Deck 6: Accounting for Investments in Associates and Joint Ventures

Question 1

When an inter-corporate investment is acquired in stages, when does the equity method first becomes appropriate?

A)When control is attained.
B)When the initial investment is made.
C)When the intent to control is determined.
D)When significant influence is first achieved.

Answer 1

D

Question 2

In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair values
and recognize the resulting gain or loss, if any, in other comprehensive income.

Answer 2

False

Question 3

An investment in an associate is reported using the equity method from the date on which it becomes an associate.

Answer 3

True

Question 4

The purpose of the acquisition analysis relating to goodwill and fair value adjustments is to determine the real post-acquisition equity of the associate or joint venture.

Question 5

Which of the following statements regarding the effects of intercompany transactions is FALSE?

A)The rationale for the IAS 28 requirements for adjusting for intercompany transactions is not clear.
B)The entity is not entitled to a share of realized equity of an associate or joint venture.
C)Adjustments to the entity's share of the equity of the associate or joint venture are made for the effects of both upstream and downstream transactions even though a downstream transaction does not affect the equity of the associate or joint venture.
D)Adjustments are not made to accounts such as sales and cost of sales as would occur under the consolidation method.

Question 6

Which of the following statements regarding losses recorded by the associate or joint venture is FALSE?

A)The entity's share of losses of an associate or joint venture is recognized but only to the point where the carrying amount of the investment in the associate or joint venture is zero.
B)The share of losses may be offset against other investments the entity has in the associate or joint venture such as long-term receivables.
C)If, after reporting losses, an associate earns a profit, the entity recognizes a share of profits only after the share of profits exceeds the share of past losses not recognized.
D)If, after reporting losses, a joint venture earns a profit, the entity does not recognize a share of profits ever.

Question 7

Adjustments to the entity's share of the equity of the associate or joint venture are made for the effects of both upstream and downstream transactions even though a downstream transaction does not affect the equity of the associate or joint venture.

Question 8

Unlike consolidation, there is no need to adjust for all transactions between the entity and the associate or joint venture; only the transactions where profit is affected require adjustment.

Question 9

If an entity had previously held an investment in another entity and by a further investment that investee became an associate or joint venture of the entity, at the date of the second investment, the previously held investment is revalued to fair value with any gain/loss being taken to profit or loss.

Question 10

The equity method of accounting will be discontinued when the investor's share of losses equals or exceeds the investment's carrying amount.

Question 11

Which methods will result in the same income and shareholders' equity?

A)Cost and consolidation.
B)Cost and equity.
C)Equity and consolidation.
D)Each method may result in different income and shareholder's equity amounts.

Question 12

Adjustments for any goodwill arising on acquisition would occur on impairment of goodwill.

Question 13

If, after reporting losses, a joint venture earns a profit, the entity does not recognize a share of profits.

Question 14

Where dividends are paid/declared by an associate or joint venture and the entity receiving the dividend prepares consolidated financial statements, the dividend revenue recognized in the entity's accounts is eliminated on consolidation.

Question 15

Sales of assets from the entity to its associate or its joint venture is an example of a downstream transaction.

Question 16

Adjustments to the entity's share of the equity of the associate or joint venture are not made to accounts such as retained earnings as would occur under the consolidation method.

Question 17

For a parent entity which will prepare consolidated financial statements, investments in associates or joint ventures held by the parent or its subsidiaries are accounted for in the consolidated financial statements by the cost method.

Question 18

Where the associate or joint venture incurs losses, the carrying amount of the Investment in Associate or Joint Venture is first reduced to zero.

Question 19

All dividends paid or payable by an investee to an investor are to be recognized as revenue by the investor when the investor is also a parent company and will be preparing consolidated financial statements.

Question 20

How do joint ventures differ from private corporations?

A)The joint venturers must share the risks and profits of the joint venture equally.
B)Venturers cannot make unilateral decisions.
C)There can only be two parties in a joint venture.
D)A joint venture does not have a board of directors.

Question 21

The maximum difference between the ends of the reporting periods of the entity and the associate or joint venture can be no more than:

A)1 month
B)3 months
C)6 months
D)12 months.

Question 22

In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair values __________________________________________.

A)and does not recognize the resulting gain or loss.
B)and recognize the resulting gain or loss, if any, in other comprehensive income.
C)and recognize the resulting gain or loss, if any, in profit or loss.
D)and recognize the resulting gain or loss, if any, in retained earnings.

Question 23

The entity's share of current period profit of the associate or joint venture is disclosed as a separate line item in the entity's __________________

A)statement of comprehensive income.
B)statement of financial position.
C)statement of cash flows.
D)statement of changes in equity.

Question 24

Sales or contributions of assets from an associate or joint venture to the investor is an example of a(n)_________________ transaction.

A)downstream
B)equity
C)fair value
D)upstream.

Question 25

How are most significant influence investments in equity securities actually recorded on the investor's books when the investor is also a parent company that will prepare consolidated financial statements?

A)Using the equity method.
B)Using proportionate consolidation.
C)At cost.
D)On a fully consolidated basis.

Question 26

Kibble Ltd. contributed some specialized equipment to receive a 45% interest in a joint venture, Lenard Inc. The equipment has a fair value of $640,000 and a carrying value of $300,000. Kibble also received $ 100,000 in cash from Lenard Inc. The other party to the joint venture, Farlinger Ltd, contributed cash of $660,000 for the 55% interest. It is deemed that the transaction lacks commercial substance. Based on the above, the gain to be recognized immediately by Kibble is:

A)$0
B)$53,125
C)$100,000
D)$340,000

Question 27

The effect of the sale of inventory on the share of profit or loss of the associate is:

A)$875 decrease
B)$4,250 increase
C)$350 increase
D)$1,250 decrease

Question 28

Where an entity prepares consolidated financial statements, the equity method is applied to associates or joint ventures of the _________________________ in the consolidated financial statements, and not in the accounts of the ________ itself.

A)parent; parent
B)parent and its subsidiaries; subsidiary
C)parent; subsidiary
D)parent and its subsidiaries; parent.

Question 29

Omar Corporation uses the equity method to account for its 25% investment in Limpit Corporation and receives $15,000 in dividends. How should Omar account for these dividends?

A)A decrease in the investment.
B)An increase in income.
C)A decrease in income.
C)An increase in assets.

Question 30

Which of the following statements regarding goodwill and fair value differences from the day that an associate or joint venture is acquired, is FALSE?

A)Where differences between fair values and carrying amounts exist at the acquisition date for the investee's identifiable assets and liabilities, subsequent equity recognized by the associate or joint venture may include fair value adjustments relating to these differences.
B)Amortization of goodwill relating to an associate or a joint venture is permitted.
C)Calculation of adjustments for differences between carrying amounts and fair values is always on an after-tax basis.
D)Adjustments for any goodwill arising on acquisition would occur on impairment of goodwill.

Question 31

The adjustment to recognize an entity's share of the asset revaluation reserve relating to an associate based on the on application of the equity method involves a debit to

A)Asset revaluation reserve.
B)Investment in associate.
C)Retained earnings.
D)Common share capital.

Question 32

If an associate or joint venture has outstanding cumulative preference shares that are held by parties other than the entity and classified as ____________, the entity computes its share of profits or losses after adjusting for the dividends on such shares, whether or not the dividends have been declared.

A)debt or equity
B)debt
C)equity
D)earnings.

Question 33

The difference between the fair value and the ___________ value of the investment at the day of a second acquisition of the same shares, is a gain or loss through the profit and loss of the entity.

A)book
B)carrying
C)current
D)future.

Question 34

On January 1, 2013, Crawford Ltd. acquired 25% of the shares of Rufus Ltd. for $69,375. At this date, the equity of Rufus Ltd. consisted of: $\begin{array}{lc}\text { Share capital } & \$ 150,000 \\\text { Retained earnings } & 80,000\end{array}$ At the acquisition date, all the identifiable assets and liabilities of Rufus Ltd. were recorded at fair value, except for plant for which the fair value was $20,000 greater than its carrying amount, and inventory whose fair value was $5,000 greater than its cost. The tax rate is 30%. The plant has a further 5-year life. The inventory was all sold by December 31, 2013. In the reporting period ending December 31, 2013, Rufus Ltd. reported a profit of $20,000.
The amount of goodwill arising from this transaction is:

A)$5,625
B)$7,500
C)$11,875
D)$160,625

Question 35

On January 1, 2013, Conji Ltd. acquired 25% of the shares of Porter Ltd. for $42,500. At this date, all the identifiable assets and liabilities of Porter Ltd. were recorded at amounts equal to fair value, and the equity of Porter Ltd. consisted of: $$\begin{array} { l c } \text { Share capital } & \$ 100,000 \\\text { Asset revaluation reserve } & 20,000 \\\text { Retained earnings } & 50,000\end{array}$$ During 2013, Porter Ltd. reported a profit of $25,000. The asset revaluation reserve increased by $5,000, this being reported in other comprehensive income. Porter Ltd. paid a $4,000 dividend. At January 1 2013, Conji Ltd. recorded the investment in Porter Ltd. at $42,500
The share of profit or loss of associate that Conji Ltd. should record is

A)$4,000
B)$6,250
C)$20,000
D)$25,000

Question 36

Regarding goodwill and fair value adjustments, any excess of the entity's share of the net fair value of an associate or joint venture's identifiable assets and liabilities over the cost of the investment is to be recognized as _______________ in the determination of the entity's share of the associate or joint venture's profit or loss in the period in which the investment is acquired.

A)income
B)a reserve
C)goodwill
D)other comprehensive income

Question 37

Dolan Ltd. has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Dolan's financial statements?

A)A holding of 3,000 of the 10,000 outstanding preferred shares of Green Co.
B)A holding of 5,000 of the 60,000 outstanding common shares of Eco-saveCo.
C)A holding of 20,000 of the 25,000 outstanding common shares of Enviro-Clean Co.
D)A holding of 15,000 of the 50,000 outstanding common shares of Planetwise Co.

Question 38

The entity's share of losses of an associate or joint venture may be offset against:

A)Other investments the entity has in the associate or joint venture.
B)Its income.
C)Its other comprehensive income.
D)The associate's or joint venturer's retained earnings.

Question 39

An investment in an associate or joint venture is reported using the _____________ method from the date on which it becomes an associate or joint venture.

A)cost
B)equity
C)proportional consolidation
D)cost or equity.

Question 40

Adjustments must be made for transactions between the associate or joint venture and the entity that give rise to unrealized profits or losses. Realization of such profits or losses occurs when:

A)The asset on which the profit or loss accrued is sold to an external party.
B)As the future benefits embodied in the asset are consumed.
C)The asset on which the profit or loss accrued is sold to an external party or as the future benefits embodied in the asset are consumed.
D)The asset on which the profit or loss accrued is sold to an external or internal party.

Question 41

Dogma Ltd. records its investment in Fayer Co. at cost. During the year, Dogma received $20,000 in dividends from Fayer. How should Dogma record these dividends?

A)As dividend income in its statement of comprehensive income.
B)As an increase to the "Investment in Fayer Co." account on its statement of financial position.
C)As a decrease to the "Investment in Fayer Co." account on its statement of financial position.
D)As dividend income on its statement of changes in equity-retained earnings section.

Question 42

An investment in an associate or joint venture is accounted for using the equity method from the date on which it becomes an associate or joint venture. On acquisition of the investment, how is any difference between the cost of the investment and the entity's share of the net fair value of the investee's identifiable assets and liabilities accounted for?

Question 43

Adjustments to the entity's share of the equity of the associate or joint venture are not made to accounts such as __________________ as would occur under the consolidation method.

A)retained earnings
B)downstream transactions
C)sales and cost of sales
D)upstream transactions.

Question 44

On February 1, 2012, Jesse Co. purchased 20% of the outstanding shares of Avril Inc. at a cost of $275,000. During the next two fiscal years, Avril Inc. reported the following:
$\begin{array}{|l|r|r|} \hline & \text { Net income } & \text { Dividends } \\\hline \text { January } 31,2013 & \$ 42,000 & \$ 20,000 \\\hline \text { January } 31,2014 & \$ 35,000 & \$ 15,000\\\hline \end{array}$ Required:
(a)If Jesse records its investment in Avril at cost, what would the balance in the investment account be at January 31, 2014? What would be reported on the statement of comprehensive income with respect to this investment for 2013 and 2014?
(b)If Jesse uses the equity method for reporting its investment in Avril, what would the balance in the investment account be at January 31, 2014? What would be reported on the statement of comprehensive income with respect to this investment?

Question 45

If an entity had previously held an investment in another entity and by a further investment that investee became an associate or joint venture of the entity, what must be recorded at the date of the second investment?

Question 46

The purpose of the acquisition analysis relating to goodwill and fair value adjustments is to determine the real post-acquisition equity of the ____________________.

A)associate.
B)joint venture.
C)parent.
D)associate or joint venture.

Question 47

The entity's share of losses of an associate or joint venture is recognized but only to the point where the carrying amount of the investment in the associate or joint venture is

A)Greater than the entity's income.
B)Less than the entity's income.
C)Zero.
D)Less than the income of the associate or joint venture.

Question 48

Assume Timpet Ltd. acquired 10% of the shares of Dawson Ltd on January 1, 2012 for $13,000. At December 31, 2012, the end of the entity's reporting period, the fair value of the investment was $16,200. The investment was designated as fair value through profit and loss based on IFRS 9. On July 1 2013, Timpet Ltd. acquired a further 10% of the share capital of Dawson Ltd. for $17,200 (this also being the fair value of the initial investment in Dawson Ltd. at this date), when the equity of Dawson Ltd. consisted of: $$\begin{array} { l r } \text { Share capital } & \$ 100,000 \\\text { Asset revaluation reserve } & 12,000 \\\text { Retained earnings } ( 1 / 1 / 13 ) & 38,000 \\\text { Profit } ( 1 / 1 / 13 \text { to } 30 / 6 / 13 ) & 8,000\end{array}$$
The identifiable assets and liabilities of Dawson Ltd were recorded at fair value at this date except for inventory, whose fair value was $15,000 greater than carrying amount. This acquisition gives Timpet Ltd. significant influence over Dawson Ltd.
On January 1, 2012, which of the following statements is TRUE?

