B407F Week 9 Tutorial solution

B407F Week 9 Tutorial solution - B407F Week 9 Tutorial...

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B407F Week 9 Tutorial solution– Investment in associates and joint arrangement Question 1 (a) Phoenix Limited is required to use the equity method of accounting for its investment in Ace Limited if Ace is its associate and Phoenix is preparing consolidated accounts. Ace is an associate of Phoenix if Phoenix can, or is presumed to be able to, exercise significance influence over the operations of Ace. Significance influence exist when the investor company has the power to participate in the financial and operation policy decisions of the investee but is not control over those policies. Representation on the board of directors is one indication of such participation. The significant influence is presumed to exist where investment is held for the long term. Unless there is contrary evidence, there is a presumption that holding of 20% or more enables the investor company to exercise significant influence over the investee company. Thus, Investment in Ace of 25% indicates that Phoenix has significant influence over Ace, unless there is evidence to the contrary. Therefore, Ace should be accounted for in the consolidated accounts as an associate using the equity method. (b) Incorrect Treatment Proper Treatment Share of Associates’ profits Phoenix has incorrectly treated dividends received from Ace as income for the year in its consolidated accounts. Phoenix should have recorded its share of profits after tax from Ace instead of recording dividend received as income. Carrying amount of Investment in associate The carrying amount of investment in Ace should not be carried at cost The investment in associate is initially recorded at cost, and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of associate. Thus, Phoenix should increase its Investment in Ace by its share of Ace’s
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B407F Week 9 Tutorial solution - B407F Week 9 Tutorial...

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