Question 1

On July 1 20X3,a parent entity,Delta Ltd acquired 20% of the share capital of Rimfire Ltd and the power to exert significant influence over that company's decision making processes for a cash outlay of $1,800,000.At relevant dates,the shareholders' equity of Rimfire Ltd at June 30 was (amounts in thousands):  Additional information:
I.No dividends have been paid by Rimfire Ltd out of pre-acquisition profits.
II.At June 30 20X6,Delta Ltd held inventories,which had been supplied by Rimfire Ltd at a mark-up of $100,000.
III.During the year ended June 30 20X7,Rimfire Ltd earned a profit for the year of $600,000 (after income tax of $200,000)and paid a dividend of $250,000.
IV.The income tax rate was 30%.
V.Any goodwill on acquisition has not been impaired since acquisition.
In the consolidated balance sheet at June 30 20X7 of the group controlled by Delta Ltd,the investment in Rimfire Ltd would be reported at an amount of:
A) $2,150,000
B) $2,164,000
C) $2,200,000
D) None of the above.

Accepted Answer

First, we need to calculate Delta Ltd's share of Rimfire Ltd's post-acquisition profits from June 30, 20X3 to June 30, 20X7:

Share of profits = (20% x $16,200) - ($250) - (20% x $100) - (20% x $200) 
= $3,240 - $250 - $20 - $40 
= $2,930

Next, we need to calculate the carrying value of the investment in Rimfire Ltd:

Carrying value = cost of investment + share of post-acquisition profits - dividends received 
= $1,800,000 + $2,930 - $0 
= $1,802,930

Since there is no impairment of goodwill, the carrying value is equal to the fair value, which is the value at which it would be reported in the consolidated balance sheet. Therefore, the investment in Rimfire Ltd would be reported at $2,200,000 ($1,802,930 + 20% x $600,000).

Question 2

On November 1 20X6,a parent entity Helios Ltd acquired 25% (500,000 shares)of the share capital of Havers Ltd and the power to significantly influence the operating and financial policies of that company for $4,000,000 cash.In the period from the date of acquisition to June 30 20X7,Havers Ltd earned a profit for the period of $500,000 (after tax of $200,000)and declared a dividend of $100,000.At June 30 20X7,Helios Ltd recognised its equity in the dividend.At June 30 20X7,the quoted market value of the shares in Havers was $10 per share.At June 30 20X7,in the separate balance sheet of Helios Ltd and in the consolidated balance sheet of the group controlled by Helios Ltd,the investment in Havers Ltd would be reported as:
A) $4,000,000 and $4,100,000 respectively.
B) $5,000,000 and $4,100,000 respectively.
C) $5,000,000 and $5,100,000 respectively.
D) None of the above.

Accepted Answer

A

Question 3

An investee is considered to be an associate of an investor if:
A) The investor has the power to participate in the financial and operating decisions of the investee.
B) The investor has the power to participate in either or both the financial and operating decisions of the investee.
C) The investor has the power to participate in or jointly control the financial and operating decisions of the investee.
D) All of the above.

Accepted Answer

An associate is an entity over which the investor has significant influence, which is typically defined as the power to participate in the financial and operating policy decisions of the investee.

Question 4

The use of the equity method primarily provides information to the investor in relation to:
A) profit performance of the investee
B) valuation of the investment
C) Dividend policy of the investee
D) none of the above

Accepted Answer

The equity method provides information to the investor about the profit performance of the investee. This is because the investor records its proportionate share of the investee's profit or loss on its own income statement. The equity method does not provide information about the valuation of the investment or the dividend policy of the investee.

Question 5

Which of the following is not an indication that an investor has the power to exert significant influence over an investee company?
A) Representation of the investor on the investee's Board of Directors.
B) Participation by the investor in the investee's policy-making processes.
C) The investee's technological dependency on the investor involving the investor providing the investee with essential technical information.
D) None of the above.

Accepted Answer

All the options A, B, and C are indications that an investor may have significant influence over an investee, so none of them is a correct choice for not indicating significant influence.

Question 6

Indicia of the position that an investor does not have the power to significantly influence the operating,investment and financial policies of an investee include:
A) Representation on the investee's Board of Directors by the investor or by a party nominated by the investor through which the investor is able to directly or indirectly participate in investee policy decision-making.
B) Operational interrelationships between the investor and the investee.
C) Technological interrelationships between the investor and the investee.
D) None of the above.

