Chapter 28 - Multiple choice quiz

For the purposes of equity accounting an associate is a business entity including:

A.	an unincorporated entity;

B.	a joint venture;

C.	a subsidiary;

D.	venture capital organisations.

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.

The application of the equity accounting method of accounting is based on the investor owning:

A.	more than 50% of the voting power in an associate;

B.	more than 20% of the voting power in an associate;

C.	less than 20% of the voting power in an associate;

D.	part of the share capital of an associate whether or not there are voting rights attached.

The equity method of accounting need not be applied where the investment:

A.	represents more than 20% of the voting shares of an associate;

B.	does not provide the investor with significant influence;

C.	is held exclusively with a view to its disposal within 12 months;

D.	is made by an investor who has no subsidiaries.

Where all of the following conditions apply an investor need not apply the equity method of accounting:

I.	The investor is a wholly owned subsidiary or a partly owned subsidiary and its owners do not object to the method not being used.
II.	The investor’s debt or equity securities are not traded in a public market.
III.	The investor has not filed financial statements with a regulatory organisation for the purpose of issuing any class of securities in a public market.
IV.	The ultimate parent of the investor publishes consolidated financial statements that comply with AASBs.

A.	I and IV only;

B.	II and III only;

C.	I, II and III only;

D.	I, II, III and IV.

Under the cost model of accounting for an investment, changes to the carrying amount of the investment occur if:

A.	the investee earns post-acquisition profits or losses;

B.	goodwill included in the investment is amortised;

C.	the investment is impaired;

D.	dividends are received from the investee.

The method of accounting that applies to an investor and associate relationship is the:

A.	cost method;

B.	fair value method;

C.	consolidation method;

D.	equity method.

In respect to the equity method of accounting, where an investor has no subsidiaries the investor must apply the:

A.	cost method of accounting for investments in associates;

B.	consolidated financial reporting

C.	equity method in its own accounting records;

D.	net present value method to measuring the expected cash flows from an associate.

The 'one-line' equity accounting method is used when accounting for an investment in:

A.	a subsidiary;

B.	a unit trust;

C.	a joint venture;

D.	an associate.

10.

The equity method of accounting for an investment in an associate includes the following steps:

	I	II	III	IV
Recognise the initial investment at cost	Yes	Yes	No	No
Recognise the initial investment at fair value	Yes	No	Yes	No
Reduce the carrying amount by any distributions	No	Yes	No	Yes
Adjust the carrying amount by the investor's share of the associate's profit or loss	No	Yes	Yes	No

II;

III;

IV.

11.

Mandy Limited acquired a 30% share in Sandy Limited for $27 000. Mandy Limited has no other investments. At the date on which it became an associate, Sandy Limited had the following equity items: Share capital $50 000, Retained earnings $40 000. At the end of the financial year following acquisition, Sandy Limited generated a profit of $6 000. The carrying amount of the investment in Sandy Limited at the end of the financial year is:

$25 200;

$27 000;

$28 800;

$33 000.

12.

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

A.	DR Cash $4 000 CR Investment in associate $4 000;

B.	DR Dividends payable $4 000 CR Cash $4 000;

C.	DR Cash $4 000 CR Dividend revenue $4 000;

D.	DR Investment in associate $4 000 CR Dividend revenue $4 000.

13.

Investor Limited acquired a 25% interest in Investee Limited for $15 000. Investor holds other equity investments but does not prepare consolidated financial statements. Investee Limited revalued its buildings class of assets by $50 000 during the current financial period. The balance of the investment in associate account at the end of the current financial period is:

$12 500;

$15 000;

$16 250;

$27 500.

14.

Tea Limited acquired a 35% investment in Cup Limited for $20 000. Tea Limited also owns two subsidiaries and prepares consolidated financial statements. Cup Limited declared and paid a dividend of $5 000 during the current financial year. The appropriate consolidation adjustment to record this transaction will include the following entry:

A.	DR Investment in associate;

DR Cash;

C.	DR Dividend revenue;

D.	DR Share of profit of associate.

15.

Company A acquired a 30% interest in an associate, Company B, for $25 000. Company A is part of a consolidated group. In the financial period immediately following the date on which it became an associate, Company B revalued assets by $4 000, generated profits of $10 000 and declared a dividend of $5 000. The balance in the investment account after equity accounting has been applied is:

$26 200;

$27 700;

$28 000;

$29 200.

16.

Where goodwill is acquired on an investment in an associate the goodwill is:

A.	amortised across the useful life of the goodwill;

B.	written off immediately against the carrying amount of the investment;

C.	carried as a separate asset in the accounting records of the investor;

D.	not subject to amortisation.

17.

On 1 July 2008 Nelson Ltd paid $2 696 000 for 40% of the shares in Dodger Ltd. At that date the equity of Dodger Ltd consisted of:

Share capital $3 million
Retained earnings $3 million

At that date all the identifiable net assets of dodger were recorded at fair value except for the following:

	Carrying amount	Fair value
Inventory	$1 million	$1.2 million
Plant	$2.5 million	$3 million

All the inventory was sold by 30 June 2009. The original cost of the plant was $3.2 million and it had an expected remaining useful life of 5 years as at 1 July 2008.

The tax rate is 30%
Nelson's 40% investment in Dodger gave rise to goodwill of:

$16 000

$86 000

$100 000

$296 000

18.

	Carrying amount	Fair value
Inventory	$1 million	$1.2 million
Plant	$2.5 million	$3 million

All the inventory was sold by 30 June 2009. The original cost of the plant was $3.2 million and it had an expected remaining useful life of 5 years as at 1 July 2008.

The tax rate is 30%
The net adjustment against the investment account at 30 June 2010 in relation to the plant is:

$28 000

$56 000

$80 000

$140 000

19.

	Carrying amount	Fair value
Inventory	$1 million	$1.2 million
Plant	$2.5 million	$3 million

All the inventory was sold by 30 June 2009. The original cost of the plant was $3.2 million and it had an expected remaining useful life of 5 years as at 1 July 2008.

The tax rate is 30%
The adjustment at 30 June 2010 in relation to the inventory will include the following:

A.	DR Share of associates profits after tax

B.	CR Share of associates profits after tax

C.	DR Opening retained earnings

D.	CR Opening retained earnings

20.

When an associate declares and pays a dividend the application of the equity method results in the investor making the following adjustment on consolidation:

A.	DR Investment in associate;

DR Cash;

C.	DR Dividend revenue;

D.	No adjustment.

21.

Which of the following movement in reserves in an associates books will result in a change to the equity carrying amount of the associate in the investor's books?

A.	A transfer of pre-acquisition reserves from the general reserve to retained earnings

B.	An increase in the asset revaluation reserve on the revaluation of a class of assets to fair value

C.	A transfer of post-acquisition retained earnings to the general reserve

D.	A reclassification of an amount in an available-for-sale reserve account on the disposal of an available-for-sale financial asset.

22.

Where an associate has an accounting policy which is dissimilar to the investor AASB 128 requires that:

A.	The associate change their accounting policy to be in line with that of the investor

B.	The investor change their accounting policy to be in line with that of the associate

C.	Note disclosure be made of the different accounting policy with details of the financial effect

D.	Adjustments for the financial effect to be included within the equity accounting journals

23.

AASB 128 requires that the reporting date of the associate be:

A.	The same as that of the investor

B.	Within 3 months of that of the investor

C.	No more than 3 months earlier or later than the investor

D.	Within 6 months of that of the investor

24.

On 1 July 2007 Nelson Ltd acquired 40% of the shares in Dodger Ltd.

On 1 June 2009, Dodger held inventory sold to it by Nelson at a profit before tax of $200 000. This inventory was still on hand at 30 June 2009 and was all sold by 30 June 2010.

In March 2010 Dodger sold inventory to Nelson at a profit before tax of $600 000. Half of this inventory was still held by Nelson at 30 June 2010.

On 1 July 2008, Nelson sold an item of equipment to Dodger for $1.5 million. Nelson recognised a profit before tax of $400 000 on the sale. The equipment had a remaining useful life of 4 years at the date of sale.
The effect of the above transaction on the share of associate profit account in Nelson's Statement of Comprehensive Income for the year ended 30 June 2009 was:

$NIL

B.	$140 000 DR

C.	$200 000 DR

D.	$350 000 DR

25.

On 1 July 2007 Nelson Ltd acquired 40% of the shares in Dodger Ltd.

On 1 June 2009, Dodger held inventory sold to it by Nelson at a profit before tax of $200 000. This inventory was still on hand at 30 June 2009 and was all sold by 30 June 2010.

In March 2010 Dodger sold inventory to Nelson at a profit before tax of $600 000. Half of this inventory was still held by Nelson at 30 June 2010.

On 1 July 2008, Nelson sold an item of equipment to Dodger for $1.5 million. Nelson recognised a profit before tax of $400 000 on the sale. The equipment had a remaining useful life of 4 years at the date of sale.
The effect of the inventory transfers in the current and prior year on the share of associate profit account in Nelson's Statement of Comprehensive Income for the year ended 30 June 2010 was:

A.	$28 000 DR correct

B.	$84 000 DR (210) pr yr ignored

C.	$112 000 DR 420 not 210

D.	$168 000 DR (420) pr yr ignored

26.

On 1 July 2007 Nelson Ltd acquired 40% of the shares in Dodger Ltd.

On 1 June 2009, Dodger held inventory sold to it by Nelson at a profit before tax of $200 000. This inventory was still on hand at 30 June 2009 and was all sold by 30 June 2010.

In March 2010 Dodger sold inventory to Nelson at a profit before tax of $600 000. Half of this inventory was still held by Nelson at 30 June 2010.

On 1 July 2008, Nelson sold an item of equipment to Dodger for $1.5 million. Nelson recognised a profit before tax of $400 000 on the sale. The equipment had a remaining useful life of 4 years at the date of sale.
The net adjustment against the investment account at 30 June 2010 in relation to the equipment transfer is:

$56 000

$80 000

$84 000

$140 000

27.

On 1 July 2006 Pan Pty Ltd acquired 25% of the shares of Dors Pty Ltd for $100 000. At that date the fair value of Dors' identifiable net assets was $400 000. Details of Dors' profit/ (loss) after tax in the years since acquisition are as follows:

Year ended

30 June

2007

2008

2009

Profit/ (loss)

25 000

(180 000)

(260 000)

There have been no other movements in the net assets of Dors and there are no unrealised profits on transactions between the entities.

The equity carrying amount of Dors in the records of Pan at 30 June 2008 is:

NIL

$3 750 CR

C.	$38 750 CR

D.	$61 250 DR

28.

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.

29.

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.

30.

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

equity;

B.	non-current liabilities;

C.	current assets;

D.	non-current assets.

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