A)Timpet Ltd. would record its investment in Dawson Ltd. at $13,000.
B)Timpet Ltd. would revalue its investment to $16,200, recognizing $3,200 in net income.
C)Dawson Ltd. becomes an associate.
D)Timpet Ltd. becomes a joint venture.

Question 49

If an associate or joint venture uses accounting policies other than those of the entity for like transactions and events in similar circumstances, adjustments shall be made to conform the _______________ accounting policies to those of the ______________ when the associate or joint venture's financial statements are used by the entity in applying the equity method.

A)associate or joint venture's; entity
B)entity's; associate or joint venture
C)parent's; subsidiary;
D)subsidiary's; parent.

Question 50

Where dividends are paid/declared by an associate or joint venture and the entity prepares consolidated financial statements, the dividend revenue recognized in the ______________ accounts is eliminated on consolidation.

A)parent's
B)associate's
C)subsidiary's
D)joint venturer's.

Question 51

What are the principles for adjusting for the effects of intercompany transactions under IAS 28?

Question 52

Describe how to account for losses incurred by associate and joint venturers.

Question 53

Describe how dividends from a subsidiary, associate and joint venture are accounted for by a parent (entity).

Question 54

On January 1, 2013, Edie Ltd acquired 25% of the shares of Gowan Ltd for $79,375. At this date, the equity of Gowan Ltd consisted of:
$$\begin{array} { l c } \text { Share capital } & \$ 150,000 \\\text { Retained earnings } & 80,000\end{array}$$ At the acquisition date, all the identifiable assets and liabilities of Gowan Ltd were recorded at fair value, except for plant for which the fair value was $15,000 greater than its carrying amount, and inventory whose fair value was $5,000 greater than its cost. The tax rate is 30%. The plant has a further 5-year life. The inventory was all sold by December 31, 2013.
In the reporting period ending December 31, 2013, Gowan Ltd reported a profit of $15,000.
The acquisition analysis at January 1, 2013 is as follows:
$\begin{array}{ll}\text { Cost of investment } &\underline{\$ 79,375}\\\text { Net fair value of the identifiable assets and } & =(\$ 150,000+\$ 80,000) \text { (equity)} \\\text { liabilities of Gowan Itd}\\&+\$ 15,000(1-30 \%) \text { (plant) } \\&+\$ 5,000(1-30 \%) \text { (inventory) } \\&=\$ 244,000 \\\text { Net fair value acquired by Edie Ltd }&=25 \% \times \$ 180,500 \\&=\$ 61.000\\ \\\text { Goodwill } & =\$ 18,375 \\\text { Depreciation (net of tax) of plant p.a. } & =1 / 5 \times(25 \% \times[\$ 15,000(1-30 \%)] \\& =\$ 525 \\\text { Effect of sale of inventory (net of tax) } & =25 \% \times \$ 5,000(1-30 \%) \\& =\$ 875\end{array}$ Required:
(a)What is the amount of the adjustment needed in applying equity accounting to the investment in the associate at December 31, 2013?
(b)What is the journal entry to reflect the application of the equity method to the investment?

Question 55

Sales of assets from the entity to its associate or its joint venture is an example of a(n)______________________ transaction.

A)downstream
B)equity
C)fair value
D)upstream.

Question 56

Describe how investments in associates and joint ventures are accounted for by a parent entity, which will and will not prepare consolidated financial statements.

Question 57

Queen Ltd. reports its investment in Kramer Co. on an equity basis. During the year, Queen received $15,000 in dividends from Kramer. How should Queen report these dividends?

A)As dividend income on its statement of changes in equity-retained earnings section.
B)As dividend income in its statement of comprehensive income.
C)As an increase to the "Investment in Kramer Co." account on its statement of financial position.
D)As a decrease to the "Investment in Kramer Co." account on its statement of financial position.

Question 58

In calculating the entity's share of equity of the associate or joint venture, dividend revenue will need to be removed from the entity's consolidated financial statements since the ______________ method will now replace the ______________ method of accounting for the investment.

A)fair value; equity
B)consolidation; proportionate consolidation
C)equity; cost
D)intercompany; cost.