Chapter 10: Consolidated Financial Statements - Test 1: answer key

Question 1 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Sterling Garments Ltd. (SGL), an Indian listed apparel group, closes its books on 31 March 2027. The board is evaluating which investees enter its consolidated financial statements for the year. SGL holds 46% of the voting power of Meridian Fibre Ltd. (MFL). Its wholly controlled subsidiary, Loom Services Ltd. (LSL), holds a further 9% of MFL's voting power; all votes are exercisable by LSL without restriction. No other shareholder holds more than 8%. SGL has no separate agreement over MFL's board. SGL also holds 44% of Nivara Finishing Ltd. (NFL). Under NFL's articles and a continuing shareholders' agreement, SGL has the unilateral right, without consent or concurrence of any other person, to appoint and remove four of NFL's seven directors. The right is exercisable throughout the relevant period and is not merely a protective veto. NFL provides finishing services to group entities and third-party customers. On 1 June 2026, SGL acquired 80% of Epsilon Retail Ltd. (ERL) for ₹9.6 crore. The investment committee's signed acquisition memorandum states that SGL's entire 80% block was acquired and held exclusively as trading stock for resale to a named strategic buyer by 31 March 2027; negotiations commenced before acquisition and disposal is expected within ten months. ERL has continued operating during the holding period. By contrast, SGL has held 75% of BluePeak Exports Ltd. (BEL) since July 2024 as a long-term strategic investment. On 15 January 2027, after a regulatory change, SGL's board decided to sell BEL, but no sale agreement had been executed by 31 March 2027. Neither ERL nor BEL has restrictions on fund transfers. The finance team proposes consolidating each investee according to its percentage shareholding, arguing that a subsidiary with dissimilar operations or a disposal plan should automatically be left out. The audit committee asks you to assess control and the permitted exclusions using AS 21 and the Companies Act, 2013.

For the purpose of AS 21, what is the appropriate conclusion regarding SGL's relationship with MFL?

1. MFL is not a subsidiary because SGL's direct voting interest is below one-half.
2. MFL is an associate because votes held through a subsidiary are disregarded.
3. MFL becomes a subsidiary only if SGL purchases the additional votes directly.
4. MFL is a subsidiary because SGL controls 55% of voting power directly and indirectly. (correct answer)

Answer: D — MFL is a subsidiary because SGL controls 55% of voting power directly and indirectly.

Explanation. AS 21 treats control as ownership, directly or indirectly through subsidiaries, of more than one-half of voting power. SGL's direct 46% and its controlled subsidiary LSL's 9% aggregate to 55%; hence MFL is controlled. The direct-only option wrongly ignores indirect ownership through a subsidiary. The test is voting power, not whether the parent itself is the registered holder of every share carrying those votes.

Where it goes wrong. Testing only the parent's direct percentage and ignoring voting rights held through a controlled subsidiary.

Authority. AS 21, paras 5.1(a) and 10; Section 2(87)(ii), Companies Act, 2013

Question 2 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Although SGL holds only 44% of NFL, how should NFL be classified for AS 21 purposes?

1. NFL is not controlled because SGL does not own more than one-half of its votes.
2. NFL is a subsidiary because SGL can unilaterally appoint and remove four of seven directors. (correct answer)
3. NFL is an associate because board appointment rights cannot establish control.
4. NFL is jointly controlled because the right arises under a shareholders' agreement.

Answer: B — NFL is a subsidiary because SGL can unilaterally appoint and remove four of seven directors.

Explanation. Control under AS 21 can arise independently through control of the composition of a company's board so as to obtain economic benefits. The power must allow appointment or removal of all or a majority of directors without another person's consent or concurrence. Four of seven directors is a majority, and SGL's right is unilateral. The 44% voting interest therefore does not prevent subsidiary status; the voting-only distractor applies just one limb of control.

Where it goes wrong. Assuming that a holding below 50% can never create a subsidiary relationship.

Authority. AS 21, para 10(i); Section 2(87)(i), Companies Act, 2013

Question 3 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is the correct treatment of ERL in SGL's consolidated financial statements for 2026-27?

1. Exclude ERL from consolidation, account for the investment under AS 13 and disclose the reason. (correct answer)
2. Consolidate ERL because a controlling investment can never be treated as temporary.
3. Consolidate ERL until the sale closes because an intention to dispose is insufficient.
4. Exclude ERL only if SGL held less than one-half of its voting power at acquisition.

Answer: A — Exclude ERL from consolidation, account for the investment under AS 13 and disclose the reason.

