Deck 16: Accounting for Associates

Question 1

Which of the following statements regarding the equity method is correct?

A)to avoid double counting,dividends received from an associate are deducted from the carrying amount of the investment account.
B)the investor records a journal entry to adjust the carrying amount of the asset "investment in associate" and record "share of profit or loss of associate" as income for the period
C)the share of the investee's net assets taken up by an investor is its percentage ownership interest in the associate
D)all of the above

Answer 1

D

Question 2

A sale or other transaction from an investor to an associate is known as a/an:

A)downstream transaction
B)unrealised transaction
C)realised transaction
D)upstream transaction

Answer 2

A

Question 3

Impairment occurs when:

A)the carrying amount of an investment in an associate equals the present value of expected future cash flows
B)the carrying amount of an investment in an associate exceeds the present value of expected future cash flows
C)the carrying amount of an investment in an associate is less than the present value of expected future cash flows
D)none of the above

Answer 3

B

Question 4

In each financial year that the equity method is applied,the carrying amount of the investment in the associate is:

A)increased or decreased by the amount of the investor's share of post- acquisition increments or decrements in the associate's other comprehensive income
B)decreased by the amount of dividends received from the associate
C)increased or decreased by the amount of the investor's share of the post- acquisition profit or loss of the associate
D)all of the above

Question 5

Define significant influence and identify the factors in AASB 128 that may establish the existence of significant influence.

Question 6

Which method of accounting initially recognises the investment at cost and then adjusts the investment for the post- acquisition changes in the investor's share of net assets of the investee?

A)investment method
B)entity method
C)equity method
D)cost method

Question 7

Which of the following statements is correct,for an investment from the date on which it becomes an associate?

A)fair values are compared with the cost of the investment,thus any change in the carrying amount of the investment since the date of purchase should be reversed
B)fair values must be determined at the date on which significant influence is obtained
C)AASB 128 states that an investment in an associate is accounted for using the equity method from the date on which it becomes an associate
D)all of the above

Question 8

A method of accounting for investments in which the investment is recognised at cost and dividends are recognised in income is known as the:

A)cost method
B)equity method
C)entity method
D)fair value method

Question 9

Identify the adjustments required in applying the equity method.

Question 10

The major limitation of the cost method is that:

A)it recognises a share of an associate's postacquisition equity
B)the investment in the associate only reflects the worth of the investment at acquisition date
C)it is a costly method to apply
D)none of the above

Question 11

An entity over which the investor has significant influence and is neither a subsidiary nor an interest in a joint venture is known as a/an:

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

Question 12

Goodwill arises when:

A)the cost of acquisition equals the investor's share of the net fair value of identifiable assets and liabilities
B)the cost of acquisition is less than the investor's share of the net fair value of identifiable assets and liabilities
C)the cost of acquisition exceeds the investor's share of the net fair value of identifiable assets and liabilities
D)none of the above

Question 13

Gairdner Ltd holds a 25% interest in Lomond Ltd.Gairdner Ltd sold inventory in the current year to Lomond Ltd.and made a profit before tax of $10 000 on the transaction.Lomond Ltd held all of the inventory at year end.Lomond Ltd's operating profit before tax for the year was $100 000.The tax rate is 30%. What is Gairdner Ltd's share of Lomond Ltd's after- tax profit?

A)$17500
B)$63000
C)$15750
D)$23250

Question 14

AASB 128 requires that the equity method be discontinued when

A)an investor ceases to have control over the investee
B)an investee ceases to have significant influence over the investor
C)an investee ceases to have control over the investor
D)an investor ceases to have significant influence over the investee

Question 15

The factors listed in AASB 128 that may be used singly or in combination to establish the existence of significant influence include:

A)the investor's voting power in the investee
B)dependence on technical information
C)material transactions between investor and investee
D)all of the above

Question 16

Which of the following statements is incorrect?

A)the equity method of accounting adjusts the carrying value of an investment in an associate to reflect post- acquisition changes in the investor's share of the net assets of the investee
B)accounting for investments at fair value through profit or loss recognises the change in fair value of the investment in income and remeasures the investment to fair value at balance date
C)the cost method of accounting adjusts the carrying value of an investment in an associate to reflect post- acquisition changes in the investor's share of the net assets of the investee
D)AASB 128 requires the application of the equity method of accounting to investments in associates in the consolidated financial statements of the investor

Question 17

The disclosures required by AASB 128 include:

A)the unrecognised share of losses of an associate,both for the period and cumulatively,if an investor has discontinued recognition of its share of losses of an associate
B)the fair value of investments in associates for which there are published price quotations
C)summarised financial information of associates,including the aggregated amounts of assets,liabilities,revenues and profit or loss
D)all of the above

Question 18

The power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies is referred to as:

A)significant influence
B)contributory influence
C)dominant influence
D)none of the above

Question 19

Which of the following statements is incorrect?

A)where consolidated financial statements are not prepared,the cost method must be applied in the investor's own books
B)only the percentage of the investor's ownership interest in the associate should be eliminated
C)unrealised profit and losses on both upstream and downstream transactions should be eliminated
D)when an asset is transferred with an intention that the asset will not be sold to an external party,realisation of the profit/loss occurs as the asset is used/consumed

Question 20

The equity journal entry on consolidation for a dividend paid by an associate is:

A)Debit Dividend revenue Credit Investment in associate
C)Debit Investment in associate Credit Dividend revenue

Question 21

Explain the equity method and the major criticism of this method.

Question 22

Summarise the adjustments required to fully eliminate unrealised profits and losses on transactions with associates.

Question 23

Explain the cost method and its major limitation.