Chapter 7

Question 1

what is negative goodwill?

Answer 1

The ‘profit’ recognised as income in the P&L of the parent company when it acquires the subsidiary

Question 2

What is non-controlling interest?

Answer 2

shares in a subsidiary less than 50% that outsiders own in a subsidiary

Question 3

What are the two elements of non-controlling interest?

Answer 3

• Value at the date of acquisition
• The share of changes in equity after the acquisition

Question 4

What are the three main calculations to consider when preparing a consolidated set of accounts?

Answer 4

1. Goodwill calculation
2. Post-acquisition profits
3. Non-controlling interests

Question 4

double entry for reducing inter-company profit

Answer 4

debit income (P&L) to selling entity - reduce
credit stock (SoFP) to buying entity to reduce

Question 5

Is the purpose of consolidated accounts to show pro-rated combination of two entities or as if they are one entity?

Answer 5

One entity (ignore if there is another owner in the subsidiary)

Question 6

formula for profit and loss for consolidated companies?

Answer 6

P&L of parent + P&L of subsidiary - P&L of non-controlling interest

Question 7

what are the areas that an inter-company transaction would arise?

Answer 7

• sales
• purchases
• unrealised profit
• dividends paid by subsidiary to parent