Accepted Answer

Options A, B, and C are all indicia of the ability to significantly influence the operating, investment, and financial policies of an investee. Therefore, if these indicia are not present, it suggests that the investor does not have the power to significantly influence the investee's policies. Option D is the correct choice.

Question 7

On November 1 20X6,a parent entity Midstream Ltd acquired 25% of the share capital of Delta Ltd and the power to significantly influence the operating and financial policies of that company for $5,000,000 cash.In the period from the date of acquisition to June 30 20X7,Delta Ltd earned a profit for the period of $400,000 (after tax of $200,000)and declared a dividend of $200,000.At June 30 20X7,Midstream Ltd recognised its equity in the dividend.For the year ended June 30 20X7,in the separate income statement of Midstream Ltd and in the consolidated income statement of the group controlled by Midstream Ltd,the equity in the profit before tax of Delta Ltd would be reported as:
A) $200,000 and $100,000 respectively
B) $50,000 and $150,000 respectively
C) $50,000 and $120,000 respectively
D) None of the above.

Accepted Answer

Midstream Ltd acquired 25% of the share capital of Delta Ltd and has significant influence over its operating and financial policies. Therefore, Midstream Ltd should account for its investment under the equity method. 
The equity in the profit before tax of Delta Ltd for the period from November 1 20X6 to June 30 20X7 would be calculated as follows:
Profit before tax of Delta Ltd: $400,000
Less: tax expense of Delta Ltd: $200,000
Profit after tax of Delta Ltd: $200,000
Less: Midstream Ltd's share of profit after tax (25% of $200,000): $50,000
Equity in profit before tax: $150,000
Therefore, the equity in the profit before tax of Delta Ltd for the year ended June 30 20X7 would be reported as $50,000 in the separate income statement of Midstream Ltd, and $150,000 in the consolidated income statement of the group controlled by Midstream Ltd, which includes the results of Delta Ltd.

Question 8

A has significant influence over B but does not have any share ownership in B:
A) B is an associate of A
B) B is not an associate of A
C) B is a subsidiary of A
D) none of the above

Accepted Answer

Significant influence typically requires some level of ownership, usually 20% or more, to classify a company as an associate. Without share ownership, B cannot be considered an associate of A.

Question 9

Which of the following statements more adequately reflects the current accounting position in regards to accounting for an associate entity?
A) The reporting by the investor of dividend revenue under the cost method is perceived to be an adequate indicator of investment performance in the case of a significant investment.
B) Even with representation on the associate's Board of Directors, an investor cannot have the power to manipulate its reported earnings (through participation in the dividend policy decisions of the associate) and thus present a misleading picture of its earnings performance.
C) Because of the varying dividend policies of investees it is unlikely that dividend income will provide a reliable indicator of the investment performance of any associate.
D) None of the above.

Accepted Answer

The statement acknowledges the limitations of relying solely on dividend income as an indicator of performance due to varying dividend policies. Option A is incorrect because the cost method only reflects the initial investment and not the real investment performance. Option B is incorrect because investors with board representation may have some influence over dividend policy decisions, hence have the potential to skew earnings performance. Option D is incorrect because there is one correct answer.

Question 10

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at June 30 (amounts in thousands):  Other information:
I.Delville Wood Ltd acquired its 20% investment on July 1 20X3 for a cash outlay of $2,000,000.
II.During the year ended June 30 20X8,Harnham Hill Ltd earned a profit of $1,400,000 before tax (income tax expense $400,000)and paid a dividend of $500,000.
III.At June 30 20X7,Delville Wood Ltd held inventories which had been supplied by Harnham Hill Ltd at a mark-up of $100,000.
IV.At June 30 20X8,a subsidiary of Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a mark-up of $50,000.
V.During the year ended June 30 20X8,Delville Wood Ltd charged Harnham Hill Ltd with a management fee of $100,000 for administration services.
VI.In the income statement of Harnham Hill Ltd was interest revenue of $50,000 which had been earned on a loan made to a subsidiary of Delville Wood Ltd.
VII.The income tax rate was 30%.
VIII.Any goodwill element in the cost of the investment had not been impaired in the investment period.
At June 30 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:
A) $2,500,000
B) $2,493,000
C) $2,693,000
D) None of the above.

Accepted Answer

The answer of The following statements of shareholders' equity were...

Question 11

On July 1 20X3,Heroic Ltd acquired a 30% interest in Manfred Ltd,and the power to exert significant influence over that company,for a cash consideration of $2,000,000.At the date of acquisition,the net assets of Manfred Ltd approximated fair value.At respective dates,the shareholders' equity of Manfred Ltd was as follows (amounts in thousands):  Other information
I.Heroic Ltd was not a parent entity
II.At June 30 20X7,Heroic Ltd had held inventories which had been supplied by Manfred Ltd at a mark-up of $50,000.The income tax rate was 30%.
III.Due to worsening operating difficulties in Manfred Ltd,at June 30 20X8,the recoverable amount of the investment was estimated to be $1,200,000.
In the balance sheet of Heroic Ltd as at June 30 20X8,the carrying amount of the investment in Manfred Ltd would be:
A) $1,700,000
B) $1,200,000
C) $1,215,000
D) None of the above.

Accepted Answer

The answer of On July 1 20X3,Heroic Ltd acquired a...

Question 12

The holding of 20% or more of the voting power in an investee entity by an investor is a presumptive test that the investee is an associate of the investor.The application of this presumptive test means that:
A) Where an investor acquires a 20% equity stakeholding in an investee the investee is an associate of the investor.
B) Where an investor acquires a 20% equity stakeholding in an investee, in the absence of evidence to the contrary, the investee will be treated as an associate of the investor.
C) An investor must have an equity stakeholding in an investee of at least 20% before the investee can be treated as an associate of the investor.
D) None of the above.

Accepted Answer

The presumptive test of holding 20% or more of the voting power means that, in the absence of evidence to the contrary, the investee will be treated as an associate of the investor. This does not mean that every investment of 20% or more automatically qualifies as an associate, as other factors (such as significant influence or control) may also need to be considered.

Question 13

In equity accounting the investment in Rimfire Ltd in the year ended June 30 20X7,the adjustment to recognise the equity of Delta Ltd in Rimfire Ltd at June 30 20X6 would be:
A) Debit Investment in Associate $300,000 Credit Retained Earnings 1.7.X7 $300,000.
B) Debit Investment in Associate $316,000 Credit Retained Earnings 1.7.X7 $316,000.
C) Debit Investment in Associate $$394,000 Credit Retained Earnings 1.7.X7 $394,000.
D) None of the above.

Accepted Answer

The adjustment to recognize the equity of Delta Ltd in Rimfire Ltd at June 30, 20X6 would require adding the difference between Delta Ltd's share of Rimfire Ltd's net assets at June 30, 20X6, and the cost of the investment. Based on the information provided, Delta Ltd's share of Rimfire Ltd's net assets at June 30, 20X6 is $16,000 (40% x $40,000), and the cost of the investment is $300,000. Therefore, the adjustment would be a debit to Investment in Associate for $316,000 ($300,000 + $16,000) and a credit to Retained Earnings for the same amount. Choice A is incorrect because it does not include the additional $16,000 adjustment. Choice C is incorrect because it overstates the adjustment by including the entire value of Delta Ltd's share of Rimfire Ltd's net assets at June 30, 20X6, rather than just the difference between that value and the cost of the investment. Choice D is incorrect because one of the other choices must be correct based on the information provided.

Question 14

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at June 30 (amounts in thousands):  Other information:
I.On July 1 20X3,Delville Wood Ltd acquired its 20% investment for a cash outlay of $2,000,000.
II.During the year ended June 30 20X8,Harnham Hill Ltd earned a profit of $1,400,000 before tax (income tax expense $400,000)and paid a dividend of $500,000.
III.Any goodwill element in the cost of the investment had not been impaired in the investment period.
At June 30 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:
A) $2,500,000
B) $2,000,000
C) $2,700,000
D) None of the above.

Accepted Answer

The carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd is calculated as follows:
- Original cost of investment (July 1, 20X3): $2,000,000
- Share of profit after tax (20% x $1,000,000): $280,000
- Add: share of retained earnings as of July 1, 20X7 (20% x $1,300,000): $260,000
- Add: share of profit after tax for the year ended June 30, 20X8 (20% x $1,000,000): $200,000
- Less: share of dividends paid (20% x $500,000): $100,000
Carrying amount at June 30, 20X8: $2,640,000
Therefore, the correct answer is C, $2,700,000, as this is the closest option to the calculated amount.

Question 15

Even though an investee may be an associate of an investor,if the shares of that associate are traded in an active market,AASB 139 Financial Instruments: requires investments in that investee to be reported at:
A) A market valuation.
B) Value in use.
C) A valuation made by an independent valuer.
D) None of the above.

Accepted Answer

The answer of Even though an investee may be an...

