T12 Solutions

ACW2491 Company Reporting
Tutorial Solution
Semester 1 2016
Topic 12: Accounting for Investment in Associates
CHAPTER 23
REVIEW QUESTIONS
1. What is an associate entity?
Paragraph 2 of AASB 128 defines an associate as:
An entity, including an unincorporated entity such as a partnership, over which the investor has
significant influence, and that is neither a subsidiary nor an interest in a joint venture.
The key criterion is the existence of significant influence, also defined in para. 2.
Note that an investor does not have to hold shares in an associate yet the application of the equity
method depends on such a shareholding. However, see the presumptions in para 6 of AASB 128.
3. Discuss the similarities and differences between the criteria used to identify subsidiaries and that
used to identify associates.
A subsidiary is identified where another entity controls that entity. Control is defined in para 2 of AASB
128.
An associate is identified where another entity has significant influence over that entity.
Control
Power over the investee
Significant influence
Power to participate
Exposure or rights to variable returns

From involvement in investee
To participate in the financial and

operating policy decisions
Ability to affect returns through power
-----------
No ownership interest is necessary
No ownership interest is necessary
4. What is meant by significant influence?

Para 2 of AASB 128 states:
Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies
Note:
power to participate
financial and operating policy decisions
5. What factors could be used to indicate the existence of significant influence?

Note paras 6 and 7 of AASB 128:
6.
If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or
indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is
presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an investor from having significant influence.
7.
The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
1

Tutorial Solution
Semester 1 2016
(b) participation in policy-making processes, including participation in decisions about dividends

or other distributions;
(c) material transactions between the investor and the investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.
PRACTICE QUESTIONS
Question 23.1 Piano Ltd
A. Journal entries in the accounts of Piano Ltd
1 July 2014
Investment in Mandolin Ltd
Cash/Payable
(Acquisition of shares in Mandolin Ltd)
2014 2015
Dr
Cr
50 000
Dr
Cr
24 000

Share of profit or loss of
associates and joint ventures
(Recognition of profit in Mandolin Ltd)
Dr
Cr
15 000
Cash
Dr
Cr
4 500

Share of profit or loss of
associates and joint ventures
Dr
Cr
13 500
Cash
Dr
Cr
3 000
Dr
Cr
12 000
Cash
(Dividend received from Mandolin Ltd)
30 June 2015
2015 2016

(Dividend received)
30 June 2016
2016 2017

(Dividend from joint venture)
Share of PL of associates and JV
50 000
24 000
15 000
4 500
13 500
3 000
12 000

Tutorial Solution
Semester 1 2016
B.
Consolidation Worksheet Entries
30 June 2015:
Share of profit or loss of associates and JV
Dr
Cr
15 000
Dividend revenue
Dr
Cr
24 000
30 June 2016:
Retained earnings (1/7/15)
Dr
Cr
9 000

Dr
Cr
13 500
Dividend revenue
Dr
Cr
4 500
30 June 2017:
Retained earnings (1/7/16)
Dr
Cr

Dr
Cr
12 000
Dividend revenue
Dr
Cr
3 000
Dr
Cr
6 000
Dr
Cr
19 790
15 000
24 000
9 000
13 500
4 500
12 000
3 000
Question 23.3 Lute Ltd

Journal entries in records of Lute Ltd:
1.
Cash
Investment in Sitar Ltd
2.
Investment in Sitar Ltd

6 000
19 790

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Exposure or rights to variable returns

To participate in the financial and

Ability to affect returns through power

No ownership interest is necessary

No ownership interest is necessary

4. What is meant by significant influence?

5. What factors could be used to indicate the existence of significant influence?

ACW2491 Company Reporting

(b) participation in policy-making processes, including participation in decisions about dividends

Investment in Mandolin Ltd

Investment in Mandolin Ltd

Investment in Mandolin Ltd

Investment in Mandolin Ltd

ACW2491 Company Reporting

Investment in Mandolin Ltd

Investment in Mandolin Ltd

Question 23.3 Lute Ltd

Investment in Sitar Ltd

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