check your understanding of accounting for associates

Q1. Under the equity method of accounting, an investor recognizes its share of the investee’s:

• A. Revenue only
  

• 
  B. Net assets
  

• 
  C. Net income or loss
  

• 
  D. Total comprehensive income

Answer explanation

Explanation: The equity method requires the investor to recognize its share of the associate's profit or loss in its own income statement.

Which of the following usually indicates that an investor has significant influence over an investee?

• A. Holding 10% of the voting power
  

• 
  B. A contractual agreement for supply of goods
  

• 
  C. Representation on the board of directors
  

• 
  D. Absence of any board involvement

Answer explanation

Explanation: Representation on the board is one of the key indicators of significant influence, generally assumed when ownership is 20% to 50%.

Company A acquires 30% of Company B for $500,000. At the acquisition date, Company B’s net assets have a fair value of $1,200,000. What is the goodwill included in the investment in associate?

• A. $0
  

• 
  B. $140,000
  

• 
  C. $500,000
  

• 
  D. $140,000

Answer explanation

Explanation: Share of net assets = 30% × $1,200,000 = $360,000. Goodwill = $500,000 – $360,000 = $140,000.

An investor owns 25% of an associate. The associate reports a profit of $400,000 for the year. What amount will the investor recognize as its share of profit?

• A. $100,000
  

• 
  B. $25,000
  

• 
  C. $400,000
  

• 
  D. $0

Answer explanation

Explanation: Investor's share = 25% × $400,000 = $100,000

Under IAS 28, if there is objective evidence of impairment, the investment in the associate must be:

• A. Fully derecognized
  

• 
  B. Written down to fair value
  

• 
  C. Written down to recoverable amount
  

• 
  D. Ignored until the associate sells assets

Answer explanation

Explanation: IAS 28 requires that the carrying amount of the investment be tested for impairment and reduced to the recoverable amount if impaired.

An investor's carrying amount of an investment in an associate is $600,000. The recoverable amount is assessed at $450,000 due to significant losses. What is the impairment loss to be recognized?

• A. $150,000
  

• 
  B. $0
  

• 
  C. $600,000
  

• 
  D. $450,000

Answer explanation

Explanation: Impairment loss = Carrying amount – Recoverable amount = $600,000 – $450,000 = $150,000.