Exam 31: Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

In respect of its interests in joint operations,AASB 11 Joint Arrangements prescribes a joint operator to recognise in its financial statements,the assets that it controls and the liabilities that it incurs,and the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint operation.

AASB 128 defines an 'investee' as an entity in which an investor has a controlling interest.

An equity investment is deemed to exist where the investor has acquired an equity instrument,which can be defined as any contract that evidences a residual interest in the assets of an entity after deducting all its liabilities.

On 30 June 2013,Perkins Ltd,Thorpe Ltd and Hackett Ltd entered into a joint operation to produce apparel and related products for the Australian national swimming team.The joint operators equally share in output and costs.On the same date,the recorded amounts of each joint operator's contributions are as follows: Perkins Ltd (Machinery) Thorpe Ltd (Equipment) Hackett Ltd (Cash) Historical cost \ 900000 \ 600000 - Accumulated depreciation \ 200000 \ 100000 - Agreed value \ 600000 \ 600000 \ 600000 Assume that agreed values equal recoverable amount and no revaluations have occurred. Which of the following combinations correctly indicates the effects on the statement of financial position and statement of financial performance of Thorpe Ltd,respectively,after processing the journal entries to account for this joint operation arrangement?

The treatment of equity investments depends on a number of factors,including:

Mop Ltd acquired a 40 per cent interest in Bucket Ltd on 1 July 2014 for a cash consideration of $824 000.Bucket Ltd's assets and liabilities were recorded at fair value at the time of purchase and were represented by equity as follows: Share capital 1580000 Retained earnings Total shareholders' funds Additional information relating to the period ended 30 June 2015: Bucket Ltd had an after-tax profit of $665 000. Bucket Ltd proposed a dividend out of pre-acquisition profits of $90 000. Later in the period Bucket Ltd paid the $90 000 dividend and declared a further $100 000 dividend out of post-acquisition profits.This dividend will not be paid until the following period. Mop Ltd accrues the dividends of associates as revenue when they are proposed.The investment has been recorded in Mop's books in accordance with the cost method.What consolidation journal entries are required to apply the equity accounting method for the period ended 30 June 2015?

Equity accounting is argued to provide:

One reason for holding equity investments in the form of marketable securities is that they generally earn a higher return than cash on deposit at a bank.

If the investor is required to prepare consolidated financial statements,it recognises its investment in an associate by applying the equity method of accounting in its consolidated financial statements,and by applying the amortised cost method in its separate financial statements.

Explain the requirements of AASB 128 in relation to accounting in the investor's books,for the effect of accounting losses and revaluation decrements made by the associate.

Explain how an investor may lose significant influence without a change in ownership levels.How should one account for such loss of significant influence?

Investments are commonly classified into equity investments,cash investments,property investments and bonds.

Hip Hop Ltd acquired a 30 per cent interest in Rock Ltd on 1 July 2014 for a cash consideration of $984 000.Rock Ltd's assets and liabilities were recorded at fair value at the time of purchase and were represented by equity as follows: Share capital 2360000 Retained earnings Total shareholders' funds Additional information relating to the period ended 30 June 2016: The opening balance of Rock's retained earnings was $1 100 000.Rock Ltd had paid a dividend out of pre-acquisition profits of $80 000 during the 2013/2014 period. Rock Ltd had an after-tax profit of $260 000 for the 2014/2015 period. Rock Ltd declared an $80 000 dividend out of post-acquisition profits.This dividend will not be paid until the following period. Hip Hop Ltd accrues the dividends of associates as revenue when they are proposed.What is the amount of the investment in Rock Ltd and the income that will be recorded in the books of Hip Hop Ltd as at 30 June 2016 under (i)the cost method and (ii)the equity method?

Discuss why management is motivated to make both short-term and long-term equity investments?

The one-line method of accounting for joint ventures is not permitted under AASB 11.

A venturer that recognises in its financial statements the assets that it controls,the liabilities it incurs,the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture is prescribed by AASB 11 for which type(s)of joint venture(s)?

A joint operation should be accounted for using the:

Where joint operators contribute assets to a joint venture,the accounting treatment is which of the following?

Significant influence is defined in AASB 128 as:

Briefly describe,and differentiate between,the two types of joint arrangements referred to in AASB 11.