Deck 29: Investments in Associates and Joint Ventures

Question 1

Significant influence is defined as

A) The power to participate in the financial and operating policy decisions of the investee without control or joint control
B) The power to control the financial and operating policy decisions of the investee
C) The power to jointly control the financial and operating policy decisions of the investee
D) None of the above

Answer 1

The power to participate in the financial and operating policy decisions of the investee without control or joint control

Question 2

The rebuttal presumption for significant influence is what percentage of ownership?

A) 0%-20%
B) 20%-50%
C) 50%-80%
D) 80%-100

Answer 2

20%-50%

Question 3

A difference in the accounting method between acquirer and acquirer should not be more than

A) 0 months
B) 3 months
C) 6 months
D) 9 months

Answer 3

3 months

Question 4

Pacific Entity (PE) acquired 20% of ordinary shares of Atlantic Entity (AE) on January 15, 20X1 for $80,000. The purchase price is equal to 20% of FE's fair value of net identifiable assets. GE has significant influence over FE. For the year ended 20X1, FE reported a loss of $500,000 and no dividends were declared. On December 31, the fair value of this investment is $40,000 less estimated selling costs of 3% of the fair value. What should be the losses recognized in the financial statements by PE?

A) $0
B) $40,000
C) $80,000
D) $100,000

Question 5

For the previously mentioned question, how much goodwill impairment should be recognized?

A) $0
B) $40,000
C) $80,000
D) $100,000

Question 6

Big Entity (BE) has an investment in Large Entity (LE) recorded at cost for $100,000. Ultimately, it is determined that the fair value of this investment is $150,000 based on a revaluation of inventory. Using the equity method, what is the proper adjusting entry for this differential?

A) Dr Inventory 50,000
B) Cr Inventory 50,000
C) Dr Differential 50,000
D) Dr Goodwill 50,000
E) Cr Goodwill 50,000
F) None of the above.

Question 7

The total impact on the financial statements is the same, regardless of whether equity method or consolidation is used.

Question 8

An entity's potential voting rights are considered in determining the investor's share of profit or loss and the investee's changes in equity.

Question 9

After applying the equity method, an investor should account for any dividends received as investment income.

Question 10

Amortization of goodwill is not permitted.

Question 11

Only dividends that have been paid in cash should be deducted from the investment account.

Question 12

Generally, for tax accounting only distributions of income (i.e., dividends) are taxed, thus creating book/tax differences.

Question 13

The equity method requires that investors report their share of OCI.

Question 14

Investments in associates are considered current assets.

Question 15

Carrying value for investments are tested for impairment as groups of assets by comparing their recoverable amounts with their carrying amounts.

Question 16

Pizza Entity (PE) acquired Slice Entity (SE) on January 1, 20X2. On that date, PE paid $240,000 to acquire 30% of the ordinary shares of SE (this amount will cause PE to exert significant influence on SE). PE also paid $5,000 for transaction costs on that date. On December 31, 20X2, SE reports $250,000 of net income and declares dividends of $100,000. Also on December 31, PE completes its valuation of SE and determines it is worth $280,000 (less estimated selling costs of $5,000). Should PE recognize an impairment loss on SE, and if so, what should the amount of loss be?

Question 17

Peanut Entity acquires 25% of the stock of Salt Entity for $200,000 (enough to give Peanut a significant influence over Salt). Salt Entity has $1,200,000 assets and $500,000 in liabilities. The fair value of the assets of the identifiable assets is $770,000 (due to an undervaluation of land by $20,000, PP&E (useful life 10 years) undervalue by $20,000, a 4-year, non-compete agreement worth $50,000, and inventory overvalued by $20,000. How much goodwill should be recognized? And what will be the amortization of the differential in the first year.

Question 18

Historically, many investments in equity instruments issued by other entities had been accounted for using the cost model. Under that model, an investment is recognized at cost at the time of acquisition and income from such investments is recognized when the investee declares dividends from post-acquisition earnings. Explain the risks of using this model, and how the equity method enhances the relevance and faithful representation of financial statements as outlined in the Conceptual Framework.