Explanation. ERL was acquired and held exclusively as trading stock for resale in the near future, with a documented sale intention existing at acquisition and an expected disposal within ten months. AS 21 treats such control as temporary and excludes the subsidiary from consolidation; the investment is accounted for under AS 13 and the reason is disclosed. The competing option confuses this case with an investment acquired for long-term ownership and only later earmarked for sale.

Where it goes wrong. Treating every subsidiary as consolidable merely because control exists, without testing the specific temporary-control exception.

Authority. AS 21, para 11(a) and its Explanation

Question 4 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

How should BEL be treated at 31 March 2027, given that SGL acquired it as a long-term investment but decided to sell it only in January 2027?

1. Exclude BEL from consolidation from the date the board first discussed a sale.
2. Exclude BEL because the expected sale is within twelve months of the reporting date.
3. Continue consolidating BEL until the investment is actually disposed of. (correct answer)
4. Account for BEL under AS 13 from the date the sale decision is approved.

Answer: C — Continue consolidating BEL until the investment is actually disposed of.

Explanation. The intention to dispose is assessed at the date the investment is acquired. BEL was acquired as a long-term strategic investment, not exclusively for near-future resale. AS 21 explains that a later decision to dispose does not make control temporary; the investment remains included in consolidation until actual disposal. The twelve-month guideline does not operate as a free-standing exemption based only on the date of a later sale decision.

Where it goes wrong. Applying the near-future time guideline to a disposal intention formed after acquisition.

Authority. AS 21, para 11(a) and its Explanation

Question 5 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Zenith Technologies Pvt. Ltd. (ZTPL) is an Indian electronics group with a reporting date of 31 March 2027. Its wholly owned subsidiary, Alpha Components Ltd. (ACL), has a 30 September 2026 reporting date because a plant-wide ERP conversion makes preparation of interim statements at 31 March impracticable. The group proposes to use ACL's 30 September statements. ACL's closing inventory balance of ₹84 lakh is measured under FIFO; using ZTPL's weighted-average policy for the same goods and circumstances, the inventory would be ₹81 lakh. There is no valuation difference in opening inventory. Between 30 September 2026 and 31 March 2027, ACL experienced an uninsured warehouse fire on 15 February 2027. Inventory carried at ₹12 lakh was destroyed, and the fire is significant to ACL's financial position. There is no insurance recovery, salvage or other compensation. The event has not been reflected in ACL's 30 September financial statements. Another group entity, Gamma Logistics Ltd. (GLL), closes its books on 31 August 2026 because of local reporting requirements. The 31 August statement is seven months before ZTPL's 31 March 2027 reporting date. GLL's management says that the difference is immaterial and proposes to use the statements without adjustment. ZTPL's board insists that all group entities should be consolidated and that reporting-date and accounting-policy differences may simply be described in a note. The following figures relate solely to ACL: FIFO inventory at 30 September 2026, ₹84 lakh; weighted-average inventory on the same date, ₹81 lakh; and fire loss after the subsidiary reporting date, ₹12 lakh. The audit committee requests advice on date gaps, significant intervening events and uniform policies before the consolidated financial statements are approved.

What adjustment is required to ACL's 30 September 2026 inventory to align it with ZTPL's weighted-average accounting policy?

1. Increase inventory by ₹3 lakh to ₹87 lakh and increase group reserves by the same amount.
2. Retain inventory at ₹84 lakh because FIFO is an acceptable accounting policy in isolation.
3. Reduce inventory by ₹3 lakh to ₹81 lakh and make the corresponding consolidation adjustment. (correct answer)
4. Reduce inventory by ₹81 lakh because the subsidiary's separate policy must be eliminated in full.

Answer: C — Reduce inventory by ₹3 lakh to ₹81 lakh and make the corresponding consolidation adjustment.

Explanation. Uniform policies are required for like transactions in similar circumstances. ACL's FIFO amount is ₹84 lakh, while the amount under the group's weighted-average policy is ₹81 lakh. Therefore, inventory is reduced by ₹3 lakh for consolidation, with the corresponding effect on the relevant profit or reserve balance. The option retaining ₹84 lakh overlooks the requirement to adjust a member's financial statements when a different policy is used.

Where it goes wrong. Assuming that a policy acceptable in separate financial statements can automatically be retained in consolidated financial statements.

Authority. AS 21, paras 20-21

Question 6 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Is ACL's 30 September 2026 reporting date acceptable for consolidation with ZTPL's 31 March 2027 financial statements, assuming that same-date statements are impracticable?

1. No; AS 21 requires parent and subsidiary statements to have the same reporting date in every case.
2. No; the permitted difference is three months, even when same-date statements are impracticable.
3. Yes; exactly six months is allowed, but significant intervening events still require adjustment.
4. Yes; six months is the maximum gap, provided significant intervening events are adjusted. (correct answer)

Answer: D — Yes; six months is the maximum gap, provided significant intervening events are adjusted.

Explanation. AS 21 prefers the same reporting date. Where that is impracticable, statements at different dates may be used only if the gap is not more than six months. The period from 30 September 2026 to 31 March 2027 is exactly six months, so it is within the limit. However, paragraph 18 separately requires adjustment for significant transactions or other events between the two dates; the permitted gap is not an exemption from those adjustments.

Where it goes wrong. Reading the six-month ceiling as permission to ignore significant intervening transactions or events.

Authority. AS 21, paras 18-19

Question 7 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is the appropriate consolidation adjustment for the warehouse fire that destroyed ACL inventory of ₹12 lakh on 15 February 2027?

1. Ignore the fire because it occurred after ACL's own reporting date of 30 September 2026.
2. Reduce the relevant consolidated inventory by ₹12 lakh and recognise the corresponding loss. (correct answer)
3. Reduce consolidated inventory by ₹6 lakh because the reporting-date gap is six months.
4. Recognise a receivable of ₹12 lakh because the group must assume an insurance recovery.

Answer: B — Reduce the relevant consolidated inventory by ₹12 lakh and recognise the corresponding loss.

Explanation. The fire occurred between ACL's reporting date and the parent's reporting date and is expressly stated to be significant. Paragraph 18 requires adjustment for significant transactions or other events in that interval. Since the inventory with a carrying amount of ₹12 lakh was destroyed and there is no recovery or salvage, the consolidated inventory must be reduced by ₹12 lakh and the corresponding loss recognised. The reporting-date difference does not justify omitting this event.

Where it goes wrong. Using the subsidiary's earlier balance sheet mechanically and omitting material events arising before the parent's reporting date.

Authority. AS 21, para 18

Question 8 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

May GLL's 31 August 2026 financial statements be used unchanged for ZTPL's 31 March 2027 consolidation merely because management considers the seven-month difference immaterial?

1. No, because the seven-month gap exceeds the maximum permitted under AS 21. (correct answer)
2. Yes, because a difference below one year is always acceptable for a subsidiary.
3. Yes, if the subsidiary's financial statements are examined under statutory audit and approved by its board.
4. No, but it may be used if only the significant transactions are disclosed in a note.

Answer: A — No, because the seven-month gap exceeds the maximum permitted under AS 21.

Explanation. The interval from 31 August 2026 to 31 March 2027 is seven months. AS 21 permits a different reporting date only where using the same date is impracticable and, even then, the difference must not exceed six months. Materiality or board approval cannot override that ceiling. The subsidiary must provide financial information that satisfies the reporting-date requirement; disclosure of selected intervening matters alone cannot cure an excessive gap.

Where it goes wrong. Treating the six-month maximum as a flexible materiality threshold that management may extend.

Authority. AS 21, paras 18-19

Question 9 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Vardhan Chemicals Ltd. (VCL) prepares consolidated financial statements for the year ended 31 March 2027. It acquired 80% of Saffron Resins Ltd. (SRL) on 1 April 2025 and has controlled SRL throughout the current year. Both entities have the same reporting date and accounting policies. There are no inter-company sales, dividends or unrealised inventory profits in the year, except for the receivable/payable balance stated below. The summarised balance sheets are as follows (₹ lakh): VCL—property, plant and equipment 40; inventories 18; trade receivables 24; cash and bank 12; investment in SRL 20; total assets 114. SRL—property, plant and equipment 28; inventories 12; trade receivables 10; cash and bank 8; total assets 58. The corresponding equity and liabilities are: VCL—share capital 40; reserves 30; borrowings 26; trade payables 18; total 114. SRL—share capital 20; reserves 12; borrowings 16; trade payables 10; total 58. VCL's trade receivables include ₹4 lakh due from SRL, and SRL's trade payables include the matching ₹4 lakh due to VCL. SRL's reserves of ₹12 lakh at 31 March 2027 comprise ₹9 lakh existing on acquisition and ₹3 lakh earned after acquisition. VCL acquired its 80% interest for ₹20 lakh. No impairment has been identified. For the current year, VCL reports revenue ₹180 lakh, operating expenses ₹126 lakh, employee costs ₹18 lakh, finance costs ₹8 lakh and depreciation ₹8 lakh. SRL reports revenue ₹90 lakh, operating expenses ₹54 lakh, employee costs ₹12 lakh, finance costs ₹4 lakh and depreciation ₹4 lakh. Treat the supplied income and expense items as the entire profit-and-loss items before tax; no tax expense arises. Management's draft adds only 80% of each SRL asset, liability, income and expense line to VCL's figures. You are required to calculate the relevant combined figures under the line-by-line approach and distinguish intragroup balance and investment-elimination adjustments.

