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CMA Final Paper 17 study materials
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CMA Final Paper 17 practice questions

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Question 1Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, an investor controls an investee when it has power over the investee, exposure to variable returns, and the ability to use its power to affect those returns. Which additional element must exist for the investor to have power?

  1. The investor must hold more than half of the investee's equity shares.
  2. The investor must have existing rights that give it the current ability to direct the relevant activities. Correct answer.
  3. The investor must have provided more than half of the investee's debt financing.
  4. The investor must have appointed the majority of the investee's board members at some time in the past.

Explanation

Power under Ind AS 110 arises from existing rights that give the current ability to direct the relevant activities, which are the activities that significantly affect the investee's returns. Holding a majority of shares is one possible source of power but is neither necessary nor sufficient by itself, and past board appointments or debt funding do not by themselves confer current power.

Question 2Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

On 1 April 2024, Alpha Ltd acquired 80% of Beta Ltd for cash. At acquisition, Beta's identifiable net assets had a fair value of Rs 500 lakh and a carrying amount of Rs 420 lakh. Non-controlling interest is measured at its proportionate share of net assets. What amount of goodwill arises on consolidation?

  1. Rs 20 lakh
  2. Nil Correct answer.
  3. Rs 100 lakh
  4. Rs 80 lakh

Explanation

Goodwill is consideration transferred plus the NCI amount less the fair value of identifiable net assets acquired. Here the NCI is 20% of Rs 500 lakh, i.e. Rs 100 lakh, so the total recognised is Rs 400 lakh plus Rs 100 lakh, equal to Rs 500 lakh, giving nil goodwill. The Rs 80 lakh difference between fair value and carrying amount is eliminated through fair value adjustments, not treated as goodwill.

Question 3Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, which of the following costs is included in the consideration transferred for a business combination?

  1. Legal and due diligence fees paid to advisers.
  2. Costs of arranging the debt used to fund the acquisition.
  3. The fair value of equity instruments issued to the former owners of the acquiree. Correct answer.
  4. Registration and stamp duty charges on the issue of shares.

Explanation

Consideration transferred comprises the fair value of assets given, liabilities incurred and equity instruments issued by the acquirer to the former owners of the acquiree. Transaction costs such as advisory, registration and debt arrangement fees are expensed as incurred rather than included in consideration.

Question 4Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

P Ltd acquired 60% of S Ltd. During the year P sold goods to S for Rs 200 lakh at a gross margin of 25%. At year end, S still held half of these goods in inventory. What adjustment is required in the consolidated financial statements?

  1. Reduce consolidated receivables and payables by Rs 100 lakh only.
  2. Reduce consolidated inventory and profit by Rs 25 lakh. Correct answer.
  3. Reduce consolidated inventory and profit by Rs 50 lakh.
  4. Reduce consolidated revenue and cost of sales by Rs 200 lakh only.

Explanation

The unrealised profit in inventory is the gross margin on goods still held by the group, i.e. 25% of Rs 100 lakh, which equals Rs 25 lakh. Consolidation eliminates this by reducing inventory and recognising a corresponding reduction in consolidated profit, attributed between the parent and the NCI.

Question 5Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

In a step acquisition, an acquirer obtains control of an investee in which it previously held an equity interest accounted for under Ind AS 109 at fair value. How is the previously held interest treated on the date control is obtained?

  1. It is derecognised and replaced by the carrying amount of the investee's net assets.
  2. It is remeasured to fair value at the acquisition date with any resulting gain or loss recognised in profit or loss. Correct answer.
  3. It is remeasured to fair value with any gain or loss recognised directly in other comprehensive income.
  4. It is carried forward at its original cost and no gain or loss is recognised.

Explanation

Ind AS 103 requires the acquirer to remeasure its previously held equity interest in the acquiree at fair value at the acquisition date. Any resulting gain or loss is recognised in profit or loss, and the remeasured fair value forms part of the consideration used in the goodwill calculation.

Question 6Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 28, an associate is an entity over which the investor has significant influence. Significant influence is presumed to exist when the investor holds:

  1. At least 20% of the voting power unless it can be clearly demonstrated that this is not the case. Correct answer.
  2. More than 50% of the voting power.
  3. At least 5% of the voting power in all circumstances.
  4. Exactly 50% of the voting power with no other rights.

Explanation

Ind AS 28 establishes a rebuttable presumption that holding 20% or more of the voting power gives significant influence, unless it can be clearly demonstrated otherwise. Holding more than 50% indicates control, while 50% with no other rights suggests joint control rather than significant influence.

Question 7Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

A parent loses control of a subsidiary. Under Ind AS 110, how is the retained non-controlling investment in the former subsidiary measured at the date control is lost?

  1. At its proportionate share of the subsidiary's net assets.
  2. At the carrying amount of the subsidiary's goodwill attributable to it.
  3. At its original cost of acquisition.
  4. At its fair value at the date control is lost. Correct answer.

Explanation

When control is lost, any retained interest in the former subsidiary is recognised at its fair value at the date control is lost. This fair value is used as the initial carrying amount for subsequent accounting under Ind AS 109 or Ind AS 28, and it also forms part of the gain or loss on disposal.

Question 8Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, a contingent consideration classified as a financial liability is measured at fair value at the acquisition date. How are subsequent changes in its fair value generally recognised?

  1. As an adjustment to goodwill in all cases.
  2. In other comprehensive income without reclassification.
  3. In profit or loss, except for measurement period adjustments. Correct answer.
  4. As a direct adjustment to retained earnings.

Explanation

Contingent consideration classified as a financial liability is remeasured at fair value at each reporting date, with changes recognised in profit or loss. The exception is that changes arising during the measurement period that relate to facts existing at the acquisition date are adjusted against goodwill.

Question 9Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

In the consolidated statement of cash flows, which treatment is required for cash flows between the parent and its subsidiaries?

  1. They are reported as financing cash flows of the group.
  2. They are disclosed only in the notes without elimination.
  3. They are reported as operating cash flows of the group.
  4. They are eliminated in full. Correct answer.

Explanation

Consolidated financial statements present the group as a single economic entity, so cash flows between group companies are intra-group transactions and are eliminated in full. Only cash flows between the group and parties outside the group are reported.

Question 10Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 21, the functional currency of an entity is:

  1. The presentation currency chosen by the parent for consolidation.
  2. The currency in which the entity's share capital is denominated.
  3. The currency of the primary economic environment in which the entity operates. Correct answer.
  4. Always the currency of the country in which the entity is incorporated.

Explanation

Functional currency is the currency of the primary economic environment in which the entity operates, determined by considering factors such as the currency that mainly influences sales prices and costs. It is not necessarily the currency of incorporation, share capital or the group's presentation currency.

Question 11Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

A foreign subsidiary's functional currency is the euro and the parent's presentation currency is the rupee. On translation of the subsidiary's financial statements, where is the resulting exchange difference recognised?

  1. In other comprehensive income and accumulated in a separate component of equity. Correct answer.
  2. Directly against the parent's retained earnings without disclosure.
  3. As an adjustment to the carrying amount of goodwill only.
  4. In profit or loss of the group.

Explanation

Under Ind AS 21, assets and liabilities of a foreign operation are translated at the closing rate and income and expenses at average rates, with exchange differences recognised in other comprehensive income. These differences are accumulated in a foreign currency translation reserve within equity and reclassified to profit or loss on disposal of the operation.

Question 12Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 36, goodwill acquired in a business combination must be tested for impairment:

  1. Every quarter regardless of any indication of impairment.
  2. Only on disposal of the cash-generating unit to which it belongs.
  3. Annually and whenever there is an indication that it may be impaired. Correct answer.
  4. Only when there is an indication of impairment.

Explanation

Goodwill is not amortised; instead it must be tested for impairment annually and whenever events or changes in circumstances indicate that it may be impaired. The test is performed at the level of the cash-generating unit or group of units to which the goodwill is allocated.

Question 13Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

A cash-generating unit has a carrying amount of Rs 1,000 lakh, including goodwill of Rs 150 lakh. Its recoverable amount is Rs 900 lakh. What is the correct allocation of the impairment loss under Ind AS 36?

