share of dividends paid 2027 Balance, Dec.31, 2027

C A B If an investment reported by the equity method suffers an impairment loss, it may be written up in value but not more than the amount of the impairment loss that was recorded at the time of impairment. C D C D Short Answer

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Joyce Inc. Investment in Mark Account As at December 31, 2027 Acquisition cost: Pro-rata share of Mark’s 2026 net income Pro-rata share of Mark’s 2026 dividends Pro-rata share of Mark’s 2027 net income Pro-rata share of Mark’s 2027 dividends Investment in Mark Inc. as at December 31, 2027

Short Answer 2026: Investment in Y Cash To record X’s purchase of Y Cash Dividend revenue To record receipt of dividends from Y-2026 Investment in Y Unrealized gains (reported in net income) To record investment at fair value at December 31, 2026 2027: Cash Dividend revenue To record receipt of dividends from Y-2027 Unrealized loss (reported in net income) Investment in Y To record investment at fair value at December 31, 2027

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Short Answer 1. Investment in YEG Cash To record YYC’s purchase of YEG Cash Investment in YEG To record receipt of dividend from YEG in 2026 ($150,000 x 40%) Investment in YEG Equity method income (40% x $80,000) Other comprehensive income related to YEG (40% x 20,000) To record the 2026 share of net income and OCI gain from YEG.

Cash Investment in YEG To record receipt of dividend from YEG in 2027 ($150,000 x 40%). Other comprehensive loss related to YEG (40% x 25,000) Investment in YEG Equity method income (40% x $280,000)

To record the 2027 share of net income and OCI loss from YEG.

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2. Original cost of investment in YEG Add: 2026 share of net income and OCI gain from YEG. Less: 2026 dividends from YEG Add: 2027 share of net income and OCI loss from YEG. Less: 2027 dividends from YEG Investment in YEG – December 31, 2027

Short Answer

March 31, 2026 June 30, 2026 September 30, 2026

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Unrealized gain at December 31, 2022: $600,000 (3,000 × $200) − $375,000 = $225,000. a) 03.31.2026

06.30.2026

09.30.2026

12.31.2026

09.30.2027

b) The investment would be included in current assets given management's intention to hold them for a short period of time.

Short Answer

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Date March 31, 2026 June 30, 2026 September 30, 2026

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Unrealized gain at December 31, 2022: $600,000 (3,000 × $200) − $375,000 = $225,000. a) 03.31.2026

Investment in Pine Cash

To record investme 06.30.2026

Investment in Pine Cash

To record investme 09.30.2026

Investment in Pine Cash

To record investme 12.31.2026

Investment in Pine

Unrealized gain (O

To record investme 12.31.2026

Cash Dividend income

To record dividend 09.30.2027

Cash

Gain on sale (OCI)

Investment in Pine

To record disposal

Accumulated OCI–

Retained earnings–

To transfer realized

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b) The investment would be included in current assets given management's intention to hold them for a short period of time. Short Answer June 30, 2027

Cash Dividend income (To record dividend paid on June 30, 2027)

July 2, 2027

Cash Investment in Syrt Company Gain on sale of investment

(To record sale of shares on July 2, 2027; carrying value on Dec 31, 2027

Unrealized loss (FVTPL) Investment in Syrt Company

(To revalue investment to fair value at year end: [$90,000 (

Short Answer

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The 15% purchase should be recorded under the fair value method (FVTPL). Black's journal entries during 2026 are as follows: Investment in White (FVTPL) Cash Purchase of 15% shares of White Cash Dividend revenue To record receipt of dividend (15% x $240,000) from White in 2026 Investment in White (FVTPL) Unrealized gain on FVTPL investment Adjust investment to fair value.

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The additional 30% purchase on January 1, 2027 changes the investment to one of significant influence. Black will now prospectively account for its investment in White on the equity method. Black's journal entries during 2027 are as follows: Investment in White (FVTPL) Unrealized gain on FVTPL investment

To adjust FVTPL investment to fair value [New share price is $37 per share ($1,110,000/30,000). Share price on Dec. 31 Investment in White Investment in White (FVTPL) To reclassify FVTPL investment to associate. Investment in White Cash Purchase of additional 30% of shares of White Cash Investment in White To record receipt of dividend from White in 2027 (45% x $250,000) Investment in White

Equity method income Recognize share of income earned

Short Answer

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(a) 1.1.2025

30.06.2025

30.06.2026

30.06.2027

31.12.2027

(b) General Ledger Investment in Slayer

January 1, 2025 − investment December 31, 2027 – impairment

Short Answer

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a) When an investment changes from significant influence to FVTPL, the equity method ceases to be appropriate, and the fair value method takes its place on a prospective basis. On this date, the investor shall measure at fair value any investment the investor retains in the former associate. b) The investor shall recognize in profit or loss any difference between: 1. The fair value of the retained investment; and 2. The carrying amount of the investment at the date when significant influence was lost. Loss on investment Investment in Western Communications Recording loss on change from significant influence to FVTPL

Short Answer

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The investment account balance at December 31, 2026, would be as follows:

