Deck 21: Associates and Joint Ventures

Question 1

Where an investor sells inventory to an associate and the inventory is still on hand at the end of the year the investor's share of the associate's profits 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.

Answer 1

D

Question 2

The following information relates to questions Nero Ltd purchased a 30% per cent shareholding in Bianco Ltd on 1 January 20X8 for $180,000. Bianco Ltd’s assets recorded at fair values and its owners’ equity, totalling $520,000, was represented as follows: $\begin{array} { l r } \text { Share capital } & \$ 260,000 \\\text { Reserves } & \$ 120,000 \\\text { Retained profits } & \$ 100,000 \\\text { Asset revaluation reserve } & \$ 40,000\end{array}$
During July 20X8, Bianco Ltd paid an interim dividend of $18,000. At 31 December 20X8, Bianco Ltd reported: $\begin{array}{ll}\text { Profit for 20X8 } & \$ 48,000 \\\text { Final dividend payable } & \$ 14,000 \\\text { A transfer to the general reserve } & \$ 10,000 \\\text { Increase of the asset revaluation reserve to } & \$ 70,000\end{array}$

-The equity carrying amount of the investment in Bianco Ltd at 31 December 20X8 is:

A) $199,200
B) $202,200
C) $203,400
D) $211,200

Answer 2

$199,200

Question 3

Clovelly Ltd, owns 25% of Bronte Ltd. Bronte's profit after tax for the year ended 30 June 20X3 is £30 000. The tax rate is 30%. During the year ended 30 June 20X4, Bronte sold £5000 worth of inventory to Clovelly. These items had previously cost Bronte £3000. All the items remain unsold by the Clovelly at 30 June 20X3. Clovelly's share of Bronte's profit for the year ended 30 June 20X3 is:

A) £5500
B) £6250
C) £7150
D) £7000

Answer 3

C

Question 4

When goodwill is acquired by an investor in an associate, 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 5

The following information relates to questions
On 1 July 2013 Joey Ltd acquired 25% of the shares of Leo Ltd for £100 000. At that date the equity of Leo Ltd was £400 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows:
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Year ended } \\\text { 30 June }\end{array} & \begin{array} { c } \text { Prafit(Lass) } \\\mathbf { £ }\end{array} \\\hline 20 \times 5 & 20,000 \\\hline 20 \times 6 & ( 200,000 ) \\\hline 20 \times 7 & ( 250,000 ) \\\hline 20 \times 1 & 16,000 \\\hline 20 \times 9 & 20,000 \\\hline\end{array}$$
There have been no dividends paid or movements in reserves since the date of acquisition.

-At 30 June 20X5 the equity accounted balance of the investment in Leo was:

A) £50 000
B) £55 000
C) £100 000
D) £105 000

Question 6

Investor Limited acquired a 30% interest in Investee Limited for €27 000. Investor holds other equity investments but does not prepare consolidated financial statements. Investee Limited revalued its buildings class of assets by €10 000 during the current financial period. The balance of the investment in associate account at the end of the current financial period is:

A) €11 100;
B) €18 100;
C) €27 000;
D) €30 000.

Question 7

Which of the following statements is correct?

A) All joint arrangements are accounted for under IAS 28.
B) Joint arrangements classified as joint ventures are accounted for under IFRS 11.
C) Joint arrangements classified as joint ventures are accounted for under IAS 28.
D) Joint arrangements classified as joint operations are accounted for under IAS 28.

Question 8

On 1 July 20X8 Berardo Ltd acquired 25% of the ordinary issued share capital of Ricky Ltd for €375 000. This investment gave rise to significant influence. The share capital and reserves of Ricky Ltd at 1 July 20X8 were:
$\begin{array}{ll}&€\\\text { Share capital } & 400,000 \\\text { General reserve } & 250,000 \\\text { Retained earnings } & 275,000\\&925,000\end{array}$ All the identifiable net assets of Ricky Ltd were stated at fair value at the date of acquisition except for a building whose carrying value was €50 000 less than the fair value. Goodwill arising on Berardo's acquisition of Ricky was:

A) €131 250
B) €135 000
C) €143 750
D) €150 000

Question 9

The following information relates to questions
On 1 July 20X3 Alpha Ltd acquired a 25% share of Beta Ltd. At that date the following assets had carrying amounts different to their fair values in Beta's books:
$$\begin{array} { | l | c | l | } \hline \text { Asset } & \begin{array} { c } \text { Carying } \\\text { amount }\end{array} & \text { Fair value } \\\hline \text { Inventory } & \text { €12 000 } & \text { €15 000 } \\\hline \text { Machinery } & \text { €24 DOQ } & \text { €30 000 } \\\hline\end{array}$$
All inventory was sold to third parties by 30 June 20X4. On 1 July 20X3, 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 20X4 in relation to the above assets is:

A) €875
B) €1250
C) €3500
D) €5000

Question 10

The following information relates to questions Nero Ltd purchased a 30% per cent shareholding in Bianco Ltd on 1 January 20X8 for $180,000. Bianco Ltd’s assets recorded at fair values and its owners’ equity, totalling $520,000, was represented as follows: $\begin{array} { l r } \text { Share capital } & \$ 260,000 \\\text { Reserves } & \$ 120,000 \\\text { Retained profits } & \$ 100,000 \\\text { Asset revaluation reserve } & \$ 40,000\end{array}$
During July 20X8, Bianco Ltd paid an interim dividend of $18,000. At 31 December 20X8, Bianco Ltd reported: $\begin{array}{ll}\text { Profit for 20X8 } & \$ 48,000 \\\text { Final dividend payable } & \$ 14,000 \\\text { A transfer to the general reserve } & \$ 10,000 \\\text { Increase of the asset revaluation reserve to } & \$ 70,000\end{array}$

-Assuming that Nero Ltd applies the equity method in its own books the entry to record the dividend receivable from Bianco Ltd at 31 December 20X9 would include:

A) a credit to the dividend revenue account.
B) a credit to the investment in associate account.
C) a debit to the dividend revenue account.
D) a debit to the investment in associate account.