Before considering any consolidation adjustment to property, plant and equipment, what amount should be shown by adding the VCL and SRL balances on a line-by-line basis?

1. ₹68 lakh (correct answer)
2. ₹62.4 lakh
3. ₹54.4 lakh
4. ₹40 lakh

Answer: A — ₹68 lakh

Explanation. AS 21 requires like items of the parent and subsidiary to be combined line by line. Property, plant and equipment is therefore ₹40 lakh plus ₹28 lakh, giving ₹68 lakh. The 80% ownership percentage is not applied to each asset line in full consolidation; it is relevant to the allocation between owners of the parent and minority interests and to acquisition-related calculations. The ₹54.4 lakh option incorrectly applies proportionate consolidation.

Where it goes wrong. Multiplying the subsidiary's assets by the parent's 80% holding instead of consolidating the full asset balance.

Authority. AS 21, para 13

Question 10 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is the consolidated trade receivables balance after eliminating the matching intragroup amount due from SRL to VCL?

1. ₹34 lakh
2. ₹24 lakh
3. ₹20 lakh
4. ₹30 lakh (correct answer)

Answer: D — ₹30 lakh

Explanation. The gross line-by-line addition is ₹24 lakh plus ₹10 lakh, or ₹34 lakh. The ₹4 lakh due from SRL is an intragroup balance matched by SRL's payable to VCL and is eliminated in full. Consolidated trade receivables are therefore ₹30 lakh. The ₹34 lakh distractor performs the addition but omits the required elimination; eliminating only 80% would also be incorrect because intragroup balances are eliminated in full.

Where it goes wrong. Adding the two ledgers but failing to eliminate a matched intragroup balance in full.

Authority. AS 21, paras 13 and 16-17

Question 11 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What is the combined profit before tax of the group for 2026-27, before allocation between owners of VCL and minority interests?

1. ₹20 lakh
2. ₹32 lakh
3. ₹36 lakh (correct answer)
4. ₹48 lakh

Answer: C — ₹36 lakh

Explanation. VCL's profit before tax is ₹180 lakh less total expenses of ₹126 lakh + ₹18 lakh + ₹8 lakh + ₹8 lakh, giving ₹20 lakh. SRL's profit before tax is ₹90 lakh less ₹54 lakh + ₹12 lakh + ₹4 lakh + ₹4 lakh, giving ₹16 lakh. The combined group profit before tax is ₹36 lakh. The full subsidiary result is included before allocating the minority share; using only 80% of SRL's profit understates consolidated profit.

Where it goes wrong. Including only the parent's share of the subsidiary's profit in the consolidated statement before the minority allocation.

Authority. AS 21, para 13

Question 12 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

What acquisition difference arises on elimination of VCL's investment in SRL, based on SRL's equity on 1 April 2025?

1. Goodwill of ₹3.2 lakh because the investment cost exceeds the parent's acquisition-date equity share.
2. Capital reserve of ₹3.2 lakh because the parent's acquisition-date equity share exceeds cost. (correct answer)
3. Capital reserve of ₹2.4 lakh based on the post-acquisition reserve movement rather than opening equity.
4. Goodwill of ₹9 lakh by treating the subsidiary's pre-acquisition reserve as goodwill on consolidation.

Answer: B — Capital reserve of ₹3.2 lakh because the parent's acquisition-date equity share exceeds cost.

Explanation. SRL's equity at acquisition was share capital ₹20 lakh plus pre-acquisition reserves ₹9 lakh, totalling ₹29 lakh. VCL's 80% share was ₹23.2 lakh. Since the investment cost of ₹20 lakh is lower by ₹3.2 lakh, that excess of the parent's share in acquisition-date equity over cost is capital reserve. The goodwill option reverses the comparison, while ₹2.4 lakh incorrectly applies 80% to the post-acquisition reserve movement instead of acquisition-date equity.

Where it goes wrong. Reversing the goodwill/capital-reserve test or using post-acquisition reserves in the acquisition-date comparison.

Authority. AS 21, para 13(a)-(c)

Question 13 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Altair Ltd. holds exactly 50% of the voting power in Nova Ltd. It has no right to appoint or remove directors, and no agreement gives it control of Nova's board. The remaining voting power is held by an independent investor. Does voting ownership alone establish control under AS 21?