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Purchase consideration Share of 2026 net income ($160,000 × 22%) Share of 2026 dividends ($55,000 × 22%) Investment in Stomp balance – Dec. 31, 2026 June 30, 2027 Investment in Stomp Company Equity method income

(To record share of net income for first six months of 2027 – 22% × $80 Cash Investment in Stomp Company (To record dividend paid on June 30, 2027 – 22% × $40,000) July 2, 2027

Cash Investment in Stomp Company Gain on sale of shares

(To record sale of shares; carrying value of shares sold is 5,000/22,000 × Dec 31, 2027

Equity method loss Investment in Stomp Company (To record share of loss for last six months of 2027 [17% × $140,000]) Investment impairment loss Investment in Stomp Company

(To write investment down to $136,000 (17,000 × $8]; Carrying value w At January 1, 2027 Share of Jan to July 2027 net income Share of 2027 dividends Investment account balance–July 1, 2027 Less: sale of 5,000 shares

Share of July to Dec 2027 loss

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Less: Impairment loss Investment account balance–Dec. 31, 2027

Short Answer When realized gains on investments accounted for through other comprehensive income were cycled through net income, companies could designate investments as accounted for through other comprehensive income and then time the disposal of such investments to recycle the gains through net income to increase or decrease earnings. To increase net income, investments with unrealized gains could be sold and the gains recognized in net income. To reduce net income, investments with unrealized losses could be sold and the losses recognized in net income. This was potentially effective because the market places more emphasis on net income relative to other comprehensive income. Section Break A D A Share of dividends declared by Y = $20,000 × 12% = $2,400. A Share of dividends declared by Y = $80,000 × 12% = $9,600. C Share of dividends declared by Y = $60,000 × 12% = $7,200. A Under the cost method, the carrying value of the Investment in Y will remain at $100,000. A After this initial journal entry to record the acquisition of the shares of Y Inc., the Investment in Y account will change in direct relation to the changes taking place in Y's equity accounts. A Share of net income = $50,000 × 12% = $6,000.

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B The investment account is reduced by the investor's share of dividends declared by the associate. B The investment account is reduced by the investor's share of dividends declared by the associate. B The investment account is reduced by the investor's share of dividends declared by the associate. Section Break A $80,000 × 20% = $16,000. A Acquisition Fair value adjustment [ ( 20,000 × Balance, Dec.31, 2026.

$ 11 )

–

$ 200,000]

Acquisition Fair value adjustment [ ( 20,000 × Balance, Dec.31, 2022.

$ 11 )

–

$ 200,000]

Acquisition Fair value adjustment [ ( 20,000 × Balance, Dec.31, 2022.

$ 11 )

–

$ 200,000]

A $80,000 × 20% = $16,000. C

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Acquisition Fair value adjustment [ ( 20,000 × Balance, Dec.31, 2022.

$ 11 )

–

$ 200,000]

B $80,000 × 20% = $16,000. D (Jenstar and Safebuy example in the text under illustration of equity method basics-significantinfluence investment). A A D B Acquisition Share of net income 2022, $120,000 × 20% Share of dividends paid 2022, $80,000 × 20% Balance, Dec.31, 2022

Section Break Short Answer

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January 1, 2026

Investment in W Cash

(To record initia June 30, 2026

Cash

Dividend incom

[To record recei Dec 31, 2026

Cash

Dividend incom

[To record recei

Investment in W

Unrealized gain

[To revalue shar

Short Answer

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At January 1, 2026–purchase of 15% 2026 revaluation Balance – Dec. 31, 2026 (15%) Additional purchase (10%) – January 1, 2027 Balance (25%) July 1, 2027 – sale of 12,500 shares (12.5%) Balance (12.5%) 2027 revaluation $146,875 (12,500 × $11.75) − $162,500 Investment account balance – Dec. 31, 2027 (12,500 shares × $11.75) January 1, 2027

June 30, 2027

July 1, 2027

Dec. 31, 2027

Short Answer

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At January 1, 2026 – purchase of 15% 2026 revaluation Balance – Dec. 31, 2026 (15%) Additional purchase (10%) – January 1, 2027 Balance (25%) Revaluation on date of sale – $350,000 (25,000 × $14) − $325,000 Balance July 1, 2027 – Sale of 12,500 shares (12.5%) Balance (12.5%) 2027 revaluation $146,875 (12,500 × $11.75) − $175,000 Investment account balance – Dec. 31, 2027 January 1, 2027

Investment in Whale Cash

(To record second purchase June 30, 2027

Cash Dividend income

[To record receipt of divide July 1, 2027

Investment in Whale Unrealized gain (OCI)

(To revalue holding to $14 Cash Investment in Whale

[To record sale of 12,500 s

Accumulated OCI – reclas

Retained earnings – gain o

(To transfer realized gain to Dec. 31, 2027

Cash Dividend income

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(To record receipt of Dec. 3 Unrealized loss (OCI) Investment in Whale

