Deck 31: Associates and Joint Ventures

Question 1

On 1 July 2021 Alpha Ltd acquired a 40% share of Beta Ltd. At that date, the following assets had carrying amounts different to their fair values in Beta's books: $\begin{array}{|l|r|r|}\hline {\text { Asset }} & \text { Carrying amount } & \text { Fair value } \\\hline \text { Inventories } & \$ 18000 & \$ 20000 \\\hline \text { Plant } & \$ 30000 & \$ 35000 \\\hline\end{array}$ All inventories were sold to third parties by 30 June 2022. On 1 July 2021, the plant had a remaining useful life of 2 years. The tax rate is 30%.
The adjustment required to the Investment in Associate account at 30 June 2022 in relation to the above assets is:

A) $1 260
B) $1 400
C) $1 750
D) $3 150

Answer 1

$1 260

Question 2

Clove Ltd owns 40% of Bark Ltd. Bark Ltd's profit after tax for the year ended 30 June 2022 is $120 000. The tax rate is 30%. On 1 July 2020, Bark Ltd sold an item of plant to Clove Ltd for $164 000. The carrying amount of the asset on this date in Bark Ltd's records was $152 000. The plant had a remaining useful life of 4 years. Clove's share of Bark's profit for the year ended 30 June 2022 is:

A) $41 000
B) $44 000
C) $48 840
D) $52 800

Answer 2

C

Question 3

The equity method of accounting for an investment in an associate includes the following steps: $\begin{array}{|l|c|c|c|c|}\hline & \text { I } & \text { II } & \text { III } & \text { IV } \\\hline \text { Recognise the initial investment at cost } & \text { Yes } & \text { Yes } & \text { No } & \text { No } \\\hline \text { Recognise the initial investment at fair value } & \text { No } & \text { Yes } & \text { Yes } & \text { No } \\\hline \text { Reduce the carrying amount by any distributions } & \text { Yes } & \text { No } & \text { No } & \text { Yes } \\\hline \begin{array}{l}\text { Adjust the carrying amount by the investor's share of } \\\text { the associate's profit or loss }\end{array} & \text { Yes } & \text { No } & \text { Yes } & \text { No } \\\hline\end{array}$

A) I.
B) II.
C) III.
D) IV.

Answer 3

I.

Question 4

Coral Limited acquired a 40% investment in Reef Limited for $120 000. Reef declared and paid a dividend of $30 000. Coral Limited does not prepare consolidated financial statements. The appropriate entry for the investor to record this dividend is:

A) DR Dividends payable $12 000; CR Cash $12 000
B) DR Cash $12 000; CR Dividend revenue $12 000
C) DR Cash $12 000; CR Investment in associate $12 000
D) DR Investment in associate $12 000; CR Dividend revenue $12 000.

Question 5

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) 20% or more of the voting power of the investee.
B) 50% or more of the voting power of the investee.
C) between 1% and 5% of the voting power of the investee.
D) between 5% and 10% of the voting power of the investee.

Question 6

Colette Ltd, owns 25% of Ambrose Ltd. Ambrose's profit after tax for the year ended 30 June 2021 is $50 000. The tax rate is 30%. During the year ended 30 June 2022, Ambrose sold $8000 worth of inventories to Colette. These items had previously cost Ambrose $6500. All the items remain unsold by Colette at 30 June 2022. Colette's share of Ambrose's profit for the year ended 30 June 2022 is:

A) $12 875.00
B) $11 000.00
C) $12 500.00
D) $12 762.50

Question 7

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) affected only if the transaction is an upstream one.
B) affected only if the transaction is a downstream one.
C) affected regardless of whether the transaction is an upstream or downstream one.
D) not affected at all regardless of whether the transaction is an upstream or downstream one.

Question 8

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 profits is:

A) decreased by the investor's share of the unrealised profit.
B) increased by the investor's share of the unrealised profit.
C) not affected as the unrealised profit is in the books of the investor, not the associate.
D) not affected as unrealised profits are only considered to arise in a parent-subsidiary relationship.