  1. Recognise no impairment because recoverable amount exceeds the carrying amount of goodwill.
  2. Allocate Rs 100 lakh to goodwill first, then to other assets pro rata only if goodwill is insufficient. Correct answer.
  3. Allocate the full Rs 100 lakh to goodwill and reduce the other assets by nil.
  4. Allocate the Rs 100 lakh pro rata across all assets including goodwill.

Explanation

An impairment loss for a cash-generating unit is allocated first to reduce the carrying amount of any goodwill allocated to the unit. Only when the loss exceeds the goodwill is the remainder allocated to the other assets of the unit pro rata to their carrying amounts.

Question 14Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 112, disclosures about interests in other entities require an entity to disclose:

  1. The personal remuneration of each subsidiary's directors.
  2. Only the names of all subsidiaries and associates.
  3. The detailed trial balance of each subsidiary.
  4. Significant judgements and assumptions in determining control, joint control and significant influence. Correct answer.

Explanation

Ind AS 112 requires disclosure of the significant judgements and assumptions made in determining control, joint control and significant influence, along with information about the composition of the group and interests in unconsolidated structured entities. It focuses on the nature of risks and the basis of consolidation rather than granular accounting records.

Question 15Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

A Ltd and B Ltd each hold 50% of the voting rights in C Ltd, and unanimous consent of both parties is required for all significant decisions. C Ltd is jointly controlled. Under Ind AS 111, how should A Ltd account for its interest in C Ltd if C Ltd is a joint venture?

  1. Apply the equity method. Correct answer.
  2. Recognise the investment at cost less impairment only.
  3. Consolidate C Ltd line by line.
  4. Measure the investment at fair value through profit or loss in all cases.

Explanation

A joint arrangement that is a joint venture, where parties have rights to the net assets of the arrangement, is accounted for using the equity method under Ind AS 111 and Ind AS 28. Line-by-line consolidation applies to subsidiaries, not joint ventures.

Question 16Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, the acquisition method requires the acquirer to recognise identifiable assets acquired and liabilities assumed at:

  1. Their carrying amounts in the acquiree's books.
  2. Their values as determined by the acquiree's management.
  3. The amounts at which they were originally purchased by the acquiree.
  4. Their acquisition-date fair values, with specified exceptions. Correct answer.

Explanation

The acquisition method requires identifiable assets acquired and liabilities assumed to be recognised at their acquisition-date fair values, subject to limited exceptions such as deferred tax and employee benefit obligations. Historical carrying amounts in the acquiree's books are therefore replaced by fair values on consolidation.

Question 17Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

P Ltd sells a depreciable asset to its subsidiary S Ltd at a profit. The asset remains in use by S Ltd at the year end. What consolidation adjustment is required in the year of sale?

  1. Eliminate the unrealised profit and adjust depreciation to reflect the group's cost basis. Correct answer.
  2. Recognise the profit immediately in the consolidated statement of profit or loss.
  3. Reclassify the profit from operating to financing activities.
  4. Eliminate the asset entirely from the consolidated statement of financial position.

Explanation

Profit on an intra-group sale of a depreciable asset is unrealised from the group's perspective and must be eliminated against the asset's carrying amount. Because the subsidiary depreciates the inflated carrying amount, depreciation is also adjusted to reflect the group's original cost, with the net effect shared between the parent and the NCI.

Question 18Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, a business combination achieved without the transfer of consideration (for example, a combination by contract alone) is accounted for using:

  1. Proportionate consolidation.
  2. The equity method.
  3. The pooling of interests method.
  4. The acquisition method, with the acquirer identified under the standard's guidance. Correct answer.

Explanation

Ind AS 103 requires every business combination to be accounted for using the acquisition method, even where no consideration is transferred. The acquirer is identified using the guidance in the standard, which may require judgement where the combination occurs by contract alone.

Question 19Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, non-controlling interest in the net assets of a subsidiary is presented in the consolidated statement of financial position:

  1. As a liability within current liabilities.
  2. As a contingent liability disclosed only in the notes.
  3. Within equity, separately from the equity of the owners of the parent. Correct answer.
  4. As a deduction from goodwill.

Explanation

Ind AS 110 requires NCI to be presented in the consolidated statement of financial position within equity, separately from the equity attributable to owners of the parent. It is not a liability, because the group does not have a present obligation to transfer cash to the non-controlling shareholders.

Question 20Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 28, how does an investor account for its share of an associate's other comprehensive income?

  1. Recognise it in profit or loss of the investor.
  2. Recognise the investor's share in other comprehensive income. Correct answer.
  3. Recognise it as an adjustment to the cost of the investment without separate disclosure.
  4. Ignore it until the investment is disposed of.

Explanation

The equity method requires the investor to recognise its share of the associate's profit or loss in profit or loss and its share of the associate's other comprehensive income in other comprehensive income. This preserves the presentation of the associate's transactions in the investor's statements.

Question 21Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, acquisition-related costs such as finder's fees and advisory fees are:

  1. Capitalised as part of goodwill.
  2. Deferred and amortised over the useful life of the acquired business.
  3. Deducted from the fair value of net assets acquired.
  4. Recognised as expenses in the periods in which the costs are incurred. Correct answer.

Explanation

Acquisition-related costs are not part of the consideration transferred and cannot be capitalised as goodwill. They are recognised as expenses in the periods in which they are incurred and the services are received, which is typically the period of the acquisition.

Question 22Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

A parent holds 70% of a subsidiary. The subsidiary reports profit of Rs 400 lakh and other comprehensive income of Rs 100 lakh for the year. What amount of total comprehensive income is attributed to the non-controlling interest?

  1. Rs 350 lakh
  2. Rs 100 lakh
  3. Rs 150 lakh Correct answer.
  4. Rs 70 lakh

Explanation

Total comprehensive income of the subsidiary is Rs 500 lakh, and the NCI's 30% share is Rs 150 lakh. Ind AS 110 requires profit or loss and each component of other comprehensive income to be attributed to owners of the parent and to the NCI.

Question 23Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, which of the following best describes a 'bargain purchase'?

  1. A combination in which the acquirer pays a premium over the market price of the acquiree.
  2. A combination in which no consideration is transferred at all.
  3. A combination in which the consideration transferred is less than the fair value of the identifiable net assets acquired. Correct answer.
  4. A combination in which the acquiree's shares trade below their nominal value.

Explanation

A bargain purchase arises when the net of consideration transferred and the NCI amount is less than the fair value of the identifiable net assets acquired, after reassessing the identification and measurement of the items. The resulting gain is recognised in profit or loss in the period of acquisition.

Question 24Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, which of the following rights would most likely give an investor power over an investee even without a majority of voting rights?

  1. A right to purchase additional shares at a future date at market price.
  2. Rights arising from a contract that give the investor the ability to appoint the majority of the board and direct relevant activities. Correct answer.
  3. A right to receive a fixed dividend on preference shares.
  4. A right to appoint one observer to the board with no voting power.

Explanation

Power can arise from contractual rights that give the investor the current ability to direct the relevant activities, such as appointing the majority of the governing body. Protective rights, observer seats without voting power and rights exercisable only at future market prices generally do not confer power.

Question 25Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 21, exchange differences arising on a monetary item that forms part of a reporting entity's net investment in a foreign operation are recognised:

  1. As an adjustment to the foreign operation's share capital.
  2. In profit or loss of the reporting entity.
  3. As an adjustment to goodwill arising on acquisition.
  4. In other comprehensive income and reclassified to profit or loss on disposal of the foreign operation. Correct answer.

Explanation

Exchange differences on monetary items that form part of the net investment in a foreign operation are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. On disposal of the foreign operation, the accumulated amount is reclassified to profit or loss as part of the gain or loss on disposal.

Question 26Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, how is the consideration transferred in a business combination measured by the acquirer?

