Patrick T. Barena: Chapter 32 - Investment in Associate

TFA 1
Chapter 32 – Investment in Associate

Patrick T. Barena
QUESTION 32-13 Multiple choice (IFRS)
6. Which statement is incorrect concerning the equity method?

a. The investment is initially recorded at cost.
b. The investment in associate is increased or decreased by the investor’s share of the profit or
loss of the investee after the date of acquisition.
c. The investor’s share of the profit or loss of the investee is recognized in the investor’s profit
or loss.
d. Dividends received from the investee are accounted for as dividend income.
7. If an associate has outstanding cumulative preference shares held by outside interests, the
investor computes share of profit or loss
a. After adjusting for preference dividends which were actually paid during the year.
b. Without regard from preference dividends.
c. After adjusting for the preference dividends only when declared.
d. After adjusting for the preference dividends, whether or not the dividends have been
declared.
8. Goodwill arising from an investment in an associate is

a. Included in the carrying amount of the investment and amortized over the useful life.
b. Included in the carrying amount of the investment and not amortized.
c. Charged to retained earnings.
d. Charged to expense immediately.
9. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off as loss.
d. Goodwill is not recognized separately within the carrying amount of the investment.
10. How is the impairment test carried out for an associate?

a. The goodwill is impairment tested individually.
b. The entire carrying amount of the investment is tested for impairment by comparing
the recoverable amount with the carrying amount.
c. The carrying amount of the investment shall be compared with the market value.
d. The recoverable amounts of all investments in associates shall be associated together.
TFA 1

Mylanie A. Barte
PROBLEM 32 - 14 (IFRS)
1. An investor shall discontinue the use of the equity method when

a. The investor ceases to have significant influence over the associate.
b. The associates operates under severe long-term restrictions.
c. The investor ceases to have control over the associate.
d. The business activities of the investor and associate are dissimilar.
2. When an investment ceases to be an associate and is accounted for in accordance with

IFRS, the fair value of the investment at the date when it ceases to be an associate
a. Is regarded as its cost on initial recognition as a financial asset.
b. Is regarded as its fair value on initial recognition as a financial asset.
c. Is regarded as its fair value on initial recognition as a financial liability.
d. Is regarded as its amortized cost on initial recognition as an investment.
3. On the loss of significant influence, the investor shall recognize in profit or loss any
difference between
a. The initial carrying amount of any retained investment, any proceeds from disposing
of the part interest and the carrying amount of the investment at the date when
significant influence is lost.
b. The fair value of any retained investment and the carrying amount of the investment
at the date significant influence is lost.
c. Any proceeds from disposing of the part interest and the carrying amount of the
investment at the date significant influence is lost.
d. The fair value of any retained investment, any proceeds from disposing of the part
interest and the carrying amount of the investment at the date significant influence is
lost.
4. The equity method is not applicable under all of the following circumstances, except
a. The investor is a wholly-owned subsidiary
b. The investor’s debt and equity instruments are not traded.
c. The investor is in the process of filing financial statements with a regulatory body
for the purpose of issuing debt and equity instruments in a public market.
d. The ultimate parent of the investor produces consolidated financial statements.
5. What is the accounting treatment when the financial statements of an associate are not
prepared as of the same date as the financial statements of the investor?
a. The associate shall prepare financial statements as the same date as that of the
investor.
b. The financial statements of the associate prepared up to a different date would be
used.
c. Any major transactions during the time gap of the financial statements shall be
accounted for.
d. As long as the gap is not greater than three months, there is no problem.
TFA 1

Christine Pauline C. Bathan
QUESTION 32-15 Multiple choice (IFRS)
1. After the date of acquisition, the investment account using the equity method would
a. Not be affected by the share of the earnings or losses of the investee

b. Not be affected by the share of the earnings of the investee but be decreased by the share of
the losses of the investee
c. Be increased by the share of the earnings of the investee but not be affected by the share of the
losses of the investee
d. Be increased by the share of the earnings of the investee and decreased by the share of
the losses of the investee.
2. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
a. Investor sells the investments

b. Investee declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee
3. When an investor uses the equity method to account for investment in ordinary shares, the
investment account is increased when the investor recognizes
a. A proportionate interest in the net income of the investee

b. A cash dividend received from the investee
c. Periodic amortization of the goodwill
d. Depreciation related to the excess of market value over carrying amount of the investee’s
depreciable assets at the date of purchase by the investor.
4. When an investor uses the equity method to account for investment in ordinary shares, cash
dividends received by the investor from the investee shall be recorded as
a. Dividend income
b. A deduction from investor’s share of the investee’s profit
c. A deduction from investment account
d. A deduction from shareholder’s equity
5. An investor uses the equity method to account for investment in ordinary shares. The purchase
price implies a fair value of the investee’s depreciable asset in excess of the investee’s net asset
carrying amount. The investor’s amortization of the excess.
a. Decreases the investment account
b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account
6. An investor uses the equity method to account for the purchase of another entity’s ordinary
shares. On the date of acquisition, the fair value of the investee’s inventory and land exceeded
their carrying amount. How would investor excess and land excess affect respectively the
investor’s equity earnings of the investee for the current year?
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
7. The excess of investor’s share of the net fair value of the associate’s net assets over the cost
investment is
a. Included in the determination of the investor’s share of the associate’s profit or loss in
the period in which the investment is acquired.
b. Credited to retained earnings directly.
c. Included in other comprehensive income.
d. A deferred gain.
8. An investor uses the equity method to account for 30% investment. Amortization of the
investor’s share of the excess of fair value over carrying amount of depreciable asset at the date
of the purchase shall be reported in the investor’s income statement as part of
a. Other expense
b. Depreciation expense
c. Equity in earnings investee
d. Amortization of goodwill
9. When an investor purchases sufficient ordinary shares to gain significant influence over the
investee, what is the proper accounting treatment of any excess of cost over the carrying amount
of the net assets acquired?
a. The excess remains in the investment account until it is sold

b. The excess is immediately expensed in the period in which the investment is made.
c. The excess is amortized over the time period that is reasonable in the light of the
underlying cause of the excess.
d. The excess is charged to retained earnings at the time the investor resells the investment.
10. An investor uses the equity method of accounting for a 30% ownership in an investee. At
year-end, the investor has a receivable from the investee. How should the receivable be reported
in the investor’s financial statements for the current year?
a. None of the receivable should be reported but the entire receivable should be offset against
investee’s payable to investor.
b. Seventy percent of the receivable should be separately reported with the balance offset against
30% of investee’s payable to investor.
c. The total receivable should be disclosed separately.
d. The total receivable should be included as part of the investment in associate, without separate
disclosure.
TFA 1

Christal Marie D. Brucal
QUESTION 32-16 Multiple choice (AICPA Adapted)

1. When an investor uses the fair value method to account for investment in ordinary shares, cash
dividends received by the investor from the investee should be recorded as
a. Dividend income
b. An addition to the investor’s share of the investee’s profit
c. A deduction from investor’s share of profit of the investee
d. A deduction from the investment account
2. An investor uses the fair value method to account for an investment in ordinary shares. A
portion of the dividends received this year were in excess of the investor’s share of investee’s
earnings subsequent to the date of investment. The amount of dividend revenue that should be
reported in the investor’s income statement for this year would be
a. Zero
b. The total amount of dividends received this year
c. The portion of the dividends received this year that were in excess of the investor’s share of
investee’s earnings subsequent to the date of investment
d. The portion of the dividends received this year that were not in excess of the investor’s share
of investee’s earnings subsequent to the date of investment
3. An investor uses the fair value method to account for investment in ordinary shares. Dividends
received in excess of the investor’s share of investee’s earnings subsequent to the date of
investment
a. Increase other comprehensive income
b. Decrease the investment account
c. Increase the investment account
d. Increase dividend revenue
4. An investor uses the fair value method to account for a 15% ownership in an investee. At year-
end, the investor has a receivable from the investee.
How should the receivable be reported?
a. The total receivable should be reported separately.

b. The total receivable should be included as part of the investment, without separate disclosure.
c. Eighty-five percent of the receivable should be reported separately with the balance offset
against the investee’s payable to the investor.
d. The total receivable should be offset against the investee’s payable to the investor.
5. On January 1 of the current year, an entity purchased 10% of another entity’s ordinary
shares. The entity purchased additional shares bringing the ownership up to 40% of the
investee’s ordinary shares outstanding on August 1 of the current year. During October of
the current year, the investee declared and paid a cash dividend on all of the outstanding
ordinary shares.
How much income from the investment should be reported for the current year?
a. 10% of investee’s income from January 1 to July 31, plus 40% of investee’s income from
August 1 to December 31
b. 40% of investee’s income from August 1 to December 31 only
c. 40% of investee’s income for the current year
d. Amount equal to dividends received from the investee

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TFA 1

Chapter 32 – Investment in Associate

QUESTION 32-13 Multiple choice (IFRS)

6. Which statement is incorrect concerning the equity method?

8. Goodwill arising from an investment in an associate is

10. How is the impairment test carried out for an associate?

Chapter 32 – Investment in Associate

1. An investor shall discontinue the use of the equity method when

2. When an investment ceases to be an associate and is accounted for in accordance with

Chapter 32 – Investment in Associate

QUESTION 32-15 Multiple choice (IFRS)

a. Not be affected by the share of the earnings or losses of the investee

a. Investor sells the investments

a. A proportionate interest in the net income of the investee

a. The excess remains in the investment account until it is sold

Chapter 32 – Investment in Associate

QUESTION 32-16 Multiple choice (AICPA Adapted)

How should the receivable be reported?

a. The total receivable should be reported separately.

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