Question 9

Robert Limited acquired a 25% interest in Jones Limited for $80 000. Robert holds other equity investments but does not prepare consolidated financial statements. Jones Limited revalued its plant and equipment class of assets during the current financial period which resulted in an increase to the asset revaluation surplus account of $36 000. The balance of the Investment in Associate account at the end of the current financial period is:

A) $29 000.
B) $80 000.
C) $86 300.
D) $89 000.

Question 10

David Limited acquired a 20% share in Tennant Limited for $52 000. David Limited has no other investments. At the date on which it became an associate, Tennant Limited had the following equity (which reflected the fair value of net assets on that date): Share capital $155 000
Retained earnings $110 000
At the end of the financial year following the investment, Tennant Limited generated a profit of $96 000. After applying the equity method of accounting, David Limited will have the following carrying amount for the investment:

A) $19 200
B) $32 800
C) $52 000
D) $71 200

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 investee.
B) recognised in the books of the investor.
C) notional adjustments and not recorded in the books of the investee.
D) relate to realised transactions and so are recognised directly by the investee.

Question 12

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

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

Question 13

Carnation Ltd purchased a 25% shareholding in Bloom Ltd on 1 January 2021 for $90 000. Bloom Ltd's assets were recorded at fair values and its owners' equity, totalling $350 000, was represented as follows: Share capital $100 000
General reserve $60 000
Asset revaluation surplus $50 000
Retained profits $140 000
During July 2021, Bloom Ltd paid an interim dividend of $15 000. At 31 December 2021, Bloom Ltd reported:
Profit after tax for 2021 $64 000
Final dividend payable $30 000
A transfer to the general reserve $20 000
Increase of the asset revaluation reserve to $80 000
Assuming that Carnation Ltd applies the equity method in its own books, the entry to record the dividend receivable from Bloom Ltd during the year ended 31 December 2022 would include a:

A) DR Dividend revenue account.
B) DR Investment in associate account.
C) CR Dividend revenue account.
D) CR Investment in associate account.

Question 14

Where an acquisition in an associate results in an excess, how is the excess accounted for in the year of acquisition?

A) CR Investment in associate account.
B) CR Share of associate profit account.
C) DR Share of associates retained earnings account.
D) No adjustment is required due to the single line method of accounting followed under the equity method.

Question 15

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) unaffected.
B) increased by the full amount of the realised profit.
C) increased by the investor's share of the realised profit.
D) decreased by the investor's share of the realised profit.

Question 16

On 1 July 2021 Barry Ltd acquired 25% of the ordinary issued share capital of Charlie Ltd for $300 000. This investment gave rise to significant influence. The share capital and reserves of Charlie Ltd at 1 July 2021 were:
$$\begin{array} { | l | r | } \hline \text { Share capital } & \$ 500000 \\\hline \text { General reserve } & 200000 \\\hline \text { Retained earnings } & 384000 \\\hline & \$ 1084000 \\\hline\end{array}$$ All the identifiable net assets of Charlie Ltd were stated at fair value at the date of acquisition except for equipment whose carrying value was $30 000 less than the fair value. The tax rate is 30%. Goodwill arising on Barry's acquisition of Charlie was:

A) $21 500
B) $29 000
C) $23 750
D) $25 000

Question 17

Which of the following statements is correct?

A) Joint arrangements classified as joint ventures are accounted for under AASB 128/IAS 28.
B) All joint arrangements are accounted for under AASB 128/IAS 28.
C) Joint arrangements classified as joint ventures are accounted for under AASB 11.
D) Joint arrangements classified as joint operations are accounted for under AASB 128/IAS 28.

