Deck 16: Investments in New Assets; Introduction to Business Combinations and Associates

Question 1

Company F has an equity accounted investment (owns 20% of the shares) in Company K, purchased in 20X1, with a carrying amount of $200 000 at year end 20X4.Company K reports no increase in owner's equity for the year ended 20X5 but pays a cash dividend of $60 000, of which Company F receives $12 000.Which journal entry will Company F process in respect of this investment as reported in its consolidated financial statements?

A)Debit to cash, credit to investment in associate, $12 000
B)Debit to investment in associate, credit to share of associate's profit or loss, $12 000
C)Debit to cash, credit to share of associate's profit or loss, $12 000
D)Debit to cash, credit to dividend revenue, $12 000

Answer 1

A

Question 2

Mozart Ltd acquired 25% and significant influence over the operations of Liszt Ltd on 1 January 20X0.Both companies have financial years ending 31 December.Liszt Ltd reported a profit of $80 000 and paid a cash dividend of $0.04 per share.Liszt Ltd has issued 1 million ordinary shares.Under equity accounting, by how much would the 'Investment in Liszt Ltd' account change for the year ended 31 December 20X0?

A)increase of $40 000
B)decrease of $40 000
C)increase of $20 000
D)increase of $10 000

Answer 2

D

Question 3

Lie Ltd acquired 30% of and significant influence over the operations of Land Ltd on 1 July 20X0.During the financial year ended 30 June 20X1, Land Ltd earned a profit of $60 000.Lie Ltd does not control any entities.What is the journal entry to record the share of Land Ltd's profit in the accounts of Lie Ltd for the year ended 30 June 20X1 using the equity method?

A) $\begin{array} { l r c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Investment in Land Ltd } & 18000 & \\\text { Share of associate's profit or loss } & & 18000\end{array}$
B) $\begin{array}{llc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Bank } & 18000 & \\\text {Investment in Land Ltd } && 18000 & \\\end{array}$

C) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Bank } & 18000 & \\\text { Revenue from Land Ltd } & & 18000\end{array}$
D) $\begin{array}{llc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Investment in Land Ltd} & 18000 & \\\text { Dividend revenue} && 18000 & \\\end{array}$

Answer 3

$\begin{array} { l r c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Investment in Land Ltd } & 18000 & \\\text { Share of associate's profit or loss } & & 18000\end{array}$

Question 4

When asset(s) are acquired, those assets must initially be recorded at the:

A)cost of acquisition
B)cost of acquisition only if a business has been acquired
C)cost of acquisition for all acquisitions other than acquisition of a business
D)lower of the cost of acquisition and the fair value of the assets acquired

Question 5

Which of the following are conceptually possible ways of accounting for share investments where significant influence is held over the investee?

A)equity method
B)cost method
C)consolidation method
D)all of the above

Question 6

GIJ Ltd acquired some assets from FUG Ltd for less than their fair value.The assets do not comprise a business.After allocating the discount to the non-monetary assets there was some discount remaining because the non-monetary assets had been written down to zero.How should GIJ Ltd account for this remaining amount?

A)Treat it as revenue of the current period
B)Treat is as revenue over the life of the non-monetary assets acquired
C)Transfer it to an asset revaluation reserve
D)Record a contra asset account and debit future depreciation charges against this account.

Question 7

Evil Ltd acquired 20% of and significant influence over the operations of Electric Ltd on 1 July 20X0.At that date the equity of Electric Ltd comprised retained profits of $800 000 and paid up capital of $3 000 000.During the financial year ended 30 June 20X1, Electric Ltd declared and paid a dividend of $200 000 out of profits earned to 30 June 20X0 and declared a final dividend of $300 000 out of profits earned in the year ended 30 June 20X1.Evil Ltd does not control any entities.What is the journal entry to record these dividends for Evil Ltd for the year ended 30 June 20X1 using the equity method?

A) $\begin{array} { l r c } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Dividend receivable } & 200000 & \\\text { Dividend revenue } & & 200000 \\\begin{array} { l } \text { Bank } \\\text { Investment in Electric }\end{array} & 300000 & \\& & 300000\end{array}$
B) $\begin{array} { l c c } \text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \\\text { Dividend receivable } & 200000 & \\\text { Bank } & 300000 & \\\text { Dividend revenue } & & 500000\end{array}$
C) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Dividend receivable } & 60000 & \\\text { Bank } & 40000 & \\\text { Investment in Electric } & & 100000\end{array}$
D) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Dividend receivable } & 40000 & \\\text { Bank } & 60000 & \\\text { Dividend revenue } & & 100000\end{array}$

Question 8

Beethoven Ltd acquired 20% and significant influence over the operations of Chopin Ltd and control over the operations of Mend Ltd on 1 July 20X0.Chopin Ltd reported a profit of $800 000 for the year ended 30 June 20X1.For its financial year ended 30 June 20X1, Beethoven Ltd would report a share of Chopin Ltd's profit of:

A)$200 000 in its separate financial statements
B)$200 000 in its consolidated financial statements
C)$160 000 in its separate financial statements
D)$160 000 in its consolidated financial statements

Question 9

DD Ltd buys a block of land from BB Ltd by paying $95 000 cash and transferring a piece of equipment to BB Ltd.The equipment is recorded in DD Ltd's at $45 000 and it has a fair value of $55 000.DD Ltd pays $25 000 in estate agent's fees to arrange the transfer.Show the journal entries to record this transaction.

A) $\begin{array}{llc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Land } & 175000 & \\\text { Bank } & 120000 & \\\text { Equipment } & & 55000\end{array}$

B) $\begin{array}{llc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Land } & 140000 & \\\text { Bank } & 95000 & \\\text { Equipment } & & 45000\end{array}$

C) $\begin{array}{llc}\text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Land } & 165000 & \\\text { Bank } & 120000 & \\\text { Equipment } & & 45000\end{array}$
D) $\begin{array} { l l l } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Land } & 175000 & \\\text { Bank } & 120000 & \\\text { Gain on sale of equipment } & & 10000 \\\text { Equipment } & & 45000\end{array}$

Question 10

Company A owns 25% of the voting shares and has significant influence over Company

A)cost method
B)equity method
B)Which method(s) of accounting for the investment in B might be permissible under Australian accounting standards?
C)consolidation method
D)cost method or equity method

Question 11

On 1 January 20X0, Zed Ltd acquired 100 % of the share capital of Ned Ltd for $900 000 cash.At that date, the equity section of Ned Ltd's balance sheet was as follows:
\begin{array}{llcc} \text { } &\$ \\ \text {Share capital } &700000\\ \text {Retained profits } &50000\\ \text {Asset revaluation reserve } &100000\\end{array}

Assuming all assets and liabilities were recorded at their fair values what was the difference on acquisition?

A)$50 000 goodwill
B)$50 000 bargain purchase
C)$100 000 goodwill
D)$100 000 bargain purchase

Question 12

Viola Ltd has significant influence over the operations of Drum Ltd from a 18% ownership.Viola Ltd prepares consolidated financial statements.Drum Ltd reported a profit of $5 000 000 and paid a cash dividend from post-acquisition profits of $180 000 to Viola Ltd.What is the difference between the balances of the account 'Investment in Drum Ltd' in Viola Ltd's own financial statements when compared with that balance in its consolidated financial statements for this year? The account balance in Viola Ltd's consolidated financial statements would be:

A)higher by $867 600
B)lower by $867 600
C)higher by $720 000
D)lower by $720 000

Question 13

Company F has an equity accounted investment (owns 20% of the shares) in Company K, purchased in 20X1, with a carrying amount of $200 000 at year end 20X4.Company K reports a total increase in owner's equity for the year ended 20X5 of $80 000.Which journal entry will Company F process in respect of this investment?