(To revalue shares to $11.7

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Student name:__________ TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. Alpha Company (Alpha) owns 42% of the voting shares of Bet Ltd. (Bet). Another individual shareholder, Joe, owns 15% of the voting shares of Bet and the remaining voting shares are owned by Number Corp. Alpha can control Bet if Joe and Alpha enter an irrevocable agreement to have Joe convey his voting rights to Alpha. true false IFRS 3 defines a business combination as a transaction or event in which an acquiror obtains ownership of the assets of another company. true false Consolidated financial statements are not required for all business combinations. true false Consolidated financial statements are required to be prepared even though no shares are acquired in the business combination as long as a contractual arrangement is signed by the acquiring company and the acquiree ‘s shareholders to give it control. true false Goodwill exists where assets that were previously used in the vendor's business are now used in the acquirer's business. true false

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MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. The Board of Directors of Company B is aware of a potential takeover bid from Company A. The assets of Company B that are of primary interest to Company A are transferred to other companies. Which of the following tactics were employed by Company B to prevent Company A from acquiring control of Company B? Pac-man defence Selling the crown jewels Poison pill White knight On January 1, 2026, A Company issued 6,000 new common shares to the shareholders of B Corporation to acquire 100% of their shares in B Corporation. Prior to the new share issuance by A Company, it had 5,000 common shares issued and outstanding. The former shareholders of B Corporation would now own 55% (6,000/11,000) of the outstanding shares. What is the outcome of this transaction? The legal parent, A Company, is treated as the subsidiary and the legal subsidiary, B Corporation, is treated as the parent for reporting purposes. Therefore, the consolidated balance sheet would incorporate B Corporation's net assets at carrying value and A Company's net assets at fair value. Since A Company shares were issued to the shareholders of B Company for the purchase, A Company will be the parent company and B Corporation, the subsidiary for reporting purposes. Therefore, the consolidated balance sheet would incorporate A Company's net assets at carrying value and B Corporation's net assets at fair value. Since neither A Company nor B Corporation can be identified as the acquirer, the consolidated balance sheet would incorporate A Company's net assets at carrying value and B Corporation's net assets at carrying value. Since neither A Company nor B Corporation can be identified as the acquirer, consolidated financial statements are not required. Each entity is only required to prepare separate-entity financial statements. Which of the following statements pertaining to the acquisition cost is CORRECT? The acquisition cost includes cash paid plus legal fees. The acquisition cost includes cash paid and the fair value of contingent consideration.

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The acquisition cost includes the fair value of any shares issued plus the costs incurred in issuing the shares. The acquisition cost is measured as the amount of cash paid at the time of the acquisition by the acquirer. How should the total consideration given to acquire control through a share purchase be allocated prior to preparing consolidated financial statements? The total consideration given should be allocated to the carrying amount of the acquired company's identifiable net assets. The total consideration given should be allocated to the fair value of the acquired company's identifiable net assets and goodwill. The total consideration given should be allocated to the acquisition differential. The total consideration given should be reflected as an increase in the acquirer's investment (in the subsidiary) account. Which of the following statements pertaining to the preparation of consolidated financial statements is correct? Consolidation entries are made in the accounting records of both the parent and subsidiary. The acquisition differential appears on the consolidated balance sheet as an asset. The parent company's investment in subsidiary account is eliminated and does not appear on the consolidated balance sheet. The subsidiary's shareholders' equity accounts are combined with the parent's shareholders' equity accounts. According to IFRS 10, there are conditions, that if met, a parent company will not be required to present consolidated financial statements for external reporting purposes. Which of the following is NOT one of the conditions? The parent company's ultimate parent issued consolidated financial statements that comply with IFRS for public use. The parent company is a wholly owned subsidiary.

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The parent company's shareholders unanimously agreed that consolidated financial statements are not required. The parent company shares are not traded in a public market. Company Y purchases a controlling interest in Company Z on January 1, 2026. Which of the following would appear as the shareholders' equity amount on Company Y's consolidated balance sheet on the date of acquisition? Company Y's shareholders' equity. The combined shareholders' equity of both companies. Company Y's shareholders' equity as well as Company Y's proportional share of Company Z's net assets at book value. Company Y's shareholders' equity as well as Company Y's proportional share of Company Z's net assets at fair market value. How should the acquirer in a business combination account for intangible assets which are readily identifiable but difficult to measure at fair value? They should be added to goodwill since the cost of determining the fair value outweighs the benefit. The fair value should be determined using a market, cost, or income-based approach. They should be expensed since most intangibles are internally generated. They should be accounted for at an amount deemed reasonable by management. Which of the following regarding the preparation of consolidated financial statement is correct? Once the parent company prepares consolidated financial statements, it no longer needs to prepare separate-entity financial statements. Only the subsidiary is required to prepare separate-entity financial statements. Consolidated financial statements are required by the parent company for reporting purposes only; each company must continue to prepare its own separate-entity financial statements. Consolidated financial statements are only required when both the parent and subsidiary companies are publicly traded.

