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1 Topic 11: HOMEWORK SOLUTION (CH.23) Chapter 23 Associates and joint ventures Review Question 9 - Methods of accounting for investments Discuss the relative merits of accounting for investments by the cost method, the fair value method and the equity method. Cost method: Advantages: Simplicity Reliable measure Disadvantages : No indication of changes in value since acquisition Revenue recognised only on right to dividends Fair value method : Advantages: Up-to-date value, present information compared with past Information Revenue recognised as value changes rather than waiting for dividends Disadvantages : Reliability a function of how active the market is Costs associated with regular updating, extra costs for audit and valuation fees Equity method : Advantages: Carrying amount related to change in net assets of the investee Revenue recognised as profits earned, prior to dividend receipt Disadvantages : Carrying amount reliant on validity of investee information Carrying amount not based on market value Recognition of revenue prior to associate declaring dividend; no transaction has yet occurred Business School ACCT5942 Corporate Accounting and Regulation Sem1, 2017
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2 Chapter 23 Associates and joint ventures Practice Question 23.1 - equity method where where investor prepares or does not prepare consolidated financial statements Piano Ltd has a 30% interest in a joint venture, Mandolin Ltd, in which it invested $50 000 on 1 July 2014. The equity of Mandolin Ltd at the acquisition date was: Share capital Retained earnings $ 30 000 120 000 All the identifiable assets and liabilities of Mandolin Ltd were recorded at amounts equal to their fair values. Profits and dividends for the years ended 30 June 2015 to 2017 were as follows: Profit before tax Income tax expense Dividends paid 2015 2016 2017 $80 000 70 000 60 000 $30 000 25 000 20 000 $80 000 15 000 10 000 Required A. Prepare journal entries in the records of Piano Ltd for each of the years ended 30 June 2015 to 2017 in relation to its investment in the joint venture, Mandolin Ltd.
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