A)Debit to investment in associate, credit to share of associate's profit or loss, $16 000
B)Debit to investment in associate, credit to share of associate's profit or loss, $80 000
C)Debit to share of associate's profit or loss, credit to investment in associate, $16 000
D)No journal entry

Question 14

Baker Ltd acquired 22% of and significant influence over the operations of Street Ltd on 1 July 20X0.During the financial year ended 30 June 20X1, Street Ltd earned a profit of $140 000.Baker Ltd does not control any entities.What is the journal entry to record the share of Street Ltd's result in the accounts of Baker Ltd for the year ended 30 June 20X1 using the equity method?

A) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Investment in Street Ltd } & 30800 & \\\text { Dividend revenue } & & 30800\end{array}$
B) $\begin{array} { l r r } \text { Accounts } & \text { Debit \$ } & \text { Credit \$ } \\\text { Investment in Street Ltd } & 30800 & \\\text { Share of associate's profit or loss } & & 30800\end{array}$
C) $\begin{array} { l c c } \text { Accounts } & \text { Debit } \$ & \text { Credit \$ } \\\text { Investment in Street Ltd } & 140000 & \\\text { Dividend revenue } & & 140000\end{array}$
D)No journal entry because Baker Ltd must use the cost method

Question 15

Singer Ltd has significant influence over the operations of Opera Ltd from a 16% ownership.Singer Ltd prepares consolidated financial statements.Opera Ltd paid a total cash dividend of $1 000 000 and reported a profit of $2 000 000 for the current year.Under the cost method how much revenue would be reported by Singer Ltd for this investment?

A)$160 000
B)$320 000
C)$480 000
D)Zero

Question 16

Brown Ltd acquired 21% of the issued share capital of Dockers Ltd.Brown Ltd does not have significant influence or control over the operating policies of Dockers Ltd, but it does have significant influence over the financial policies of Dockers Ltd.Dockers Ltd is a/an _________________ of Brown Ltd.

A)investment
B)partner
C)associate
D)subsidiary

Question 17

ZXW Ltd buys a tractor from WQR Ltd by undertaking to pay a debt currently owed by WQR Ltd.This debt is recognised in WQR Ltd's accounts at $250 000 and it has a fair value of $230 000.ZXW Ltd incurs $10 000 legal fees in arranging this acquisition.ZXW Ltd would initially record this tractor at:

A)$230 000
B)$240 000
C)$250 000
D)$260 000

Question 18

For all asset acquisitions, acquired goodwill is recognised when the cost of acquisition is:

A)greater than the fair value of the net assets acquired
B)less than the fair value of the net assets acquired
C)greater than the fair value of the net assets acquired and the acquisition is of a business
D)less than the fair value of the net assets acquired and the acquisition is of a business

Question 19

Billy Ltd owns 19% of Guyatts Ltd and has significant influence over the operations of Guyatts Ltd.For the year ended 31 December 20X1, Guyatts Ltd reported a profit of $900 000 and paid a total cash dividend of $100 000.What is the difference between the total revenue reported by Billy Ltd under the equity method in AASB 128 versus that revenue which would be reported under the cost method? The AASB 128 net revenue would be higher by:

A)$33 000
B)$133 000
C)$152 000
D)$190 000

Question 20

According to AASB 128, the main evidence of significant influence, through an investor's power to participate in policy setting, include:

A)representation on the associate's governing body
B)actual participation in policy making
C)material transactions between investors and associate
D)any or all of the above

Question 21

The recoding of acquired goodwill in a business combination can only be made in the consolidated statements of the group.

Question 22

Return of post-acquisition equity has always been regarded as a dividend revenue and not as return of the initial investment.

Question 23

An investor can purchase up to 49% of shares in a public listed company without any special requirements being imposed on the purchases.

Question 24

Company J has a share investment (owns 60% of the shares, purchased in 20X1) and controls Company T, with a carrying amount of $200 000 at year end 20X4.Company T reports no increase in owner's equity between 20X0 and 20X5 but for the year ended 20X5 pays a cash dividend of $60 000, of which Company J receives $36 000.Which journal entry will Company J process in respect of this investment, assuming that AASB 127.38A is in effect during the period?

A)Debit to cash, credit to investment, $36 000
B)Debit to investment in associate, credit to share of associate's profit or loss, $36 000
C)Debit to cash, credit to dividend revenue, $36 000
D)Debit to investment, credit to dividend revenue, $36 000

Question 25

Goodwill is defined as future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

Question 26

On 1 January 20X0, Ringo Ltd acquired 100 % of the share capital of George Ltd for $1 000 000 cash.At that date, the equity section of George Ltd's balance sheet was as follows:
\begin{array}{llcc} \text { } &\$ \\ \text {Share capital } &800000\\ \text {Retained profits } &100000\\ \text {Asset revaluation reserve } &100000\\end{array}
Assuming all assets and liabilities were recorded at their fair values what will be the effect of the acquisition on Ringo's account balances in its separate financial statements?

A)Goodwill will be increased by $200 000
B)Bargain purchase will be increased by $200 000
C)Investment in subsidiaries will increase by $800 000
D)None of the above

Question 27

Internally created synergies of a subsidiary can be recognised as an asset during a business combination.

Question 28

In a business combination, the only goodwill components suitable for recognition in financial statements are component 4, synergies, and component 5, over-valuation of the consideration.

Question 29

The equity method of accounting is always used to account for share investments which convey significant influence.

Question 30

Return of post-acquisition equity for an investment in an associate may be regarded as a dividend revenue or a return of the initial investment depending on the operation of AASB 127.38A.

Question 31

Interchange of management personnel is not a factor pointing toward the existence of a significant influence relationship.

Question 32

Company PPP has a share investment in, and controls Company PPP (Owns 70% of the shares, purchased in 20X1) with a carrying amount of $200 000 at year end 20X4.Company QQQ reports an increase in owner's equity of $100 000 for the year ended 20X5 pays a cash dividend of $80 000 from this, of which Company PPP receives $56 000.Which journal entry will Company PPP process in respect of this investment, assuming that AASB 127.38A was not in effect during the period?

A)Debit to cash, credit to investment, $126 000
B)Debit to cash, credit to share of associate's profit or loss, $26 000
C)Debit to cash, credit to dividend revenue, $56 000
D)Debit to cash, $126 000, credit to investment, $56 000, credit to share of associate's profit or loss, $70 000.

Question 33

On 1 January 20X0, Linda Ltd acquired 100 % of the share capital of Yoko Ltd for $900 000 cash.At that date, the equity section of Yoko Ltd's balance sheet was as follows:
\begin{array}{llcc} \text { } &\$ \\ \text {Share capital } &900000\\ \text {Retained profits } &400000\\ \text {Asset revaluation reserve } &300000\\end{array}
Assuming all assets and liabilities were recorded at their fair values what will be the effect of the acquisition on the financial statements?

A)Goodwill will be increased by $700 000 in Linda's separate statements
B)Bargain purchase will be increased by $700 000 in the Linda Group consolidated statements
C)Bargain purchase will be increased by $700 000 in the Linda separate statements
D)Goodwill will be increased by $400 000 in Yoko's separate statements

Question 34

On 1 January 20X0, John Ltd acquired 100 % of the share capital of Paul Ltd for $400 000 cash.At that date, the equity section of Paul Ltd's balance sheet was as follows:
Share capital
Retained profits $\quad$ $\quad$$\quad$ 100000
Asset revaluation reserve
Assuming all assets and liabilities were recorded at their fair values what was the difference on acquisition?

A)$200 000 goodwill
B)$100 000 bargain purchase
C)$100 000 goodwill
D)$200 000 bargain purchase

Question 35

Under AASB 3, if goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.