Question 18

The following are regarded as factors indicating the existence of significant influence over another entity: $\begin{array}{|l|c|c|c|c|}\hline & \text { I } & \text { II } & \text { III } & \text { TV } \\\hline \text { interchange of managerial personnel } & \text { Yes } & \text { Yes } & \text { No } & \text { Yes } \\\hline \text { participation in decisions about dividends } & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \\\hline \text { representation on the board of directors } & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \\\hline \text { ability to control the investee's operating policies } & \text { No } & \text { No } & \text { No } & \text { Yes } \\\hline\end{array}$

A) I.
B) II.
C) III.
D) IV.

Question 19

Carnation Ltd purchased a 25% shareholding in Bloom Ltd on 1 January 2021 for $90 000. Bloom Ltd's assets were recorded at fair values and its owners' equity, totalling $350 000, was represented as follows: Share capital $100 000
General reserve $60 000
Asset revaluation surplus $50 000
Retained profits $140 000
During July 2021, Bloom Ltd paid an interim dividend of $15 000. At 31 December 2021, Bloom Ltd reported:
Profit after tax for 2021 $64 000
Final dividend payable $30 000
A transfer to the general reserve $20 000
Increase of the asset revaluation surplus to $80 000
The equity carrying amount of the investment in Bloom Ltd at 31 December 2021 is:

A) $106 000
B) $109 750
C) $102 250
D) $113 500

Question 20

When goodwill is acquired by an investor in an associate, the amortisation of goodwill is:

A) not permitted.
B) included in the revaluation of the investment.
C) spread evenly across the useful life of the investment.
D) included in the determination of the investor's share of the associate's profit or loss.

Question 21

On 1 July 2017 Fred Ltd acquired 30% of the shares of Barney Ltd for $240 000. At that date, the equity of Barney 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: $\begin{array}{|r|r|}\hline \text { Year ended }&\text { Profit/(Loss) } \\\text { 30 June }& \$ \\\hline 2018 & 40000 \\\hline 2019 & (360000) \\\hline 2020 & (500000) \\\hline 2021 & 15000 \\\hline 2022 & 44000 \\\hline\end{array}$ There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2019 the equity accounted balance of the investment in Barney was:

A) $240 000
B) $144 000
C) $252 000
D) $108 000

Question 22

On 1 July 2017 Fred Ltd acquired 30% of the shares of Barney Ltd for $240 000. At that date, the equity of Barney 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: $\begin{array}{|r|r|}\hline \text { Year ended }&\text { Profit/(Loss) } \\\text { 30 June }& \$ \\\hline 2018 & 40000 \\\hline 2019 & (360000) \\\hline 2020 & (500000) \\\hline 2021 & 15000 \\\hline 2022 & 44000 \\\hline\end{array}$ There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2022 the equity accounted balance of the investment in Barney was:

A) nil.
B) $228 300
C) $13 200
D) $11 700

Question 23

If an associate incurs losses the investor is required to:

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

Question 24

On 1 July 2017 Fred Ltd acquired 30% of the shares of Barney Ltd for $240 000. At that date, the equity of Barney 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: $\begin{array}{|r|r|}\hline \text { Year ended }&\text { Profit/(Loss) } \\\text { 30 June }& \$ \\\hline 2018 & 40000 \\\hline 2019 & (360000) \\\hline 2020 & (500000) \\\hline 2021 & 15000 \\\hline 2022 & 44000 \\\hline\end{array}$ There have been no dividends paid or movements in reserves since the date of acquisition.
At 30 June 2021 the equity accounted balance of the investment in Barney was:

A) $0
B) $4 500
C) ($1 500)
D) $240 000

Question 25

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

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

Question 26

When disclosing information about investments in associates, AASB 12/IFRS 12 Disclosure of Interests in Other Entities requires separate disclosure of which of the following?
I. Unrecognised share of losses in associates, in the Notes to the accounts.
II. Shares of changes recognised directly in the associate's equity, in the statement of changes in equity.
III. Share of profit or loss of associates, in the statement of profit or loss and other comprehensive income.
IV. Carrying amounts of investments in associates, in the statement of financial position.

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

Question 27

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

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