Testbank

to accompany

Applying International
Accounting Standards
by
Alfredson, Leo, Picker, Pacter & Radford

Prepared by
Victoria Wise

John Wiley & Sons Australia, Ltd 2005

 -2-

CHAPTER 22 – Accounting for investments in associates

Question 1

The accounting method applied to investments in associates, known as the equity method, is also
known as the:

A entity method of consolidation;

B proprietary method of consolidation;
C multiple line consolidation method;
D one-line consolidation method.

Question 2

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 3

The following are regarded as factors indicating the existence f significant influence over another
entity:
I II III IV
 representation on the board of directors Yes Yes Yes Yes
 participation in decisions about dividends No Yes Yes Yes
 interchange of managerial personnel No No No Yes
 ability to control the investee’s operating policies No Yes No No

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

Question 4

Organisation to which IAS 28 Investments in Associates, applies include:

A unincorporated entities;

Applying International Accounting Standards – Chapter 22

 -3-

B venture capital organisations;

C mutual funds;
D unit trusts.

Question 5

Where non-current assets are held for resale are required to be measured using:

A the equity method;

B the lower of carrying amounts and fair values less costs to sell;
C the lower of cost or market value;
D fair value.

Question 6

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:

 Share capital $50 000

 Retained earnings $40 000

At the end of the financial year following the investment, Juliano Limited generated a profit of
$6 000. After applying the equity method of accounting, Gunawan Limited will have the
following carrying amount for the investment:

A $19 200;
B $18 000;
C $16 800;
D $9 200.

Question 7

Campbell Limited acquired a 30% investment in Laura Limited for $21 000. Laura Limited
declared and paid a dividend of $5 000. Campbell Limited does not prepare consolidated
financial statements. The appropriate entry for Campbell Limited to record this dividend is:

A DR Investment in associate $1 500

CR Dividend revenue $1 500;
B DR Cash $1 500
CR Investment in associate $1 500;
C DR Dividends received $3 500
CR Cash $3 500;

Applying International Accounting Standards – Chapter 22

 -4-

D DR Cash $3 500
CR Dividend revenue $3 500.

Question 8

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 $18 100;
B $11 100;
C $30 000;
D $27 000.

Question 9

In investor company acquired a 40% interest in an associate for $30 000. The investor is part of
a consolidated group. In the financial period immediately following the date on which it became
an associate, the investee took the following action:

 revalued assets up to fair value by $5 000

 generated profits of $16 000
 declared a dividend of $3 000

The balance in the investor’s account ‘Shares in associate’, after equity accounting has been
applied, is:

A $30 000;
B $38 400;
C $39 600;
D $37 200.

Question 10

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.

Applying International Accounting Standards – Chapter 22

 -5-

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

When disclosing information about investments in associates, IAS 28 Investments in Associates,

requires separate disclosure of which of the following?

I. Shares in associates, in the balance sheet.

II. Share of profit or loss of associates, in the income statement.
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.

Applying International Accounting Standards – Chapter 22

 -6-

ANSWERS

1 D

2 C

3 D

4 A

5 B

6 A

7 B

8 C

9 D

10 B

11 C

12 A

Applying International Accounting Standards – Chapter 22