DWDW

1.
The tax base of revenue received in advance is equal to zero where the revenue received
is taxed in the reporting period that the revenue is received. TRUE
Chapter 18 Key
5.
Non-deductible expenses in the current or

subsequent periods results in a deferred tax
asset. FALSE
7.
It is possible for a firm to legally make a large accounting profit but pay little or no tax
based on its taxable income.
6.
The tax-effect of the
TRUE
temporary difference
that arises from
revaluation of nonChapter - Chapter 18 #7current assets is
Difficulty:
Easy
4.
The balance recognised in profit and
loss. FALSEfor income taxes
Section: Introduction
to accounting
sheet
2Deferred approach
. tax assets compares
the carrying
are the
8.
Profit value
for taxation
with purposes is determined in accordance with AASB 112.
amounts of
the tax
income
FALSE
base of the
taxes
recoverabl assets and
e in future liabilities. T
Chapter - Chapter
RUE 18 #8
periods
Difficulty: Easy
that arise
Section: Introduction to accounting for income taxes
from
assessable
temporary
differences
9.
The difference between the carrying amount of an asset or liability in the balance sheet
. FALSE
and its tax base is a temporary difference.
3Deferred
. tax assets
TRUE
may arise
from
amounts- Chapter
of
Chapter
18 #9
income
Difficulty: Easy
taxes 18.01 The balance sheet approach to accounting for taxation
Section:
recoverabl
e in future
periods
that arise
10.
There are two types of temporary differences between the carrying value of assets and
from carry
liabilities and the tax baseassessable temporary differences and neutral temporary
forward
of
differences.
unused tax
losses. TR
UE
FALSE
Chapter - Chapter 18 #10

Difficulty: Easy
Section: 18.01 The balance sheet approach to accounting for taxation
11.
The tax figure calculated and recorded on the statement of comprehensive income is an
accurate reflection of the entity's tax liability for the stated period.
FALSE

Difficulty: Easy
12.
The balance sheet approach to accounting for taxation relies on comparing the historical
cost of an item with its appropriate tax base.
FALSE

Difficulty: Easy
13.
When the carrying amount of an asset exceeds its tax base, the amount that will be
allowed as a deduction for tax purposes will exceed the amount of assessable economic
benefits.
FALSE

Difficulty: Medium
14.
Under AASB 112, where the carrying amount of an asset is less than the amount that is
economically recoverable, the deferred tax asset should be adjusted.
FALSE

Difficulty: Medium
Section: 18.02 Tax base of assets and liabilities, further consideration
15.
According to AASB 112, with one exception, the tax base of a liability is to be determined
in the following manner: Carrying amount Future deductible amount + Future assessable
amount.
TRUE

Difficulty: Easy
16.
AASB 112 defines the tax base as the amount that is attributed to an asset or liability for
tax purposes.
TRUE

Difficulty: Easy
17.
Deferred tax assets arise as a result of tax losses. In Australia losses incurred in previous
years can always be carried forward to offset taxable income derived in future years.
FALSE

Difficulty: Easy
Section: 18.04 Unused tax losses
18.
When a non-current asset is revalued the tax base is not affected as depreciation for tax
purposes will continue to be based on original cost.
TRUE

Difficulty: Easy
Section: 18.05 Revaluation of non-current assets
19.
When a non-current asset is revalued, the recognition of future tax associated with an
asset that has a fair value in excess of cost, acts to reduce the amount of the revaluation
reserve.
TRUE

Difficulty: Easy
20.
AASB 112 required an entity to offset current tax assets and current tax liabilities if the
entity intends to realise the asset and settle the liability simultaneously.
TRUE

Difficulty: Medium
Section: 18.06 Offsetting deferred tax liabilities and deferred tax assets
21.
A change in tax rates does not require any change in the carrying amount of deferred tax
assets and deferred tax liabilities.
FALSE

Difficulty: Easy
Section: 18.07 Change of tax rates
22.
AASB 112 uses what term to describe the method for accounting for taxes that it
mandates?
A.
net balances method
B.
financial position method
C.
asset and liability method
D.
balance sheet method

Difficulty: Easy
23.
The AASB 112 approach has been adopted because:
A.
B.
C.
D.
it matches the revenues earned with tax payable on those revenues.
it is conservative.
it is considered consistent with the AASB Conceptual Framework.
it is considered acceptable by the ATO.

Difficulty: Easy
24.
The generally accepted (a) accounting rule and (b) tax rule for development expenditure
are:
A.
(a) capitalise and amortise; (b) a tax deduction when paid for.
B.
(b) expense when paid for; (b) a tax deduction when paid for.
C.
(c) capitalise and amortise; (b) a tax deduction when amortised.
D.
(d) expense when paid for; (b) a tax deduction when amortised.

Difficulty: Easy
25.
The amount of tax assessed by the ATO based on the entity's operations for the period will
be reflected in which account?
A.
income tax expense
B.
deferred income tax
C.
deferred tax liability
D.
income tax payable

Difficulty: Easy
26.
Some items are treated as a deduction for tax purposes when they are paid but are
recognised as expenses when they are accrued for accounting purposes. Which of the
following items are of that type?
A.
B.
long-service leave
goodwill amortisation
C.
depreciation
D.
entertainment

Difficulty: Medium
27.
Some items are typically not allowable tax deductions but are recognised as an expense
for accounting purposes. Which of the following items are of that type?
A.
research and development costs
B.
warranty costs
C.
sick leave payments
D.

Difficulty: Medium
28.
The tax base is defined in AASB 112 as:
A.
B.
the amount of assessable income for the period.
the tax rate applicable to income levels under $60 000.
C.
the amount that is attributed to an asset or liability for tax purposes.
D.
the head office of the Australian Taxation Office in Canberra.

Difficulty: Easy
29.
A taxable temporary difference is one that will result in:
A. an increase in income tax payable in future reporting periods when the carrying
amount of the asset or liability is recovered or settled.
B. a decrease in income tax payable in future reporting periods when the carrying amount
of the asset or liability is recovered or settled.
C. an increase in income tax recoverable in future reporting periods when the carrying
D. a decrease in income tax payable in future reporting periods when the carrying amount
of the asset or liability is recovered or settled and an increase in income tax
recoverable in future reporting periods when the carrying amount of the asset or
liability is recovered or settled.

Difficulty: Medium
30.
A deductible temporary difference is one that will result in:
A. a decrease in income tax recoverable in future reporting periods when the carrying
B. an increase in income tax payable in future reporting periods when the carrying
C. a decrease in income tax recoverable in future reporting periods when the carrying
amount of the asset or liability is recovered or settled, and an increase in income tax
payable in future reporting periods when the carrying amount of the asset or liability is
recovered or settled.
D. a decrease in income tax payable in future reporting periods when the carrying amount
of the asset or liability is recovered or settled.

Difficulty: Medium
31.
Under the approach of AASB 112 to accounting for income taxes, a taxable temporary
difference creates which account?
A.
provision for tax payable
B.
deferred tax asset
C.
general reserve
D.

Difficulty: Easy
32.
Under the approach of AASB 112 to accounting for income taxes, a deductible temporary
difference creates which account?
A.
deferred tax revenue
B.
C.
deferred tax asset
D.
provision for tax payable

Difficulty: Easy
33.
Tissues Ltd has a depreciable asset that is estimated for accounting purposes to have a
useful life of 8 years. For taxation purposes the useful life is 5 years. The asset was
purchased at the beginning of year 1, there is no residual value, and the straight-line
method of depreciation is used for both tax and accounting purposes. The tax rate is 30%
and the cost of the asset is $100 000. What is the amount of the deferred tax liability
account generated by this asset at the end of years 1, 2 and 3?
A.
End of year 1 $0; year 2 $2250; year 3: $4500
B.
End of year 1 $7500; year 2 $15,000; year 3: $22 500
C.
D.

Difficulty: Easy
34.
Snifful Industries has a depreciable asset that is estimated for accounting purposes to
have a useful life of 7 years. For taxation purposes the useful life is 3 years. The asset was
purchased at the beginning of year 1, there is no residual value, and the straight-line
and the cost of the asset is $210 000. What is the amount of the deferred tax liability
account generated by this asset at the end of years 2, 3 and 4?
A.
End of year 2: $24 000; year 3: $36 000; year 4: $27 000
B.
C.
D.
End of year 2: $12 000; year 3: $12 000; year 4: $(9000)

Difficulty: Hard
35.
Sinfonia Ltd made credit sales for this period of $100 000. The allowance for doubtful
debts for these sales is $3000. For taxation purposes the amount provided for doubtful
debts is not tax-deductible and the taxation office has included the $100 000 in taxable
income. The tax rate is 30%. What is the deferral arising from this situation?
A.
none
B.
deferred tax liability of $900
C.
deferred tax asset of $900
D.
deferred tax liability of $3000

Difficulty: Medium
36.
A company has a loan with a carrying value of $60 000. The payment of the loan is not
deductible for tax purposes. The tax rate is 30%. What is the tax base for this item?
A.
$0
B.
$60 000
C.
$18 000
D.
$78 000

Difficulty: Medium
37.
A company has received $40 000 for subscription revenue in advance and recorded a
liability account 'revenue received in advance'. Revenue is taxed when it is received. The
tax rate is 30%. What is the tax base for this item?
A.
$0
B.
$40 000
C.
$12 000
D.
$36 000

Difficulty: Medium
38.
A deferred tax asset arises if:
A.
the carrying amount of an asset is greater than its tax base
B.
the carrying amount of a liability is greater than its tax base
C.
the carrying amount of a liability is less than its tax base
D. the carrying amount of an asset is greater than its tax base and the carrying amount of
a liability is less than its tax base

Difficulty: Medium
Section: 18.03 Deferred tax assets and deferred tax liabilities
Section: Summary
39.
The correct method for calculating the amount of a deferred tax liability or asset may be
expressed as a formula as follows:
A. (Carrying amount of assets or liabilities tax bases of assets or liabilities) tax rate
B. Carrying amount of assets or liabilities (tax bases of assets or liabilities tax rate)
C. Carrying amount of assets or liabilities tax bases of assets or liabilities tax rate
D.
Carrying amount of assets or liabilities tax bases of assets or liabilities

Difficulty: Easy
40.
Bulldog Supplies Ltd has an item of equipment that has a carrying value of $80 000. For
taxation purposes the asset's net value is $60 000 and deferred tax liabilities of $3000
had previously been recorded. Bulldog also has accrued interest revenue of $5000 that
will not be taxed until it is received in cash. The tax rate is 30%. What is the journal entry
to record the tax effect?
A.
B.
C.
D.

Difficulty: Hard
41.
Raging Dragons Ltd has a depreciable asset that is estimated for accounting purposes to
have a useful life of 15 years. For taxation purposes the useful life is 10 years. The asset
was purchased at the beginning of year 1, there is no residual value, and the straight-line
and the cost of the asset is $150 000. What adjustment will be required to the deferred
tax liability account in years 10 and 11?
A.
End of year 10 $1500; year 11 $1500
B.
End of year 10 $5000; year 11 $(10 000)
C.
End of year 10 $1500; year 11 $(3000)
D.
End of year 10 $15 000; year 11 $(3000)

Difficulty: Hard
42.
Digitor Industries Ltd accrues long-service leave as employees work towards their
entitlement. For tax purposes, long-service leave is not deductible until it is paid. During
the current period Digitor has accrued $50 000 in long-service leave expense and paid
none. The tax rate is 30%. What is the journal entry to record the deferral?
A.
B.
C.
D.

Difficulty: Medium
43.
Mighty Motors Ltd offers a warranty on all the spare parts it sells. This period the accrued
warranty is $5000. For tax purposes there is no deduction for the warranty until payments
are made. Mighty Motors also has equipment that has a useful life for accounting
purposes of 4 years and for tax purposes 3 years. The equipment was purchased at the
beginning of the current period, cost $9000 and has no residual value. The straight-line
method of depreciation is used for both accounting and tax purposes. The accounting
profit before tax this period is $80 000. The tax rate is 30%. What are the journal entries
to record the tax expense and tax payable?
A.
B.
C.
D.

Difficulty: Hard
44.
The criterion for recognising a deferred tax asset is that:
A. it should be fully recognised if it is probable that future taxable amounts within the
entity will be available against which the deductible temporary differences can be
utilised.
B. it should be recognised if it is possible that future taxable amounts within the entity will
be available against which the deductible temporary differences can be utilised.
C. it should be recognised to the extent, and only to the extent, that it is possible that
future taxable amounts within the entity will be available against which the deductible
temporary differences can be utilised.
D. it should be recognised to the extent, and only to the extent, that it is probable that
future taxable amounts within the entity will be available against which the deductible

Difficulty: Easy
45.
The tax base of a liability must be calculated as the liability's carrying amount as at the
reporting date, less any future deductible amounts and plus any future assessable
amounts that are expected to arise from settling the liability's carrying amount as at the
reporting date. The exception to this rule is that:
A. In the case of revenue received in advance, the tax base must be calculated as the
liability's carrying amount less any amount of the revenue received in advance that has
been included in taxable amounts in the current or a previous reporting period.
B. In the case of carry forward tax losses, the tax base must be adjusted for any
consideration paid by a company within the group that is receiving the transferred tax
loss.
C. In the case of a downward revaluation of a non-current asset, the tax base must be
calculated as the decrease in the asset plus any amount expected to be received in the
future inflated by the index for capital gains tax.
D. In the case of a warranty liability, the tax base must be calculated as the liability's
carrying amount less any amounts paid out this period that have not been included in
taxable amounts in the current period.

Difficulty: Easy
46.
Casper Ltd incurred a loss of $500 000 for tax purposes in 2014. This was due to one-off
circumstances and it is expected that Casper will make profits again in 2015 and
subsequent years. There are no temporary differences in either year. In 2015 Casper
makes a profit of $700 000. The tax rate is 30%. What are the journal entries for 2014 and
2015?
A.
B.
C.
D.

Difficulty: Medium
47.
Some items are typically not allowable tax deductions but are recognised as an expense
for accounting purposes. Which of the following items are of that type?
A.
research and development costs
B.
warranty costs
C.
D.
sick leave payments
entertainment

Difficulty: Medium
48.
The amount of tax calculated based on the entity's operations for the period will be
reflected in which account?
A.
income tax expense
B.
deferred income tax
C.
D.
income tax payable

Difficulty: Easy
49.
Spring Day Ltd has a piece of equipment that it has revalued to its fair value of $90 000
this period. It originally cost $80 000 and the accumulated depreciation for both
accounting and tax purposes is $20 000. There is no intention to sell the equipment in the
near future. The tax rate is 30%. What is the journal entry to reflect the revaluation's tax
implications?
A.
B.
C.
D.

Difficulty: Medium
50.
Shopping Malls Ltd has some land it purchased several years ago for $300 000. It has
revalued the land this period to $480 000 and management intends to sell it in the near
future. When the land was acquired the index for capital gains tax was 110 and at
reporting date it is 132. The tax rate is 30%. What is the entry to record the tax
implications of the revaluation?
A.
B.
C.
D.

Difficulty: Hard
51.
Recognising deferred tax assets and deferred tax liabilities as per AASB 112 creates some
conflict with the definition of assets and liabilities in the AASB Conceptual Framework. Key
issues in this regard are:
A. It is questionable whether or not the company controls the benefits from the deferred
tax asset, and there is not a present obligation to transfer the funds represented in the
deferred tax liability to the government.
B. The company really has no claim against the government for the amount of the
deferred tax asset and it is not probable that the company will have to pay the deferred
tax liability.
C. Setting off the deferred tax asset and deferred tax liability does not meet the
requirements of the AASB Conceptual Framework and there is a contingent element
involved in the recognition of the deferred tax asset.
D. The AASB Conceptual Framework does not permit the recognition of the rights to future
revenues implicit in assets to trigger obligations to future expenses implicit in liabilities
and the extent to which a deferred tax liability is recognised should not depend on
management's intention to sell a revalued asset.