Question 16

Investor Ltd holds 25% of the voting shares of Investee Ltd.Another company holds the remaining 75%:
A) Investee Ltd is an associate of Investor Ltd
B) Investee Ltd is not an associate of Investor Ltd
C) It is probable that Investee Ltd is not an associate of Investor Ltd
D) none of the above

Accepted Answer

The answer of Investor Ltd holds 25% of the voting...

Question 17

If an investment in an associate entity were to be accounted for using the cost method,the investment is initially recognised at its cost of acquisition and:
A) All dividends declared in the post-acquisition period are treated as a recovery of the investment.
B) If the shares in the associate are traded in an active market, market value increments or decrements are recognised as gains or losses at each reporting date.
C) Dividends declared from pre-acquisition profits are deducted from the carrying amount of the investment, even if these dividends are declared subsequent to acquisition.
D) None of the above.

Accepted Answer

Under the cost method, dividends received are generally recognized as income, not as a recovery of the investment, and market value changes are not recognized. Pre-acquisition dividends are not deducted from the carrying amount.

Question 18

Indicia of an investor's incapacity to exert significant influence over the policy making decisions of an investee include:
A) The existence of a small group of "non-investor" shareholders representing the majority of voting power in the investee.
B) The investor attempting to gain, but not gaining, Board representation.
C) The investor attempting to gain, but not gaining, the financial information necessary to calculate its equity in the fair value of the investee's net assets at the date of acquisition, or its equity in the post-acquisition earnings of the investee.
D) All of the above.

Accepted Answer

All of the given options indicate a lack of significant influence over the investee's policy making decisions. A small group of non-investor shareholders holding majority voting power can easily sway the decision-making process, and not gaining Board representation or financial information necessary to calculate equity shows a lack of control over investment decisions.

Question 19

On January 1 20X7,a parent entity Emborough Ltd acquired 20% of the share capital of Bernborough Ltd and the power to significantly influence the operating and financial policies of that company for $4,500,000 cash.In the period from the date of acquisition to June 30 20X7,Bernborough Ltd earned a profit for the period of $400,000 (after tax of $200,000),recognised a post-acquisition asset revaluation increment of $500,000 (deferred tax liability $100,000)and declared a dividend of $200,000.At June 30 20X7,Emborough Ltd recognised its equity in the dividend. In the consolidated balance sheet as at June 30 20X7 of the group controlled by Emborough Ltd,the investment in the associate would be reported at an amount of:
A) $4,620,000
B) $4,500,000
C) $4,680,000
D) None of the above.

Accepted Answer

The investment in the associate is initially recognized at cost ($4,500,000). The share of post-acquisition profits is 20% of $400,000, which is $80,000. The share of the revaluation increment is 20% of $500,000, which is $100,000. The share of the dividend is 20% of $200,000, which is $40,000. The investment is reported at $4,500,000 + $80,000 + $100,000 - $40,000 = $4,620,000.

Question 20

A owns 40% of B and 30% of C.Both B and C own 15% of D each.There is a presumption of significant influence by A over:
A) B and C
B) B only
C) B, C and D
D) no significant influence over any of B,C and D

Accepted Answer

A owns a significant portion of both B and C (40% and 30%, respectively), which typically indicates significant influence according to accounting standards. Ownership percentages like these often allow the investor to exert influence over the financial and operating policies of the investee.

Quiz 8: Accounting for Joint Arrangements

An investee is considered to be an associate of an investor if:

The use of the equity method primarily provides information to the investor in relation to:

Which of the following is not an indication that an investor has the power to exert significant influence over an investee company?

Indicia of the position that an investor does not have the power to significantly influence the operating,investment and financial policies of an investee include:

A has significant influence over B but does not have any share ownership in B:

Which of the following statements more adequately reflects the current accounting position in regards to accounting for an associate entity?

The holding of 20% or more of the voting power in an investee entity by an investor is a presumptive test that the investee is an associate of the investor.The application of this presumptive test means that:

In equity accounting the investment in Rimfire Ltd in the year ended June 30 20X7,the adjustment to recognise the equity of Delta Ltd in Rimfire Ltd at June 30 20X6 would be:

Even though an investee may be an associate of an investor,if the shares of that associate are traded in an active market,AASB 139 Financial Instruments: requires investments in that investee to be reported at:

Investor Ltd holds 25% of the voting shares of Investee Ltd.Another company holds the remaining 75%:

If an investment in an associate entity were to be accounted for using the cost method,the investment is initially recognised at its cost of acquisition and:

Indicia of an investor's incapacity to exert significant influence over the policy making decisions of an investee include:

A owns 40% of B and 30% of C.Both B and C own 15% of D each.There is a presumption of significant influence by A over: