Associates & Joint Ventures | Test Bank 9e

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Chapter 29 Testbank

1. 'Investee' is defined as an entity in which an investor has a controlling interest.

True   False

2. 'Significant influence' is explained in paragraph 3 of AASB 128 as the power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies.

True   False

3. Joint arrangements are particularly common in the mining, real estate development and construction industries, and have been for several decades.

True   False

4. The loss of significant influence can occur with or without a change in absolute or relative ownership levels.

True   False

5. According to AASB 12 Disclosure of Interests in Other Entities, an entity shall disclose information that enables users of its financial statements to evaluate the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates.

True   False

6. Materiality can be defined as 'a threshold concept concerning the relevance of an event or transaction to financial statement users'.

True   False

7. AASB 128 provides guidance on how to apply the equity method of accounting.

True   False

8. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition.

True   False

9. AASB 128 prescribes the use of the equity method of accounting when the effect of equity accounting losses or revaluation decrements causes the carrying amount of the investment to fall below zero.

True   False

10. An equity investment is defined as:

A. shares in an organisation, giving the investor a joint control over financial and operating policy decisions.

B. shares in an organisation, giving the investor a control over the entity's operating policy and distribution of profit.

C. shares in an organisation, giving the investor an ownership interest and therefore a share in the organisation's profit.

D. shares in an organisation, giving the investor a significant influence over the entity's financial and operating policy decisions.

11. Which of the following is not a factor to consider in determining whether one entity has significant influence over another entity?

A. Representation on the board of directors of the investee

B. Material transactions between the investor and the investee

C. Provision of essential technical information

D. Interchange of sales personnel

12. AASB 128 requires that where an investor company does significantly influence an investee:

A. the investee company must revalue its assets to fair value and disclose all related party transactions

B. the investor company must mark the shares to market

C. the investee company must provide the investor company with details regarding profits made on inter-company transactions so that they may be eliminated from the group accounts

D. the investor company must adopt the equity method of accounting for the investment

13. Significant influence is defined in AASB 128 as:

A. the controlling ability of an entity to affect substantially both the financial and operating policies of another entity

B. the power of an entity to participate in the financial and operating policy decisions of the investee, but it is not control or joint control over those policies

C. the demonstrated ability of an entity to affect substantially or control either the financial or operating policies of another entity

D. the ability of a company to change the composition of managerial board of another company

14. Mop Ltd acquired a 40 per cent interest in Bucket Ltd on 1 July 2024 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:

Additional information relating to the period ended 30 June 2025:

Bucket Ltd had an after-tax profit of $665 000. Bucket Ltd proposed a dividend out of post-acquisition profits of $90 000. 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 under the equity accounting method for the period ended 30 June 2025 assuming that Mop Ltd is a parent entity?

A.

B.

C.

D.

15. Flower Ltd acquired a 35 per cent interest in Bud Ltd on 1 July 2023.

Information relating to the period ended 30 June 2025 is as follows:

In the previous period, consolidation adjustments had a net effect of $61 250 (debit) to the Investment account in Bud Ltd.

Bud Ltd had an after-tax profit of $190 000 for the 2024/2025 period.

Bud Ltd revalued the land upward during the period by $100 000.

Bud Ltd declared a $60 000 dividend out of post-acquisition profits. This dividend will not be paid until the following period.

Flower Ltd accrues the dividends of associates as revenue when they are proposed. The investment has been recorded in Flower'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 2025 assuming that Flower Ltd is a parent entity (Ignore tax)?

A.

B.

C.

D.

16. A joint venture is defined in both AASB 128 and AASB 11 as:

A. an arrangement whereby two or more parties carry on business with a common goal to make a profit and each can commit the joint venture to debts through decisions made unilaterally.

B. an arrangement whereby two or more venturers establish a common activity in which they jointly and severally take responsibility for liabilities and expenses and obtain the benefits of outputs generated.

C. a legal entity constituted by venturers pursuing a common goal and sharing control of assets and responsibility for expenses and liabilities.

D. a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

17. Sting Ltd and Pink Ltd enter into a contractual agreement to form a joint arrangement which is considered to be a joint operation on 1 July 2024. Sting Ltd is to contribute land and production buildings and equipment. Pink Ltd agrees to contribute $8.1 million in cash. It is agreed that they will share output, assets and future contributions in the ratio 50:50. The following information relates to the contribution by Sting Ltd.

What are the entries to record the formation of the joint operation in the books of Sting Ltd and Pink Ltd?

A.

Sting Ltd's books ($000)

Dr

Cash

3 350

Cr

Land

1 750

Cr

Buildings

950

Cr

Equipment

650

Pink Ltd's books

Dr

Land

1 750

Dr

Buildings

950

Dr

Equipment

650

Cr

Cash

3 350

B.

Sting Ltd's books ($000)

Dr

Cash

4 050

Cr

Land

1 750

Cr

Buildings

950

Cr

Equipment

650

Cr

Profit on sale of land

250

Cr

Profit on sale of buildings

50

Cr

Profit on sale of equipment

400

Pink Ltd's books

Dr

Land

1 750

Dr

Buildings

950

Dr

Equipment

650

Dr

Investment in JO

4 750

Cr

Cash

8 100

C.