Altair Ltd. holds exactly 50% of the voting power in Nova Ltd. It has no right to appoint or remove directors, and no agreement gives it control of Nova's board. The remaining voting power is held by an independent investor. Does voting ownership alone establish control under AS 21?

1. No, because the voting-power test requires more than one-half of the votes. (correct answer)
2. Yes, because ownership of one-half is treated as ownership of a majority.
3. Yes, because equal voting rights automatically give the parent control.
4. No, because control can arise only through appointment of directors.

Answer: A — No, because the voting-power test requires more than one-half of the votes.

Explanation. The voting-power limb of control requires ownership, directly or indirectly, of more than one-half of the voting power. Exactly 50% does not satisfy the word 'more than'. The facts also deny Altair any independent board-composition control, so the alternative control limb is unavailable. The majority-equivalence distractor substitutes 'one-half' for the statutory and accounting-standard threshold and would create control where the stated facts do not.

Where it goes wrong. Treating 50% as equivalent to more than 50%, without separately checking board-composition control.

Authority. AS 21, para 5.1(a); Section 2(87)(ii), Companies Act, 2013

Question 14 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Holdco Ltd. owns 43% of the voting power of Target Ltd. Its wholly controlled subsidiary, Subco Ltd., owns another 9% of Target's voting power. No separate board appointment rights exist. What is the correct conclusion?

Holdco Ltd. owns 43% of the voting power of Target Ltd. Its wholly controlled subsidiary, Subco Ltd., owns another 9% of Target's voting power. No separate board appointment rights exist. What is the correct conclusion?

1. Target is not controlled because Holdco's direct registered holding is only 43%.
2. Target is a subsidiary because direct and indirect voting power together is 52%. (correct answer)
3. Target is an associate because Subco's voting rights cannot be attributed to Holdco.
4. Target is controlled only if Subco transfers its shares into Holdco's own name.

Answer: B — Target is a subsidiary because direct and indirect voting power together is 52%.

Explanation. Holdco's direct interest is 43%, and its wholly controlled subsidiary holds 9% more. AS 21 expressly includes voting power owned indirectly through subsidiaries, so the relevant total is 52%. This exceeds one-half and establishes control. The registered-holder distractor ignores indirect ownership; a transfer of the shares into Holdco's own name is not required for the AS 21 control test to be met.

Where it goes wrong. Failing to trace voting power through a controlled subsidiary when testing indirect control.

Authority. AS 21, paras 5.1(a) and 10; Section 2(87)(ii), Companies Act, 2013

Question 15 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. A parent has power to appoint all members of a provident fund trust's governing body. The trust holds and administers employee retirement contributions, and the parent does not control it to obtain economic benefits from its activities. How should the trust be treated for AS 21 consolidation?

A parent has power to appoint all members of a provident fund trust's governing body. The trust holds and administers employee retirement contributions, and the parent does not control it to obtain economic benefits from its activities. How should the trust be treated for AS 21 consolidation?

1. Consolidate it because power to appoint the governing body always establishes a subsidiary.
2. Consolidate it only in proportion to the employer's annual contribution to the trust.
3. Do not treat it as a subsidiary because control is not exercised to obtain economic benefits. (correct answer)
4. Treat it as an associate because the trust has an independent governing body and separate legal identity.

Answer: C — Do not treat it as a subsidiary because control is not exercised to obtain economic benefits.

Explanation. AS 21 explains that control of a governing body is relevant when exercised so as to obtain economic benefits from the entity's activities. It specifically notes entities such as gratuity and provident fund trusts, where the objective of control is not to obtain such benefits, are not considered for preparation of consolidated financial statements. The appointment-power-only option overlooks this purpose element in the AS 21 control definition.

Where it goes wrong. Equating governance or appointment powers with control for consolidation without considering the economic-benefit purpose.

Authority. AS 21, para 10

Question 16 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A Ltd. holds 48% of B Ltd.'s voting power and has a contractual right to nominate four of B's seven directors. However, each appointment requires the prior consent of an independent lender, which may refuse consent at its discretion. A Ltd. has no other control rights. Which conclusion is most appropriate?

A Ltd. holds 48% of B Ltd.'s voting power and has a contractual right to nominate four of B's seven directors. However, each appointment requires the prior consent of an independent lender, which may refuse consent at its discretion. A Ltd. has no other control rights. Which conclusion is most appropriate?

1. B is a subsidiary because A's four nominees form a majority of its board.
2. B is a subsidiary because a contractual right to nominate four directors is sufficient.
3. B is a subsidiary because lender consent is presumed to be only procedural.
4. The rights fail because A cannot appoint a majority without the lender's consent. (correct answer)

Answer: D — The rights fail because A cannot appoint a majority without the lender's consent.

Explanation. The voting interest of 48% is not more than one-half. For board-composition control, AS 21 requires power, without the consent or concurrence of another person, to appoint or remove all or a majority of directors. Since the independent lender can refuse consent at its discretion, A Ltd. does not have the required unilateral power. The nomination-right distractor ignores the express condition that appointment power must not depend on another person's consent.

Where it goes wrong. Counting nominated directors without checking whether the parent can appoint or remove them without another party's consent.

Authority. AS 21, para 10(i); Section 2(87)(i), Companies Act, 2013

Question 17 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. P Ltd. acquired 70% of Q Ltd. as a strategic investment, with no intention of near-future disposal. Eighteen months later, P Ltd. decided to sell the interest and began looking for buyers. The sale is still incomplete at the reporting date. What is the AS 21 treatment?

P Ltd. acquired 70% of Q Ltd. as a strategic investment, with no intention of near-future disposal. Eighteen months later, P Ltd. decided to sell the interest and began looking for buyers. The sale is still incomplete at the reporting date. What is the AS 21 treatment?

1. Continue consolidating Q until the controlling investment is actually disposed of. (correct answer)
2. Exclude Q from the date the board approves a future sale strategy.
3. Exclude Q because the intended sale is now expected within twelve months.
4. Use AS 13 from the date P begins negotiations with prospective buyers.

Answer: A — Continue consolidating Q until the controlling investment is actually disposed of.

Explanation. The temporary-control exception is assessed by reference to the intention at the time the investment is acquired. P Ltd. originally acquired Q Ltd. as a strategic investment and did not intend near-future disposal. A later decision to sell does not create temporary control retrospectively. AS 21 requires Q to remain consolidated until disposal actually occurs. The sale-plan distractor confuses a subsequent change in intention with the acquisition-date intention required by paragraph 11(a).

Where it goes wrong. Treating a later disposal decision as if it had existed when control was first acquired.

Authority. AS 21, para 11(a) and its Explanation

Question 18 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. R Ltd. owns 90% of S Ltd. S Ltd. remains operationally controlled by R Ltd., but a binding government order imposes severe long-term restrictions that significantly impair S Ltd.'s ability to transfer funds to R Ltd. Which treatment is required by AS 21?

R Ltd. owns 90% of S Ltd. S Ltd. remains operationally controlled by R Ltd., but a binding government order imposes severe long-term restrictions that significantly impair S Ltd.'s ability to transfer funds to R Ltd. Which treatment is required by AS 21?

1. Consolidate S because ownership above 50% overrides transfer restrictions in every case.
2. Exclude S, apply AS 13 to the investment and disclose the reason for non-consolidation. (correct answer)
3. Consolidate only non-current assets because transfers of funds are restricted.
4. Treat S as an associate and apply the AS 23 equity method from the date restrictions begin.

Answer: B — Exclude S, apply AS 13 to the investment and disclose the reason for non-consolidation.

Explanation. AS 21 provides a specific exclusion where a subsidiary operates under severe long-term restrictions that significantly impair its ability to transfer funds to the parent. The stated government order meets that condition. The investment in the excluded subsidiary is accounted for in accordance with AS 13, and the reason for non-consolidation is disclosed. The 90% ownership distractor treats the control threshold as absolute and ignores the express paragraph 11 exception.

Where it goes wrong. Assuming majority ownership automatically requires consolidation even where a specific exclusion in paragraph 11 applies.

Authority. AS 21, para 11(b)

Question 19 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A manufacturing parent controls 72% of a subsidiary whose principal activity is operating a chain of hotels. The subsidiary is profitable, freely transfers funds to the parent and has no temporary-control features. The finance director proposes exclusion because the businesses are dissimilar. Which view is correct?

A manufacturing parent controls 72% of a subsidiary whose principal activity is operating a chain of hotels. The subsidiary is profitable, freely transfers funds to the parent and has no temporary-control features. The finance director proposes exclusion because the businesses are dissimilar. Which view is correct?

1. Exclude the subsidiary because entities from different industries cannot be combined.
2. Exclude the subsidiary but disclose its assets, liabilities and results in a separate note.
3. Consolidate the subsidiary; different business activities alone are not a valid exclusion. (correct answer)
4. Consolidate its results only and leave its balance-sheet items outside the group.

Answer: C — Consolidate the subsidiary; different business activities alone are not a valid exclusion.

