Accounting for Investments and Ventures

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Questions and Answers

AB has several subsidiaries, and exerts joint control over EF, an entity in which it holds 30% of the ordinary share capital. The parties sharing control have rights to the net assets of EF. During the financial year ended 30 April 20X5, EF sold goods to AB valued at $80,000. The cost of the goods to EF was $60,000. 25% of the goods remained in AB's inventory at 30 April 20X5. What is the amount of the adjustment required in respect of the inventory? Give your answer to the nearest $.

1500

Which THREE of the following are permissible methods of measuring investments in associates and joint ventures in the parent’s separate financial statements?

At fair value (correct)
At cost (correct)
At value in use
Using the equity method (correct)
Using the consolidation method

QR is one of three shareholders in another entity, LP. The majority shareholder holds 60.1%, the second shareholder holds 20% and QR holds 19.9% of the voting shares. The board of directors comprises six board members from the majority shareholder and two board members from each of QR and the 20% shareholder. A shareholders' agreement states that certain board and shareholder resolutions require unanimous or majority decision. There is no indication that the majority shareholder and the 20% shareholder act together in a common way. During the year, senior managers of QR were seconded to LP to provide technical advice. How should QR classify the investment in LP?

As an associate
As a joint venture (correct)
As a financial asset
As a subsidiary

Which THREE of the following statements are true?

<p>A joint venture is always structured through a separate vehicle (B), A joint venture must be accounted for using the equity method in the consolidated financial statements (A), A contractual arrangement and two or more parties sharing control are the key characteristics of a joint arrangement (C)</p> Signup and view all the answers

Flashcards

Inventory Adjustment Calculation

The amount of adjustment required in respect of the inventory is calculated as follows:

Unsold goods in AB's inventory = $80,000 x 25% = $20,000
Cost of the goods in inventory = $60,000 x 25% = $15,000
Adjustment required = $20,000 - $15,000 = $5,000

Therefore, the amount of the adjustment required in respect of the inventory is $5,000.

Measurement Methods for Associates and Joint Ventures

The permissible methods of measuring investments in associates and joint ventures in the parent's separate financial statements are:

At cost: The investment is initially recorded at cost and subsequently adjusted for any impairment losses.
Using the equity method: The investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the associate's or joint venture's profit or loss.
At fair value: The investment is initially recorded at fair value and subsequently adjusted to reflect changes in fair value.

The other methods, at value in use and using the consolidation method, are not permissible for measuring investments in associates and joint ventures in the parent's separate financial statements.

Associates: Significant Influence

QR holds 19.9% of the voting shares, which is not a controlling interest. However, QR has significant influence over LP through its board representation and the shareholders' agreement. While the majority shareholder holds 60.1% and the second shareholder holds 20%, there's no indication of them acting together in a common way. Therefore, the presence of a significant influence despite not holding a majority stake classifies the investment as an associate.

Joint Ventures: Separate Vehicle

A joint venture is always structured through a separate vehicle, a distinct legal entity formed by the parties involved. This allows for independent management and operations of the joint venture. In contrast, joint operations are not structured through a separate vehicle. They are operated directly by the parties involved without a separate legal entity. Therefore, joint ventures require a separate vehicle, while joint operations do not.