Consolidated Financial Statements Paper 1

Answer (A) is correct. In a consolidated statement of financial position, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary should be eliminated in their entirety regardless of the portion of the subsidiary’s shares held by the parent. Thus, all effects of the $1,000,000 loan should be eliminated in the preparation of the year-end consolidated statement of financial position.

Answer (D) is correct. Acquisition-related costs, such as finder’s fees, professional and consulting fees, and general administrative costs, are expensed as incurred. But direct issue costs of equity (underwriting, legal, accounting, tax, registration, etc.) are debited to additional paid-in capital. Accordingly, the amount expensed is $360,000 ($240,000 + $120,000).

Answer (C) is correct. A bargain purchase is recognized in the consolidated financial statements as an ordinary gain at the acquisition date. A bargain purchase occurs when the net of the acquisition-date fair values of identifiable assets acquired and liabilities assumed exceeds the sum of the acquisition-date fair values of the consideration transferred, any noncontrolling interest recognized, and any previously held equity interest in the acquiree.

Answer (A) is correct. In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary should be eliminated in their entirety regardless of the portion of the subsidiary’s stock held by the parent. Thus, the entire $70,000 advance should be eliminated in the preparation of the year-end consolidated balance sheet.

Answer (A) is correct. In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary are eliminated in their entirety, regardless of the portion of the subsidiary’s stock held by the parent. However, intraentity transactions should not be eliminated from the separate financial statements of the entities.

Answer (C) is correct. In consolidated financial statements, the effects of intraentity transactions should be eliminated. The original amount recorded for the acquisition by Water Co. of the equipment from Fire Co. was the carrying amount on Fire’s balance sheet plus the gain on the sale. In the consolidated financial statements, the equipment should be reported at the amount previously recorded on Fire’s balance sheet. This amount is the original cost recorded by Water minus the gain recognized by Fire when the transaction took place.