Question 11

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 12

Where an acquisition in an associate results in an excess the excess is accounted for in the year of acquisition as follows:

A) as a credit against the investment in associate account.
B) as a credit against the share of associate profit account.
C) as a debit against the share of associates retained earnings
D) no adjustment is required due to the single line method of accounting followed under the equity method.

Question 13

For the purposes of equity accounting, significant influence is regarded 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.

Question 14

Clovelly Ltd owns 25% of Bronte Ltd. Bronte's profit after tax for the year ended 30 June 20X5 is £30 000. The tax rate is 30%. On 1 July 20X3, Bronte Ltd sold an item of plant to Clovelly Ltd for £8000. The carrying amount of the asset on this date in Bronte Ltd's records was £3000. The plant had a remaining useful life of 5 years. Clovelly's share of Bronte's profit for the year ended 30 June 20X5 is:

A) £6800
B) £7325
C) £7675
D) £7750

Question 15

Gunawan Limited acquired a 20% share in Juliano Limited for €18 000. Gunawan Limited has no other investments. At the date on which it became an associate, Juliano Limited had the following equity:
$\bullet$ Share capital €50 000
$\bullet$ Retained earnings €40 000
At the end of the financial year following the investment, Juliano Limited generated a profit of €6000. After applying the equity method of accounting, Gunawan Limited will have the following carrying amount for the investment:

A) €9200;
B) €16 800;
C) €18 000;
D) €19 200.

Question 16

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

A) unaffected;
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 17

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

Question 18

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

A) between 1% and 5% 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) 50% or more of the voting power of the investee;

Question 19

Codger Limited acquired a 40% investment in Lodger Limited for €50 000. Lodger declared and paid a dividend of €10 000. Codger Limited does not prepare consolidated financial statements. The appropriate entry for the investor to record this dividend is:

A)
$\begin{array} { l l l } \text { DR } & \text { Cash } & € 4000 \\& \text { CR Investment in associate } & € 4000\end{array}$
B)
$\text { DR Dividends payable } \quad € 4000$
$\text { CR Cash } \quad € 4000$
C)
$\begin{array}{lll}\text { DR } & \text { Cash } & € 4000 \\\text { CR} & \text { Dividend revenue } & € 4000\end{array}$
D)
$\begin{array}{ll}\text { DR Investment in associate } & € 4000 \\\text { CR Dividend revenue } & € 4000\end{array}$

Question 20

The following information relates to questions
On 1 July 20X3 Alpha Ltd acquired a 25% share of Beta Ltd. At that date the following assets had carrying amounts different to their fair values in Beta's books:
$$\begin{array} { | l | c | l | } \hline \text { Asset } & \begin{array} { c } \text { Carying } \\\text { amount }\end{array} & \text { Fair value } \\\hline \text { Inventory } & \text { €12 000 } & \text { €15 000 } \\\hline \text { Machinery } & \text { €24 DOQ } & \text { €30 000 } \\\hline\end{array}$$
All inventory was sold to third parties by 30 June 20X4. On 1 July 20X3, 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 20X5 in relation to the above assets is:

A) €500
B) €1225
C) €1400
D) €1750

Question 21

Investments in associates accounted for using the equity method are presented in the statement of financial position amongst:

A) equity;
B) non-current liabilities;
C) current assets;
D) non-current assets.

Question 22

If an associate incurs losses the investor is required to:

A) ignore the losses for the purposes of equity accounting adjustments;
B) recognise losses only to the point where the carrying amount is equal to the initial investment;
C) recognise losses to the point where the carrying amount of the investment is zero;
D) reclassify the investment as a current asset.

Question 23

The following information relates to questions
On 1 July 2013 Joey Ltd acquired 25% of the shares of Leo Ltd for £100 000. At that date the equity of Leo Ltd was £400 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows:
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Year ended } \\\text { 30 June }\end{array} & \begin{array} { c } \text { Prafit(Lass) } \\\mathbf { £ }\end{array} \\\hline 20 \times 5 & 20,000 \\\hline 20 \times 6 & ( 200,000 ) \\\hline 20 \times 7 & ( 250,000 ) \\\hline 20 \times 1 & 16,000 \\\hline 20 \times 9 & 20,000 \\\hline\end{array}$$
There have been no dividends paid or movements in reserves since the date of acquisition.

-At 30 June 20X8 the equity accounted balance of the investment in Leo was:

A) NIL
B) £1500
C) £5000
D) £20 000

Question 24

When disclosing information about investments in associates, IAS 28, 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 25

The following information relates to questions
On 1 July 2013 Joey Ltd acquired 25% of the shares of Leo Ltd for £100 000. At that date the equity of Leo Ltd was £400 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows:
$$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Year ended } \\\text { 30 June }\end{array} & \begin{array} { c } \text { Prafit(Lass) } \\\mathbf { £ }\end{array} \\\hline 20 \times 5 & 20,000 \\\hline 20 \times 6 & ( 200,000 ) \\\hline 20 \times 7 & ( 250,000 ) \\\hline 20 \times 1 & 16,000 \\\hline 20 \times 9 & 20,000 \\\hline\end{array}$$
There have been no dividends paid or movements in reserves since the date of acquisition.

-At 30 June 20X7 the equity accounted balance of the investment in Leo was:

A) NIL
B) (£3500)
C) £4000
D) £16 000

Question 26

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.