Sting Ltd's books ($000)

Dr

Investment in JO

4 750

Cr

Land

1 750

Cr

Buildings

950

Cr

Equipment

650

Cr

Asset revaluation reserve

700

Pink Ltd's books

Dr

Investment in JO

4 050

Cr

Cash

4 050

D.

Sting Ltd's books ($000)

Dr

Cash

4 050

Cr

Land

1 750

Cr

Buildings

950

Cr

Equipment

650

Cr

Profit on sale of land

250

Cr

Profit on sale of buildings

50

Cr

Profit on sale of equipment

400

Pink Ltd's books

Dr

Land

2 000

Dr

Buildings

1 000

Dr

Equipment

1 050

Cr

Cash

4 050

18. A joint arrangement that is not structured through a separate vehicle is called:

A. a wholly-owned subsidiary

B. a joint operation

C. a contractual arrangement

D. a partnership

19. According to AASB 11, which of the following is defined as 'a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement'?

A. jointly controlled entities

B. jointly controlled assets

C. joint operations

D. joint ventures

20. According to paragraph 22 of AASB 128, in applying the equity method of accounting, the carrying amount of the investment in the associate must be ________ by the amount of the investor's share of the post-acquisition profit or loss of the associate after adjustments for certain inter-entity transactions.

A. increased

B. increased or decreased

C. decreased

D. None of the given answers are correct.

21. The purpose of ________ is to determine the carrying amount of the investment in the associate. That is, this accounting standard provides guidance about a measurement technique and not a consolidation technique.

A. AASB 128

B. AASB 126

C. AASB 127

D. None of the given answers are correct.

22. When the equity-accounted value of the investment in the associate falls to zero and losses continue, the use of the equity method of accounting should be _________________. (paragraph 38 of AASB 128).

A. continued

B. suspended

C. strictly followed

D. None of the given answers are correct.

23. According to paragraph 39 of AASB 128, following the suspension of the equity method, if the associate or joint venture subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits ___________ the share of losses not recognised.

A. equals

B. is greater than

C. is less than

D. None of the given answers are correct.

24. According to AASB 12 Disclosure of Interests in Other Entities, an entity shall disclose:

(a) for each joint arrangement and associate that is material to the reporting entity:

A. the name of the joint arrangement or associate

B. the nature of the entity's relationship with the joint arrangement or associate

C. the principal place of business (and country of incorporation, if applicable and different from the principal place of business) of the joint arrangement or associate

D. All of the given answers are correct.

25. According to AASB 12 Disclosure of Interests in Other Entities, an entity shall disclose:

(b) for each joint venture and associate that is material to the reporting entity:

A. whether the investment in the joint venture or associate is measured using the equity method or at fair value

B. summarised financial information about the joint venture or associate as specified in paragraphs B12 and B13

C. if the joint venture or associate is accounted for using the equity method, the fair value of its investment in the joint venture or associate, if there is a quoted market price for the investment

D. All of the given answers are correct.

26. A ________________ is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

A. joint venture

B. joint operation

C. contractual arrangement

D. None of the given answers are correct.

27. What are the parties to a joint venture called?

A. Joint venturers

B. Joint contractors

C. Joint parties

D. None of the given answers are correct.

28. A joint venturer will choose between measuring its investment in the joint venture at ____________________ in its own separate financial statements, and apply the equity method of accounting in its consolidated financial statements.

A. either cost or amortised value

B. either fair value or consolidated value

C. either cost or fair value

D. None of the given answers are correct.

29. If the joint venturer prepares consolidated financial statements, then the equity method ______________ in the consolidated financial statements.

A. will be used

B. will not be used

C. is not relevant

D. None of the given answers are correct..

30. Discuss the accounting treatment for a joint operation as prescribed in AASB 11 Joint Arrangements.

______________________________________________________________________________

31. Discuss the adjustments that the investor is required to make in terms of the share of associate's profit or loss in inter-entity transactions.

______________________________________________________________________________

32. Discuss the application of the equity method of accounting when losses have been incurred by an associate.

______________________________________________________________________________

33. Discuss when the equity method of accounting is discontinued, as per AASB 128.

______________________________________________________________________________

34. Define joint venture as per AASB 128 and AASB 11.

______________________________________________________________________________

35. Discuss the method that is used to prepare consolidated financial statements by joint venturers.

______________________________________________________________________________

36. Discuss briefly AASB 12 Disclosure of Interests in Other Entities.

______________________________________________________________________________

37. Define 'joint control' as per AASB 11.

______________________________________________________________________________

38. Define 'joint arrangement' as per AASB 11.

______________________________________________________________________________

39. Discuss, using an example, where a transaction is between two associates of the investor, what the treatment on unrealised profits or losses will be, as per AASB 128.

______________________________________________________________________________

Chapter 29 Testbank