Explanation. AS 21 specifically states that a subsidiary must not be excluded merely because its business activities are dissimilar from those of other group enterprises. Consolidation provides better information about the group, and additional segment information may explain different activities. Since the parent controls 72% and neither paragraph 11 exception applies, the subsidiary is included in full. The note-only distractor is not a permitted substitute for consolidation on grounds of business dissimilarity.

Where it goes wrong. Treating commercial or industry differences as an independent ground for non-consolidation.

Authority. AS 21, para 12

Question 20 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A group uses weighted-average costing in its consolidated financial statements. One subsidiary uses FIFO for similar inventory transactions. After reasonable investigation, the group concludes that it is not practicable to make the policies uniform for that subsidiary. What must be done?

A group uses weighted-average costing in its consolidated financial statements. One subsidiary uses FIFO for similar inventory transactions. After reasonable investigation, the group concludes that it is not practicable to make the policies uniform for that subsidiary. What must be done?

1. Adopt FIFO throughout the group because at least one group member already uses it.
2. Exclude the subsidiary until it changes its accounting policy to the group method.
3. Make no disclosure because FIFO can be acceptable under the inventory standard.
4. Disclose why uniformity is impracticable and the proportions of items using different policies. (correct answer)

Answer: D — Disclose why uniformity is impracticable and the proportions of items using different policies.

Explanation. Paragraph 20 requires uniform accounting policies for like transactions and similar circumstances. If using uniform policies is not practicable, the fact must be disclosed together with the proportions of consolidated items to which the different policies have been applied. Exclusion of the subsidiary is not the remedy. Where practicable, paragraph 21 requires appropriate adjustments to the member's financial statements; the disclosure route applies to the stated impracticability.

Where it goes wrong. Confusing the disclosure exception for impracticability with a general right to retain different policies without explanation.

Authority. AS 21, paras 20-21

Question 21 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. The parent applies weighted-average costing. A subsidiary reports closing inventory of ₹6,25,000 under FIFO, whereas the same inventory would be ₹5,90,000 under the group's policy. Opening inventory has no difference. What adjustment is required for consolidation?

The parent applies weighted-average costing. A subsidiary reports closing inventory of ₹6,25,000 under FIFO, whereas the same inventory would be ₹5,90,000 under the group's policy. Opening inventory has no difference. What adjustment is required for consolidation?

1. Reduce inventory and the relevant current-period profit by ₹35,000. (correct answer)
2. Increase inventory and profit by ₹35,000 to retain the subsidiary's FIFO method.
3. Reduce inventory and profit by ₹6,25,000 because FIFO balances are eliminated.
4. No adjustment is needed because both costing methods are accepted under AS 2.

Answer: A — Reduce inventory and the relevant current-period profit by ₹35,000.

Explanation. The group-policy inventory amount is ₹5,90,000 compared with the subsidiary's reported ₹6,25,000. The difference is ₹35,000, so the subsidiary's inventory is reduced by that amount for consolidation. Since opening inventory has no difference, the whole closing-stock adjustment affects the current-period result: inventory and profit are each lower by ₹35,000. The distractor that makes no adjustment ignores AS 21's requirement for uniform policies within like transactions.

Where it goes wrong. Recognising that both methods may be acceptable separately but forgetting that consolidation requires a common policy.

Authority. AS 21, paras 20-21

Question 22 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. A parent reports at 31 March 2027. A subsidiary's statements are drawn up to 30 September 2026 because it is impracticable to prepare statements at 31 March. The difference in reporting dates has been six months in each of the previous two years as well. Which statement most appropriately reflects AS 21?

A parent reports at 31 March 2027. A subsidiary's statements are drawn up to 30 September 2026 because it is impracticable to prepare statements at 31 March. The difference in reporting dates has been six months in each of the previous two years as well. Which statement most appropriately reflects AS 21?

1. The six-month gap is allowed only with adjustments for significant intervening events.
2. The dates may be used with intervening-event adjustments and consistent application each year. (correct answer)
3. The statements may be used without adjustment because six months is the maximum gap.
4. Different dates may be used only if the parent also changes its own year-end to September.

Answer: B — The dates may be used with intervening-event adjustments and consistent application each year.

Explanation. AS 21 requires the same reporting date as far as practicable. If that is impracticable, different dates may be used where the gap does not exceed six months. Significant transactions or other events between the dates must be adjusted, and paragraph 19 requires the length of reporting periods and the difference in dates to remain consistent from period to period. The no-adjustment option incorrectly treats the maximum gap as a waiver of the adjustment requirement.

Where it goes wrong. Remembering the six-month limit but overlooking intervening-event adjustments and period-to-period consistency.