  1. At the carrying amount of the identifiable net assets acquired, adjusted for goodwill
  2. At fair value, calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and equity interests issued by the acquirer Correct answer.
  3. At the nominal or face value of the shares issued plus the book value of any cash paid
  4. At the lower of fair value and the acquirer's carrying amount of the consideration given

Explanation

Ind AS 103 requires the consideration transferred to be measured at fair value, being the aggregate of the acquisition-date fair values of assets transferred, liabilities incurred to former owners and equity interests issued. This fair value anchors goodwill, which is the residual after recognising identifiable net assets. Book values and nominal amounts are not permitted.

Question 27Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

X Ltd acquires 100% of Y Ltd. At acquisition date, Y Ltd has an unrecorded internally generated brand that qualifies as an identifiable intangible. How should X Ltd treat this brand in the consolidated financial statements?

  1. Recognise it at the cost incurred by Y Ltd in developing the brand
  2. Recognise it at fair value only if it is separable or arises from contractual or legal rights and its fair value can be measured reliably Correct answer.
  3. Do not recognise it, because internally generated brands are never capitalised under Ind AS 38
  4. Recognise it at fair value only if Y Ltd had already capitalised it in its separate financial statements

Explanation

In a business combination, the acquirer recognises identifiable intangibles of the acquiree at fair value even if the acquiree had expensed them, provided the definition of an intangible asset is met (separability or contractual/legal basis) and fair value is reliably measurable. The prohibition on capitalising internally generated brands applies to the entity that developed them, not to the acquirer. Prior capitalisation by the acquiree is irrelevant.

Question 28Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

P Ltd holds 80% of S Ltd. During the year P Ltd sold goods to S Ltd for Rs 500 lakh at a gross margin of 25%. At year end S Ltd still held goods invoiced at Rs 200 lakh. What adjustment is required in the consolidated financial statements?

  1. Eliminate the full Rs 200 lakh of closing inventory held by S Ltd
  2. Make no adjustment because the sale was at arm's length between separate legal entities
  3. Eliminate unrealised profit of Rs 125 lakh by reducing consolidated inventory and consolidated profit
  4. Eliminate unrealised profit of Rs 50 lakh by reducing consolidated inventory and consolidated profit Correct answer.

Explanation

Only profit still unrealised at year end is eliminated: 25% of the Rs 200 lakh remaining in inventory equals Rs 50 lakh. This reduces inventory and consolidated retained earnings (allocated between owners and NCI where relevant). Eliminating the whole closing inventory or the whole margin on total sales would overstate the adjustment.

Question 29Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, which factor determines whether an investor with less than a majority of voting rights nevertheless controls an investee?

  1. Whether the investor receives a fixed dividend preference ahead of other equity holders
  2. Whether the investor has appointed the majority of the board under a contractual arrangement alone
  3. Whether the investor has practical ability to direct the relevant activities unilaterally, considering the size and dispersion of other holdings and voting patterns at previous meetings Correct answer.
  4. Whether the investor holds at least 20% of the voting rights, creating a rebuttable presumption of control

Explanation

Control requires power over the relevant activities, exposure to variable returns and the ability to use power to affect those returns. Power can exist with a de facto majority where holdings are widely dispersed and the investor can direct relevant activities unilaterally. A 20% threshold relates to significant influence, not control, and dividend preference alone is a return, not power.

Question 30Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, how does an acquirer measure a non-controlling interest in the acquiree that is present at the acquisition date?

  1. At the proportionate share of identifiable net assets only, with no option to use fair value
  2. At the book value of the NCI shown in the acquiree's own financial statements
  3. At either fair value or the NCI's proportionate share of the acquiree's identifiable net assets, on an acquisition-by-acquisition basis Correct answer.
  4. At fair value only, with no option to use proportionate net assets

Explanation

Ind AS 103 permits a choice for each business combination: measure NCI at fair value (including goodwill attributable to NCI) or at the proportionate share of the acquiree's identifiable net assets. The choice affects the amount of goodwill recognised. Book value in the acquiree's statements is not a permitted measurement basis.

Question 31Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, a parent's ownership in a subsidiary falls from 90% to 70% through a sale of shares, with control retained. How is this transaction accounted for in the consolidated financial statements?

  1. As an equity transaction with owners, with no gain or loss recognised in profit or loss, and the carrying amount of NCI adjusted Correct answer.
  2. As a change in accounting policy applied retrospectively to the earliest comparative period
  3. As a disposal giving rise to a gain or loss in consolidated profit or loss for the 20% interest sold
  4. As a remeasurement of the retained 70% interest to fair value through other comprehensive income

Explanation

A change in ownership interest that does not result in loss of control is accounted for as an equity transaction. The carrying amounts of controlling and non-controlling interests are adjusted, and any difference between the consideration and the NCI adjustment is recognised in equity attributable to owners. No gain or loss arises, and the retained interest is not remeasured.

Question 32Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 28, an investment in an associate is initially recognised at cost. Subsequently, how is the carrying amount determined using the equity method?

  1. Fair value at each reporting date, with changes recognised in profit or loss
  2. Cost plus cumulative dividends received, less the investor's share of post-acquisition losses
  3. Cost plus the investor's share of post-acquisition profit or loss and other comprehensive income, less dividends received and any impairment Correct answer.
  4. Cost less the investor's share of post-acquisition profit, plus any dividends received

Explanation

The equity method increases the carrying amount by the investor's share of the associate's post-acquisition profit or loss and other comprehensive income, and reduces it for distributions received and for impairment losses. Dividends received are not income under the equity method. Fair value measurement applies only in limited cases such as venture capital organisations electing that treatment.

Question 33Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, an acquirer must determine whether a transaction is a business combination or an asset acquisition. Which feature distinguishes a business from a mere collection of assets?

  1. The payment of consideration in cash rather than in shares
  2. The presence of inputs and processes applied to those inputs that together have the ability to create outputs Correct answer.
  3. The existence of a separate legal entity holding the assets
  4. The size of the acquired assets relative to the acquirer's total assets

Explanation

A business consists of inputs and processes applied to those inputs that have the ability to create outputs. If the acquired set lacks an organised workforce or processes capable of producing outputs, it is an asset acquisition, and goodwill is not recognised. Legal form, form of consideration and relative size are not the defining criteria.

Question 34Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, how are the identifiable assets acquired and liabilities assumed measured at the acquisition date, with limited exceptions?

  1. At their carrying amounts in the acquiree's books
  2. At the acquirer's carrying amounts for similar assets
  3. At their acquisition-date fair values Correct answer.
  4. At the lower of fair value and carrying amount in the acquiree's books

Explanation

The acquisition method requires identifiable assets acquired and liabilities assumed to be recognised at acquisition-date fair values, subject to specified exceptions such as deferred tax, employee benefits and contingent liabilities within the scope of Ind AS 37. The acquiree's carrying amounts are not carried forward except in those exceptions.

Question 35Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, a subsidiary is excluded from consolidation only in which circumstance?

  1. When the subsidiary operates in a hyperinflationary economy
  2. When the subsidiary's functional currency differs from the parent's presentation currency
  3. When the subsidiary has reported losses for three consecutive years
  4. When the parent holds the subsidiary exclusively with a view to its disposal within twelve months and is actively seeking a buyer, in which case it is accounted for under Ind AS 105 Correct answer.

Explanation

Ind AS 110 requires consolidation of all subsidiaries, with a narrow exception for subsidiaries acquired and held exclusively with a view to disposal within twelve months, which are accounted for under Ind AS 105 as held for sale. Differences in functional currency and losses do not permit exclusion; those subsidiaries are consolidated using translation under Ind AS 21.

Question 36Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, a contingent liability of the acquiree that is a present obligation arising from a past event but whose fair value cannot be measured reliably at acquisition date is treated how?

  1. It is recognised at fair value determined by the acquirer's management estimate regardless of reliability
  2. It is recognised at the maximum amount claimed by the counterparty
  3. It is not recognised at acquisition date, and the resulting effect is reflected in goodwill; subsequent resolution is accounted for under the applicable standard Correct answer.
  4. It is recognised at a nominal value of one rupee until reliably measurable

Explanation

Ind AS 103 requires recognition of contingent liabilities at fair value if reliably measurable; where fair value cannot be measured reliably, the item is not recognised and the effect flows into goodwill. Subsequent settlement or changes are dealt with under the relevant standard, such as Ind AS 37. Nominal or maximum-claim amounts are not measurement bases.