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Assume that two companies wish to engage in a business combination involving a share exchange. Once the share exchange is consummated, each shareholder group will have an equal number of voting shares. Which of the following statements best describes the course of action that must be taken under these circumstances? Other factors must be examined to determine which shareholder group has control. The company with the largest net assets (at fair market value) is deemed to be the acquirer. No acquirer can be identified since no shareholder group has majority voting control, so the share exchange must be annulled. The Boards of Directors of both companies must enter into discussions to agree on which party will be the acquirer. Company A makes a hostile take-over bid for control of Company B. In response, Company B makes a counter-offer to purchase shares from Company A's shareholders. Which of the following best describes Company B's response? Pac-man defence Selling the crown jewels Poison pill Hostile defence One company is considering entering into a business combination with another. The potential acquirer wants to acquire the subsidiary's assets and liabilities but wishes to prepare consolidated financial statements using the fair market values of its own assets and liabilities as well of those of its potential subsidiary. Can this be accomplished? (Assume that each of the methods is currently allowable under GAAP) Yes, this is permissible under the acquisition method. Yes, this is permissible under the direct approach. Yes, this is permissible under the new-entity method. Yes, it is permissible if push-down accounting is used.

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1234567 Inc. is contemplating a business combination with 7654321 Inc. One company is incorporated under the Canada Business Corporations Act and the other under the Business Corporations Act for Ontario. Is a statutory amalgamation permissible under these circumstances? Yes, provided the combination is accounted for using the Acquisition Method. Yes, provided the surviving corporation continues the businesses of the predecessor corporations. No, a statutory amalgamation would not be possible, since one company is incorporated under federal law and the other under provincial law. Cannot be determined from the information given. Which of the following statements pertaining to consolidated financial statements is CORRECT? Consolidated financial statements reflect a group of economic resources that are under the common control of the parent company. Consolidated financial statements mostly benefit the nnoncontrolling shareholders and creditors of the subsidiary company. When control over a subsidiary is present, the parent company is required to prepare consolidated financial statements for internal purposes. Consolidated financial statements are additional financial statements that retroactivelycombine separate-entity financial statements of the parent and subsidiaries as if they were always one entity. A Inc. purchased 100% of B Inc.'s voting shares for cash. The assets and liabilities reported in the consolidated balance sheet of A Inc. prepared on the date of acquisition will include which of the following? The book value of A's assets and liabilities plus the book value of B's assets and liabilities. The fair market value of A's assets and liabilities plus the book value of B's assets and liabilities. The book value of A's assets and liabilities plus the fair market value of B's assets and liabilities. The fair market value of A's assets and liabilities plus the fair market value of B's assets and liabilities. Which of the following must be possible in order for a business combination to exist?

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Control of another company's net assets that constitute a business. A contract with another company to lease the assets that will be used in a business. Acquisition of shares of another company. Ownership of all another company's operating assets. Company A (A) purchased 100% of the voting shares of Company B (B) for $100,000 cash on January 1, 2022. Immediately before the acquisition, A and B reported cash balances of $300,000 and $150,000 respectively. If consolidated financial statements were prepared immediately following the acquisition, how much cash would be reported on A's consolidated balance sheet? $250,000 $350,000 $450,000 $550,000 A Inc. is contemplating a business combination with B Inc. A Inc.'s management is considering the acquisition of a majority of B's voting shares. The fair market values of B's assets far exceed their book values. Which of the following statements pertaining to this situation is correct? The purchase of B's shares would likely be the cheaper method of acquiring control, but it would only be more advantageous to the shareholders of B Inc. from a tax perspective. The purchase of B's shares would likely be the cheaper method of acquiring control, and it would be more advantageous to the consolidated entity from a tax standpoint. The purchase of B's shares would be more expensive method of acquiring control due to the high fair value of B's assets. The purchase of B's shares would likely be a more expensive way of acquiring control, but it would be more advantageous to the consolidated entity from a tax standpoint. IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements is correct? Companies may choose between the new entity method and the acquisition method when accounting for business combinations.

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The new-entity method can be used if management determines the users of the company's consolidated financial statements would benefit from the fair value reporting of both the parent and subsidiary on acquisition date. The only acceptable method of accounting for business combinations is the acquisition method. The new entity method can only be used when cash is the sole consideration offered by the acquirer in a business combination. XYZ Inc. owns 55% of DEF Inc.'s 100,000 outstanding voting shares. Another company, GHI Inc., owns 40%, with the remaining shares being held by many individual investors. GHI Inc. also owns $25,000,000 worth of DEF Inc.'s $1,000 par value bonds, each of which is convertible to one voting share of DEF Inc. Which of the following statements regarding the control of DEF Inc. is correct? XYZ Inc. has control over DEF Inc. as it owns a majority of DEF Inc.'s currently outstanding voting shares. XYZ Inc. does not have control over DEF Inc. because GHI Inc. will have enough voting shares to control DEF Inc. if it exercised its conversion rights for the bonds. XYZ Inc. has de facto control over DEF Inc. As long as GHI Inc. does not exercise its option to convert its bonds to voting shares, XYZ Inc. has control over DEF Inc. A Inc. purchased 100% of the voting shares of B Inc. on July 1, 2027. Which of the following statements is TRUE? The 2027 consolidated income statement will include only the income of A Inc. from January 1, 2027 to June 30, 2027 and income for both A Inc. and B Inc. from July 1, 2027 to December 31, 2027. The 2027 consolidated income statement will include income for both A Inc. and B Inc. for the entire year. The 2026 income statement (i.e., the comparative year), will retroactively include income for both A Inc. and B Inc. The 2027 consolidated income statement will only include income from A Inc. Company A owns 80% of the voting shares of Company B, which in turn owns 70% of the shares of Company C. There are no outstanding conversion rights, warrants or options which Version 1