Difficulty: Medium
Section: 18.08 Evaluation of the assets and liabilities created by AASB 112
52.
The balance sheet approach adopted in AASB 112:
A.
will continue to be used as the alternatives are too simplistic.
B.
will only be understood by the very sophisticated financial readers.
C. uses existing statement of financial position data thus reducing record keeping costs.
D. will only be understood by the very sophisticated financial readers and uses existing
statement of financial position data thus reducing record keeping costs.

Difficulty: Easy
53.
When the carrying amount of an asset exceeds the tax base, there will be a deferred tax
, because the taxation payments have effectively been
.
A.
B.
C.
D.
asset; made in advance of recognising the expense
asset; deferred to future periods
liability; made in advance of recognising the expense
liability; deferred to future periods

Difficulty: Medium
54.
Temporary differences:
A. arise due to differences between income tax legislation and accounting rules, in a
particular period, and are reversed in subsequent periods.
B. can be both deductible temporary differences or taxable temporary differences.
C. must be considered, and accounted for, by the creation of deferred tax asset and
liabilities for all statement of financial position items (e.g. including asset revaluations),
rather than just statement of comprehensive income items, which is a major change
created by the new standard.
D.
arise due to changes in the income tax rate.

Difficulty: Medium
55.
As at 30 June 2012, net accounts receivables was $57 000, and the allowance for doubtful
debts was $3000. On 30 June 2013, the respective balances were $64 000 and $4000.
Assuming there were no other temporary differences, what is the journal entry to adjust
for the changes in these balances as at 30 June 2013? The corporate tax rate is 30%.
A.
B.
C.
D.

Difficulty: Hard
56.
As at 30 June 2012, the Provision for Long-service leave balance was $125 000. During
2011/12 $54 000 was charged to the provision account, and leave to the value of $34 000
was taken by staff. The balance on 30 June 2013 was $135 000, following the charging of
long-service leave expense of the same amount as in 2011/12 , i.e. $54 000. Assuming
there were no other temporary differences, what is the journal entry to adjust for the
changes in these balances as at 30 June 2013? The corporate tax rate is 30%.
A.
B.
C.
D.

Difficulty: Hard
57.
Criteria used by an entity to assess the probability that taxable profit will be available
against which unused tax losses can be utilised include:
A. whether the unused tax losses result from identifiable causes that are unlikely to recur.
B. whether it is probable that the entity will have taxable profits before the unused tax
losses expire.
C. whether permission has been received from the Australian Taxation Office to carry
forward tax losses.
D. whether the entity has unused tax losses relating to the same taxation authority and
the same taxable entity, which will result in taxable amounts against which the unused
tax losses can be utilised before they expire.

Difficulty: Medium
58.
The carrying amount of a deferred tax asset is reviewed:
A.
annually
B.
at each reporting date
C.
when assets are revalued
D.
None of the given answers are correct.

Difficulty: Easy
59.
Which of the following statements is not correct in relation to tax rate changes?
A. An increase in tax rates will create an expense where an entity has deferred tax
liabilities.
B.
Across time it is likely that governments will change tax rates.
C. A decrease in tax rates will create an income where an entity has deferred tax assets.
D. Changes in tax rates will have implications for the value attributed to pre-existing
deferred tax assets.

Difficulty: Hard
60.
The carrying amount of deferred tax assets and deferred tax liabilities can change:
A.
with a change in the amount of the related temporary differences.
B. even if there is no change in the amount of the related temporary differences.
C.
with a re-assessment of the recoverability of deferred tax liabilities.
D. with a change in the amount of the related temporary differences and even if there is
no change in the amount of the related temporary differences.

Difficulty: Medium
61.
Bogart Ltd has the following tax balances as at 30 June 2012:
The balances were calculated when the tax rate was 30%. On 30 September 2012, the
government announced a change to the company tax rate to 40%, effective immediately.
What is the journal entry to adjust the carry-forward balances of the deferred tax asset
and deferred tax liability?
A.
B.
C.
D.

Difficulty: Medium
62.
If a tax rate change from 30% to 25% results in an adjustment to the deferred tax liability
account of $50 000, what is (a) the amount of the temporary differences and (b) the type
of temporary differences?
A.
(a) $ 1 000 000; (b) taxable temporary differences
B.
(a) $ 1 000 000; (b) deductible temporary differences
C.
(a) $ 50 000; (b) taxable temporary differences
D.
(a) $ 50 000; (b) deductible temporary differences

Difficulty: Medium
63.
Which of the following statements is correct with respect to AASB 112 Income Taxes when
the government increase tax rates?
A. The entity applies a prospective application to deferred tax assets and deferred tax
liabilities initially recognised subsequent to the announcement of the tax change.
B.
Expense is recognised if the entity has deferred tax liabilities only.
C.
Income is recognised if the entity has deferred tax liabilities only.
D.
Expense is recognised if the entity has deferred tax assets only.

Difficulty: Medium
64.
Which of the following statements is correct with respect to AASB 112 Income Taxes when
a non-current asset is revalued?
A. On revaluation date, the revaluation reserve is increased by the product of the

temporary difference and the tax rate.
B. On revaluation date, the revaluation reserve is decreased by the product of the

temporary difference and the tax rate.
C. On revaluation date, a deferred tax liability is created equal to the amount of the
temporary difference.
D. On revaluation date, a deferred tax asset is created equal to the amount of the
temporary difference.

Difficulty: Medium
65.
What is the accounting treatment for goodwill that is consistent with AASB 112 Income
Taxes?
A.
treated as a deductible expense in the year of recognition
B. treated as a non-deductible expense in the year of recognition and subsequent periods
C. the difference between the carrying amount and the tax base results to a taxable
D. the difference between the carrying amount and the tax base results to a deductible

Difficulty: Medium
66.
On 1 January 2012, William Bay Ltd purchased a machine for $100 000. The entity adopts
a straight-line depreciation method and uses 10% and 15% as depreciation rate and tax
rate respectively. The salvage value is zero and the tax rate is 30%.
At 31 December 2012, which of the following statements is correct with respect to the
transaction that is in accordance with AASB 112 Income Taxes only?
A.
There is a deductible temporary difference of $5000.
B.
There is a deductible temporary difference of $1500.
C.
There is a taxable temporary difference of $5000.
D.
There is a taxable temporary difference of $1500.

Difficulty: Medium
67.
On 1 January 2012, William Bay Ltd purchased a machine for $100 000. The entity adopts
a straight-line depreciation method and uses 10% and 15% as depreciation rate and tax
rate respectively. The salvage value is zero and the tax rate is 30%.
At 31 December 2012, which of the journal entries is correct with respect to the
transaction that is in accordance with AASB 112 Income Taxes only?
A.
B.
C.
D.

Difficulty: Medium
68.
Some items are treated as a deduction for tax purposes when they are paid but are
recognised as expenses when they are accrued for accounting purposes. Which of the
following items are of that type?
A.
B.
warranty costs
C.
depreciation
D.
entertainment

Difficulty: Medium
69.
The reversal of deductible temporary differences results in deductions in determining the:
A.
income tax expense
B.
future taxable profits
C.
carrying amounts
D.
income tax payable

Difficulty: Medium
70.
When considering the recognition of assets and liabilities for tax purposes, reference is
made to the:
A.
depreciation rate
B.
carrying amount
C.
D.
tax base
historical cost

Difficulty: Easy
71.
The accounting profit multiplied by the tax rate is known as:
A.
income tax payable
B.
income tax expense
C.
D.
taxable amount
assessable amount

Difficulty: Easy
72.
72. How is taxable profit derived? How can it be calculated by starting with, and adjusting,
accounting profit?
Taxable profit is the profit derived by the entity determined by applying the current
taxation rules. It will typically be different from accounting profit (which is derived by
applying accounting standards). To work out taxable profit we have to make adjustments
to accounting profit so that we remove the effect of differences between accounting rules
and tax rules.
So to determine taxable profit we will adjust for those items of expense and income that
are treated differently by taxation rules and accounting rules. For example, we will add
back the depreciation calculated from an accounting perspective (using the principles
provided in AASB 116 Property, Plant and Equipment), and then subtract the amount that
would be allowed by the ATO as a deduction to allow us to arrive at taxable profit.
For more information refer to The balance sheet approach to accounting for taxation'.

Difficulty: Medium
73.
How do deferred tax assets and deferred tax liabilities arise? How do you calculate their
balances at a point in time?
Temporary differences lead to deferred tax assets or deferred tax liabilities. Temporary
differences arise because of differences between the carrying amount of an asset and its
tax base. As previously defined, the tax base of an asset is the amount that is attributed
to an asset or liability for tax purposes. The tax base represents the amount that an asset
or liability would be recorded at if a statement of financial position were prepared applying
taxation rules. In relation to the tax base of an asset, and accepting the above definition,
the following formula can be applied:
Carrying amount + Future amount deductible for tax purposes Future taxable economic
benefits = Tax base
For more information refer to Tax base of assets and liabilities: further consideration'.

Difficulty: Easy
74.
Discuss the criteria for recognising deferred tax assets when there are unused tax losses?
Consistent with the test for deferred tax assets generated by temporary differences,
deferred tax assets generated as a result of unused tax losses must also be able to satisfy
the probable' test before they are recognised. As paragraph 34 of AASB 112 states: A
deferred tax asset shall be recognised arising from the carry forward of unused tax losses
and unused tax credits to the extent that it is probable that future taxable profit will be
available against which the unused tax losses and unused tax credits can be utilised.
In relation to unused tax losses, paragraph 35 of AASB 112 further provides:
The criteria for recognising deferred tax assets arising from the carry forward of unused
tax losses and tax credits are the same as the criteria for recognising deferred tax assets
arising from deductible temporary differences. However, the existence of unused tax
losses is strong evidence that future taxable profit may not be available. Therefore, when
an entity has a history of recent losses, the entity recognises a deferred tax asset arising
from unused tax losses or tax credits only to the extent that the entity has sufficient
taxable temporary differences or there is convincing other evidence that sufficient
taxable profit will be available against which the unused tax losses or unused tax credits
can be utilised by the entity. In such circumstances, paragraph 82 requires disclosure of
the amount of the deferred tax asset and the nature of the evidence supporting its
recognition.
For more information refer to Unused tax losses'.

Difficulty: Medium
75.
Discuss the assumptions made when recognising a deferred tax asset or a deferred tax
liability.
When recognising a deferred tax asset or a deferred tax liability, a number of assumptions
are made. A key assumption is that the entity will remain in business (in other words it is a
going concern) and that taxable income will be derived in future years. The recognition
criteria for deferred tax assets are the same as those applied to other assets and rely on
the probable' test. AASB 112 provides the general rule that a deferred tax asset must be
recognised for all deductible temporary differences that reflect the future tax
consequences of transactions and other events that are recognised in the statement of
financial position, to the extent that it is probable that future taxable amounts within the
entity will be available against which the deductible temporary differences can be utilised.
In this regard, paragraph 27 of AASB 112 states:
The reversal of deductible temporary differences results in deductions in determining the
taxable profits of future periods. However, economic benefits in the form of reductions in
tax payments will flow to the entity only if it earns sufficient taxable profits against which
the deductions can be offset. Therefore, an entity recognises deferred tax assets only
when it is probable that taxable profits will be available against which the deductible
For more information refer to Deferred tax assets and deferred tax liabilities'.

Difficulty: Medium
76.
Explain, with examples, how changes in tax rates affect pre-existing deferred tax asset
and deferred tax liability balances.
Across time it is likely that governments will change tax rates. Changed tax rates will have
implications for the value attributed to pre-existing deferred tax assets and deferred tax
liabilities. For example, if an organisation has recognised a deferred tax asset relating to a
previous loss for tax purposes and that previously carried-forward tax loss was $1 million,
and the tax rate is increased from 30% to 35%, the amount of the deferred tax asset will
need to be increased from $300 000 to $350 000. This is because when the organisation
subsequently earns a taxable profit of $1 000 000 it will be able to offset the loss against
the $350 000 in tax that would otherwise be payable under the revised tax rate. The $50
000 increase in the value of the deferred tax asset (which is calculated as $1 000 000 x
[0.35 0.30]) would be treated as income, given that the carrying amount of the asset has
been increased. Conversely, if the tax rate had been decreased, the value of the asset
would be decreased and this would be recognised as an expense. An increase in tax rates
will create an expense where an organisation has deferred tax liabilities, whereas a
decrease in tax rates will create income in the presence of deferred tax liabilities. Where
there are both deferred tax assets and deferred tax liabilities at the time of a change in
tax rate, there will be both gains and losses (there will be a gain on the asset and a loss
on the liability, or vice versa) and the net amount would be treated as either income or an
expense.
For more information refer to Change of tax rates'.

Difficulty: Easy
77.
Evaluate deferred tax assets and deferred tax liabilities in terms of the AASB Conceptual
Framework and the notion that they fail to meet the criteria outlined in the Framework.
Consider whether the asset deferred tax asset' or the liability deferred tax liability' as
generated by tax-effect accounting actually meet the definitions provided within the AASB
Conceptual Framework.
First, let us consider the deferred tax asset. As we know, an asset is defined as a resource
controlled by the entity as a result of past events and from which future economic benefits
are expected to flow to the entity'. At the end of the reporting period, the company really
has no claim against the government for the value of the deferred tax asset. The
realisation of the benefit will arise only if the company earns sufficient revenue in the
future and if the relevant taxation legislation does not change. It is questionable whether
the benefits are actually controlled by the entity at the end of the reporting period. There
is arguably a contingent element involved.
With respect to the deferred tax liability, a liability is defined in the AASB Conceptual
Framework as a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits'. Where a deferred tax liability exists, the company is not currently
obliged to transfer funds of an amount equal to the balance of the account. The funds will
be transferred in the future only if the company earns sufficient revenue; that is, there is a
dependency on future events, not past events. There is also the assumption that the
relevant taxation legislation will not change.
For more information refer to Evaluation of the assets and liabilities created by AASB
112'.

Difficulty: Medium
78.
Discuss how the carrying amounts of deferred tax assets and liabilities may change even
though there are no changes in the amount of the underlying temporary differences.

Difficulty: Hard
79.
Explain how a deferred tax liability arises from depreciation of machinery and equipment.
From a taxation perspective specific depreciation rates might be stipulated that have no
direct relationship to the useful life of an asset (accelerated depreciation rates may be
offered by the government to stimulate investment in particular assets). It is necessary to
add back the depreciation calculated from an accounting perspective (using the principles
provided in AASB 116 Property, Plant and Equipment), and then subtract the amount that
would be allowed by the ATO as a deduction to allow us to arrive at taxable profit. This
gives rise to a deferred tax liability.
The excess of the tax depreciation over accounting depreciation in the first four years
reduces the taxable profit, and thus the taxes that have to be paid and no depreciation is
deductible in the fifth year (for taxation purposes, the asset is fully depreciated at the end
of the fourth year and has a tax base of zero), meaning that to determine taxable profit
the accounting depreciation has to be added back with no offset of the tax depreciation.
Effectively, the entity is given an extra' deduction in years 1 to 4, which it will have to
give back in year 5. There is in effect a timing difference'.
A deferred liability is considered to exist throughout the life of the asset and at the end of
five years the total, depreciation for accounting purposes equals the total depreciation
allowed for tax purposes. Any differences in total depreciation throughout the five years
are of a temporary nature. Once the additional taxation is paid in year 5, the deferred tax
liability will no longer exist.
For more information refer to The balance sheet approach to accounting for taxation'.

