Deck 14: Associates and Joint Ventures

Question 1

The contractually agreed sharing of control of an arrangement which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control is referred to as:

A) joint control.
B) contractual control.
C) unanimous control.
D) shared control.

Answer 1

A

Question 2

Goodwill acquired in an associate is:

A) amortised across its useful life.
B) written off immediately against the carrying amount of the investment.
C) carried as a separate asset in the accounting records of the investor.
D) not subject to amortisation.

Answer 2

D

Question 3

For the purposes of equity accounting, significant influence is defined as the power of an investor to:

A) control the financial and operating policies of an associate.
B) participate in the financial and operating policy decisions of an investee.
C) participate in the day-to-day management of a joint venture interest.
D) dominate the financing decisions of an entity.

Answer 3

B

Question 4

Kanga Limited acquired a 35% investment in Roo Limited for $20 000. Kanga Limited also owns two subsidiaries and prepares consolidated financial statements. Roo Limited declared and paid a dividend of $5000 during the current financial year. The appropriate consolidation adjustment to record this transaction will include which of the following?

A) DR Investment in associate
B) DR Cash
C) DR Dividend revenue
D) DR Share of profit of associate

Question 5

Which of the following is not one of the three levels of control that one entity can exercise over another?

A) Controlling influence
B) Significant influence
C) Control
D) Joint control

Question 6

Broncos Limited acquired a 30% interest in Bennett Limited for $54 000. Broncos holds other equity investments but does not prepare consolidated financial statements. Bennett Limited revalued its buildings upwards by $20 000 during the current financial period. The balance of the investment in associate account at the end of the current financial period is:

A) $22 200.
B) $36 200.
C) $54 000.
D) $60 000.

Question 7

On 1 July 2016 Titans Ltd acquired a 25% share of Taylor Ltd. At that date, the following assets had carrying amounts different to their fair values in Taylor's books. $$\begin{array} { | l | c | l | } \hline \text { Asset } & \begin{array} { c } \text { Carrying } \\\text { amount }\end{array} & \text { Fair value } \\\hline \text { Inventories } & \$ 24000 & \$ 30000 \\\hline \text { Machinery } & \$ 48000 & \$ 60000 \\\hline\end{array}$$ All inventories were sold to third parties by 30 June 2017. On 1 July 2016, the machinery had a remaining useful life of 3 years.
The tax rate is 30%.
The adjustment required to the investment in associate account at 30 June 2018 in relation to the above assets is:

A) $1000.
B) $2450.
C) $2800.
D) $3500.

Question 8

On 1 July 2016 Titans Ltd acquired a 25% share of Taylor Ltd. At that date, the following assets had carrying amounts different to their fair values in Taylor's books. $$\begin{array} { | l | c | l | } \hline \text { Asset } & \begin{array} { c } \text { Carrying } \\\text { arnourt }\end{array} & \text { Fair value } \\\hline \text { Inventories } & \$ 24000 & \$ 30000 \\\hline \text { Machinery } & \$ 48000 & \$ 60000 \\\hline\end{array}$$ All inventories were sold to third parties by 30 June 2017. On 1 July 2016, the machinery had a remaining useful life of 3 years.
The tax rate is 30%.
The adjustment required to the investment in associate account at 30 June 2017 in relation to the above assets is:

A) $1750.
B) $2500.
C) $7000.
D) $10 000.

Question 9

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

A) entity method of consolidation.
B) significant influence method.
C) multi-line consolidation method.
D) one-line consolidation method.

Question 10

Where the investor is not a parent, the investor applies:

A) the cost method to its associates in its own accounting records.
B) the equity method to its associates and subsidiaries in the consolidated financial statements.
C) the fair value method to its associates in its own accounting records.
D) the equity method to its associates in its own accounting records.

Question 11

When goodwill in an associate is acquired by an investor, 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 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

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

A) 100% 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) 75% or more of the voting power of the investee.