Question 37Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, intragroup balances, transactions, income and expenses are eliminated in full. Which item arising from an intragroup transaction is also eliminated?

  1. Depreciation charged by the subsidiary on assets acquired from the parent
  2. Intragroup dividends and the related dividend income recognised by the parent Correct answer.
  3. Tax paid by the subsidiary on its intragroup profits
  4. Salaries paid by the parent to its own employees

Explanation

Consolidation eliminates the full amount of intragroup assets, liabilities, equity, income, expenses and cash flows, including intragroup dividends and the corresponding dividend income. Depreciation on assets acquired from the parent is an expense of the group and is not eliminated as such, although the underlying unrealised profit is. Taxes paid to external authorities and third-party employee costs are genuine group items.

Question 38Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, in a business combination achieved in stages (step acquisition) where the acquirer previously held an equity interest accounted for under Ind AS 28, how is the previously held interest treated when control is obtained?

  1. It is remeasured to fair value with the gain or loss recognised in other comprehensive income
  2. It is remeasured to acquisition-date fair value, with the resulting gain or loss recognised in profit or loss Correct answer.
  3. It is carried forward at its equity-method carrying amount and added to the consideration
  4. It is derecognised at cost, with no gain or loss recognised

Explanation

On obtaining control, the acquirer remeasures any previously held equity interest to acquisition-date fair value and recognises the resulting gain or loss in profit or loss. That fair value forms part of the consideration transferred for computing goodwill. Carrying the interest forward at equity-method carrying amount is not permitted.

Question 39Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 110, how is profit or loss of a subsidiary allocated between owners of the parent and non-controlling interests when the subsidiary has accumulated losses exceeding the NCI's equity?

  1. Losses are not allocated to NCI until the subsidiary returns to profit
  2. Losses are allocated to NCI only up to the amount of the NCI's original investment
  3. NCI is allocated its share of losses even if this results in a debit balance, unless NCI has no obligation and no ability to fund further losses Correct answer.
  4. Losses are allocated entirely to owners of the parent once NCI reaches nil

Explanation

Ind AS 110 requires profit or loss and each component of other comprehensive income to be attributed to owners of the parent and to NCI. NCI absorbs its share of losses even if that creates a debit balance, unless the NCI has no obligation and no ability to make additional investment to cover losses. Capping losses at nil or at the original investment is not permitted.

Question 40Financial Accounting and Reporting (Consolidation, Business Combinations, Ind AS/IFRS Application)

Under Ind AS 103, which of the following costs does an acquirer recognise as an expense in the period incurred rather than as part of the consideration transferred?

  1. The fair value of liabilities assumed from the acquiree at acquisition date
  2. The fair value of a contingent consideration arrangement payable in cash to former owners
  3. The fair value of shares issued as consideration to the former owners of the acquiree
  4. Legal, advisory and valuation fees incurred to effect the business combination Correct answer.

Explanation

Acquisition-related costs such as finder's fees, legal, advisory and valuation fees are expensed as incurred. They are not part of the consideration transferred and therefore do not affect goodwill. Shares issued, contingent consideration and assumed liabilities are components of the consideration or of the recognised liabilities, measured at fair value.

Question 41Strategic Cost Management and Performance Evaluation

A company produces two joint products, X and Y, from a single process costing $120,000. At the split-off point, X can be sold for $90,000 and Y for $30,000. Using the relative sales value method, what amount of joint cost is allocated to product X?

  1. $90,000 Correct answer.
  2. $60,000
  3. $120,000
  4. $80,000

Explanation

Under the relative sales value method, joint costs are allocated in proportion to sales value at split-off. X represents $90,000 of the $120,000 total sales value, so it receives 75% of $120,000, which equals $90,000.

Question 42Strategic Cost Management and Performance Evaluation

Which costing method assigns all manufacturing costs, including fixed production overhead, to units produced and treats fixed overhead as a product cost rather than a period cost?

  1. Direct costing
  2. Variable costing
  3. Throughput costing
  4. Absorption costing Correct answer.

Explanation

Absorption costing capitalizes fixed production overhead into inventory and cost of goods sold, so it is a product cost. Variable and throughput costing treat fixed overhead as a period expense.

Question 43Strategic Cost Management and Performance Evaluation

A company uses activity-based costing. Its machine setup activity costs $150,000 and involves 500 setups. Product A requires 120 setups. What setup cost should be assigned to Product A?

  1. $30,000
  2. $25,000
  3. $36,000 Correct answer.
  4. $18,000

Explanation

The activity rate is $150,000 divided by 500 setups, or $300 per setup. Multiplying by 120 setups gives $36,000 assigned to Product A.

Question 44Strategic Cost Management and Performance Evaluation

In a standard costing system, a favorable direct material price variance most likely indicates that:

  1. More material was used than the standard allowed
  2. Production volume exceeded the budgeted level
  3. Labor efficiency was better than standard
  4. Material was purchased at a price below standard Correct answer.

Explanation

The material price variance isolates the difference between actual and standard price per unit of material. A favorable variance means the actual price paid was lower than the standard price.

Question 45Strategic Cost Management and Performance Evaluation

Which transfer pricing approach is most appropriate when the selling division has no spare capacity and a perfectly competitive external market exists for the intermediate product?

  1. Negotiated price below market
  2. Variable cost plus a markup
  3. Full absorption cost
  4. Market price Correct answer.

Explanation

When spare capacity is absent and a competitive market exists, market price is the appropriate transfer price because it reflects the opportunity cost of internal transfer. Cost-based prices would understate that opportunity cost.

Question 46Strategic Cost Management and Performance Evaluation

A firm has contribution margin of $400,000, fixed costs of $250,000, and operating income of $150,000. What is its degree of operating leverage?

  1. 1.67
  2. 0.375
  3. 2.67 Correct answer.
  4. 1.60

Explanation

Degree of operating leverage equals contribution margin divided by operating income. Here $400,000 divided by $150,000 equals approximately 2.67.

Question 47Strategic Cost Management and Performance Evaluation

A company is deciding whether to accept a special order when it has idle capacity. Which cost is relevant to the decision?

  1. Sunk research and development spending
  2. The variable cost of producing the additional units Correct answer.
  3. The original cost of equipment already purchased
  4. Allocated fixed factory overhead per unit

Explanation

Relevant costs are future costs that differ between alternatives. With idle capacity, incremental variable production cost is relevant while sunk and allocated fixed costs do not change.

Question 48Strategic Cost Management and Performance Evaluation

Which balanced scorecard perspective focuses on measures such as customer retention rate, customer satisfaction, and market share?

  1. Customer perspective Correct answer.
  2. Internal business process perspective
  3. Financial perspective
  4. Learning and growth perspective

Explanation

The customer perspective captures how well the organization creates value for its customers, using measures like satisfaction, retention, and market share. The other perspectives address financial results, process efficiency, and employee capabilities.

Question 49Strategic Cost Management and Performance Evaluation

A company reports sales of $500,000, average accounts receivable of $50,000, and average inventory of $25,000. What is the accounts receivable turnover ratio?

  1. 5 times
  2. 10 times Correct answer.
  3. 2 times
  4. 20 times

Explanation

Accounts receivable turnover is sales divided by average receivables, or $500,000 divided by $50,000, which equals 10 times. This measures how efficiently receivables are collected.

Question 50Strategic Cost Management and Performance Evaluation

A favorable labor efficiency variance combined with an unfavorable labor rate variance most likely suggests that:

  1. More hours were worked than the standard allowed
  2. The standard wage rate was set too low
  3. Lower-skilled workers were used than the standard anticipated
  4. Higher-skilled workers were used than the standard anticipated Correct answer.

Explanation

Using higher-skilled workers typically raises the actual wage rate above standard, producing an unfavorable rate variance, while faster work reduces hours below standard and yields a favorable efficiency variance. This pattern is the classic trade-off.