would enable holders of other instruments to acquire additional voting shares of any of these companies. In this scenario, which of the following statements is TRUE? Company A has no control over Company C because it does not own any shares of Company C. Company A has direct control over Company C. Company A has indirect control over Company C. Company A does not have control over Company C's net assets. Yurt Inc. (Yurt) owns 42% of North Inc.'s (North) voting shares. Yurt is the largest single shareholder of North's voting shares, with the rest of North's shares being widely held by individual investors. There was a very poor turnout at North's recent annual meeting, enabling Yurt to easily elect the majority of North's Board of Directors. Which of the following statements accurately describes this situation? Yurt cannot control North because it cannot exercise control over North without the cooperation of North's other shareholders. Yurt controls North because it is North's single largest shareholder group. Yurt is deemed to control North because it has elected the majority of North's Board members and the other shareholders are not organized in such a way to actively cooperate when they vote. At this point, Yurt has significant influence and would only be able to control North if it acquires more than 50% of North's voting shares. Which of the following statements is correct? Under the new-entity method, both the parent and subsidiary company's net assets are recorded at their fair market values at the date of acquisition. Under the acquisition method, the acquirer company's net assets are revalued to fair value to reflect the substance of the transaction which, in essence is, a new company has been formed. As of January 1st, 2011, the new-entity method must be used to account for business combinations where an acquirer can be identified. The acquisition method is consistent with the historical cost principle while the new-entity method is not. How is negative goodwill treated under the acquisition method?

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The acquiring company could potentially report a gain on acquisition. The acquiring company will report a loss on acquisition. The negative goodwill will be included in other comprehensive income, as it is an unrealized gain. The negative goodwill is prorated and allocated to the fair value of the identifiable net assets of the acquired company. Circus Ltd. (Circus) issued 10,000 common shares plus paid cash of $100,000 to acquire 100% of the common shares of Clown Inc. (Clown). On the acquisition date, Circus’ common shares were trading at $60.50 per share. The cost of issuing the shares was $20,000. Which of the following is the CORRECTacquisition cost for the common shares of Clown? $100,000 $80,000 $705,000 $685,000 Appendix B of IFRS 3 provides an extensive list of what must be disclosed for each business combination. Which of the following items is NOT included in that list? The acquisition-date fair value of the total consideration given. The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. The percentage of voting equity interests acquired. The net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination. When is a parent company allowed to comprehensively revalue the assets and liabilities of a subsidiary to its fair values at the acquisition date using push-down accounting, following a business combination? When reporting under ASPE and there is a significant non-controlling interest When reporting under ASPE and there is an insignificant (or no) non-controlling interest

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When reporting under IFRS and there is a significant non-controlling interest When reporting under IFRS and there is an insignificant (or no) non-controlling interest Which of the following is required when preparing a consolidated balance sheet on the date of the formation of a subsidiary by its parent company? The assets and liabilities of the subsidiary must be revalued to fair value. The goodwill from the business combination must be calculated. The parent's investment account must be eliminated against the subsidiary's share capital. The parent's investment account must be eliminated against the subsidiary's retained earnings. Company A currently owns 70% of the voting shares of Company B. Which of the following would result in the loss of control of Company B? The Receiver has taken control of the assets of Company B and will continue to operate the business to maximize the sale's value of Company B's assets. The Receiver has seized a specific asset of Company B to satisfy the terms of a loan agreement, but the seizure does not affect the ability of Company B to continue in business under Company A's direction. The Canadian government has imposed restrictions over Company B's ability to sell its merchandise in certain markets. The non-controlling shareholder of Company B has the right to approve capital expenditures exceeding $5,000,000. Which of the following is NOT one of the elements that must exist for an investor to have control over an investee? The investor has existing rights to currently direct activities that significantly affect the investee's returns. The investor must have exposure to returns that vary resulting from the investee's performance. The investor must be able to use its power to affect the amount of its returns from its involvement. The investor must currently own more than 50% of the voting shares to have control over the investee. Version 1

