Deck 10: Accounting for Investments

Question 1

Which statement is correct regarding shares purchased by one company in another to make use of temporary idle cash balances?

A) They will normally be sold when the company needs cash
B) They must always be measured at cost
C) They can be classified as either current or non-current assets
D) All of the statements are correct

Answer 1

A

Question 2

The AASB standard which covers the treatment of shares held as a current investment is:

A) AASB 128
B) AASB 139
C) AASB 101
D) AASB 102

Answer 2

B

Question 3

When deciding on the broad accounting treatment for investments in the shares of other companies that are held as non-current assets,the holdings are normally classified into which of the following broad groups?

A) Stock exchange listed holdings, family company holdings
B) Liquid holdings, non-liquid holdings
C) Small holdings, holdings that give significant influence, holdings that give control
D) Small holdings, large holdings

Answer 3

C

Question 4

Which of these is not a feature of the pure equity accounting method?

A) A proportionate share of dividends paid by the investee is debited to the bank account and credited to the investment account
B) A proportionate change in after-tax profits of the investee is debited to the investment account and credited to share of net profit of associate
C) A proportionate change in asset revaluations by the investee is debited to the investment account and credited to a revaluation reserve
D) Any difference between the acquisition price and the amount at which the investment is initially recorded in the investor's accounts is recorded as goodwill

Question 5

The accounting standard that applies to financial assets that consist of 'small holdings' of shares held as non-current assets is:

A) AASB 116 'Property, Plant and Equipment'
B) AASB 136 'Impairment of Assets'
C) AASB 139 'Financial Instruments: Recognition and Measurement'
D) All of the standards apply

Question 6

Companies purchase shares in other companies:

A) to acquire control over the other company's operations
B) to be held as a long-term investment
C) to make use of surplus cash
D) for all of the above reasons

Question 7

Lindy Ltd acquired an investment property for cash on 1 January 20X0 at a cost of $1 500 000.Its fair value on 31 December 20X0 was $2 000 000.What accounting entry would be made under AASB 140 on 31 December 20X0 if Lindy Ltd had elected to use the fair value model for the property?

A) Dr investment property $500 000, cr gain from increase in fair value of investment property $$\$ 500000$$
B) Dr investment property $500 000, cr revaluation reserve $500 000
C) Dr investment property $500 000, cr accumulated depreciation $500 000
D) None of the above

Question 8

Under AASB 128,the power to participate in the financial and operating policy decisions of the investee,but not having control or joint control over those policies,is known as:

A) significant influence
B) reasonable influence
C) primary influence
D) notable influence

Question 9

Under AASB 128,which of these factors is likely to suggest the presence of significant influence?

A) Representation on the board of directors of the investee
B) Material transactions between the investor and the investee
C) Interchange of managerial personnel
D) All of the above

Question 10

Which statement is correct?

A) Of the three possible variations of equity accounting, cost based equity normally shows the lowest carrying amount for the investment in the associates accounts
B) Equity accounting requires that unrealised profits and losses on inter-company transactions between the investor and the investee be eliminated
C) Of the three possible variations of equity accounting the pure equity method shows the highest share of profit of the associate because it includes as income the share of revaluations by the investee
D) All of the statements are correct

Question 11

Where an inter-corporate investment is carried at acquisition cost plus or minus the investor's share of post-acquisition profits or losses of the investee,and asset revaluations by the investee are ignored,the method of equity accounting that is being applied is the:

A) hybrid equity method
B) cost-based equity method
C) pure equity method
D) mixed equity method

Question 12

Which of the following is not part of the AASB 140 proposals to account for investment properties?

A) After initial recognition, investment properties can be measured by either the cost model or the fair value model
B) If the fair value model is chosen, changes to fair value must be recognised as gains or losses when they occur
C) If the cost model is chosen then, all of a company's investment properties must be measured in accordance with AASB 116
D) Different investment properties can be valued using different cost models

Question 13

The hybrid equity method differs from the pure equity method in that:

A) goodwill is not amortised
B) the goodwill component of the purchase price is not shown in a separate account from the investment
C) investee revaluations are regarded as adjustments to equity rather than as income
D) both B and C

Question 14

Lindy Ltd acquired an investment property for cash on 1 January 20X0 at a cost of $1 500 000.Its fair value on 31 December 20X0 was $2 000 000.What accounting entry would be made under AASB 140 on 31 December 20X0 if Lindy Ltd had elected to use the cost value model for the property and depreciation was to be charged at 10% per annum on cost?

A) Dr investment property $500 000, cr accumulated depreciation $500 000
B) Dr depreciation expense $150 000, cr accumulated depreciation $150 000
C) Dr depreciation expense $200 000, cr accumulated depreciation $200 000
D) Dr investment property $500 000, cr gain from increase in fair value of investment property $$\$ 500000$$

Question 15

It is generally accepted,for shares held by one company in another as a non-current asset,that a 'small holding' is less than what percentage of the investee's issued shares?

A) 20%
B) 5%
C) 15%
D) 10%

Question 16

On 1 January 20X0 Jesse Company purchased a 'small holding' of 1500 shares in Nulla Ltd for a fair value of $2000.On 1 January 20X1 the fair value of the shares was assessed as having risen to $2500.What journal entry would be made on 1 January 20X1 to recognise the change in value?

A) Debit investment in Nulla Ltd $500; credit gain on investment revaluation, $500
B) Debit investment in Nulla Ltd $500; credit investment revaluation reserve, $500
C) No entry is necessary
D) None of the above

Question 17

Which basis of valuation for shares of other entities,held as current assets,is required under AASB 139?

A) The lower of cost and market value
B) Cost
C) Fair value
D) All bases of valuation are permitted

Question 18

Under AASB 139,in relation to financial assets,which statement is incorrect?

A) They must initially be recorded at fair value
B) Both gains and losses arising from changes in fair value must be recognised in the income account
C) It is a requirement that revaluations be carried out at least every five years
D) None of the statements is incorrect

Question 19

Under AASB 128,the quantitative test that normally raises a presumption of significant influence is:

A) holding 15% or more of the voting power in an investee
B) holding 25% or more of the voting power in an investee
C) owning 25% or more of the shares in an investee
D) holding 20% or more of the voting power in an investee

Question 20

Under AASB 128,an entity,including an unincorporated entity such as a partnership,over which the investor has significant influence,and that is neither a subsidiary nor an interest in a joint venture,is the definition of an:

A) associate
B) associate partnership
C) association
D) accompanying entity

Question 21

Explain:
i.the meaning of significant influence
ii.how AASB 128 requires the equity method of accounting to be applied

Question 22

Explain the nature of investment properties and summarise the accounting treatment proposed by AASB 140.

Question 23

When an inter-corporate investment is always carried at an amount equal to the investors' share of the book value of the underlying net assets of the investee,the method of equity accounting that is being followed is:

A) cost-based equity method
B) pure equity method
C) hybrid equity method
D) There is no equity method where the investment is always carried at an amount equal to the investors' share of the book value of the underlying net assets of the investee.

Question 24

Accounting for shares held by one company in another varies according to the proportion the shares held by the investor are of the investee's share capital.Explain.

Question 25

On 1 July 20X0 Myall Ltd acquired 25% of the voting shares of Kenny Company for $400 000 in cash.On 30 June 20X1 Kenny Company paid a total dividend to its shareholders of $40 000.The journal entry made in Myall Ltd's accounts to record the receipt of the dividend is:

A) debit cash at bank $10 000; credit investment in K Company $10 000
B) debit cash at bank $10 000; credit dividend income $10 000
C) debit cash at bank $40 000; credit dividend income $40 000
D) debit cash at bank $40 000; credit Investment in K Company $40 000

Question 26

Discuss the essential characteristics of a joint venture and the way in which joint ventures can be arranged.

Question 27

When the existence of a subsidiary is established:

A) equity financial statements must be prepared
B) joint venture financial statements must be prepared
C) consolidated financial statements must be prepared
D) none of the above is necessary

Question 28

Under AASB 127,the test for the recognition of a subsidiary is:

A) ownership by the investor of 100% of the shares in another company
B) ownership by the investor of more than 50% of the shares in another company
C) power by the investor to control the investee
D) both B and C