Exam 9: Accounting for Associates and Joint Ventures: the Equity Method

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

On 1 July 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): 30 June 30 June 20X3 20X8 Shareholders' equity Share capital \ 2000 \ 2000 Retained earnings 3000 2000 Total shareholders' equity \5 000 \4 000 Other information I.Heroic Ltd was not a parent entity II.At 30 June 20X7,Heroic Ltd had held inventories that had been supplied by Manfred Ltd at a markup of $50 000.The income tax rate was 30%. III.Due to worsening operating difficulties in Manfred Ltd,at 30 June 20X8,the recoverable amount of the investment was estimated to be $1 200 000. In the balance sheet of Heroic Ltd at 30 June 20X8,the carrying amount of the investment in Manfred Ltd would be:

It is possible that different entities can respectively exert control and significant influence over an investee entity.

During the year ended 30 June 20X7,a parent entity,Rimfire Ltd,sold merchandise to its 30% owned associate Neville Ltd at a markup of $100 000.At 30 June 20X7,Neville Ltd still held one-half of this merchandise in inventory.Because of marketing problems,Neville Ltd had written down the merchandise by $20 000.The income tax rate was 30%.In the consolidated financial statements prepared for the year ended 30 June 20X7 of the group controlled by Rimfire Ltd,the effect of the unsold merchandise at June 30 20X7 would be:

On 1 July 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 30 June was (amounts in thousands): 200X3 20X7 Shareholders' equity Share capital \ 2000 \ 2000 Retained earnings 4000 6000 Total shareholders' equity \6 000 \8 000 I.No dividends have been paid by Rimfire Ltd out of pre-acquisition profits. II.At 30 June 20X6,Delta Ltd held inventories that had been supplied by Rimfire Ltd at a markup of $100 000. III.During the year ended 30 June 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 30 June 20X7 of the group controlled by Delta Ltd,the investment in Rimfire Ltd would be reported at an amount of:

When preparing the equity accounting adjustments in the consolidated financial statements,losses on the investment will:

What is the rationale for the extensive note disclosure requirements under AASB 128?

Discuss whether equity accounting profits are realise' from the viewpoint of the investor.

The balance of an investment in an associate account cannot be negative.

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at 30 June (amounts in thousands): 20x3 20x7 20x8 Shareholders' equity Share capital \ 2000 \ 2000 \ 2000 Revaluation surplus 1000 Retained earnings 4000 6000 6500 Total shareholders' equity \6 000 \8 000 \9 500 Other information: I.On 1 July 20X3,Delville Wood Ltd acquired its 20% investment for a cash outlay of $2 000 000. II.During the year ended 30 June 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 30 June 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:

There is no formal definition of terms 'investor' and 'investee' under current accounting standards.

Ownership of 20% or more of voting shares leads to a presumption of significant influence.

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:

The equity accounting method must be applied by all applicable reporting entities.

Unrealised profits on both upstream and downstream transactions between an investor and an associate are to be eliminated under accounting standard AASB 128 Investments in Associates and Joint Ventures.

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:

Even though an investee may be an associate of an investor,if the shares of that associate are traded in an active market,AASB 128 Investment in Associates and Joint Ventures requires the application of the:

Investors that are not parent entities must record all equity entries in their own records.

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at 30 June (amounts in thousands): 20x3 20x7 20x8 Shareholders' equity Share capital \ 2000 \ 2000 \ 2000 Revaluation surplus 1000 Retained earnings 4000 6000 6500 Total shareholders' equity \6 000 \8 000 \9 500 -Other information: I.Delville Wood Ltd acquired its 20% investment on 1 July 20X3 for a cash outlay of $2 000 000. II.During the year ended 30 June 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 30 June 20X7,Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a markup of $100 000. IV.At 30 June 20X8,a subsidiary of Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a markup of $50 000. V.During the year ended 30 June 20X8,Delville Wood Ltd charged Harnham Hill Ltd with a management fee of $100 000 for administration services. VI.The income statement of Harnham Hill Ltd recognised 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. In preparing the consolidated financial statements for the year ended 30 June 20X8,the journal adjustment to recognise the equity of Delville Wood Ltd in its associate would be:

Goodwill arising on an equity investment is not required to be separately tested for impairment.