Exam 6: Accounting for Investments in Associates and Joint Ventures

In calculating the entity's share of equity of the associate or joint venture, dividend revenue will need to be removed from the entity's consolidated financial statements since the ______________ method will now replace the ______________ method of accounting for the investment.

Adjustments must be made for transactions between the associate or joint venture and the entity that give rise to unrealized profits or losses. Realization of such profits or losses occurs when:

The equity method of accounting will be discontinued when the investor's share of losses equals or exceeds the investment's carrying amount.

Assume Timpet Ltd. acquired 10% of the shares of Dawson Ltd on January 1, 2012 for $13,000. At December 31, 2012, the end of the entity's reporting period, the fair value of the investment was $16,200. The investment was designated as fair value through profit and loss based on IFRS 9. On July 1 2013, Timpet Ltd. acquired a further 10% of the share capital of Dawson Ltd. for $17,200 (this also being the fair value of the initial investment in Dawson Ltd. at this date), when the equity of Dawson Ltd. consisted of: Share capital \ 100,000 Asset revaluation reserve 12,000 Retained earnings (1/1/13) 38,000 Profit (1/1/13 to 30/6/13) 8,000 The identifiable assets and liabilities of Dawson Ltd were recorded at fair value at this date except for inventory, whose fair value was $15,000 greater than carrying amount. This acquisition gives Timpet Ltd. significant influence over Dawson Ltd. On January 1, 2012, which of the following statements is TRUE?

How do joint ventures differ from private corporations?

Adjustments to the entity's share of the equity of the associate or joint venture are not made to accounts such as __________________ as would occur under the consolidation method.

Describe how investments in associates and joint ventures are accounted for by a parent entity, which will and will not prepare consolidated financial statements.

On January 1, 2013, Edie Ltd acquired 25% of the shares of Gowan Ltd for $79,375. At this date, the equity of Gowan Ltd consisted of: Share capital \ 150,000 Retained earnings 80,000 At the acquisition date, all the identifiable assets and liabilities of Gowan Ltd were recorded at fair value, except for plant for which the fair value was $15,000 greater than its carrying amount, and inventory whose fair value was $5,000 greater than its cost. The tax rate is 30%. The plant has a further 5-year life. The inventory was all sold by December 31, 2013. In the reporting period ending December 31, 2013, Gowan Ltd reported a profit of $15,000. The acquisition analysis at January 1, 2013 is as follows: Cost of investment Net fair value of the identifiable assets and =(\ 150,000+\ 80,000) (equity) liabilities of Gowan Itd +\ 15,000(1-30\%) (plant) +\ 5,000(1-30\%) (inventory) =\ 244,000 Net fair value acquired by Edie Ltd =25\%\times\ 180,500 =\ 61.000 Goodwill =\ 18,375 Depreciation (net of tax) of plant p.a. =1/5\times(25\%\times[\ 15,000(1-30\%)] =\ 525 Effect of sale of inventory (net of tax) =25\%\times\ 5,000(1-30\%) =\ 875 Required: (a)What is the amount of the adjustment needed in applying equity accounting to the investment in the associate at December 31, 2013? (b)What is the journal entry to reflect the application of the equity method to the investment?

Which of the following statements regarding goodwill and fair value differences from the day that an associate or joint venture is acquired, is FALSE?

In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair values __________________________________________.

Adjustments to the entity's share of the equity of the associate or joint venture are made for the effects of both upstream and downstream transactions even though a downstream transaction does not affect the equity of the associate or joint venture.

Which methods will result in the same income and shareholders' equity?

When an inter-corporate investment is acquired in stages, when does the equity method first becomes appropriate?

On January 1, 2013, Conji Ltd. acquired 25% of the shares of Porter Ltd. for $42,500. At this date, all the identifiable assets and liabilities of Porter Ltd. were recorded at amounts equal to fair value, and the equity of Porter Ltd. consisted of: Share capital \ 100,000 Asset revaluation reserve 20,000 Retained earnings 50,000 During 2013, Porter Ltd. reported a profit of $25,000. The asset revaluation reserve increased by $5,000, this being reported in other comprehensive income. Porter Ltd. paid a $4,000 dividend. At January 1 2013, Conji Ltd. recorded the investment in Porter Ltd. at $42,500 The share of profit or loss of associate that Conji Ltd. should record is

The entity's share of losses of an associate or joint venture is recognized but only to the point where the carrying amount of the investment in the associate or joint venture is

Regarding goodwill and fair value adjustments, any excess of the entity's share of the net fair value of an associate or joint venture's identifiable assets and liabilities over the cost of the investment is to be recognized as _______________ in the determination of the entity's share of the associate or joint venture's profit or loss in the period in which the investment is acquired.

Where dividends are paid/declared by an associate or joint venture and the entity receiving the dividend prepares consolidated financial statements, the dividend revenue recognized in the entity's accounts is eliminated on consolidation.

Adjustments for any goodwill arising on acquisition would occur on impairment of goodwill.

If an entity had previously held an investment in another entity and by a further investment that investee became an associate or joint venture of the entity, what must be recorded at the date of the second investment?

On January 1, 2013, Crawford Ltd. acquired 25% of the shares of Rufus Ltd. for $69,375. At this date, the equity of Rufus Ltd. consisted of: Share capital \ 150,000 Retained earnings 80,000 At the acquisition date, all the identifiable assets and liabilities of Rufus Ltd. were recorded at fair value, except for plant for which the fair value was $20,000 greater than its carrying amount, and inventory whose fair value was $5,000 greater than its cost. The tax rate is 30%. The plant has a further 5-year life. The inventory was all sold by December 31, 2013. In the reporting period ending December 31, 2013, Rufus Ltd. reported a profit of $20,000. The amount of goodwill arising from this transaction is: