Exam 9: Accounting for Associates and Joint Ventures: the Equity Method

An investment in an associate company will initially be recorded at fair value.

If A has significant influence over B but does not have any share ownership in B:

Where an associate makes profits subsequent to the investor's acquisition of the equity investment,a deferred tax liability will be required to be recognised.

The following statements of shareholders' equity were prepared for Harnham Hill Ltd,a 20% owned associate of the parent entity Delville Wood Ltd,at 30 June (amounts in thousands): 20x3 20x7 20x8 Shareholders' equity Share capital \ 2000 \ 2000 \ 2000 Revaluation surplus 1000 Retained earnings 4000 6000 6500 Total shareholders' equity \6 000 \8 000 \9 500 - Other information: I.Delville Wood Ltd acquired its 20% investment on 1 July 20X3 for a cash outlay of $2 000 000. II.During the year ended 30 June 20X8,Harnham Hill Ltd earned a profit of $1 400 000 before tax (income tax expense $400 000)and paid a dividend of $500 000. III.At 30 June 20X7,Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a markup of $100 000. IV.At 30 June 20X8,a subsidiary of Delville Wood Ltd held inventories that had been supplied by Harnham Hill Ltd at a markup of $50 000. V.During the year ended 30 June 20X8,Delville Wood Ltd charged Harnham Hill Ltd with a management fee of $100 000 for administration services. VI.In the income statement of Harnham Hill Ltd was interest revenue of $50 000 which had been earned on a loan made to a subsidiary of Delville Wood Ltd. VII.The income tax rate was 30%. VIII.Any goodwill element in the cost of the investment had not been impaired in the investment period. At 30 June 20X8,the carrying amount of the investment in the consolidated balance sheet of the group controlled by Delville Wood Ltd was:

What is the correct entry to recognise the equity of Dragon Ltd in Lagoon Industries when Lagoon records a profit of $85 000 and Dragon holds 35% of Lagoon's ordinary shares?

If an investment in an associate entity were to be accounted for using the cost method,the investment is initially recognised at its cost of acquisition and:

Which of the following is NOT an indication that an investor has the power to exert significant influence over an investee company?

Accounting for investment in associates by parent entities using the equity method will be done:

Discuss the different identification and disclosure requirements for goodwill purchased as part of an investment in a subsidiary and an associate.

On 1 November 20X6,a parent entity,Helios Ltd,acquired 25% (500 000 shares)of the share capital of Havers Ltd and the power to significantly influence the operating and financial policies of that company for $4 000 000 cash.In the period from the date of acquisition to 30 June 20X7,Havers Ltd earned a profit for the period of $500 000 (after tax of $200 000)and declared a dividend of $100 000.At 30 June 20X7,Helios Ltd recognised its equity in the dividend.At 30 June 20X7,the quoted market value of the shares in Havers was $10 per share.At 30 June 20X7,in the separate balance sheet of Helios Ltd and in the consolidated balance sheet of the group controlled by Helios Ltd,the investment in Havers Ltd would be reported as:

The equity carrying amount of an investment will always be equal to the investor's proportional share of the net assets of the investee.

The use of the equity method primarily provides information to the investor in relation to:

Explain the following statement: 'When reconciling the investor's interest in an associate's net assets to the equity accounted carrying amount of the investment in the investor's financial statements,the unimpaired balance of goodwill will be a reconciling item.'

On 1 November 20X6,a parent entity,Midstream Ltd,acquired 25% of the share capital of Delta Ltd and the power to significantly influence the operating and financial policies of that company for $5 000 000 cash.In the period from the date of acquisition to 30 June 20X7,Delta Ltd earned a profit for the period of $400 000 (after tax of $200 000)and declared a dividend of $200 000.At 30 June 20X7,Midstream Ltd recognised its equity in the dividend.For the year ended 30 June 20X7,in the separate income statement of Midstream Ltd and in the consolidated income statement of the group controlled by Midstream Ltd,the equity in the profit before tax of Delta Ltd would be reported as:

Indicia of an investor's incapacity to exert significant influence over the policy-making decisions of an investee include:

A gain on bargain purchase of an equity investment will be excluded from the investor's share of profit or loss of the associate.

Discuss the basis of the equity carrying amount of the investment.

In preparing the consolidated financial statements of the group controlled by Portia Ltd for the year ended 30 June 20X6,a fair value gain on available-for-sale financial assets would appear:

Indicia of the position that an investor does NOT have the power to significantly influence the operating,investment and financial policies of an investee include:

On 1 January 20X7,a parent entity,Emborough Ltd,acquired 20% of the share capital of Bernborough Ltd and the power to significantly influence the operating and financial policies of that company for $4 500 000 cash.In the period from the date of acquisition to 30 June 20X7,Bernborough Ltd earned a profit for the period of $400 000 (after tax of $200 000),recognised a post-acquisition asset revaluation increment of $500 000 (deferred tax liability $100 000)and declared a dividend of $200 000.At 30 June 20X7,Emborough Ltd recognised its equity in the dividend. In the consolidated balance sheet at 30 June 20X7 of the group controlled by Emborough Ltd,the investment in the associate would be reported at an amount of: