Question 1

Where the investor prepares consolidated financial statements and a dividend is received from an associate,the entry in the investor's books on receipt of the dividend involves a credit adjustment against dividend revenue.

Accepted Answer

This statement is true. When an investor prepares consolidated financial statements and receives a dividend from an associate, the entry in the investor's books involves a credit adjustment against dividend revenue. This adjustment is necessary to reflect the investor's share of the associate's earnings, which are included in the consolidated financial statements.

Question 2

The investor recognises its shares of an associate's losses only to the point where the carrying amount of the investment reaches zero.

Accepted Answer

This statement is true. The investor is only responsible for recognizing losses in their investment up to the point where the carrying amount (the value of the investment in the investor's books) reaches zero. Once the carrying amount has been reduced to zero, the investor is no longer responsible for recognizing further losses, unless they have incurred additional obligations or made additional investments in the associate.

Question 3

The investor's share of current period profits is disclosed as a separate line item in the statement of profit or loss and other comprehensive income.

Accepted Answer

This is true as the investor's share of current period profits is often presented as a separate line item after the company's own net profit in the statement of profit or loss and other comprehensive income. This line item is commonly referred to as "non-controlling interest" or "minority interest".

Question 4

The holding of debentures by an investor in an associate,and the payment of interest on those debentures,requires adjustment under equity accounting.

Accepted Answer

Under equity accounting, investments in associates are accounted for using the equity method, where the investment is initially recognized at cost and subsequently adjusted for the investor's share of the associate's profits or losses. Holding debentures and receiving interest payments from an associate are treated as separate financial transactions and do not require adjustment in the equity accounting for the investment in the associate.

Question 5

Only upstream transactions are adjusted for when making notional adjustment to post-acquisition profits of an associate prior to calculating the investor's share..

Accepted Answer

Both upstream and downstream transactions need to be adjusted for when making notional adjustments to post-acquisition profits of an associate prior to calculating the investor's share, to eliminate unrealized profits or losses.

Question 6

Where the investor does not prepare consolidated financial statements and a dividend is received from an associate,the entry in the investor's books on receipt of the dividend involves a credit adjustment against dividend revenue.

Accepted Answer

The answer of Where the investor does not prepare consolidated...

Question 7

Where an investment in an associate is made in a number of separate acquisitions,the equity method is applied from the date that significant influence is obtained.

Accepted Answer

When an investment in an associate is made in separate acquisitions, the equity method is applied from the date that significant influence is obtained.

Question 8

Equity adjustments must be made for transactions between the associate and the investor that give rise to unrealised profits or losses.

Accepted Answer

Equity adjustments are necessary for transactions between the associate and investor that result in unrealized profits or losses. This is based on the principle that the investor's share of the associate's profits or losses should reflect the economic substance of the underlying transaction.

Quiz 23: Associates and Joint Ventures