Authority. AS 21, paras 18-19

Question 23 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Parent P Ltd. reports at 31 March 2027, while subsidiary S Ltd. reports at 30 November 2026. It is impracticable to prepare same-date statements. On 15 February 2027, S Ltd. sells a machine for ₹22 lakh; its carrying amount immediately before sale is ₹16 lakh. The sale is significant. What is the appropriate adjustment in preparing the parent's consolidated statements?

Parent P Ltd. reports at 31 March 2027, while subsidiary S Ltd. reports at 30 November 2026. It is impracticable to prepare same-date statements. On 15 February 2027, S Ltd. sells a machine for ₹22 lakh; its carrying amount immediately before sale is ₹16 lakh. The sale is significant. What is the appropriate adjustment in preparing the parent's consolidated statements?

1. Make no adjustment because the subsidiary has already approved its 30 November statements.
2. Recognise only the ₹22 lakh proceeds and retain the machine at its original carrying amount.
3. Reflect removal of the ₹16 lakh machine, the ₹22 lakh proceeds and the ₹6 lakh gain. (correct answer)
4. Reduce the machine by ₹22 lakh and recognise no gain because it is an intragroup disposal.

Answer: C — Reflect removal of the ₹16 lakh machine, the ₹22 lakh proceeds and the ₹6 lakh gain.

Explanation. The reporting-date gap is four months and is within the six-month ceiling, assuming the same date is impracticable. The significant machine sale occurred within the gap and must be reflected in consolidation. The machine is derecognised at its ₹16 lakh carrying amount, proceeds of ₹22 lakh are recognised, and the resulting gain is ₹6 lakh. The no-adjustment option omits a material intervening transaction; the proceeds-only option leaves an asset that no longer exists at the parent's reporting date.

Where it goes wrong. Failing to reflect a significant disposal between the subsidiary's reporting date and the parent's reporting date.

Authority. AS 21, para 18

Question 24 · 2 marks · Chapter 10: Consolidated Financial Statements · medium

Scenario. Parent P Ltd. owns 65% of subsidiary S Ltd. P Ltd. reports inventory of ₹24 lakh and S Ltd. reports inventory of ₹10 lakh. There are no intragroup inventory balances or unrealised profits. What inventory amount is included in the consolidated balance sheet?

Parent P Ltd. owns 65% of subsidiary S Ltd. P Ltd. reports inventory of ₹24 lakh and S Ltd. reports inventory of ₹10 lakh. There are no intragroup inventory balances or unrealised profits. What inventory amount is included in the consolidated balance sheet?

1. ₹30.5 lakh
2. ₹24 lakh
3. ₹6.5 lakh
4. ₹34 lakh (correct answer)

Answer: D — ₹34 lakh

Explanation. Under the line-by-line method, like items of the parent and subsidiary are added in full. Inventory is therefore ₹24 lakh + ₹10 lakh = ₹34 lakh. The 65% holding affects the attribution of net assets and results between owners of the parent and minority interests, not the percentage of the subsidiary's individual assets included in the consolidated balance sheet. The ₹30.5 lakh distractor incorrectly includes only 65% of S Ltd.'s inventory.

Where it goes wrong. Applying the parent's ownership percentage to each asset line instead of consolidating all of the subsidiary's balances.

Authority. AS 21, para 13

Question 25 · 2 marks · Chapter 10: Consolidated Financial Statements · hard

Scenario. Parent P Ltd. reports revenue of ₹80 lakh and subsidiary S Ltd. reports revenue of ₹35 lakh. P Ltd.'s revenue includes a sale of ₹10 lakh to S Ltd., which is included in S Ltd.'s expenses as purchases. There are no other intragroup sales. What is consolidated revenue?

Parent P Ltd. reports revenue of ₹80 lakh and subsidiary S Ltd. reports revenue of ₹35 lakh. P Ltd.'s revenue includes a sale of ₹10 lakh to S Ltd., which is included in S Ltd.'s expenses as purchases. There are no other intragroup sales. What is consolidated revenue?

1. ₹105 lakh (correct answer)
2. ₹115 lakh
3. ₹80 lakh
4. ₹110 lakh

Answer: A — ₹105 lakh

Explanation. The initial line-by-line addition gives revenue of ₹80 lakh + ₹35 lakh = ₹115 lakh. The ₹10 lakh sale from P Ltd. to S Ltd. is an intragroup transaction and must be eliminated in full, so consolidated revenue is ₹105 lakh. The subsidiary's corresponding purchase expense is also eliminated from group expenses. Retaining ₹115 lakh counts a sale by the group to itself and overstates external revenue.

Where it goes wrong. Adding group-company sales without eliminating the internal transaction in full.

Authority. AS 21, paras 13 and 16-17