In general, which of the following statements about the income tax implications for the following forms of business combinations is true? An acquisition of shares is generally better for the acquirer but worse for the vendor. An acquisition of net assets is generally better for the acquirer but worse for the vendor. An acquisition of shares is generally worse for both the acquirer and the vendor. An acquisition of net assets is generally better for both the acquirer and the vendor. Which of the following is NOT considered to be part of the acquisition cost of a subsidiary? Any cash paid to the seller. The fair value of contingent consideration. Present value of any promises by the acquirer to pay cash in the future. The cost of issuing shares as part of the consideration. Which of the following is part of the acquisition cost of a subsidiary? Due diligence fees paid to lawyers. The fair value of assets transferred by the acquirer. The costs of issuing debt or shares. Amounts paid to accountants for advice. On December 31, 2026, A Company (A) has capital assets with a cost of $250,000 and accumulated depreciation of $150,000 and B Company (B) has capital assets with a cost of $180,000 and accumulated depreciation of $80,000. B's capital assets have a fair value of $200,000 on that date. If A acquires B on January 1, 2027, and prepares a consolidated balance sheet on that date, at what values should the capital assets appear on that balance sheet (using the net method)? Cost of $430,000 and accumulated depreciation of $230,000. Cost of $450,000 and accumulated depreciation of $150,000. Cost of $450,000 and accumulated depreciation of $230,000.

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Cost of $680,000 and accumulated depreciation of $230,000. IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements pertaining to the accounting requirements is INCORRECT? All business combinations should be accounted for using the acquisition method. The acquisition date is the date the acquirer obtains control of the acquiree. The acquirer is required to measure 100% of the fair value of the acquiree on acquisition date even if the acquirer only purchases 70% of the voting shares. The acquirer should only recognize and measure identifiable assets that are presented on the acquiree's balance sheet at acquisition date. Which method under ASPE is a private company permitted to use to report its subsidiaries? The private company is only permitted to use the consolidation method. The private company can use the consolidation method, equity method or cost method. The private company is only permitted to use the equity method. The private company is permitted to choose between the equity method or cost method. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. On April 1, 2027, the balance sheets of Optimum Inc. and Electra Inc. were as follows:

Cash and short-term securities Inventory Plant and equipment (net) Total Assets Current liabilities Bonds payable Common shares Retained earnings Total Liabilities and Equity

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On that date, the fair values of Electra's assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

On April 1, 2027, Optimum issued 5,000 new common shares with a market value of $60.00 per share as consideration for Electra's net assets. Prior to the issue, Optimum had 10,000 outstanding common shares. Required: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Optimum's acquisition of Electra's assets. c) Prepare Optimum's balance sheet immediately following its acquisition of Electra's assets. d) Prepare Electra's balance sheet following the acquisition.

Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc. for $325,000 in cash on May 1, 2027. On that date, just prior to the acquisition, the balance sheets of each of these companies were as follows:

Cash and short-term securities Inventory Plant and equipment (net) Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

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On that date, the fair values of Jackson's assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

Sonic's book values approximated their fair values on that date. Required: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Sonic's acquisition of Jackson's shares. c) Prepare Sonic's consolidated balance sheet immediately following its acquisition of Jackson's assets.

Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2027. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows:

Cash and short-term securities Inventory Plant and equipment (net) Goodwill Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

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On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Based on the information provided: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Park Place Inc.'s acquisition of Baltic Ltd. shares. c) Prepare Park Place Inc.'s consolidated balance sheet immediately following its acquisition of Baltic Ltd.'s voting shares.

On July 1, 2027, Park Place Inc. issued shares with a fair value of $825,0000 to the shareholders of Baltic Ltd for all of their shares. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows:

Cash and short-term securities Inventory Plant and equipment (net) Goodwill Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

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On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

Cash and short-term securities Inventory Plant and equipment (net) Goodwill Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

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On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Prepare any disclosure required for Park Place Inc. under IFRS. Assume Baltic Ltd. has a reliable and specialized workforce that produces high-end loudspeakers for touring musicians and that Park Place Inc. manufactures stage equipment needed for live music performances.

Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows:

Cash and short-term securities Inventory Plant and equipment (net) Goodwill Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

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On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

In addition to the above, an independent appraiser deemed that Baltic Ltd. had trademarks with a fair market value of $480,000 which had not been accounted for. In turn, Park Place Inc. fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Calculate the goodwill arising from this business combination and state how it would be shown in the consolidated balance sheet on the acquisition date.

Assume that X Inc. wishes to enter into a business combination with Y Inc. on January 1, 2027. X is unsure whether it should purchase Y's assets or liabilities or whether it should purchase all of Y's outstanding voting shares. X and Y are incorporated in different jurisdictions. On January 1, 2027, Y Inc. was estimated to have various intangibles estimated to be worth a total of $1,000,000. Of this amount, $250,000 can be attributable to a trademark owned by Y. Required: In the absence of any other figures, prepare a brief report explaining anything that would be of interest the Board of Directors of X Inc.

Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1st, 2027, Firm Inc. would like to purchase all of the voting shares of its main competitor, N-CORP Inc. Briefly discuss the purported accounting implications of this transaction.

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Telecom Inc has decided to purchase the shares of Intron Inc. for $300,000 in cash on July 1, 2027. On the date, the balance sheets of each of these companies were as follows:

Cash and short-term securities Inventory Plant and equipment (net) Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

On that date, the fair values of Intron's assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

Required: Based on the information provided, answer the following: a) Prepare the journal entry to record the purchase of Intron's shares. b) Prepare the consolidation entries (eliminating entries) that are required to prepare the consolidated financial statements.