Question 14

Where which of the following conditions exist, is the equity method not applied to associates? I. The entity is a wholly owned subsidiary or a partly owned subsidiary and its owners do not object to the entity not applying the equity method.
II) The entity's debt or equity securities are not traded in a public market.
III) The entity has not filed financial statements with a regulatory organisation for the purpose of issuing any class of securities in a public market.
IV) The ultimate parent of the entity publishes consolidated financial statements that comply with IFRS.

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

Question 15

Factor Limited acquired a 25% investment in Red Limited for $31 000. Red Limited declared and paid a dividend of $10 000. Factor Limited does not prepare consolidated financial statements. Which of the following is the appropriate entry for Factor Limited to record this dividend?

A) DR Investment in associate $2500 CR Dividend revenue $2500
B) DR Cash $2500 CR Investment in associate $2500
C) DR Dividends received $2500 CR Cash $2500
D) DR Cash $2500 CR Dividend revenue $2500

Question 16

Voyager Ltd acquired a 40% interest in Sea Ltd for $60 000. Voyager Ltd is part of a consolidated group. In the financial period immediately following the date on which it became an associate, Sea Ltd generated profits after tax of $32 000 and paid a dividend of $6000. After equity accounting has been applied, the balance in the investor's account 'shares in associate' is:

A) $72 800.
B) $70 400.
C) $60 000.
D) $86 000.

Question 17

Cozza Limited acquired a 40% investment in Hodgo Limited for $1 000 000. Hodgo declared and paid a dividend of $20 000 during the current year. Cozza Limited does not prepare consolidated financial statements. Which of the following is the appropriate entry for Cozza to record this dividend?

A) DR Cash $8000 CR Investment in associate $8000
B) DR Dividends payable $8000 CR Cash $8000
C) DR Cash $8000 CR Dividend revenue $8000
D) DR Investment in associate $8000 CR Dividend revenue $8000

Question 18

Warriors Limited acquired a 20% share in Tomkins Limited for $36 000. Warriors Limited has no other investments. At the date on which it became an associate, Tomkins Limited had the following equity:
-share capital $100 000
-retained earnings $80 000.
At the end of the financial year following the investment, Tomkins Limited generated a profit after tax of $12 000. After applying the equity method of accounting, Warriors Limited will have which of the following carrying amounts for the investment?

A) $38 400
B) $36 000
C) $33 600
D) $18 400

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 adjusted at all regardless of whether the transaction is an upstream or downstream one.
B) adjusted only if the transaction is an upstream one.
C) adjusted only if the transaction is a downstream one.
D) adjusted regardless of whether the transaction is an upstream or downstream one.

Question 20

Which of the following statements is incorrect?

A) Significant influence requires the investor to have the power or capacity to participate in the investee's financial and operating policy decision.
B) The key criterion for identifying a joint arrangement is that the joint venturers have joint control over the joint venture.
C) Significant influence requires the investor to actually exercise its power over the investee.
D) The assessment of the existence of significant influence requires judgement on the part of the accountants.

Question 21

Where an investor has discontinued the use of the equity method because the associate has incurred losses, it must disclose the:

A) unrecognised share of current period and cumulative losses of the associate.
B) reason why it has discontinued the method.
C) accounting policy it has adopted in place of the equity method.
D) effect on the statement of changes in equity if it had continued to use the method.

Question 22

When disclosing information about investments in associates, AASB 128/IAS 28 Investments in Associates and Joint Ventures, 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 23

Where an investor sells inventories to an associate and the inventories are still on hand at the end of the year, the investor's share of the associate's profit 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 24

Where an investor has significant influence over an associate, the method of accounting used to account for such interests is referred to as the partial consolidation method.

Question 25

Where the carrying amount of an associate's depreciable assets is lower than their fair values at the date of acquisition, an adjustment is required to be made to restate the assets to their fair values.

Question 26

An associate is defined in AASB 128/IAS 28 Investments in Associates and Joint Ventures as an entity over which the investor has control.

Question 27

On 1 July 2012 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000. At that date the equity of Spice Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows. $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Year ended } \\30 \text { June }\end{array} & \text { Profit/(Loss) } \\&\$\\\hline 2013 & 40000 \\\hline 2014 & ( 400000 ) \\\hline 2015 & ( 500000 ) \\\hline 2016 & 32000 \\\hline 2017 & 40000 \\\hline\end{array}$$ There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2014 the equity accounted balance of the investment in Spice was:

A) $100 000.
B) $110 000.
C) $200 000.
D) $210 000.

Question 28

Any excess of the investor's share of the net fair value of an associate's identifiable assets and liabilities over the cost of the investment is recognised as income in the determination of the investor's share of the associate's profit or loss in the period in which the investment is acquired.

Question 29

Fair value and goodwill adjustments arising on the acquisition of an associate are recognised separately in the books of the investor.

Question 30

A joint arrangement is defined in AASB 128/IAS 28 Investments in Associates and Joint Ventures as an arrangement between two or more entities whereby the entities have joint control of another entity.

Question 31

It is possible for more than one entity to exercise significant influence over an entity.

Question 32

Lady Ltd owns 25% of Gaga Ltd. Gaga's profit after tax for the year ended 30 June 2017 is $60 000. The tax rate is 30%. During the year ended 30 June 2017, Lady sold $10 000 worth of inventories to Gaga. These items had previously cost Lady $6000. All the items remain unsold by Gaga at 30 June 2017. Lady's share of Gaga's profit for the year ended 30 June 2017 is:

A) $11 000.
B) $12 500.
C) $14 300.
D) $14 000.

Question 33

Significant influence is defined as the power to participate in the financing or operating policy decisions of the investee.

Question 34

The classification of an investment as an associate relies on the existence of significant influence.

Question 35

On 1 July 2012 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000. At that date the equity of Spice Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows. $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Year ended } \\30 \text { June }\end{array} & \text { Profit/(Loss) } \\&\$\\\hline 2013 & 40000 \\\hline 2014 & ( 400000 ) \\\hline 2015 & ( 500000 ) \\\hline 2016 & 32000 \\\hline 2017 & 40000 \\\hline\end{array}$$ There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2017 the equity accounted balance of the investment in Spice was:

A) nil.
B) $3000.
C) $10 000.
D) $40 000.

Question 36

Significant influence automatically arises where the investor holds 20% or more of the shares in the investee.

Question 37

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

A) not adjusted as the profit has been realised.
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 38

The basic premise under the equity method is that the investor is entitled to a share of the post-acquisition movements in the net assets of the associate.

Question 39

Where an entity prepares consolidated financial statements and has an investment in an associate, they have a choice of applying the equity method on consolidation or directly in their own books.

Question 40

On 1 July 2012 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000. At that date the equity of Spice Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows. $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Year ended } \\30 \text { June }\end{array} & \text { Profit/(Loss) } \\&\$\\\hline 2013 & 40000 \\\hline 2014 & ( 400000 ) \\\hline 2015 & ( 500000 ) \\\hline 2016 & 32000 \\\hline 2017 & 40000 \\\hline\end{array}$$ There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2016 the equity accounted balance of the investment in Spice was:

A) nil.
B) ($7000).
C) $8000.
D) $32 000.

Question 41

The investor recognises its shares of an associate's losses only to the point where the carrying amount of the investment reaches zero.

Question 42

Where the investor does not prepare consolidated financial statements and a dividend is received from an associate, the entry in the investor's books on receipt of the dividend involves a credit adjustment against dividend revenue.

Question 43

The investor's share of current period profits is disclosed as a separate line item in the statement of profit or loss and other comprehensive income.

Question 44

Only upstream transactions are adjusted for when making notional adjustment to post-acquisition profits of an associate prior to calculating the investor's share.

Question 45

Where the investor prepares consolidated financial statements and a dividend is received from an associate, the entry in the investor's books on receipt of the dividend involves a credit adjustment against dividend revenue.

Question 46

Equity adjustments must be made for transactions between the associate and the investor that give rise to unrealised profits or losses.

Question 47

The holding of debentures by an investor in an associate, and the payment of interest on those debentures, requires adjustment under equity accounting.

Question 48

Where an investment in an associate is made in a number of separate acquisitions, the equity method is applied from the date that significant influence is obtained.