Difficulty: Medium
80.
Discuss the accounting treatment for the temporary difference that arises from
revaluation of non-current assets.
AASB 112 requires that, to the extent that the deferred tax relates to amounts that were
previously recognised in equity as either direct credits or direct debits (as is the case for
upward asset revaluations), the journal entry to recognise the deferred tax asset or
liability must also be adjusted against the equity account. As paragraph 61 of AASB 112
stipulates:
Current tax and deferred tax shall be charged or credited directly to equity if the tax
relates to items that are credited or charged, in the same or a different period, directly to
equity.
Given that the revaluation is adjusted against equity (revaluation surplus), the accounting
entry to record the recognition of the deferred tax liability would therefore be:
Dr Revaluation surplus and Cr Deferred tax liability
Hence the recognition of the future tax associated with an asset that has a fair value in
excess of its cost, as recognised by a revaluation, acts to reduce the amount of the
revaluation surplus (and, therefore, the amount of equity). The above entries assume that
the revalued amount of the asset will be recovered by the entity's continued use of the
asset.
For more information refer to Revaluation of non-current assets'.

Difficulty: Hard
81.
Discuss the conditions that must be met to allow the set-off of current assets and current
tax liabilities.

Difficulty: Hard
Section: 18.06 Offsetting deferred tax liabilities and deferred tax assets
Chapter 18 Summary
Category
# of Ques
tions
Chapter - Chapter 18
81
Difficulty: Easy
35
Difficulty: Hard
11
Difficulty: Medium
35
Section: 18.01 The balance sheet approach to accounti 28

ng for taxation
Section: 18.02 Tax base of assets and liabilities, further 12
consideration
Section: 18.03 Deferred tax assets and deferred tax lia 11
bilities
Section: 18.06 Offsetting deferred tax liabilities and de 2

ferred tax assets
Section: 18.08 Evaluation of the assets and liabilities cr 3

eated by AASB 112
Section: Summary
Chapter 27 Key
1.
As prescribed in AASB 3 Business Combinations, when an acquirer makes a bargain

purchase, the acquirer recognises the excess as goodwill on acquisition date.
FALSE
Difficulty: Easy
Section: 27.06 Accounting for business combinations
2.
When an acquirer makes a bargain purchase in a business combination, the excess that
remains is recognised in profit or loss of the acquirer on acquisition date.
TRUE
Difficulty: Easy
3.
Goodwill arises at acquisition date when the purchase price exceeds the identifiable
assets acquired and the liabilities assumed.
TRUE
Difficulty: Easy
4.
Where separate entities in a group do not apply the same accounting methods, AASB 10
Consolidated Financial Statements prescribes adjustments to be made on consolidation to
remove the effects of different accounting policies.
TRUE
Difficulty: Medium
5.
AASB 10 Consolidated Financial Statements permits the reporting periods of entities in the
group to be dissimilar as long as adjustments are made on consolidation to remove the
effects of different reporting periods.
FALSE
Difficulty: Easy
6.
The first step in the consolidation process is substituting the assets and liabilities of the
subsidiary for the investment account that currently exists in the parent company.
TRUE
Difficulty: Easy
7.
The purpose of providing consolidated statements is to show the results and financial
position of a group as if it were operating with a single source of finance.
FALSE
Difficulty: Easy
Section: 27.01 Rationale for consolidating the financial statements of different legal entities
Section: Introduction to accounting for group structures
8.
In the consolidated financial statements of the parent entity and its controlled entities
only transactions with assets and liabilities relating to parties external to the economic
entity will be reflected.
TRUE
Difficulty: Easy
Section: 27.03 Alternative consolidation concepts
9.
Sullivan (1985) argued that the preparation of group accounts can proceed to the
fulfilment of the true and fair notion only when partitioning is fully enforced.
FALSE
Difficulty: Medium
Section: 27.02 History of Australian Accounting Standards that govern the preparation of
consolidated financial statements
10.
Under AASB 10 parent companies may choose whether to present one set of consolidated
accounts or to provide two or more sub-sets of the consolidated accounts to cover the
whole group.
FALSE

Difficulty: Easy
11.
A subsidiary is an entity that is controlled by a parent entity.

TRUE

Difficulty: Easy
12.
The consolidation concept adopted in AASB 10 is to include all the assets and liabilities of
the parent entity and subsidiaries in the consolidation and to treat non-controlling
interests as part of the equity of the group.
TRUE

Difficulty: Easy
13.
Non-controlling interests (minority interests) are defined as the equity in the parent
company that is not provided by the group shareholders.
FALSE

Difficulty: Easy
14.
AASB 10 requires the parent company to have control of another entity in order for that
entity's consolidation into the group accounts to be required.
TRUE

Difficulty: Easy
15.
It is possible for one entity to control another entity under the AASB 10 definition without
the controlling entity having any equity-ownership interest in the other entity.
TRUE

Difficulty: Medium
Section: 27.04 The concept of control
16.
A company may own more than 50 per cent of the capital of another entity and not have
effective control of that entity as defined in AASB 10.
TRUE

Difficulty: Easy
17.
Control is defined in AASB 10 as the 'capacity to manage the policies of another entity'.
FALSE

Difficulty: Easy
18.
The consolidation process does not involve any adjustments to the financial statements of
the individual entities making up the group.
TRUE

Difficulty: Easy
19.
AASB 10 notes that in preparing consolidated financial statements, an entity combines the
financial statements of the parent and the subsidiaries line by line by adding together, in
proportion to the degree of ownership, like items of assets, liabilities, income and
expenses; but not equity balances.
FALSE

Difficulty: Easy
20.
'Control' over a subsidiary, once determined as being in existence, can only be lost with a
change in the level of ownership.
FALSE

Difficulty: Medium
21.
'Passive' control implies that it is possible to exert control over another entity even though
the option to exert such control may never be exercised.
TRUE

Difficulty: Easy
22.
Post-acquisition earnings of the subsidiary are included in the economic entity's earnings.
TRUE

Difficulty: Easy
Section: 27.10 Consolidation after date of acquisition
23.
The degree of control over an investee determines how the investor accounts for the
investment.
TRUE

Difficulty: Easy
Section: 27.11 Disclosure requirements
24.
One important aim of releasing AAS 24 in 1991 and amendments made to The
Corporations Law in the same year was to:
A. require parent entities to consolidate companies that they controlled into one set of
financial statements for the first time.
B. change the treatment of non-controlling interests to be reflected in the accounts as a

liability.
C. prevent companies from keeping debt off the statement of financial position
consolidated statement of financial position by interposing partnerships or trusts in the
group structure.
D. require the consolidation of the cash-flow statement as well as the statement of

financial position and statement of comprehensive income.

Difficulty: Easy
25.
The partition effect in relation to a group of companies arose when:
A. It was not permitted under The Corporations Law to consolidate an entity that was not
a company. This resulted not only in the non-company entity not being consolidated,
but also all the entities (company or otherwise) that it controlled not being
consolidated.
B. The non-controlling shareholders in a number of companies controlled by a parent

entity organised themselves to block the transfer of funds within a group.
C. Companies in a group coordinated to transfer assets in such a way as to protect part of

the group from being taxed, thus reducing the total tax owing for the group as a whole.
D. Dividends were declared and paid in such a way as to manage cash reserves within a
group.

Difficulty: Easy
26.
A consolidated entity is defined as:
A. the company and its subsidiaries at the end of the financial year. Subsidiaries are
companies and trusts as defined in terms of the Corporations Act.
B. a combined entity constituted by a parent entity and its controlled entities.
C. a trust or partnership registered as a management investment scheme and all the

entities it controls at the end of the financial year.
D. the parent company, non-controlling interests and subsidiaries owned by that parent
company as at the end of the financial year.

Difficulty: Easy
27.
Which of the following statements is an accurate description of the difference between a

legal entity and an economic entity?
A. An economic entity is one that combines one or more legal entities with synergy such
that they each make higher returns than they would individually. If an entity ceases to
effectively produce increased returns in this way it becomes uneconomic. A legal entity
is one that is recognised in law as having a separate existence from its owners.
B. A legal entity is one that uses appropriate corporate governance measures to ensure
that it abides by legislative requirements and other legal regulations. An economic
entity may span more than one legal entity, but is not a legal entity in itself.
C. An economic entity is one that is formed for the purpose of generating a profit and
therefore a return to owners. A legal entity is one that is circumscribed by legal
constitution or accounting standards as constituting a reporting entity.
D. A legal entity refers to an entity that has its own particular legal status such as a
company, trust or partnership. The concept of an economic entity emphasises
substance over legal form. It may operate as a coordinated entity and contain more
than one legal entity.

Difficulty: Medium
28.
Which of the following statements accurately describes the elimination entry to eliminate
pre-acquisition shareholders' funds?
A. It is made once at the time of the first consolidation of the economic entity's accounts
in order to eliminate the parent entity's investment in the subsidiary against the nonmonetary assets of the controlled entity.
B. It is made each time the consolidation is performed in order to adjust the carrying value
of the controlled entity's non-current assets to their fair value.
C. It is carried out once at the date that control of the subsidiary is achieved in order to
create the goodwill or discount and eliminate the parent entity's equity against the
controlled entity's investment.
D. It is made each time the consolidation is performed in order to eliminate the parent
entity's investment in the controlled entity against the equity of the controlled entity.
Any adjustments necessary to bring the non-current assets of the controlled entity to
fair value are made before the elimination entry and any difference between the
consideration paid and the fair value of the net assets of the controlled entity are
recognised.

Difficulty: Easy
29.
At acquisition date which of the following is not required to be recognised by the

acquirer?
A.
B.
C.
D.
Liabilities assumed.
non-controlling interest in the acquiree.
goodwill separately from the identified assets acquired
Retained earnings of the acquiree.

Difficulty: Medium
30.
The factors that are taken into consideration in determining whether or not an entity
should be consolidated under AASB 10 include:
A. the nature of the legal form of the entity and whether or not the 'parent' entity owns
enough of the equity in the entity to effectively control the benefits that flow from the
relationship with the other entity.
B.
whether or not the potential 'parent' entity controls the other entity.
C. the number of members on the board under the control of the potential 'parent' entity,
and whether or not the other entity has been partitioned by the potential 'parent'
entity.
D. whether or not the potential 'parent' entity controls the other entity and whether or not
it is in a significantly different business to the potential 'parent'.

Difficulty: Medium
31.
In the situation in which a subsidiary is only controlled temporarily, AASB 10 requires:
A. the investment be recorded at fair market value and any gain or loss on acquisition
recognised immediately in the statement of comprehensive income.
B.
the subsidiary to be treated as an associate and equity accounting applied.
C. the results of the subsidiary for the period of time that it was controlled to be included
in the consolidated accounts.
D. the investment to be reported at cost and dividends be accrued when declared.

Difficulty: Easy
32.
What are the major consolidation concepts?
A.
entity, partnership and parent
B.
equity, control and ownership
C.
D.
parent-entity, ownership and proprietary
entity, parent-entity and proprietary

Difficulty: Easy
33.
Which of the following consolidation concepts are described correctly?
A. The entity concept requires the inclusion of all the parent entity assets and the
proportionate share of the assets and liabilities of the subsidiaries where the proportion
is based on the direct ownership of the capital of the subsidiary by parent companies
within the group.
B. The proprietary concept includes all the assets and liabilities of the parent company
and subsidiaries as assets and liabilities of the group. Non-controlling interest is treated
as a liability of the group.
C. The parent-entity concept includes all assets and liabilities of the parent and its
subsidiaries in the consolidated accounts. The non-controlling interest is treated as a
liability of the group.
D. The proprietary concept includes all the assets and liabilities of the parent company
and subsidiaries as assets and liabilities of the group. Non-controlling interest is treated
as a liability of the group; the parent-entity concept includes all assets and liabilities of
the parent and its subsidiaries in the consolidated accounts. The non-controlling
interest is treated as a liability of the group.

Difficulty: Medium
34.
Which consolidation concept mainly underlies the approach adopted in AASB 10?
A.
proprietary concept
B.
accrual concept
C.
entity concept
D.
parent-entity concept

Difficulty: Easy
35.
AASB 10 defines control as:
A. governing the financial, operating and sustainability policies of an entity so as to

benefit from its activities.
B. the capacity of an entity to dominate the decision making of another entity by virtue of
a majority shareholding or controlling ownership interest in some form.
C. the capacity and willingness to direct the decision making of another entity with
respect to its financial and operating policies to improve the performance and position
of the controlling entity.
D. the power to govern the financial and operating policies of an entity so as to benefit
from its activities.

Difficulty: Easy
36.
AASB 10 identifies a number of factors that may indicate the existence of control. These
include:
A.
the ability to appoint the CEO of another entity.
B. the power to dominate the composition of the board of directors or governing body of
another entity.
C. the power to require another entity to purchase goods and services from an entity that
results in a benefit to the controlling entity.
D. the ability to appoint the CEO of another entity and the power to dominate the
composition of the board of directors or governing body of another entity.

Difficulty: Easy
37.
Richer Ltd is owed a material amount by Poorer Partnership. Poorer is heavily in debt to
Richer Ltd, but due to an unexpected economic downturn is unable to make repayments
according to schedule. The board of Richer Ltd believes that Poorer has a good chance of
trading out of its current economic difficulties as its management and product are sound
and the current problems stem from external factors that are expected to pass within the
next 12 to 18 months. Richer Ltd enters into an arrangement with Poorer to manage its
finances until the economic situation reverses. At this stage it is not perceived as
necessary for Richer Ltd to be otherwise involved in the running of Poorer. Given the
situation described, what is Richer Ltd most likely to be required to do to account for
Poorer under AASB 10?
A. As the control achieved is only temporary, under AASB 10 Richer would not be required
to consolidate Poorer.
B. Richer Ltd should consolidate Poorer under AASB 10 because it has control over it by
the definition of 'control' in AASB.
C. Richer Ltd should not be required to consolidate Poorer as it does not have control as
defined in AASB 10.
D. Richer Ltd does have temporary control of Poorer, but since Poorer is a partnership
Richer is not required to include it in a consolidated set of financial statements.

Difficulty: Medium
38.
Gigi Ltd is acting as a trustee for Bonberre trust. Gigi has complete control of the
operating and financing decisions of the trust. The nominated beneficiaries of the trust are
Mr and Mrs Bonberre, who each receive 50 per cent of the trust profits. Given the situation
described, what is Gigi Ltd most likely to be required to do to account for the Bonberre
trust under AASB 10?
A. Gigi Ltd should be required to consolidate the trust as it controls the operating and
financing decisions.
B. Gigi Ltd should not be required to consolidate Bonberre trust because a trust cannot be
a subsidiary under The Corporations Law.
C. Gigi Ltd should treat the trust as an investment in its books, valued at the present
value of any future income streams expected to be received in return for managing the
trust.
D. Gigi Ltd should not consolidate the trust because, while it does control the financing
and operating decisions of the trust, it cannot do so in a way to benefit Gigi Ltd.

Difficulty: Hard
39.
Growl Ltd acquires all the issued capital of Tiger Ltd for a cash payment of $5 000 000 on
30 June 2015. The statement of financial position of Tiger Ltd at purchase date is:
The fair value of the net assets at the date of purchase was $4 200 000. What amount of
goodwill or excess would be recorded in the consolidated statements at the date of
purchase?
A.
$500 000 goodwill
B.
$300 000 discount
C.
$800 000 goodwill
D.
$389 000 discount

Difficulty: Medium
40.
Panda Ltd acquires all the issued capital of Bear Ltd for a cash payment of $2 545 000 on
30 June 2015. The statement of financial position of Bear Ltd at purchase date is:
Assuming the assets are at fair value, what amount of goodwill would be recorded in the
books of Bear Ltd and what amount would be recorded in the consolidated statements at
the date of purchase?
A.
B.
Bear's books $0; consolidated statements $0
Bear's books $0; consolidated statements $545 000
C.
Bear's books $545 000; consolidated statements $270 000
D.
Bear's books $270 000; consolidated statements $270 000

Difficulty: Easy
41.
Gouda Ltd acquires all the issued capital of Cheese Ltd for a cash payment of $2 545 000
on 30 June 2015. The statement of financial position of Cheese Ltd at purchase date is:
Assuming the assets are at fair value, what would be the consolidation entry to eliminate
the investment in Cheese Ltd?
A.
B.
C.
D.

Difficulty: Medium
42.
Jasper Ltd acquires all the issued capital of Carrot Ltd for a cash payment of $2 800 000
on 30 June 2014. The statement of financial position of both entities at purchase date is:
Assuming the assets of Carrot Ltd are recorded at fair value, what is the consolidated
statement of financial position at the date of purchase?
A.
B.
C.
D.

Difficulty: Medium
43.
In what situation does an excess on acquisition arise and how does AASB 3 require it to be
treated?
A. An excess arises when the fair value of the purchase consideration is greater than the
nominal value of the assets purchased. AASB 3 requires an excess to be eliminated by
recognising it as a gain in the period in which the entity was purchased.
B. An excess arises when the fair value of the purchase consideration is greater than the
nominal value of the assets purchased. AASB 3 requires the fair values of the monetary
assets acquired to be proportionately decreased until the excess is eliminated. If an
excess balance remains it must be recognised as an expense in the statement of
comprehensive income.
C. An excess arises when the cost of acquisition exceeds the fair value of the identifiable
net assets purchased. AASB 3 requires the equity of the purchased entity to be
proportionately decreased until the excess is eliminated.
D. An excess arises when the fair value of the identifiable net assets acquired by the
entity exceeds the fair value of the consideration paid. AASB 3 requires a reassessment
of the identification and measurement of the identifiable net assets, and a
reassessment of the measurement of the fair value of the consideration paid. If an
excess remains after the reassessment it must be recognised as income in profit or
loss.

Difficulty: Medium
Section: 27.07 Gain on bargain purchase
44.
Arthur Ltd acquires all the issued capital of Martha Ltd for a cash payment of $3 000 000
on 30 June 2015. The statement of financial position of Martha Ltd at purchase date is:
Assuming the assets are at fair value, what is the goodwill or excess on consolidation?
A.
$500 000 goodwill
B.
$1 580 000 excess
C.
$510 000 goodwill
D.
$495 000 excess

Difficulty: Medium
45.
Banderas Ltd acquires all the issued capital of Ryan Ltd for a cash payment of $2 900 000
on 30 June 2014. The statement of financial position of Ryan Ltd at purchase date is:
Assuming the assets are at fair value, what is the consolidation entry to eliminate the
investment in Ryan Ltd?
A.
B.
C.
D.

Difficulty: Medium
46.
Fresco Ltd acquires all the issued capital of Indoor Ltd for a cash payment of $1 000 000
on 30 June 2015. The statement of financial position of Indoor Ltd at purchase date is:
Assuming the assets of Indoor Ltd are at fair value, what is the entry to eliminate the
investment in Fresco Ltd?
A.
B.
C.
D.

Difficulty: Medium
47.
Which of the following statements accurately describes important aspects of consolidation

after the date of acquisition?
A. The elimination entry is made only the first time the consolidation is conducted. Any
goodwill arising from the purchase is amortised over the appropriate period (not more
than 20 years) and any excess will have been written off in the first year's elimination
entry. Post-acquisition earnings are considered to be part of the group's earnings.
B. The elimination entry will be made each time the consolidation is undertaken. Goodwill
arising on consolidation will be recognised. If the controlled entity was purchased at a
discount the excess is recognised as a gain in the profit or loss on the acquisition date
C. The elimination entry is made each time the consolidation is undertaken. If an excess
arises on consolidation it is completely written off in the first year and is not included in
the consolidation worksheet entries again. If goodwill arises it is recognised for the full
amount at acquisition and amortised over a period not exceeding 20 years. Any
earnings made by the controlled entity after acquisition belongs to the parent entity
and should be reflected in the consolidated accounts and the parent entity's books.
D. The elimination entry will be made each time the consolidation is undertaken, but the
amount of goodwill or excess recognised each time will change. The excess will be
written off in the first period and the goodwill amortised over an appropriate period (not
exceeding 20 years). The goodwill expense will be recognised in the books of the
parent company and matched against the post-acquisition earnings of the controlled
entity. Any remaining surplus is treated as income in the consolidated accounts.

Difficulty: Medium
48.
Sigmund Ltd acquires all the issued capital of Freud Ltd for a cash payment of $1 900 000
on 30 June 2014. The financial statements of both entities on 30 June 2105 are:
The fair value of the net tangible assets of Freud Ltd on 30 June 2014 was $1 332 000.
The equity of Freud at that time was made up of share capital of $1 172 000 and retained
earnings of $160 000. Goodwill had been determined to have been impaired by $56 800
during the period. During the period ended 30 June 2015 there were no intragroup
transactions. Which of the following consolidated financial statements is correct?
A.
B.
C.
D.

Difficulty: Hard
49.
In a situation where the net assets acquired in the controlled entity are not recorded at
fair value, approaches that may be taken to account for this include:
A.
B.
C.
Adjust the excess or goodwill so that the elimination entry balances.
Revalue the assets in the parent entity's books.
Revalue the assets during the consolidation process each period.
D. Adjust the depreciation on the assets to bring them to fair value in the consolidated
accounts.

Difficulty: Easy
Section: 27.08 Subsidiarys assets not recorded at fair values
50.
In the situation in which a subsidiary revalues its non-current assets to fair value in its
books as part of being acquired by a parent entity, the accounting treatment is:
A. to treat the revaluation according to AASB 116 Property, Plant and Equipment in the
books of the subsidiary entity.
B. to create a revaluation surplus in the consolidated accounts and write it off against the
parent entity's investment in the subsidiary.
C. to adjust the investment recorded by the parent entity so that the entry balances in the
elimination entry.
D. to write off the adjustment to fair value to the statement of comprehensive income, as
determined by AASB 10 Consolidated Financial Statements, which is concerned with
the treatment of the revaluation in the books of the controlled entity.

Difficulty: Easy
51.
Where the controlled entity's non-current assets were not at fair value at the date of
purchase and they have not been revalued in the controlled entity's accounts, the
treatment in the consolidation entry may include which of the following entries?
A.
B.
C.
D.

Difficulty: Medium
52.
Gingimup Ltd purchased all the equity of Kindawansa Ltd on 30 June 2015. At that time
the carrying value of the net assets of Kindawansa was $1 200 000. This amount was
made up in equity as follows: share capital $1 000 000; retained earnings $200 000.
Kindawansa has held some valuable land for a long time (purchased at $ 1 200 000), but
has not revalued it. Its fair value at 30 June 2015 was $2 800 000 (all other non-current
assets are recorded at fair value). Gingimup Ltd paid cash consideration of $3 000 000 for
Kindawansa Ltd. Assuming that the land has not been revalued in the controlled entity's
books, what are the elimination entries required to reflect the purchase of Kindawansa
Ltd?
A.
B.
C.
D.

Difficulty: Medium
53.
Candle Ltd acquires all the issued capital of Wick Ltd for a cash payment of $4 500 000 on
30 June 2014. The statement of financial position of Wick Ltd at purchase date is:
The fair value of the net assets of Wick Ltd as at 30 June 2014 is $3 800 000. What is the
consolidation entry to eliminate the investment in Wick Ltd?
A.
B.
C.
D.

Difficulty: Hard
54.
Which of the following statements is not correct?
A.
A group comprises a parent and all of its subsidiaries.
B. Consolidated financial statements are financial statements of a group of entities

presented as if that group was acting as a single economic entity.
C.
A subsidiary is an entity that is controlled by another entity.
D.
A parent is an entity that has more than one subsidiary.

Difficulty: Easy
55.
The preparation of consolidated financial statements:
A. obviates the need for separate entities to prepare and release their own separate
financial statements.
B. does not obviate the need for separate entities to prepare and release their own
separate financial statements.
C.
should be done in accordance with AASB 10.
D. does not obviate the need for separate entities to prepare and release their own
separate financial statements and should be done in accordance with AASB 10.

Difficulty: Easy
56.
A former loophole (now closed) that existed under the former s. 9 of The Corporations
Law:
A.
required the preparation of one set of consolidated accounts for the group.
B. required the preparation of separate accounts for each body corporate in the group.
C. gave the choice of using full consolidation, proportional consolidation or the equity
method of accounting.
D. gave the choice of one set, or two or more sets, of consolidated accounts; or separate
accounts for each body corporate; or a combination.

Difficulty: Easy
57.
A subsidiary:
A. is excluded from consolidation because the investor is a venture capital organisation.
B. is not excluded from consolidation simply because the investor is a venture capital
organisation.
C. is excluded from consolidation because its business activities are dissimilar from those
of other entities within the group.
D. is not excluded from consolidation simply because the investor only has significant
influence, and not control, over it.

Difficulty: Medium
58.
Non-controlling interests are defined is AASB 10 as:
A. that portion of profit or loss and net assets of a subsidiary attributable to equity
interests that are not owned directly by the parent.
B. that portion of net assets of a subsidiary attributable to equity interests that are not
owned, directly or indirectly through subsidiaries, by the parent.
C. that portion of profit or loss and net assets of a subsidiary attributable to equity
interests that are not owned, directly or indirectly through subsidiaries, by the parent.
D. the largest single shareholding, less fifty per cent, not owned, directly or indirectly
through subsidiaries, by the parent.
Difficulty: Medium
59.
'Control' exists when the parent owns less than half of the voting power of an entity
when:
A.
No other entity owns more than half either.
B. There is power to govern the financial and operating policies of the entity under a
statute.
C. There is power to govern the financial and operating policies of the entity under an
agreement.
D. There is power to govern the financial and operating policies of the entity under a
statute and there is power to govern the financial and operating policies of the entity
under an agreement.

Difficulty: Easy
60.
The lack of a direct link between levels of ownership and control (i.e. the degree of
ownership does not, of itself, determine if an entity has control of another):
A. is consistent with the AASB Framework's definition of assets, which relies on control
and not legal ownership.
B. is consistent with the AASB Framework's definition of assets, which relies on legal
ownership and not control.
C. is consistent with the AASB Framework's definition of equity, which recognises

investments in other entities.
D. is consistent with the AASB Framework's definition of equity, which relies on control and
not legal ownership.

Difficulty: Medium
61.
In determining control, 'potential voting rights':
A. include those rights embedded in such instruments as share call options and share
warrants.
B.
C.
which are currently exercisable should be taken into account.
even if they are not currently exercisable should be taken into account.
D. include those rights embedded in such instruments as share call options and share
warrants and which are currently exercisable.

Difficulty: Easy
62.
Goodwill is:
A.
an intangible asset, as defined in AASB 138.
B. future economic benefits arising from assets that are not capable of being separately
recognised or individually identified
C. determined as being the excess of the fair value of the identifiable net assets acquired
over the cost of an acquisition.
D. recognised by the acquirer, at acquisition date, as an asset in its own books.

Difficulty: Medium
63.
After initial recognition, goodwill is measured in which of the following ways?
A.
B.
C.
D.
at cost
at fair value
at cost less accumulated impairment losses
at cost less accumulated amortisation

Difficulty: Easy
64.
When group members do not apply the same accounting methods, the consolidation
process requires which of the following to be done?
A.
All group members must change their accounting policies to be consistent.
B. Adjustments must be made on consolidation to remove the effects of the different

policies.
C. Two sets of consolidated accounts need to be presented; the first done on the basis of
the inconsistent policies, the second done after the subsidiaries have adjusted their
policies in line with the parent.
D. A choice is to be made by the parent's management between any of the three other
given answers.

Difficulty: Easy
65.
On consolidation, the investment in subsidiary, shown in the investor's books, shall be

eliminated in full against which of the following?
A.
assets and liabilities of the subsidiary
B.
post-acquisition shareholders' funds of the subsidiary
C.
share capital of the subsidiary acquired by the parent only
D.
none of the given answers

Difficulty: Easy
66.
Which of the following statements about post-acquisition earnings is incorrect?
A.
They form part of earnings of the economic entity.
B. They are the earnings produced subsequent to the acquisition date by members of the
group.
C. They are eliminated against the parent's earnings, in a similar fashion to preacquisition earnings.
D. They form part of earnings of the economic entity and they are eliminated against the
parent's earnings, in a similar fashion to pre-acquisition earnings.

Difficulty: Medium
67.
Which of the following statements is not in accordance with AASB 3 Business

Combinations?
A. An entity shall account for each business combination by applying the acquisition
method.
B. For each business combination, one of the combining entities shall be identified as the
acquirer.
C. The acquirer is required to recognise, separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree.
D. The acquirer shall measure the identifiable assets acquired and the liabilities assumed
at their acquisition-date agreed values.

Difficulty: Medium
68.
On 1 July 2012, Goliath Ltd acquires all shares in David Ltd for $800 000. The fair value of
net assets acquired is $920 000 comprised of $600 000 in share capital and $320 000 in
retained earnings. What is the appropriate elimination entry for this investment that is in
accordance with AASB 3 Business Combinations and AASB 10 Consolidated Financial
Statements?
A.
B.
C.
D.

Difficulty: Medium
69.
On 1 July 2012, Felix Ltd acquires all shares in Oscar Ltd for $800 000. The fair value of
net assets acquired is $620 000 comprising $400 000 in share capital and $220 000 in
Statements?
A.
B.
C.
D.

Difficulty: Medium
70.
On 1 July 2012, Bob Ltd acquires all shares in Ted Ltd for $600 000. The fair value of net
assets acquired is $500 000 comprising $400 000 in share capital and $100 000 in
Statements?
A.
B.
C.
D.

Difficulty: Medium
71.
On 1 July 2012, Carol Ltd acquires all shares in Alice Ltd for $400 000. The fair value of net
assets acquired is $320 000 comprising $200 000 in share capital and $120 000 in
retained earnings. On the date of purchase, a contingent liability is not recorded in the
books of the acquiree but assumed by the acquirer. The contingent liability is estimated at
$20 000 and likely to eventuate after acquisition. What is the appropriate elimination
entry for this investment that is in accordance with AASB 3 Business Combinations and
AASB 10 Consolidated Financial Statements?
A.
B.
C.
D.

Difficulty: Medium
72.
On 1 July 2012, Mawson Ltd acquires all shares in Mountain Ltd for $400 000. The fair
value of net assets acquired is $320 000 comprising $200 000 in share capital and $120
000 in retained earnings. On the date of purchase, successful publishing title is not
recorded in the books of the acquiree but assumed by the acquirer. The publishing title is
estimated at $20 000 and likely to eventuate after acquisition. What is the appropriate
elimination entry for this investment that is in accordance with AASB 3 Business
Combinations and AASB 10 Consolidated Financial Statements?
A.
B.
C.
D.

Difficulty: Medium
Section: 27.09 Previously unrecognised identifiable intangible
73.
Which of the following would not be classified as an identifiable intangible asset in

accordance with AASB 138 Intangible assets?
A.
B.
C.
D.
mastheads
goodwill
customer lists
patent

Difficulty: Easy
Section: 27.09 Previously unrecognised identifiable intangible
74.
Directors have determined that goodwill acquired in 2014 has been impaired by $5000.
What is the appropriate elimination entry for this impairment?
A.
B.
C.
D.

Difficulty: Easy
75.
AASB 12 Disclosure of Interests in Other Entities requires an entity to disclose for each of
its subsidiaries that have non-controlling interests that are material to the reporting
entity:
A.
summarised financial information about the subsidiary
B. the profit or loss allocated to non-controlling interests of the subsidiary during the
reporting period.
C. accumulated non-controlling interests of the subsidiary at the end of the reporting

period.
D.
All of the given answers are required to be disclosed.

Difficulty: Easy
Section: 27.11 Disclosure requirements
76.
When an investee is classified as an associate which method of accounting is used to

account for the investment?
A.
proprietary method
B.
acquisition method
C.
equity method
D.
parent-entity method

Difficulty: Easy
Section: 27.12 Control, joint control, and significant influence
77.
Discuss, and provide an example of the 'partition' effect that existed under the previous
Corporations Law, prior to 1991.
Before the Corporations Legislation Amendment Act 1991 came into force, s. 295 of The
Corporations Law required group financial statements to be prepared. However, s. 9
defined a 'group' as meaning '(a) the company; and, (b) its subsidiaries at the end of the
financial year'. In explaining why trusts could not be included (and, remember, it is the
parent entity's and its subsidiaries' financial statements that are included in the
consolidated financial statements), subsidiaries were defined in The Corporations Law in
such a way that they had to be companies; so any entity that was not a company could
not be legally consolidated as it could not be included within the 'group'. Nor could entities
controlled by a non-corporate entity be consolidatedeven if the controlled entities
happened to be companies. This introduced what Sullivan labelled a partition effect (see
Figure 27.2).
Hence, before the amendments to The Corporations Law in 1991 group consolidated
financial
statements could include only entities that were companies. Therefore, by interposing a
unit trust, which in turn would own the equities in other companies none of the financial
statements of the companies controlled by the trust, or of the trust itself, could legally be
included in the consolidation process. This was referred to as a partition effect as
everything from the trust down was partitioned off and excluded from the consolidation
process.
This could have a beneficial impact on the leverage indicators (such as debt to assets)
derived from the consolidated financial statements. Referring to Figure 27.2 on page 872,
if the trust had not been interposed but instead C Ltd and D Ltd were directly controlled
by B Ltd, the debt-to-assets ratio of the economic entity would be 57 per cent. By
interposing a unit trust and not including C Ltd, D Ltd or the trust itself in the consolidation
process, the debt-to-assets ratio falls to a more favourable 40 per cent.
For more information refer to 'History of Australian Accounting Standards that govern the
preparation of consolidated financial statements'.

Difficulty: Easy
78.
Briefly outline the three main concepts of consolidation and how they differ. Identify the
concept used in Australia and the implications this has for the consolidation accounting
process.
The three alternative concepts are:

1. The entity conceptthe consolidated financial statements reflect the financial position
and financial performance of the economic entity as if it were operating as a single
economic unit under common managerial control, the control emanating from the
management group of the ultimate parent organisation.
2. The proprietary conceptall assets and liabilities of the parent entity and only a
proportionate share of the subsidiaries' assets and liabilities are included in the
consolidation process.
3. The parent-entity conceptall assets and liabilities of the parent and its subsidiaries
are included. The non-controlling interest is treated as a liability, rather than as part of
equity.
For more information refer to 'Alternative consolidation concepts' .

Difficulty: Medium
79.
Discuss the reason for recognising non-controlling interests as part of equity, rather than
as a liability.
The consolidated financial statements reflect the financial position and financial
performance of the economic entity as if it were operating as a single economic unit under
common managerial controlthe control emanating from the management group of the
ultimate parent organisation. In rejecting the parent-entity concept the accounting
standard-setters considered that it was inappropriate to classify the interests of outside
shareholders, that is the non-controlling interests, as liabilities because their claim on the
net assets of a subsidiary is not of the nature of a liability.
For more information refer to 'Alternative consolidation concepts'.

Difficulty: Medium
80.
What are the three key elements of the definition of control? Enumerate several factors
that may provide an indication of control.
The three elements of control are explained in some detail throughout AASB 10 and in the
associated Application Guidance that accompanies AASB 10. Indeed one of the major
changes made when the former AASB 127 was replaced by AASB 10 is that the concept of
control is now much more extensively addressed. For control to be deemed to exist, all
three elements identified must be present. As paragraph 7 of AASB 10 states:
an investor controls an investee if and only if the investor has all the following:
a. power over the investee (see paragraphs 1014);
b. exposure, or rights, to variable returns from its involvement with the investee (see
paragraphs 15 and 16); and
c. the ability to use its power over the investee to affect the amount of the investor's
returns (see paragraphs 17 and 18).
Some examples are:
* If the investor holds the majority of the voting rights (for example, the majority of the
ordinary shares in a company) then that should provide the investor with control over the
investee.
* Potential voting rights are financial instruments that do not in themselves have voting
rights but they can potentially be converted into other financial instrumentssuch as
ordinary sharesthat would then provide voting rights.
* When a dominant shareholder holds voting rights and all other shareholdings are widely
dispersed, and those other shareholders do not actively cooperate when they exercise
their votes, so as to have more voting power than the dominant shareholder.
For more information refer to 'The concept of control'.

Difficulty: Medium
81.
Define goodwill, and explain (with an example) how it is determined and accounted for as
part of the consolidation process.
Paragraph 52 of AASB 3 states that:

Goodwill acquired in a business combination represents a payment made by the acquirer
in anticipation of future economic benefits from assets that are not capable of being
individually identified and separately recognised.
Returning to the accounting procedures required in consolidation, we must consider the
fair value of both the assets acquired and the purchase consideration given in exchange.
For example, as Parent Ltd pays cash for the equity interest in Subsidiary Ltd, the fair
value of the purchase consideration is easily determined as the amount of cash given in
exchange. If we assume that the assets in Subsidiary Ltd are fairly valued, and there are
no contingent liabilities to consider, then goodwill acquired by Parent Ltd would be
determined as:
Fair value of purchase consideration $500 000
Less Fair value of identifiable assets acquired and liabilities assumed $480 000
Goodwill on acquisition $20 000
For more information refer to 'Determination of goodwill'.

Difficulty: Medium
82.
Briefly outline the steps taken in order that the financial information about the group is
presented as that of a single economic entity.
The first step in the consolidation process is substituting the assets and liabilities of the
subsidiary for the investment account that currently exists in the parent company. Where
the fair value of the net assets (inclusive of an amount attributed to contingent liabilities)
does not equal the fair value of the investment, this will lead to a difference on
consolidation. This difference will either be goodwill or a bargain gain on purchase (see
Worked Example 27.3 on page 890).
Next the investment account will be eliminated in full against the pre-acquisition equity of
the subsidiary. This will avoid double counting of the assets, liabilities and equity of the
subsidiary.
AASB 10 details a number of the procedures required in preparing consolidated financial
statements (some, but not all, of which will be considered in this chapter). Paragraphs
B86B99 set out guidance for the preparation of consolidated financial statements.
For more information refer to 'Eliminating parent's investment in subsidiary'.

Difficulty: Medium
83.
Discuss the two approaches that may be taken when the subsidiary's assets are not
recorded at fair value at the date of acquisition. What implication does the choice between
the two methods have on the consolidation accounting process?

Difficulty: Medium
84.
Discuss the treatment as required in AASB 10 Consolidated Financial Statements for

potential voting rights when considering whether one entity controls another entity.
Potential voting rights are financial instruments that do not in themselves have voting
rights but they can potentially be converted into other financial instrumentssuch as
ordinary sharesthat would then provide voting rights. For example, the investor might
hold share options or preference shares that in themselves do not have voting rights, but
they can potentially be converted to ordinary shares that would provide voting rights. An
increase in voting rights would increase the potential for an investor to control the
investee. Therefore, where the 'potential voting rights' are currently exercisable they
should be taken into account when assessing the existence of 'control'.
For more information refer to 'Potential voting rights'.

Difficulty: Medium
85.
Explain the circumstances when a bargain purchase may occur and discuss the
accounting treatment prescribed in AASB 3 Business Combinations for bargain purchases.

Difficulty: Medium
86.
AASB 3 requires entities to account for business combinations using the acquisition
method. Describe the steps required to implement the acquisition method.
AASB 3 requires entities to account for business combinations using what is referred to as
the acquisition method. The acquisition method requires four steps to be taken, these
being:
1. identifying the acquirer
2. determining the acquisition date
3. recognising and measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree
4. recognising and measuring goodwill or a gain from a bargain purchase.
See 'Accounting for business combinations' for the description of each step.
For more information refer to 'Accounting for business combinations'.

Difficulty: Medium
87.
Discuss how the subsidiary's post-acquisition earnings are accounted for on consolidation.
In the period following acquisition, the subsidiary will generate profits or losses. To the
extent that these results have been generated in the period after acquisition, and
therefore reflect, in part, the efforts of the management team of the parent entity, they
should be reflected in the results of the economic entity. That is, unlike pre-acquisition
earnings, post-acquisition earnings of the subsidiary are considered to be part of the
earnings of the economic entity and are not eliminated on consolidation. Accounting postacquisition is examined more closely in Worked Example 27.8 on page s 90203.
The consolidated retained earnings balance at the end of the 2016 financial year will
equal the parent entity's retained earnings, plus the post-acquisition earnings of the
controlled entity.
For more information refer to 'Consolidation after date of acquisition'.

Difficulty: Medium
Chapter 27 Summary
Chapter 28 Key
1.
AASB 10 Consolidated Financial Statements prescribes that intragroup balances,

transactions, income and expenses be eliminated in full on consolidation. This
requirement is consistent with the parent entity concept of consolidation.
FALSE
Difficulty: Easy
Section: Introduction to accounting for intragroup transactions
2.
AASB 10 Consolidated Financial Statements prescribes that intragroup balances,

transactions, income and expenses be eliminated in full on consolidation even where the
parent entity holds only a fraction of the issued equity.
TRUE
Difficulty: Easy
3.
If a subsidiary makes a dividend payment out of pre-acquisition earnings, the parent entity
should consider whether its investment in the subsidiary is impaired.
TRUE
Difficulty: Medium
Section: 28.01 Dividend payments from pre- and post-acquisition earnings
4.
Intragroup profits are eliminated in consolidation to reduce consolidated profits.

FALSE
Difficulty: Easy
5.
Intragroup profits are eliminated in consolidation to exclude intragroup transactions in the

parent entity's financial statements.
FALSE
Difficulty: Easy
6.
Parent Ltd sells inventories to Child Ltd amounting to $200 000 during the financial year.
The inventories are no longer in the hands of Child Ltd at year-end. Parent Ltd is no longer
required to eliminate these intragroup transactions because these transactions have been
realised by sale to external parties.
FALSE
Difficulty: Medium
Section: 28.02 Intragroup sale of inventory
7.
Transactions between entities that form an economic group should be eliminated in

proportion to the level of control between the parent entity and the subsidiary entity.
FALSE
Difficulty: Easy
8.
The level of equity ownership is not a factor in deciding what proportion of a transaction
between entities in a group should be eliminated.
TRUE
Difficulty: Easy
9.
Dividends may be identified as being paid out of pre-acquisition or post-acquisition profits

by a subsidiary company. Where dividends are paid out of post-acquisition profits the
investment in the subsidiary should be decreased by the amount of the dividend.
FALSE
Difficulty: Easy
10.
Companies in an economic entity may increase the level of consolidated sales reported by
selling inventory between themselves.
FALSE

Difficulty: Easy
11.
Company A owns 51% of the issued capital of Company B and Company A owns 60% of
the issued capital of Company C. Company A controls both B and C. If Company A sells
inventory for $500 000 to Company C and Company C sells it to Company B for $600 000
and Company B sells it to an entity external to the group for $700 000, the amount of
sales revenue to be recorded for that inventory for the group of companies is $1 560 000.
FALSE

Difficulty: Medium
12.
The value of inventory on hand for the economic group at the end of the period will always
equal the sum of the inventory on hand at the end of the period for each of the entities in
the group.
FALSE

Difficulty: Easy
13.
In the absence of an election to be a 'tax consolidated group', the Australian Tax Office
assesses income earned by the individual legal entities in an economic group and does
not take into consideration consolidation adjustments required for group accounts.
TRUE

Difficulty: Easy
14.
Intragroup sales of non-current assets results in the need to eliminate the effect of any
profit or loss on sale in the period of the sale and, in the rest of the periods of the asset's
life, any tax effects of the profit or loss, the depreciation and accumulated depreciation
will have to be adjusted for the life of the asset, along with the tax effects of the
adjustment to depreciation.
TRUE

Difficulty: Medium
Section: 28.03 Sale of non-current assets within the group
15.
If we simply aggregate the sales of the parent and subsidiary companies, without
adjustment, when there have been intragroup sales, total income would be overstated.
TRUE

Difficulty: Easy
16.
The fact that consolidation worksheets start 'afresh' each year means that the tax entry
for eliminating unrealised profit in opening inventory requires a 'Dr' to deferred tax assets,
rather than income tax expense.
FALSE

Difficulty: Easy
17.
Only dividends paid externally should be shown in the consolidated financial statements.
TRUE

Difficulty: Easy
18.
The term 'cum div' is used when shares are being bought with a dividend entitlement.
TRUE

Difficulty: Easy
19.
Examples of intragroup transactions include:
A.
B.
C.
D.
dividends payable to group members.
the payment of taxation.
the recognition of minority interests.
the sale of inventories to external parties.

Difficulty: Easy
20.
Intragroup transactions that are to be eliminated in the consolidated accounts include:
A.
B.
C.
inter-entity loans.
inter-entity sales of non-current assets.
the payment of management fees to a member of the group.
D.
all of the given answers.

Difficulty: Easy
21.
Dividends paid between entities in the group should be:
A. not permitted by the ultimate controlling entity because it does not make sense to
exchange money between entities in the one economic group.
B. reflected in the group accounts because it reflects the economic return the group
earned by investing in the companies that form its operations.
C. eliminated from the group accounts, but reflected in the individual legal entity
accounts, since the group accounts reflect the many entities as one single economic
entity.
D. retained in the consolidated statements but disclosed separately as related-party

transactions.

Difficulty: Easy
22.
Little Company declared a dividend of $90 000 for the period ended 30 June 2014. Big
Company owns 100% of the equity of Little Company. Big Company accrues dividends
when they are declared by its subsidiaries. What elimination entry would be required to
prepare the consolidated financial statements for the group for the period ended 30 June
2014?
A.
B.
C.
D.

Difficulty: Easy
23.
Monster Co Ltd owns 100% of the issued shares of Mini Co Ltd. Mini Co Ltd declared a
dividend of $100 000 for the period ended 30 June 2014. Monster Co Ltd accrues
dividends when they are declared by its subsidiaries. What elimination entry would be
required to prepare the consolidated financial statements for the group for the period
ended 30 June 2015?
A.
B.
C.
D.

Difficulty: Easy
24.
The treatment of dividends, paid by a subsidiary, that are identified as paid out of preacquisition profits in the period they are paid is to:
A. Capitalise the dividend in the books of the parent entity as a further investment in the
subsidiary. This amount will be eliminated on consolidation.
B. Record dividend revenue and the receipt of cash in the books of the parent entity and
then test the subsidiary for impairment.
C. Record a return of the investment in the subsidiary by decreasing the investment in the
subsidiary in the books of the parent entity. The amount of the investment will be
eliminated on consolidation.
D. Record a decrease in pre-acquisition reserves or retained profits in the books of the

subsidiary so that on consolidation the elimination entry will automatically eliminate
the effect of the dividend.