Telecom Inc has decided to purchase the shares of Intron Inc. for $300,000 in cash on July 1, 2027. On the date, the balance sheets of each of these companies were as follows: Version 1

Cash and short-term securities Inventory Plant and equipment (net) Total assets Current liabilities Bonds payable Common shares Retained earnings Total liabilities and equity

On that date, the fair values of Intron's assets and liabilities were as follows: Cash and short-term securities Inventory Plant and equipment (net) Current liabilities Bonds payable

Required: Prepare the consolidated balance sheet on date of acquisition.

Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd) ("GEH") in 2027. The Vice President, Finance of GWM has asked you, the manager in charge of this year's audit, whether GWM must prepare consolidated financial statements for the year ended December 31, 2027. GWM has about fifteen wholly owned subsidiaries and has in the past prepared consolidated financial statements. Required: Prepare a discussion around the need to prepare consolidated financial statements.

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Poseidon Inc. (Poseidon) acquired all of the outstanding shares of Storm Limited (Storm) by paying $300,000 in cash, issuing a debenture for $300,000 and issuing 10,000 common shares with a market value of $50 each. Poseidon incurred costs of $60,000 in investigation, accounting, and legal fees directly related to the acquisition. In addition, the company incurred costs of $20,000 for the issue of the debenture and another $30,000 for the issue of the additional shares. Required: Prepare the journal entry(ies) necessary to record the acquisition and related costs on the books of Poseidon.

Arthur Ltd. and Blaine Ltd. formed a corporation, Weather Ltd., to develop a new technology to monitor changes in weather patterns. Each of the investor's own 50% of the voting shares of Weather Ltd. Arthur Ltd. is unilaterally responsible for all decisions regarding developing and obtaining regulatory approval for the technology, whereas Blaine Ltd. is unilaterally responsible for all decisions regarding the manufacturing and marketing of the technology. Explain how you would determine which of the two investor's control Weather Ltd.

SECTION BREAK. Answer all the part questions. IOU Inc. (IOU) purchased 100% of the outstanding common shares of UNI Inc. (UNI) for cash of $900,000. On the date of acquisition, UNI's assets included $2,000,000 of inventory, and land with a book value of $120,000. UNI also had $1,400,000 in liabilities on that date. UNI's book values were equal to their fair market values, except for the company's land, which was estimated to have a fair market value of $170,000. How much goodwill will be created by IOU's acquisition of UNI? $130,000 Version 1

$50,000 $180,000 Can't be measured with the information provided. Assuming that the purchase of the common shares of UNI Inc. was properly recorded at cost, which of the following journal entries is required to prepare consolidated financial statements the day following the acquisition?

Investment in UNI Cash

Inventory Land Goodwill Liabilities Investments in UNI

Net Assets Acquisition differential Cash

No entry. Which of the following is the correct journal entry to record IOU's acquisition of UNI?

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Investment in UNI Cash

Inventory Land Goodwill Liabilities Cash

Net Assets Acquisition differential Cash

No journal entry required by IOU. The journal entry is recorded by UNI. Assume UNI also had patent rights with a fair market value on acquisition date of $20,000 that were not shown on its balance sheet because the rights had been developed internally. How much goodwill would be created by IOU's acquisition of UNI? $130,000 $110,000 $70,000 $180,000

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Parent Inc. (Parent) and Sub Inc. (Sub) had the following balance sheets on December 31, 2026:

Current Assets Fixed Assets (net) Total Assets Current Liabilities Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

On January 1, 2027, Parent purchased all of Sub's common shares for $50,000 in cash. On that date, Sub's current assets and fixed assets had a fair value of $18,000 and $48,000, respectively. Consolidated financial statements were prepared on that date. On July 1, 2027, Pro Ltd. (Pro) issued 5,000 common shares to acquire 100% of Show Corporation’s (Show) common shares. Assume there was no acquisition differential on this business combination. Both companies have a December 31st year end and income is earned evenly throughout the year. The following is the net income for each of Pro and Show and the common shares outstanding for Pro:

Separate income (excluding any income from Show) Common shares, outstanding on December 31st

Show Net income

What is the amount of earnings per share presented on Pro’s comparative consolidated financial statements at the end of 2026 and 2027? $3.00 (2026); $2.60 (2027) $4.80 (2026); $4.80 (2027) $3.00 (2026); $3.20 (2027) $2.00 (2026); $1.60 (2027) Which of the following is the correct amount for current assets on the consolidated balance sheet?

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$70,000 $28,000 $78,000 $120,000 Which of the following is the correct amount for fixed assets on the consolidated balance sheet? $172,000 $100,000 $148,000 $160,000 Which of the following is the correct amount for the goodwill arising from this business combination? No goodwill acquired $23,000 $27,000 $31,000 Which of the following is the correct amount for the shareholders' equity section of the consolidated balance sheet? $102,000 $90,000 $98,000 $121,000 Which of the following is NOT a business combination? The acquirer purchasesthe net assets that constitute a business from another company.

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The acquirer purchases enough shares from the acquiree’s shareholders to give it the power to determine the acquiree’s strategic operating and financial policies. The acquirer signs an agreement with the acquiree company to give it control. Two companies agree to create a new company which purchases the net assets of the combining companies. A Corporation had net income of $50,000 in 2026 and $60,000 in 2027, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2026 and $40,000 in 2027. On January 1, 2027, A Corporation acquired all of the outstanding common shares of B Company for a cash payment of $300,000. Assume that there was no acquisition differential on this business combination. What net income would A Corporation report for 2026 in its comparative consolidated financial statements at the end of 2027? $30,000 $50,000 $80,000 $100,000 What net income would A Corporation report for 2027 in its comparative consolidated financial statements at the end of 2027? $40,000 $60,000 $80,000 $100,000

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Answer Key Test name: Chapter 3 TRUE FALSE False; For a business combination to occur an entity must acquire control over the other entity's business. If assets are acquired that do not constitute a business, then a basket purchase has occurred which is not a business combination. TRUE True; Consolidated financial statements are not required when the acquirer directly purchases the net assets of a business. TRUE FALSE Goodwill exists if the value of the business (not just assets) acquired is greater than the fair value of the identifiable net assets. The synergy of the management, employees and assets working together make the value of business greater than the sum of its individual parts. If a business is not acquired, the acquirer would only be paying fair value for the assets (i.e., no goodwill). B A B The acquisition cost is measured as the fair value of consideration given to acquire the business but does not include costs paid to, for example, consultants, as these costs do not increase the fair value of the acquired company. Costs incurred in issuing debt or shares are deducted from the amount recorded for the proceeds received for the debt or share issue. Consideration also includes, the fair value of assets transferred by the acquirer, and the present value of any promises by the acquirer to pay cash in the future. B C C Version 1

A B C A A C The net assets of both the acquiring company and acquired company are reported at their fair value under the new-entity method. C A variation of a business combination that can occur is a statutory amalgamation, whereby, under the provisions of federal or provincial law, two or more companies incorporated under the same Companies Act can combine and continue as a single entity. The shareholders of the combining companies become shareholders of the surviving company, and the non-surviving companies are wound up. A Consolidated financial statements benefit present and prospective shareholders and creditors of the parent company. The parent company is required to prepare consolidated financial statements for external purposes. The parent and subsidiary each prepare their own financial statements for internal purposes. Consolidated financial statements are prepared once the parent obtains control of the net assets of the subsidiary. The assets and liabilities are combined for reporting purposes as of the date control was obtained. Revenues and expenses are combined starting on the date of acquisition (i.e., not retroactively). C The acquisition method is required for all business combinations. The consolidated balance sheet reflects the acquiring company's net assets at carrying amount and the acquired company's net assets at fair value. A B

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Consolidated cash = $350,000 = Parent CV $300,000 − cash paid for acquisition of B's common shares $100,000 + Sub CV $150,000. A C B A C C A The new-entity method has gained support by people who believe fair value information is more relevant and useful than historical cost information; however, the method has received virtually no support in the accounting profession. The primary reason being the additional revaluation difficulties (i.e., subjective determination of fair value) and resulting costs. A C The acquisition cost ($705,000) is made up of the cash ($100,000) plus the fair value1 of the shares issued by Circus [$605,000(10,000 x $60.50)]. 1 The fair value of the shares is based on the market price of the shares on the acquisition date. The costs incurred for the share issuance are deducted from the amount recorded from the proceeds received for the share issue. D B C The preparation of the consolidated balance sheet on the date of formation of a subsidiary is simplified; only requiring the elimination of the parent's investment account against the subsidiary's share capital. On date of formation, the net asset carrying value is equal to the fair value, there is no goodwill or retained earnings. A D Version 1

Owing more than 50% of the voting shares would presumably give the investor control but all factors need to be reviewed to ensure control exists. For example, if D Company owns 60% of the voting shares and F Company owns the other 40%, but also owns convertible bonds. If the convertible bonds were converted, F Company could end up with the majority of voting shares. F Company would then have control and not D Company. B For a net asset purchase, the acquirer will acquire the assets at fair value which will allow for higher tax values for capital cost allowance for tax purposes. The vendor will have to consider capital gains and recapture on the disposition of the capital properties which will generally result in higher taxable income. A share purchase will not result in additional CCA for the acquirer but there are tax advantages to the vendor (e.g., rollovers, the capital gains deduction for qualifying property). D B B Consolidated capital assets (cost) = $450,000 = Parent CV $250,000 + Sub FV $200,000 and consolidated capital assets (accumulated depreciation) = $150,000. (Note: the accumulated depreciation of B Company is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset: B Company − CV = $180,000 − $80,000 = $100,000 (NBV). FV = $200,000 − $100,000 (NBV) = $100,000. NBV + FV adjustment = $200,000). D An identifiable asset is not necessarily one that is recognized in the records of the acquiree company. For example, the acquiree may have a patent that the acquiree company developed internally so it does not appear on the balance sheet, but it has a fair value that is part of the acquisition cost. B The private company is permitted to use the consolidation method, equity method or cost method but all subsidiaries should be reported using the same method. Short Answer

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