Chapter 20: Accounting For Investments in Associates: Review Questions

Tutorial Week 10 Moodle Questions and Solutions
Chapter 20: Accounting for investments in associates
REVIEW QUESTIONS
3. Discuss the similarities and differences between the criteria used to identify
subsidiaries and that used to identify associates.
A subsidiary is identified where another entity controls that entity. Control is defined in para
2 of AASB 128.
An associate is identified where another entity has significant influence over that entity.
Control
Power over the investee
Significant influence
Power to participate
Exposure or rights to variable returns

From involvement in investee
To participate in the financial and

operating policy decisions
Ability to affect returns through power
-----------
No ownership interest is necessary
No ownership interest is necessary
4. What is meant by significant influence?

Para 2 of AASB 128 states:
Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies
Note:
power to participate
financial and operating policy decisions
6. Discuss the relative merits of accounting for investments by the cost method, the fair
value method and the equity method.
Cost method:
Advantages:
Disadvantages:
Fair value method:

Advantages:
Disadvantages:
Simplicity
Reliable measure
No indication of changes in value since acquisition
Revenue recognised only on dividend receipt
Up-to-date value, present information compared with past

Information
Revenue recognised as value changes rather than waiting for
dividends
Reliability a function of how active the market is
Costs associated with regular updating, extra costs for audit and
valuation fees
Equity method:
Advantages:
Disadvantages:
Carrying amount related to change in wealth of the investee

Revenue recognised prior to dividend receipt
Carrying amount reliant on validity of investee information
Carrying amount not based on market value
Recognition of revenue prior to associate declaring dividend;
no transaction has yet occurred
Tutorial Week 11 Blackboard Questions and Solutions
PRACTICE QUESTIONS
Question 20.2
HARP LTD LYRE LTD
40%
Harp Ltd
Lyre Ltd
At 1 July 2012:
Net fair value of identifiable assets
and contingent liabilities of Lyre Ltd
Net fair value acquired
Cost of investment
Goodwill
=
=
=
=
=
$400 000
40% x $400 000
$160 000
$170 000
$10 000
Recorded profit Lyre Ltd

Investors Share 40%
$39 000
15 600
Increment in Asset Revaluation Surplus

(40% x $100 000)
$40 000
Note:
1.
There is no need to adjust for differences in depreciation method. If both companies

have chosen a method that best reflects the flow of benefits as the assets are consumed,
then there is no policy difference.
2.
As the general reserve is created as an appropriation from Retained Earnings, then

there is no need to adjust for movements in general reserve.
The journal entries in the books of Harp Ltd for the year ended 30 June 2013 are:
1 July 2012
2012 2013
Investment in Lyre Ltd

Cash/Share capital
Dr
Cr
170 000
Cash
Dr
Cr
6 000

Share of profit or loss
of associates
(40% x $39 000)
Dr
Cr
15 600

Asset revaluation surplus
(40% x $100 000)
Dr
Cr
40 000

(Dividend from associate:
40% x $15 000)
30 June 2013
170 000
6 000
15 600
40 000
Question 20.3
LUTE LTD SITAR LTD
Profit for the period
Adjustments:
Unrealised after tax profit in ending inventory (a)
[$5 000 (1 30%)]
Unrealised after tax profit in ending inventory (b)
[$2 500 (1 30%)]
Unrealised profit in opening inventory (c)
[$6 000 (1 30%)
$100 000
(3 500)
(1 750)
4 200
98 950
$19 790
Investors share 20%

Journal entries in books of Lute Ltd:
1.
Cash
Investment in Sitar Ltd
(20% ($10 000 + $20 000))
2.
Investment in Sitar Ltd

Share of profit or loss of associate
Dr
Cr
6 000
Dr
Cr
19 790
6 000
19 790
Tutorial Week 11 Blackboard Questions and Solutions
Question 20.7
BELL LTD CHIME LTD
30%
Bell Ltd
At 1 July 2011:
Net fair value of identifiable assets
and liabilities of Chime Ltd
Net fair value acquired

Cost of investment
Goodwill
Chime Ltd
=
=
=
=
=
=
Depreciation:
Non-current assets: 20% (30% x $10 500)
$20 000 + $10 000 (equity)

+ $15 000 (1 30%) (assets)
$40 500
30% x $40 500
$12 150
$13 650
$1 500
$630
1. Bell Ltd does not prepare consolidated financial statements
Profit for 2012-2013 period

Adjustments:
Unrealised after tax profit in ending inventory
$30 000 (1 30%)
Realised profit on opening inventory
$10 000 (1 30%)
Investors share 30%
Pre-acquisition adjustments:
Depreciation
Increase in asset revaluation surplus

Investors share 30%
$180 000
(21 000)
7 000
$166 000
$49 800
(630)
$49 170
$30 000
$9 000
Question 20.7 (contd)

The required entries in Bell Ltds accounts for the 2012-2013 year are:
Cash
Dr
Cr
15 000
Dividend receivable
Investment in Chime Ltd
(30% x $50 000 dividend provided)
Dr
Cr
15 000

(30% x $30 000)
Dr
Cr
9 000

Share of profits or losses of associates
Dr
Cr
49 170

(30% x $50 000 dividend paid)
2.
15 000
15 000
9 000
49 170
Bell Ltd prepares consolidated financial statements

Change in retained earnings balance 2011 2012
($50 000 - $10 000)
Adjustments:
General reserve transfers
Unrealised profit in inventory at 30/6/12
($10 000 (1 - 30%)
$40 000
5 000
(7 000)
$38 000
$11 400
Investors share 30%

Pre-acquisition adjustments:
Depreciation
(630)
$10 770
The consolidation worksheet entries at 30/6/13 are:

Retained earnings (1/7/12)
Dr
Cr
10 770

(30% x $30 000)
Dr
Cr
9 000

Share of profits or losses of associates
Dr
Cr
49 170
Dividend revenue
(30% x $50 000 dividend paid)
Dr
Cr
15 000
Dividend revenue
(30% x $50 000 dividend declared)
Dr
Cr
15 000
10 770
9 000
49 170
15 000
15 000

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Tutorial Week 10 Moodle Questions and Solutions