Deck 20: Accounting for Investments in Associates

Question 1

At 30 June 20X6 the equity accounted balance of the investment in Leo was:

A)$50 000
B)$55 000
C)$100 000
D)$105 000

Answer 1

B

Question 2

Investor Limited acquired a 30% interest in Investee Limited for $27 000.Investor holds other equity investments but does not prepare consolidated financial statements.Investee Limited revalued its buildings class of assets by $10 000 during the current financial period.The balance of the investment in associate account at the end of the current financial period is:

A)$11 100;
B)$18 100;
C)$27 000;
D)$30 000.

Answer 2

D

Question 3

The accounting method applied to investments in associates,known as the equity method,is also known as the:

A)entity method of consolidation;
B)proprietary method of consolidation;
C)multiple line consolidation method;
D)one-line consolidation method.

Answer 3

D

Question 4

Campbell Limited acquired a 30% investment in Laura Limited for $21 000.Laura Limited declared and paid a dividend of $5 000.Campbell Limited does not prepare consolidated financial statements.The appropriate entry for Campbell Limited to record this dividend is:

A)DR Investment in associate $1 500 CR Dividend revenue $1 500;
B)DR Cash $1 500 CR Investment in associate $1 500;
C)DR Dividends received $3 500 CR Cash $3 500;
D)DR Cash $3 500 CR Dividend revenue $3 500.

Question 5

At 30 June 20X9 the equity accounted balance of the investment in Leo was:

A)NIL
B)$1 500
C)$5 000
D)$20 000

Question 6

The following are regarded as factors indicating the existence of significant influence over another entity:

I II III IV
-representation on the board of directors Yes Yes Yes Yes
-participation in decisions about dividends No Yes Yes Yes
-interchange of managerial personnel No No No Yes
-ability to control the investee's operating policies No Yes No No

A)I;
B)II;
C)III;
D)IV.

Question 7

Where an investor sells inventory to an associate in a prior year and the inventory is sold by the associate during the current year the investment in associate account is:

A)unaffected;
B)decreased by the investor's share of the realised profit;
C)increased by the investor's share of the realised profit;
D)increased by the full amount of the realised profit.

Question 8

At 30 June 20X8 the equity accounted balance of the investment in Leo was:

A)NIL
B)($3 500)
C)$4 000
D)$16 000

Question 9

An investor company acquired a 40% interest in an associate for $30 000.The investor is part of a consolidated group.In the financial period immediately following the date on which it became an associate,the investee took the following action:
-revalued assets up to fair value by $5 000
-generated profits of $16 000
-declared a dividend of $3 000
The balance in the investor's account 'Shares in associate',after equity accounting has been applied,is:

A)$30 000;
B)$37 200;
C)$38 400;
D)$39 600.

Question 10

The adjustment required to the investment in associate account at 30 June 20X8 in relation to the above assets is:

A)$500
B)$1 225
C)$1 400
D)$1 750

Question 11

For the purposes of equity accounting for an investment in an associate,it is presumed that the investor has significant influence over the other entity where the investor holds:

A)between 1% and 5% of the voting power of the investee;
B)between 5% and 10% of the voting power of the investee.
C)20% or more of the voting power of the investee;
D)50% or more of the voting power of the investee;

Question 12

Adjustments made for the purpose of calculating the incremental adjustment to the share of profit of an associate are:

A)recognised in the books of the investor;
B)recognised in the books of the investee;
C)notional adjustments and not included in the books of the investee;
D)relate to realised transactions and so are recognised directly by the investee.

Question 13

Perry Ltd owns 25% of Gaga Ltd.Gaga's profit after tax for the year ended 30 June 20X4 is $30 000.The tax rate is 30%.During the year ended 30 June 20X4,Perry sold $5000 worth of inventory to Gaga.These items had previously cost Perry $3000.All the items remain unsold by Gaga at 30 June 20X4.Perry's share of Gaga's profit for the year ended 30 June 20X4 is:

A)$5,500
B)$6,250
C)$7,150
D)$7,000

Question 14

Gunawan Limited acquired a 20% share in Juliano Limited for $18 000.Gunawan Limited has no other investments.At the date on which it became an associate,Juliano Limited had the following equity:
-Share capital $50 000
-Retained earnings $40 000
At the end of the financial year following the investment,Juliano Limited generated a profit of $6 000.After applying the equity method of accounting,Gunawan Limited will have the following carrying amount for the investment:

A)$19 200;
B)$18 000;
C)$16 800;
D)$9 200.

Question 15

When disclosing information about investments in associates,AASB 128 Investments in Associates,requires separate disclosure of which of the following?
I Shares in associates,in the statement of financial position.
II Share of profit or loss of associates,in the statement of profit or loss and other comprehensive income.
III Share of any discontinuing operations,in the statement of changes in equity.
IV Shares of changes recognised directly in the associate's equity,in the statement of changes in equity.

A)I,II,III and IV;
B)I,II and IV only;
C)II,II and IV only;
D)I,II and III only.

Question 16

Where an investor sells inventory to an associate and the inventory is still on hand at the end of the year the investor's share of the associate's profits is:

A)not affected as unrealised profits are only considered to arise in a parent-subsidiary relationship;
B)not affected as the unrealised profit is in the books of the investor,not the associate;
C)increased by the investor's share of the unrealised profit;
D)decreased by the investor's share of the unrealised profit.

Question 17

The adjustment required to the investment in associate account at 30 June 20X7 in relation to the above assets is:

A)$875
B)$1 250
C)$3 500
D)$5 000

Question 18

Organisations to which AASB 128 Investments in Associates,applies include:

A)unincorporated entities;
B)venture capital organisations;
C)mutual funds;
D)unit trusts.

Question 19

Where there are transactions between the investor and associate that result in an unrealised profit,the investor's share of the associate's profit is:

A)not affected at all regardless of whether the transaction is an upstream or downstream one;
B)affected only if the transaction is an upstream one;
C)affected only if the transaction is a downstream one;
D)affected regardless of whether the transaction is an upstream or downstream one.

Question 20

When goodwill is acquired by an investor in an associate,the amortisation of goodwill is:

A)spread evenly across the useful life of the investment;
B)not permitted;
C)included in the determination of the investor's share of the associate's profit or loss;
D)included in the revaluation of the investment.

Question 21

Outline the accounting treatment where an associate makes accounting losses.

Question 22

Explain why adjustment entries for equity accounting must be made on a year to year basis.

Question 23

Explain why the equity method is often referred to as the single line method.

Question 24

Explain why the equity method is not applied to an investor and associate relationship unless the investor holds shares in the associate.

Question 25

Outline and discuss the concept of significant influence.