Difficulty: Medium
25.
Stormy Ltd has purchased all the issued capital of Cloud Ltd at the beginning of the
current period. At the end of the period Cloud Ltd declares a dividend of $50 000 that is
identified as being paid out of pre-acquisition profits. What entries would Stormy Ltd and
Cloud Ltd make in their own books? (Assume Stormy Ltd accrues the dividends of
subsidiaries when they are declared.)
A.
B.
C.
D.

Difficulty: Medium
26.
Forest Ltd purchased all the issued capital of Shrub Ltd on 1 July 2013 for cash
consideration of $1 million. The fair value of Shrub Ltd's net assets at that date was $1
million made up of:
During the period ended 30 June 2014, Shrub Ltd declare a dividend of $100 000 out of
pre-acquisition earnings. What consolidation journal entries would be required to prepare
group accounts for the period?
A.
B.
C.
D.

Difficulty: Medium
27.
Radio Ltd acquired all the issued capital of Wave Ltd on 1 July 2014 for cash consideration
of $2 million. The fair value of the net assets of Wave Ltd at that date was $1.8 million as
follows:
During the period ending 30 June 2015, Wave Ltd declare a dividend of $300 000 that is
identified as being paid out of pre-acquisition profits. Goodwill had been determined to
have impaired by $20 000 during the period. What consolidation journal entries would be
required to prepare group accounts for the period ended 30 June 2015?
A.
B.
C.
D.

Difficulty: Medium
28.
Hammer Ltd acquired all the issued capital of Nail Ltd on 1 July 2015 for cash
consideration of $1.5 million. The fair value of the net assets of Nail Ltd at that date was
$1.2 million as follows:
During the period ended 30 June 2016, Nail Ltd declared a dividend of $200 000 that is
identified as being paid out of pre-acquisition profits and a further $100 000 is declared at
the end of the period that is out of post-acquisition profits. Goodwill had been determined
to have been impaired by $15 000 during the period. What consolidation journal entries
would be required to prepare group accounts for the period ended 30 June 2016?
A.
B.
C.
D.

Difficulty: Hard
29.
Large Company owns 80% of the issued capital of Smaller Company and Large Company
owns 60% of the issued capital of Medium Company. The three companies form an
economic entity for the purposes of consolidated accounts. During the period Smaller
Company sold inventory to Medium for $400 000. Medium sold the same inventory to
Large for $560 000 and Large sold it to an entity external to the group for $760 000. What
are the sales revenue reported in the consolidated statements for this item?
A.
$1 416 000
B.
$1 720 000
C.
$760 000
D.
$400 000

Difficulty: Easy
30.
Companies A, B and C are all part of the one economic entity, but are all separate legal
entities required to prepare their own financial statements. Company A sold Company B's
inventory that cost $56 000 for $78 000. At the end of the same period Company B has
three-quarters of that inventory still on hand and the rest has been sold to an entity
outside the economic group. At what amount should the inventory remaining in Company
B be recorded in Company B's own financial statements?
A.
$42 000
B.
$58 500
C.
$56 000
D.
$14 625

Difficulty: Easy
31.
Companies A, B and C are all part of the one economic entity, but are all separate legal
entities required to prepare their own financial statements. Company A sold Company B
inventory that cost $56 000 for $78 000. At the end of the same period Company B has
three-quarters of that inventory still on hand and the rest has been sold to an entity
outside the economic group. At what amount should the inventory remaining in Company
B be recorded in the consolidated statements?
A.
$14 625
B.
$56 000
C.
$58 500
D.
$42 000

Difficulty: Easy
32.
Meat Ltd purchased 100% of the issued capital of Pie Ltd for a cash consideration of $1.7
million on 1 July 2014. At that time the fair value of the net assets of Pie Ltd were
represented by:
Goodwill had been determined to have been impaired by $20 000 during the period.
During the period ended 30 June 2015, Pie Ltd sold inventory that cost $450 000 for $620
000 to Meat Ltd. Twenty per cent of this inventory remains on hand in Meat Ltd at the end
of the year. Both companies use a perpetual inventory system. The taxation rate is 30%.
At the end of the period Pie Ltd declared a dividend of $45 000 that has not yet been paid.
What consolidation journal entries are required for the period ending 30 June 2015?
A.
B.
C.
D.

Difficulty: Hard
33.
French Ltd purchased 100% of the issued capital of Pastry Ltd for a cash consideration of
$2.1 million on 1 July 2015. At that time the fair value of the net assets of Pastry Ltd were
represented by:
Goodwill had been determined to have been impaired by $5000 during the period. During
the period ended 30 June 2016 Pastry Ltd sold inventory that cost $190 000 for $300 000
to French Ltd. Sixty per cent of this inventory remains on hand in French Ltd at the end of
the year. Both companies use a perpetual inventory system. The taxation rate is 30%.
What consolidation journal entries are required for the period ending 30 June 2016?
A.
B.
C.
D.

Difficulty: Medium
34.
French Ltd owns 100% of the issued capital of Pastry Ltd. During the period ended 30 June
2014, Pastry Ltd sold inventory that cost $190 000 for $300 000 to French Ltd. Sixty per
cent of this inventory remains on hand in French Ltd at the end of that year. Both
companies use a perpetual inventory system. The taxation rate is 30%.
What consolidation journal entries are required in relation to the inter-company
transaction for the period ending 30 June 2015?
A.
B.
C.
D.

Difficulty: Medium
35.
Belgium Ltd owns all the issued capital of Chocolate Ltd. During the period ended 30 June
2015, Belgium Ltd sold Chocolate Ltd inventory that had a cost of $200 000 for $270 000.
At the end of the current period Chocolate Ltd had 75% of that inventory still on hand; the
rest was sold to entities external to the group. During the previous period Chocolate Ltd
had sold inventory to Belgium Ltd at a profit of $49 000. At the end of that period (30 June
2014) Belgium Ltd still had 40% of that inventory on hand. That entire inventory was sold
to parties external to the group during the current year. The taxation rate is 30% and both
companies use a perpetual inventory system.
What consolidation journal entries are required to eliminate the effects of these
transactions for the period ended 30 June 2015?
A.
B.
C.
D.

Difficulty: Medium
36.
Zeus Ltd owns 100% of the issued capital of Ares Ltd. On 1 July 2015, Zeus Ltd purchased
an item of equipment from Ares Ltd for $800 000. Ares had owned the equipment for 2
years. It originally cost $890 000 and the accumulated depreciation was $178 000 at the
time of sale. The equipment has been depreciated over this time, but not written down or
revalued. The remaining useful life of the equipment at 1 July 2015 is estimated to be 8
years. Zeus Ltd expects the benefits to be obtained from the equipment to be evenly
received over its useful life. The tax rate is 30%.
What are the consolidation journal entries required for this inter-company transaction for
the period ended 30 June 2016?
A.
B.
C.
D.

Difficulty: Medium
37.
Zeus Ltd owns 100% of the issued capital of Ares Ltd. On 1 July 2012, Zeus Ltd purchased
an item of equipment from Ares Ltd for $800 000. Ares had owned the equipment for 2
years. It originally cost $890 000 and the accumulated depreciation was $178 000 at the
time of sale. The equipment has been depreciated over this time, but not written down or
revalued. The remaining useful life of the equipment at 1 July 2012 is estimated to be 8
years. Zeus Ltd expects the benefits to be obtained from the equipment to be evenly
received over its useful life. The tax rate is 30%.
the period ended 30 June 2014?
A.
B.
C.
D.

Difficulty: Medium
38.
Apple Ltd owns all the issued capital of Pear Ltd. On 1 July 2014, Pear Ltd purchased an
item of plant from Apple Ltd for $1 000 000. Apple Ltd had owned the plant for 5 years. It
originally cost $1 350 000 and the accumulated depreciation at 1 July 2004 is $562 500.
The remaining useful life of the equipment on the date of sale to Pear Ltd is estimated to
be 7 years. The pattern of benefits is expected to be obtained from the equipment evenly
over its useful life. The tax rate is 30%. Round all calculations to the nearest dollar.
the periods ended 30 June 2015 and 30 June 2016?
A.
B.
C.
D.

Difficulty: Hard
39.
Which of the following statements describes the reasons why tax adjustments may be
required when eliminating the unrealised profit from intragroup sales of inventory?
A. Tax is paid on a group perspective and therefore one taxable income figure must be
derived for the group.
B.
Tax will be adjusted at the request of the Australian Taxation Office.
C. If tax has been paid by one of the separate legal entities, from the group's perspective
this represents a deferral of the payment of tax.
D. If tax has been paid by one of the separate legal entities, from the group's perspective
this represents a pre-payment of tax.

Difficulty: Medium
40.
What is the amount of unrealised profit that needs to be eliminated at the end of the
period, in the following situation, where Barker Limited is the parent of Corbett Limited?
(Ignore the tax effect.)
Barker purchases 500 units of inventory for $20 each. Barker sells this entire inventory to
Corbett at a mark-up of 50%. At the end of the period, 100 units are on hand.
A.
$1000
B.
$2000
C.
$3000
D.
$5000

Difficulty: Easy
41.
What is the amount of unrealised profit that needs to be eliminated at the end of the
period, in the following situation, where Morecombe Limited is the parent of Wise Limited?
(Ignore the tax effect.)
Morecombe purchases 500 units of inventory for $20 each. Morecombe sells this entire
inventory to Wise at a mark up of 25%. Wise then sells half of the inventory to an external
party. Half of the remaining amount (after the external sale) is sold back to Morecombe for
$2500.
A.
cannot determine from the information given
B.
$300
C.
$625
D.
$1250

Difficulty: Hard
42.
The journal entries to eliminate unrealised profit in closing inventory at 30 June 2014 were
as follows:
What are the journal entries to eliminate the unrealised profits in opening inventory the
following period?
A.
B.
C.
D.

Difficulty: Medium
43.
A non-current asset was sold by Subsidiary Limited to Parent Limited during the 2013/14
financial year. The carrying amount of the asset at the time of the sale was $700 000. As
part of the consolidation process, the following journal entry was passed.
What (a) amount did Parent Limited pay Subsidiary Limited for the asset; (b) was the cost
of the asset as shown in the books of Subsidiary Limited?
A.
(a) $900 000; (b) $1 400 000
B.
(a) $900 000; (b) $1 200 000
C.
(a) $700 000; (b) $1 200 000
D.
(a) $900 000; (b) $800 000

Difficulty: Easy
44.
A non-current asset was sold by Subsidiary Limited to Parent Limited on 30 June 2014. The
carrying amount of the asset at the time of the sale was $700 000. As part of the
consolidation process, the following journal entry was passed.
Assuming there is another ten years of useful life remaining for the asset, what are the
journal entries at 30 June 2016 to adjust for depreciation?
A.
B.
C.
D.

Difficulty: Medium
45.
Lilo Ltd sells inventory items to its subsidiary Stitch Ltd. If during the financial year 2013,
the unrealised profits in ending inventory in Stitch Ltd exceeds that of its unrealised profits
in beginning inventory, which of the following statements is correct with respect to Lilo
Ltd's consolidated financial statements after considering these transactions only?
A.
Consolidated profit will decrease.
B.
Consolidated deferred tax liability will increase.
C.
Consolidated ending inventory will decrease.
D.
Consolidated sales will be unaffected.

Difficulty: Hard
46.
Penny Ltd sells inventory items to its subsidiary Bolt Ltd. If during the financial year 2013,
the unrealised profits in ending inventory in Bolt Ltd is less than its unrealised profits in
beginning inventory, which of the following statements is correct with respect to Penny
Ltd's consolidated financial statements after considering these transactions only?
A.
Consolidated profit will increase.
B.
Consolidated deferred tax liability will increase.
C.
Consolidated ending inventory will decrease.
D.
Consolidated sales will be unaffected.

Difficulty: Hard
47.
Aladdin Ltd sells inventory for a profit to its subsidiary Jasmine Ltd to be used as
machinery in Jasmine Ltd's production process. The consolidation worksheet of Aladdin Ltd
with respect to this transaction only should not include:
A.
a debit to sales.
B.
a credit to cost of sales.
C.
a credit to inventories.
D.
a credit to machinery.

Difficulty: Medium
48.
Aladdin Ltd sold inventory items (with a cost of $100 000) to its subsidiary Genie Ltd for
$120 000. Half of the inventory items were sold by Genie Ltd to external parties before
the financial year end. Ignoring taxes, which of the following statements is correct with
respect to this transaction only?
A.
Consolidated sales will decrease by $60 000.
B.
C.
Consolidated profit will decrease by $10 000.
D.

Difficulty: Medium
49.
Alice Ltd sold inventory items to its subsidiary Mad Hatter Ltd and had the following
intercompany transactions:
Cost of inventory $100 000 sold for $125 000 for the year ended 30 June 2012. Half of the
inventory items were sold by Mad Hatter Ltd to external parties before the financial year
end 30 June 2012.
inventory items were sold by Mad Hatter Ltd to external parties before the financial year
end 30 June 2013.
Ignoring taxes, which of the following statements is correct with respect to this transaction
only for the year ended 30 June 2013?
A.
B.
Consolidated sales will increase by $25 000.
C.
D.
There will be no change in the consolidated profit.

Difficulty: Hard
50.
Woody Ltd sold inventory items to its subsidiary Buzz Lightyear Ltd and had the following
intercompany transactions:
Cost of inventory $300 000 sold for $375 000 for the year ended 30 June 2012. One third
of the inventory items were sold by Buzz Lightyear Ltd to external parties before the
financial year end 30 June 2012.
inventory items were sold by Buzz Lightyear Ltd to external parties before the financial
year end 30 June 2013.
Ignoring taxes, which of the following statements is correct with respect to this transaction
only for the year ended 30 June 2013
A.
B.
Consolidated sales will increase by $275 000.
C.
Consolidated profit will increase by $62 500.
D.
Consolidated profit will increase by $12 000.

Difficulty: Hard
51.
A non-current asset was sold by Subsidiary Limited to Parent Limited during the 2013/14
financial year. The carrying amount of the asset at the time of the sale was $1 400 000. As
part of the consolidation process, the following journal entry was passed.
What (a) amount did Parent Limited pay Subsidiary Limited for the asset; (b) was the cost
of the asset as shown in the books of Subsidiary Limited?
A.
(a) $1 800 000; (b) $1 400 000
B.
(a) $1 800 000; (b) $1 600 000
C.
(a) $1 400 000; (b) $2 400 000
D.
(a) $1 800 000; (b) $2 400 000

Difficulty: Easy
52.
Blue Ltd sold inventory items (with a cost of $90 000) to its subsidiary Maroon Ltd for
$120 000. Half of the inventory items were sold by Maroon Ltd to external parties before
A.
B.
C.
D.
Difficulty: Medium
53.
Tookey Ltd sold inventory items (with a cost of $75 000) to its subsidiary Milky Ltd for
$135 000. A third of the inventory items were sold by Milky Ltd to external parties before
A.
B.
C.
D.

Difficulty: Medium
54.
Detail at least five types of intragroup transactions that require elimination adjustments to
be made in the consolidated accounts

Difficulty: Easy
55.
Explain, with examples, the difference between dividend payments out of pre-acquisition
profits and dividend payments out of post-acquisition profits, and the manner in which
they are accounted for in consolidation accounting.
Post-acquisitiononly dividends paid externally should be shown in the consolidated

financial statements. In Figure 28.1 on page 922, for example, we see that the subsidiary,
which we will say is 100% owned by Parent Entity, pays $1000 in dividends to Parent
Entity and Parent Entity pays $4000 in dividends to its shareholders. The only dividends
being paid externally (that is, which leave the boundary' of the economic entity), and
hence the only dividends to be shown in the consolidated financial statements, will be the
dividends paid to the shareholders of Parent Entity; that is, the $4000 in dividends. The
dividends paid to the parent entity by the 100-per-cent-owned subsidiary will be
eliminated on consolidation. See Worked Example 28.1 on pages 92224 for an illustration
of the consolidation of accounts when a dividend has been paid by a subsidiary company
after acquisition.
Pre-acquisitionfrom 2008 Paragraph 12 of AASB 127 Separate Financial Statements now
requires that:
An entity shall recognise a dividend from a subsidiary, a joint venture or an associate in
profit or loss in its separate financial statements when its right to receive the dividend is
established.
Therefore, the situation now is that dividends paid by a subsidiary are recorded as
dividend revenue in the parent entity's accounts, regardless of whether they are paid out
of:
a. pre-acquisition profits/equity (that is, paid out of profits earned by the subsidiary prior
to the purchase by the parent of the interest in the subsidiary) or
b. post-acquisition profits/equity (that is, paid out of profits earned by the subsidiary after
the purchase by the parent entity of the interest in the subsidiary).
Once a subsidiary makes a dividend payment out of pre-acquisition earnings, this raises
another issue to consider. If a payment is made out of pre-acquisition profits of the
subsidiary then this in itself may have implications for the value of the parent's
investment in the subsidiary. The dividend payment will have the effect of reducing the
net assets of the subsidiary. This in turn may provide an indication that the parent entity's
investment in the subsidiary may thereafter have a value that may be below the original
cost of the investment; that is, the investment in the subsidiary may be impaired. See
Worked Example 28.2 on pages 92629, which shows dividends paid out of pre-acquisition
earnings.
For more information refer to ' Dividends out of post-acquisition profits' and ' Dividends
out of pre-acquisition profits'.

Difficulty: Medium
56.
Explain, with examples and the assumptions made, why it is necessary to pass
consolidation journal entries to adjust for unrealised profits existing in opening inventory.
From Worked Example 28.3, on pages 930935, there were unrealised profits in the
closing inventory of Big Ltd at 30 June 2015, so that when it is time to do the consolidation
adjustments at the end of the next financial year for Big Ltd and its controlled entity there
will be unrealised profits in opening inventory. Remember that the consolidation journal
entries do not affect the accounts of the individual legal entities and hence do not carry
forward, and therefore the cost of the opening inventory held by one of the entities within
the group will be overstated from the group's perspective, as at the beginning of the
financial period.
The closing retained earnings of Little Ltd in the last year (opening retained earnings this
year) will also be overstated from the group's perspective as it will include a gain on the
intragroup sale of inventory. In the consolidation adjustments, we need to shift the income
from the previous period, in which the inventory was still on hand, to the period in which
the inventory will ultimately be sold to parties external to the economic entity. The
inventory is assumed to be sold in the following period. Hence the consolidation
adjustment entries at the end of the following year at 30 June 2016, would be:
Dr Opening retained earnings1 July 2015 $40 000
Cr Cost of goods sold $40 000
Remember that reducing the value of opening inventory will reduce cost of goods sold.
This entry will effectively shift the income from 2015 to 2016 (the period in which the sale
to an external party actually occurs). With higher profits this will lead to a higher tax
expense, which, as we know, is based upon accounting profits with the adoption of taxeffect accounting.
Dr Income tax expense $13 200
Cr Opening retained earnings1 July 2015 $13 200
Any profits in closing inventory in 2016 will also need to be accounted for.
For more information refer to 'Unrealised profit in opening inventory' .

Difficulty: Medium
57.
Explain why unrealised profits and losses between entities within a group are eliminated
on consolidation. Discuss when these transactions are realised for consolidated statement
purposes.
Entities that are related often sell inventory to one another in what is known as an
intragroup sale of inventory. From the group's perspective, revenues should not be
recognised until an external sale of inventory has taken place, that is, when inventory has
been sold to parties outside the group. As we already know, paragraph B86c of AASB 10
stipulates:
Consolidated financial statements eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to transactions between entities of the group
(profits or losses resulting from intragroup transactions that are recognised in assets,
such as inventory and fixed assets, are eliminated in full). Intragroup losses may indicate
an impairment that requires recognition in the consolidated financial statements. AASB
112 Income Taxes applies to temporary differences that arise from the elimination of
profits and losses resulting from intragroup transactions.
For example, Company A might sell $100 000 of inventory to Company B, which, in turn,
sells it to a party outside the economic entity for an amount of $150 000 (see Figure 28.2
on page 929). If we simply aggregate the sales of Company A and Company B in the
consolidation process, it would appear that the economic entity's total sales are $250 000.
From the economic entity's perspective, this would be incorrect. The only sales that should
appear in the consolidated statements are those made to parties external to the group, in
this case one sale of $150 000. It is possible at year end for some, or all, of the inventory
sold within the group to still be on hand. Let us assume that half of the inventory sold by
Company A to Company B is still on hand at year end and, further, that the total amount
of inventory transferred from Company A to Company B at a sales price of $100 000

actually cost Company A $70 000 to manufacture. With half of the inventory still on hand,
this would mean that effectively there is inventory on hand in Company B's accounts, at a
cost to Company B of $50 000, that cost the group only $35 000 to manufacture. As we
know, pursuant to Australian and international accounting standards, an entity is to record
inventory at the lower of cost and net realisable value (see Chapter 7 for an explanation of
how to measure inventory) so the inventory needs to be written down by $15 000 for the
purposes of the consolidated financial statements (which have as their focus the economic
entity). In the financial statements of Company B, as a separate legal entity, it would be
correct to leave the inventory at its cost to Company B, that is $50 000.
For more information refer to 'Intragroup sale of inventory'.

Difficulty: Medium
58.
Explain the accounting treatment for impairment to the subsidiary investment when
dividends have been paid out of pre-acquisition profits.
If a payment is made out of pre-acquisition profits of the subsidiary then this in itself may
have implications for the value of the parent's investment in the subsidiary. The dividend
payment will have the effect of reducing the net assets of the subsidiary. This in turn may
provide an indication that the parent entity's investment in the subsidiary may thereafter
have a value that may be below the original cost of the investment; that is, the
investment in the subsidiary may be impaired.
Therefore, in accordance with an amendment made to AASB 136 Impairment of Assets in
mid-2008, paragraph 12(h) now states that the payment of a dividend by a subsidiary is
treated as an indication that the parent's investment in a subsidiary may be impaired, if:
i. the carrying amount of the investment in the separate financial statements exceeds the
carrying amounts in the consolidated financial statements of the investee's net assets,
including associated goodwill; or
(ii)the dividend exceeds the total comprehensive income of the subsidiary, jointly
controlled entity or associate in the period the dividend is declared.
If the parent's investment in the subsidiary is impaired as a result of the subsidiary
making a dividend payment out of pre-acquisition earnings, the investment in the
subsidiary in the parent's own accounts must be written down to its recoverable amount
by recognising an impairment loss expense. In the parent's accounts the entries would be:
Dr Impairment lossinvestment in subsidiary
Cr Accumulated impairment lossinvestment in subsidiary
In the consolidation worksheet, the impairment losses relating to the parent's investment
in the subsidiary would be reinstated to both the investment in subsidiary account and to
the subsidiary's equity by virtue of the following entries:
Dr Accumulated impairment lossinvestment in subsidiary
Cr Impairment lossinvestment in subsidiary
For more information refer to 'Dividends out of pre-acquisition profits'.

Difficulty: Hard
59.
Discuss the reasoning behind the elimination all dividends receivable/payable between
entities within the group during the consolidation process.
In the consolidation process it is necessary to eliminate all dividends paid/payable to other

entities within the group, and all intragroup dividends received/receivable from other
entities within the group. Even though the separate legal entities in the group might be
paying dividends to each other, it does not make sense for such dividends to be shown
when we consider the group as a single economic entity. That is, you cannot pay
dividends' to yourself. The only dividends that should be shown in the consolidated
financial statements would be dividends paid to parties external to the group, that is to
the shareholders of the parent entity and to the non-controlling interests. We will discuss
non-controlling interests in depth in the next chapter. The elimination of intragroup
dividends is consistent with the general principle espoused in AASB 10 that intragroup
(within the group) transactions are to be eliminated in full on consolidation.
For more information refer to 'Dividend payments from pre and post acquisition earnings'.

Difficulty: Easy
60.
Explain why gains recognised on sale of assets between entities within a group are
reversed on consolidation.
When an item of property, plant and equipment is sold, the difference between the
carrying amount of the asset and the sale proceeds is shown as a gain or loss on sale. The
net amount of the gain is to be included within profit or loss. The gross proceeds from the
sale is not to be shown as revenue. As paragraph 68 of AASB 116 Property, Plant and
Equipment states:
The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be included in profit or loss when the item is derecognised (unless AASB
117 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.
The result of the sale of the asset giving rise to a gain will be shown in individual entity's
financial statements. However, from the economic entity's perspective there has been no
sale and therefore no gain on sale given that there has been no transaction with an party
external to the group. The elimination entry is necessary so that the accounts reflect the
balances that would have applied had the intragroup sale not occurred.
For more information refer to 'Sale of non-current assets within the group'.

Difficulty: Easy
Chapter 28 Summary
Chapter 29 Key
1.
AASB 10 Consolidated and Separate Financial Statements prescribes that non-controlling

interests be presented in the consolidated statement of financial position as a liability.
FALSE
Difficulty: Easy
Section: 29.01 What is a non-controlling interest?
2.
Total comprehensive income is attributed to the owners of the parent and to the noncontrolling interests even if this results in the non-controlling interests having a deficit
balance.
TRUE
Difficulty: Easy
Section: 29.02 Non-controlling interests to be disclosed in the consolidated financial statements
3.
AASB 101 Presentation of Financial Statements requires a separate line item on the face
of the statement of financial position showing the non-controlling interest in equity.
TRUE
Difficulty: Easy
4.
AASB 101 Presentation of Financial Statements requires an entity to disclose separately in

the statement of comprehensive income, profit or loss for the period attributable to noncontrolling interests and owners of the parent.
TRUE
Difficulty: Easy
5.
One of the steps in preparing consolidated financial statements is working out the
amounts to be attributed to non-controlling interests to determine the amount to be
eliminated in the consolidation process.
FALSE
Difficulty: Easy
Section: 29.03 Calculating non-controlling interests
6.
Using full goodwill method, share of goodwill attributable to the non-controlling interests is
recognised in the statement of financial position as part of non-controlling interest in
equity.
TRUE
Difficulty: Easy
7.
Parties who are not part of the ownership of the parent entity in a group and who own
capital in a company that is a controlled entity in that group are called outside financing
interests.
FALSE
Difficulty: Easy
8.
In calculating the proportion of a subsidiary's profit that is attributable to owners who are
not part of the group, all adjustments to the group's profit should be treated as affecting
the calculation for the outside owners.
FALSE
Difficulty: Easy
9.
Under the proprietary concept of consolidation, non-controlling interests are shown as a

liability.
TRUE
Difficulty: Easy
10.
In preparing consolidated financial statements non-controlling interests are allocated on a

'line-by-line' basis.
FALSE

Difficulty: Medium
11.
Non-controlling interests are 'identified' and eliminated as part of the consolidation

process.
FALSE

Difficulty: Easy
12.
Non-controlling interests are shown as equity, that is, as contributors of equity capital to
the economic entity.
TRUE

Difficulty: Easy
13.
Non-controlling interests are allocated on a 'line-by-line' basis throughout the statement of

comprehensive income.
FALSE

Difficulty: Easy
14.
Only dividends payable to the parent entity are eliminated against dividends receivable in
the accounts of the parent entity.
TRUE

Difficulty: Easy
15.
Where the parent entity holds less than 100 per cent interest in a subsidiary, AASB 10
requires the remaining shareholders' interests in what items to be disclosed?
A.
B.
C.
the subsidiary's share capital and reserves
the subsidiary's profit or loss
the subsidiary's current and non-current assets
D. the subsidiary's share capital and reserves and the subsidiary's profit or loss

Difficulty: Easy
16.
Non-controlling interests arise when:
A.
The parent entity does not control a subsidiary in the group.
B. The parent entity raises capital through preference shares that have the characteristics
of debt to fund the subsidiary.
C. The subsidiary has owners of equity who are not owners through their ownership
interest in the controlling parent entity.
D. The subsidiary has invested in other entities in which it does not have a controlling
interest.

Difficulty: Easy
17.
Buster Ltd owns 85 per cent of the issued capital of Rhymes Ltd. During the period ended
30 June 2016 the operating profit of Rhymes Ltd was $680 000. Buster Ltd bought goods
for $540 000 from Rhymes. The goods cost Rhymes $400 000 and at the end of the period
none of this inventory was still on hand. Rhymes paid Buster a management fee of $100
000 during the period. Goodwill on consolidation was impaired by $30 000. Rhymes paid a
dividend of $40 000 at the end of the period.
What is the non-controlling interest in the operating profit of Rhymes Ltd?
A.
$87 000
B.
$112 500
C.
$102 000
D.
$101 969

Difficulty: Medium
18.
On 1 July 2015 Harry Ltd purchased 80 per cent of the issued share capital of Wills Ltd and
has control of Wills. The fair value of the net assets of Wills Ltd on that date was
represented as follows:
Harry Ltd paid cash consideration of $2 500 000 for Wills. Wills Ltd made an operating
profit of $350 000, there were no intragroup transactions during the period ended 30 June
2016. Goodwill had been determined to have been impaired during the year by $25 000.
What consolidation journal entries are required for the period and what is the noncontrolling interest in equity as at 30 June 2016?
A.
B.
C.
D.

Difficulty: Medium
19.
Finger Ltd purchased 75 per cent of the issued capital and in the process gained control
over Nail Ltd on 1 July 2013. The fair value of the net assets of Nail Ltd at purchase was
represented by:
Finger Ltd paid cash consideration of $4 000 000 for Nail Ltd. During the period ended 30
June 2015, Nail Ltd paid management fees of $540 000 to Finger Ltd and Nails had an
operating profit of $980 000. Nails' opening retained earnings at the beginning of the
period were $1 460 000. At the end of the period Nail Ltd declared a dividend of $90 000.
There were no other inter-company transactions. Goodwill was determined to have been
impaired by $19 000 during the period. Companies in the group accrue dividends when
they are declared by subsidiaries.
For the period ended 30 June 2015, what consolidation journal entries are required and
what is the non-controlling interest?
A.
B.
C.
D.

Difficulty: Hard
20.
When a subsidiary company that has a non-controlling interest (NCI) declares a dividend,
the treatment in the consolidated statement of financial position of dividends not paid is:
A. The non-controlling interest portion of the dividend owing should be eliminated along
with the parent entity's share, leaving a zero balance in dividends payable.
B. The NCI's portion should be deducted from the non-controlling interest's share in equity.
There should be no dividend amounts remaining in the consolidated statement of
financial position, but the amount owed to the NCI should be disclosed separately.
C. The amount owing to NCI as a dividend payable should be included in the consolidated
statement of financial position as a current liability.
D. The amount of dividends payable to both the parent entity and the NCI will be reflected
in the consolidated statement of financial position.

Difficulty: Easy
21.
Calculating goodwill for a subsidiary that has a non-controlling interest involves:
A. Taking the parent entity's share of the fair value of the identifiable net assets of the
subsidiary and deducting it from the fair value of the consideration paid.
B. Dividing the fair value of the consideration paid for the subsidiary by the percentage
ownership of the parent entity and deducting the fair value of the identifiable net
assets of the subsidiary from that amount.
C. Taking the book value of equity of the subsidiary and deducting the fair value of the
consideration paid for the subsidiary.
D. Dividing the fair value of the identifiable net assets of the subsidiary by the percentage
ownership of the parent entity and deducting this amount from the fair value of the
consideration paid.

