Equity Accounting Flashcards
What is the primary purpose of equity accounting?
To recognize the investment in an associate or joint venture and the share of its profits or losses.
True or False: Equity accounting is used for controlling interests in subsidiaries.
False
In equity accounting, how is the initial investment recorded?
At cost.
What is the accounting treatment for dividends received under equity accounting?
Dividends are treated as a reduction in the investment balance.
Fill in the blank: Equity accounting is applied when an investor has significant influence, typically defined as owning _____ of the voting power.
20% to 50%
What financial statements are affected by equity accounting?
The income statement and the balance sheet.
True or False: Under equity accounting, the investor’s share of the associate’s profits increases the carrying amount of the investment.
True
What is the term used to describe the financial interest held by an investor in an associate?
Investment in associates.
Multiple Choice: Which of the following is NOT a characteristic of an associate? A) Significant influence B) Ownership of less than 20% C) Joint control D) Common management
B) Ownership of less than 20%
What is the effect of an associate’s losses on the investor’s financial statements?
The investor’s share of losses reduces the carrying amount of the investment.
True or False: Equity accounting requires the use of fair value accounting for investments.
False
What is the impact of foreign currency translation adjustments on equity accounted investments?
They are recognized in other comprehensive income.
Fill in the blank: The equity method requires the investor to recognize its share of the associate’s _____ in its financial statements.
Profit or loss
What is the maximum percentage of ownership that allows for equity accounting?
49%
True or False: Equity accounting can be applied to joint ventures.
True
What is a joint venture?
A contractual arrangement where two or more parties undertake an economic activity together, sharing control.
Multiple Choice: Which of the following statements about equity accounting is true? A) It applies to all investments B) It is only for controlling interests C) It applies when there is significant influence D) It is used for passive investments
C) It applies when there is significant influence
What happens to the equity accounted investment when the associate is sold?
The gain or loss is recognized in the income statement.
Fill in the blank: The investor’s share of the associate’s profits is reported in the _____ section of the income statement.
Investment income
What is the treatment of impairment losses on equity accounted investments?
They are recognized in profit or loss and reduce the carrying amount of the investment.
True or False: Under equity accounting, the investor must consolidate the financial statements of the associate.
False
What is the key difference between equity accounting and consolidation?
Equity accounting is used for significant influence, while consolidation is for control.
Multiple Choice: Which of the following is a key principle of the equity method? A) Recognizing all revenues B) Recognizing share of profits C) Ignoring losses D) Reporting at fair value
B) Recognizing share of profits
What is the role of the investor in an associate under the equity method?
To exert significant influence over the associate’s financial and operating policies.
