Company Accounting Multiple Choice Questions | Chapter 19

1.Under the cost model of accounting for an investment, changes to the carrying amount of the investment occur if:

A. the investee earns post-acquisition profits or losses;
B. goodwill included in the investment is amortised;
C. the investment is impaired;
D. dividends are received from the investee.


2.The method of accounting that applies to an investor and associate relationship is the:

A. cost method;
B. fair value method;
C. consolidation method;
D. equity method.

3. For the purposes of equity accounting an associate is a business entity including:

A. an unincorporated entity;
B. a joint venture;
C. a subsidiary;
D. venture capital organisations.


4. For the purposes of equity accounting, significant influence is regarded as the power of an investor to:

A. control the financial and operating policies of an associate;
B. participate in the financial and operating policy decisions of an investee;
C. participate in the day-to-day management of a joint venture interest;
D. dominate the financing decisions of an entity.


5. The application of the equity accounting method of accounting is based on the investor owning:

A. more than 50% of the voting power in an associate;
B. more than 20% of the voting power in an associate;
C. less than 20% of the voting power in an associate;
D. part of the share capital of an associate whether or not there are voting rights attached.


6. The equity method of accounting need not be applied where the investment:

A. represents more than 20% of the voting shares of an associate;
B. does not provide the investor with significant influence;
C. is held exclusively with a view to its disposal within 12 months;
D. is made by an investor who has no subsidiaries.

7. In respect to the equity method of accounting, where an investor has no subsidiaries the investor must apply the:

A. cost method of accounting for investments in associates;
B. consolidated financial reporting
C. equity method in its own accounting records;
D. net present value method to measuring the expected cash flows from an associate.


8. The 'one-line' equity accounting method is used when accounting for an investment in

A. a subsidiary;
B. a unit trust;
C. a joint venture;
D. an associate.

9. Mandy Limited acquired a 30% share in Sandy Limited for $27 000. Mandy Limited has no other investments. At the date on which it became an associate, Sandy Limited had the following equity items: Share capital $50 000, Retained earnings $40 000. At the end of the financial year following acquisition, Sandy Limited generated a profit of $6 000. The carrying amount of the investment in Sandy Limited at the end of the financial year is:

A. $25 200;
B. $27 000;
C. $28 800;
D. $33 000.

10. Codger Limited acquired a 40% investment in Lodger Limited for $50 000. Lodger declared and paid a dividend of $10 000. Codger Limited does not prepare consolidated financial statements. The appropriate entry for the investor to record this dividend is:

A.
DR Cash $4 000
CR Investment in associate $4 000;
B.
DR Dividends payable $4 000

CR Cash $4 000;
C.
DR Cash $4 000

CR Dividend revenue $4 000;
D.
DR Investment in associate $4 000

CR Dividend revenue $4 000.


11. Investor Limited acquired a 25% interest in Investee Limited for $15 000. Investor holds other equity investments but does not prepare consolidated financial statements. Investee Limited revalued its buildings class of assets by $50 000 during the current financial period. The balance of the investment in associate account at the end of the current financial period is:

A. $12 500;
B. $15 000;
C. $16 250;
D. $27 500.

12. Tea Limited acquired a 35% investment in Cup Limited for $20 000. Tea Limited also owns two subsidiaries and prepares consolidated financial statements. Cup Limited declared and paid a dividend of $5 000 during the current financial year. The appropriate consolidation adjustment to record this transaction will include the following entry:

A. DR Investment in associate;
B. DR Cash;
C. DR Dividend revenue;
D. DR Share of profit of associate.

13. Company A acquired a 30% interest in an associate, Company B, for $25 000. Company A is part of a consolidated group. In the financial period immediately following the date on which it became an associate, Company B revalued assets by $4 000, generated profits of $10 000 and declared a dividend of $5 000. The balance in the investment account after equity accounting has been applied is:

A. $26 200;
B. $27 700;
C. $28 000;
D. $29 200.

14. Where goodwill is acquired on an investment in an associate the goodwill is:

A. amortised across the useful life of the goodwill;
B. written off immediately against the carrying amount of the investment;
C. carried as a separate asset in the accounting records of the investor;
D. not subject to amortisation.

15. When an associate declares and pays a dividend out of pre-acquisition profits the application of the equity method results in the investor making the following adjustment:

A. DR Investment in associate;
B. Cr Cash;
C. CR Dividend revenue;
D. No adjustment.


16. If an associate incurs losses the investor is required to:

A. ignore the losses for the purposes of equity accounting adjustments;
B. recognise losses only to the point where the carrying amount is equal to the initial investment;
C. recognise losses to the point where the carrying amount of the investment is zero;
D. reclassify the investment as a current asset.

17. Where an investor has discontinued the use of the equity method because the associate has incurred losses it must disclose the:

A. unrecognised share of current period and cumulative losses of the associate;
B. reason why it has discontinued the method;
C. accounting policy it has adopted in place of the equity method;
D. effect on the statement of changes in equity if it had continued to use the method.


18. Investments in associates accounted for using the equity method are presented in the statement of financial position amongst:

A. equity;
B. non-current liabilities;
C. current assets;
D. non-current assets.

Solution