Difficulty: Easy
22.
Calculating the non-controlling interest (NCI) in the operating profit and opening retained
earnings of a subsidiary is done by:
A. taking the operating profit and opening retained earnings figures of the subsidiary and
multiplying them by the percentage ownership held by the NCI.
B. adjusting the operating profit and opening retained earnings of the subsidiary for any
intragroup transactions and multiplying them by the percentage ownership held by the
NCI.
C. adjusting the operating profit of the subsidiary for any unrealised profit or expense of
the subsidiary as a result of any intragroup transactions and multiplying both this and
the opening retained earnings by the percentage ownership held by the NCI.
D. adjusting the opening retained earnings and the operating profit for any unrealised
profit or expense of the subsidiary as a result of intragroup transactions and multiplying
this by the percentage ownership held by the NCI.

Difficulty: Medium
23.
Groucho Ltd purchased 60 per cent of the issued capital and in the process gained control
over Marx Ltd on 1 July 2014. The fair value of the net assets of Marx Ltd at purchase was
represented by:
Groucho Ltd paid cash consideration of $1 850 000 for Marx Ltd. During the period ended
30 June 2015, Marx Ltd paid management fees of $200 000 to Groucho Ltd and Marx had
an operating profit of $530 000. Marx Ltd paid a dividend of $100 000 during the period.
Groucho purchased inventory from Marx during the period for $80 000. The inventory cost
Marx Ltd $56 000 and at the end of the period Groucho had 50 per cent of that inventory
still on hand. Goodwill has been determined to have been impaired by $6200 during the
period. Companies in the group use perpetual inventory systems and accrue dividends
when they are declared by subsidiaries. Ignore tax implications.
what is the non-controlling interest?
A.
B.
C.
D.

Difficulty: Hard
24.
Green Ltd purchased 90 per cent of the issued capital and in the process gained control
over Maroon Ltd on 1 July 2015. The fair value of the net assets of Maroon Ltd at purchase
was represented by:
Green Ltd paid cash consideration of $3 700 000 for Maroon Ltd. During the period ended
30 June 2017, Maroon Ltd paid management fees of $100 000 to Green Ltd and Maroon
had an operating profit of $405 000. Maroon Ltd declared a dividend of $98 000 during the
period. Green purchased inventory from Maroon during the period ended 30 June 2017 for
$100 000. The inventory cost Maroon Ltd $85 000 and at the end of the period Green had
35 per cent of that inventory still on hand. Maroon's opening retained earnings for the
period ended 30 June 2017 was $810 000. Goodwill has been determined to have been
impaired by $13 600. Companies in the group use perpetual inventory systems and
accrue dividends when they are declared by subsidiaries. There were no other intercompany transactions. Ignore tax implications.
what is the outside equity interest?
A.
B.
C.
D.

Difficulty: Hard
25.
Which of the following is not one of the stages used to determine non-controlling interest?
A.
the non-controlling interest in the current period's profit or loss
B. the non-controlling interest in share capital at the date of acquisition of the subsidiary
by the parent entity
C.
the non-controlling interest in the goodwill at acquisition
D. the non-controlling interest in reserves at the date of acquisition of the subsidiary by

the parent entity

Difficulty: Easy
26.
The disclosure of non-controlling interests in the (a) comprehensive income statement;

and (b) statement of financial position is as follows:
A. (a) profit or loss attributable to non-controlling interest in the notes; (b) non-controlling
interest in equity as a separate line item
B. (a) profit or loss attributable to non-controlling interest on the face; (b) non-controlling
interest in equity as part of share capital
C. (a) profit or loss attributable to non-controlling interest in the notes; (b) non-controlling
interest in equity as part of share capital
D. (a) profit or loss attributable to non-controlling interest on the face; (b) non-controlling
interest in equity as a separate line item

Difficulty: Medium
27.
After eliminating the dividend payable to the parent, the balance of the dividend payable
to the non-controlling interest will be:
A.
B.
eliminated as well.
included within the consolidated financial statements.
C.
recognised as an expense in the consolidated financial statements.
D.
transferred into a non-controlling interest reserve account.

Difficulty: Easy
28.
There is no adjustment for things such as management fees when determining noncontrolling interest, because:
A.
B.
They are not a material item.
They do not involve non-controlling interest.
C.
They are considered to be realised.
D.
They relate only to the parent entity.

Difficulty: Medium
29.
Which of the following situations, involving eliminations as part of the consolidation

process, would not have implications for the calculation of non-controlling interest?
A.
the sale of a non-current asset by the subsidiary to the parent
B.
the payment of a management fee by the subsidiary to the parent
C.
the sale of inventory by the parent to the subsidiary
D. the payment of a management fee by the subsidiary to the parent and the sale of
inventory by the parent to the subsidiary

Difficulty: Medium
30.
Acquirer Limited purchased 75 per cent of Subby Limited for $45 000. The fair value of
identifiable assets was $95 000, and the fair value of liabilities and contingent liabilities
amounted to $47 000. According to AASB 10, what would be the amount of 'goodwill
allocated to non-controlling interests of Subby Limited'?
A.
$3000
B.
$9000
C.
$12 000
D.
($3000)

Difficulty: Hard
31.
Which of the following statements is incorrect with regards to non-controlling interests in

subsidiaries?
A. The requirement to eliminate the effects of intragroup transactions holds whether or

not there are non-controlling interests.
B. The non-controlling interest's share in the dividends paid or proposed by the subsidiary
is eliminated on consolidation.
C. The non-controlling interest's share of the profits of the subsidiary is calculated after
adjustments to eliminate income and expenses of the subsidiary that are unrealised
from the economic entity's perspective.
D. Management fees paid in an intragroup transaction are considered realised when

determining non-controlling interests in a subsidiary.
Difficulty: Medium
32.
As prescribed in AASB 10, which of the following statements is incorrect with regards to
non-controlling interests in subsidiaries?
A. Non-controlling interests are presented in the consolidated statement of financial

position within equity, separately from the equity of the owners of the parent.
B. Profit or loss and each component of other comprehensive income are attributed to the
owners of the parent and to the non-controlling interests.
C. Total comprehensive income is attributed to the owners of the parent and to the noncontrolling interests even if this results in the non-controlling interests having a deficit
balance.
D.
All of the given statement are correct.

Difficulty: Medium
33.

subsidiaries?
A. A non-controlling interest is defined as equity in a subsidiary not attributable, directly

or indirectly, to a parent.
B. Under the entity concept, if subsidiaries are partly owned by the parent entity, both the
parent entity and the non-controlling interests will have an ownership interest in the
subsidiary's profits, dividend payments, and share capital and reserves.
C. Under the entity concept, non-controlling interests will be shown as a liability.
D. Under the proprietary concept, non-controlling interests will be shown as a liability.

Difficulty: Medium
34.
On 1 July 2012, Han Solo Ltd acquired 80 per cent of the share capital of Chewbacca Ltd
for $400 000, which represented the fair value of the consideration paid, when the share
capital and reserves of Chewbacca Ltd were:
All assets of Chewbacca Ltd were recorded at fair value at acquisition date, except for
equipment that had a fair value $20 000 greater than its carrying amount. The cost of the
equipment was $40 000 and it had accumulated depreciation of $10 000. The tax rate is
30 per cent.
Using the partial goodwill method, what is the amount of fair value adjustment and
goodwill, respectively, on 1 July 2012 for non-controlling interests in Chewbacca Ltd?
A.
$ 2800; zero
B.
$11 200; 22 200
C.
$ 2 800; $22 200
D.
$11 200; $88 800

Difficulty: Hard
35.
On 1 July 2012, Han Solo Ltd acquired 80 per cent of the share capital of Chewbacca Ltd
for $500 000, which represented the fair value of the consideration paid, when the share
capital and reserves of Chewbacca Ltd were:
All assets of Chewbacca Ltd were recorded at fair value at acquisition date, except for
machinery that had a fair value $20 000 greater than its carrying amount. The cost of the
equipment was $40 000 and it had accumulated depreciation of $10 000. The tax rate is
30 per cent.
Under the full goodwill method, what is the amount of fair value adjustment and goodwill,
respectively, on 1 July 2012 for non-controlling interests in Chewbacca Ltd?
A.
$ 2800; zero
B.
$11 200; zero
C.
$ 2 800; $22 200
D.
$11 200; $88 800

Difficulty: Hard
36.

subsidiaries?
A. A non-controlling interest is defined as a liability in a subsidiary not attributable,

directly or indirectly, to a parent.
B. Under the entity concept, if subsidiaries are partly owned by the parent entity, both the
parent entity and the non-controlling interests will have an ownership interest in the
subsidiary's profits, dividend payments, and share capital and reserves.
C. Under the entity concept, non-controlling interests will be shown as equity.
D. Under the proprietary concept, non-controlling interests will be shown as equity.

Difficulty: Medium
37.

subsidiaries?
A. The requirement to eliminate the effects of intragroup transactions does not hold when
there are non-controlling interests.
B. The non-controlling interest's share in the dividends paid or proposed by the subsidiary
is not eliminated on consolidation.
C. The non-controlling interest's share of the profits of the subsidiary is calculated after
adjustments to eliminate income and expenses of the subsidiary that are realised from
the economic entity's perspective.
D. Management fees paid in an intragroup transaction are considered realised when

determining non-controlling interests in a subsidiary.

Difficulty: Medium
38.
Detail three situations where the presence of non-controlling interests means that
elimination journal entries would not be the same as they would be if the subsidiary was
100 per cent owned.
The non-controlling interests' proportional share of the net assets of the subsidiary is
considered to be part of the group, and 100 per cent of the subsidiary's assets, liabilities,
income and expensessubject to adjustments for intragroup transactionsare still to be
consolidated in the presence of non-controlling interests. If a parent entity controls a
subsidiary, it controls all the assets even though it does not have a 100 per cent
ownership interest in the subsidiary. Therefore, it is appropriate for the consolidated
financial statements to show all the assets under the control of the parent entity, and how
profitably those assets have been used by the parent entity's management.
In Chapters 27 and 28 we considered various consolidation journal entries. Even though
those journal entries were made in cases where the parent entity owned 100 per cent of
the subsidiary, all such journal entries would remain the same in the presence of noncontrolling interests, except for the following:
We eliminate only the parent's share of the subsidiaries' pre-acquisition share capital
and reserves against the investment in the subsidiary. Hence, the non-controlling interest
in share capital and reserves will be included in the statement of financial position.
In relation to the dividends paid and declared by the subsidiary, only the parent's share
of such dividends are treated as intragroup transactions and therefore eliminated as part
of the consolidation process. The dividends paid, or payable, to non-controlling interests
are shown in the consolidated financial statements (as are the dividends paid and payable
by the parent entity).
In relation to dividends payable by subsidiaries, only those payable to the parent entity
are eliminated against the dividends receivable in the accounts of the parent entity.
Dividends payable by the subsidiary to non-controlling interests are included in the
consolidated financial statements (as are the dividends payable by the parent entity to its
shareholders).
For more information refer to 'What is a non-controlling interest?'

Difficulty: Easy
39.
In adjusting for intragroup transactions prior to calculating non-controlling interests,

describe the treatment of: (a) intragroup service and interest payments; and (b)
intragroup sales of inventory and non-current assets.

Difficulty: Medium
40.
Describe the two options in measuring the non-controlling interest.

Difficulty: Hard
41.
Discuss how share capital and reserves are determined at the date of the acquisition and
post-acquisition changes in share capital and reserves.

Difficulty: Medium
42.
Discuss the three elements considered when calculating non-controlling interests.
The non-controlling interests are identified but not eliminated as part of the consolidation
process. They are identified for disclosure purposes. Non-controlling interest is calculated
by taking three elements into account:
1. Non-controlling interests' share in the net assets (equity) of subsidiaries at the dates
the parent entity acquired the subsidiaries. This requires the non-controlling interests'
share of the pre-acquisition balances of contributed equity, retained earnings and reserves
to be determined.
2. Non-controlling interests' share in the changes in equity since acquisition date. This is
achieved through calculating the non-controlling interests' share of the post acquisition
movements in retained earnings and reserves.
3. Non-controlling interests' share in the profit or loss of the subsidiaries in the current
period. At the end of the reporting period the non-controlling interests' share in profit for
the year, distributions and transfers made, and movements in reserves for the year must
be determined.
Even in the presence of non-controlling interests we combine all the assets, liabilities,
equity, income and expenses of the entities of the parent and the subsidiaries as part of
the consolidation process. The only exception to this is where the assets, liabilities, equity,
income or assets have been impacted by transactions within the group, in which case the
effects need to be eliminated in full. When eliminating the investment in subsidiaries we
only eliminate the parent entity's interest in each subsidiary's equity account. The
remaining amounts in the subsidiaries' equity accounts will relate to the non-controlling
interests in the economic entity.
For more information refer to 'Calculating non-controlling interests'.

Difficulty: Medium
43.
Differentiate 'full goodwill method' from the 'partial goodwill method' in the presence of
non-controlling interests in a subsidiary. Discuss the implications of permitting the use of
either method in business combinations.

Difficulty: Hard
44.
Describe the three steps involved in preparing consolidated financial statements.

Difficulty: Medium
Chapter 29 Summary

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1.

Non-deductible expenses in the current or

Chapter - Chapter 18 #10

Chapter - Chapter 18 #11

Chapter - Chapter 18 #12

Chapter - Chapter 18 #13

Chapter - Chapter 18 #14

Chapter - Chapter 18 #15

Chapter - Chapter 18 #16

Chapter - Chapter 18 #17

Chapter - Chapter 18 #18

Chapter - Chapter 18 #19

Chapter - Chapter 18 #20

Chapter - Chapter 18 #21

net balances method

financial position method

asset and liability method

balance sheet method

Chapter - Chapter 18 #22

The AASB 112 approach has been adopted because:

it matches the revenues earned with tax payable on those revenues.

it is considered consistent with the AASB Conceptual Framework.

it is considered acceptable by the ATO.

Chapter - Chapter 18 #23

(c) capitalise and amortise; (b) a tax deduction when amortised.

Chapter - Chapter 18 #24

income tax expense

deferred income tax

deferred tax liability

income tax payable

Chapter - Chapter 18 #25

Chapter - Chapter 18 #26

Section: 18.01 The balance sheet approach to accounting for taxation

research and development costs

sick leave payments

Chapter - Chapter 18 #27

The tax base is defined in AASB 112 as:

the amount of assessable income for the period.

the tax rate applicable to income levels under $60 000.

the amount that is attributed to an asset or liability for tax purposes.

the head office of the Australian Taxation Office in Canberra.

Chapter - Chapter 18 #28

A taxable temporary difference is one that will result in:

Chapter - Chapter 18 #29

A deductible temporary difference is one that will result in:

Chapter - Chapter 18 #30

provision for tax payable

deferred tax asset

deferred tax liability

Chapter - Chapter 18 #31

deferred tax revenue

deferred tax liability

deferred tax asset

provision for tax payable

Chapter - Chapter 18 #32

End of year 1 $0; year 2 $2250; year 3: $4500

End of year 1 $7500; year 2 $15,000; year 3: $22 500

End of year 1 $6750; year 2 $4500; year 3: $2250

End of year 1 $2250; year 2 $4500; year 3: $6750

Chapter - Chapter 18 #33

End of year 2: $12 000; year 3: $12 000; year 4: $(9000)

Chapter - Chapter 18 #34