Equity Accounting

Question 1

What is the primary purpose of equity accounting?

Answer 1

To recognize the investment in an associate or joint venture and the share of its profits or losses.

Question 2

True or False: Equity accounting is used for controlling interests in subsidiaries.

Answer 2

False

Question 3

In equity accounting, how is the initial investment recorded?

Answer 3

At cost.

Question 4

What is the accounting treatment for dividends received under equity accounting?

Answer 4

Dividends are treated as a reduction in the investment balance.

Question 5

Fill in the blank: Equity accounting is applied when an investor has significant influence, typically defined as owning _____ of the voting power.

Answer 5

20% to 50%

Question 6

What financial statements are affected by equity accounting?

Answer 6

The income statement and the balance sheet.

Question 7

True or False: Under equity accounting, the investor’s share of the associate’s profits increases the carrying amount of the investment.

Answer 7

True

Question 8

What is the term used to describe the financial interest held by an investor in an associate?

Answer 8

Investment in associates.

Question 9

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

Answer 9

B) Ownership of less than 20%

Question 10

What is the effect of an associate’s losses on the investor’s financial statements?

Answer 10

The investor’s share of losses reduces the carrying amount of the investment.

Question 11

True or False: Equity accounting requires the use of fair value accounting for investments.

Answer 11

False

Question 12

What is the impact of foreign currency translation adjustments on equity accounted investments?

Answer 12

They are recognized in other comprehensive income.

Question 13

Fill in the blank: The equity method requires the investor to recognize its share of the associate’s _____ in its financial statements.

Answer 13

Profit or loss

Question 14

What is the maximum percentage of ownership that allows for equity accounting?

Answer 14

49%

Question 15

True or False: Equity accounting can be applied to joint ventures.

Answer 15

True

Question 16

What is a joint venture?

Answer 16

A contractual arrangement where two or more parties undertake an economic activity together, sharing control.

Question 17

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

Answer 17

C) It applies when there is significant influence

Question 18

What happens to the equity accounted investment when the associate is sold?

Answer 18

The gain or loss is recognized in the income statement.

Question 19

Fill in the blank: The investor’s share of the associate’s profits is reported in the _____ section of the income statement.

Answer 19

Investment income

Question 20

What is the treatment of impairment losses on equity accounted investments?

Answer 20

They are recognized in profit or loss and reduce the carrying amount of the investment.

Question 21

True or False: Under equity accounting, the investor must consolidate the financial statements of the associate.

Answer 21

False

Question 22

What is the key difference between equity accounting and consolidation?

Answer 22

Equity accounting is used for significant influence, while consolidation is for control.

Question 23

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

Answer 23

B) Recognizing share of profits

Question 24

What is the role of the investor in an associate under the equity method?

Answer 24

To exert significant influence over the associate’s financial and operating policies.

Question 25

True or False: Changes in the ownership interest of the investor affect the application of the equity method.

Answer 25

True