CHAPTER 22

INVESTMENT IN ASSOCIATE
QUESTION 22-1
Define the following:

1. Significant influence
2. Control
3. Associate
4. Subsidiary

ANSWER 22-1

1. Significance influence is the power to participate in the financial and operating policy decisions
of the investee but not control or joint control over those policies.

2. Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.

3. Associate is an entity, including an incorporated entity such as a partnership, over which the
investor has significant influence and that is neither a subsidiary nor an interest in a joint
venture.

4. Subsidiary is an entity including an unincorporated entity such as a partnership that is controlled

by another entity known as the parent.

QUESTION 22-2

When thus an investor have significant influence?

ANSWER 22-2

The assessment of significant influence is a matter of judgment. However, PAS 28 provides a practical
guidance to assist management in making such assessment.

If the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the
investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated
that this is not the case.

Conversely, if the investor holds, directly, or indirectly through subsidiaries, less than 20% of the voting
power of the investee, it is presumed that the investor does not have significant influence, unless such
influence can de clearly demonstrated.

A substantial or majority ownership by another investor does not necessarily preclude an investor from
having significant influence.
The existence of the significant influence by an investor is usually evidenced in one or more of the
following ways:

a. Representation in the board of directors

b. Participation in policy making process
c. Material transactions between the investor and the investee
d. Interchange of the managerial personnel
e. Provision of essential technical information

QUESTION 22-3

Explain the treatment of potential voting rights in relation to having significant influence.

ANSWER 22-3

An entity may own share warrants, debt or equity instruments that are convertible into common shares
that have potential, if exercised or converted, to give the entity additional voting power.

The existence of such potential voting rights is considered in assessing whether an entity has significant
influence.

However, when potential voting rights exist, the investor’s share of profit or loss of the investee and
changes in the investee’s equity is determined on the basis of “present ownership interest” and does not
reflect the possible exercise or conversion of potential voting rights.

QUESTION 22-4

When thus an investor lose significant influence?

ANSWER 22-4

An entity loses significant influence over an investee when it loses the power to participate in the
financial and operating policy decisions of the investee.

The loss of significant influence can occur with or without change in the absolute or relative ownership
interest.

For example, the loss of significant influence could occur when an associate becomes subject to control
of a government, court, administrator or regulator.

The loss of significant influence could also occur as a result of a contractual agreement.

QUESTION 22-5

Explain the equity method of accounting.

ANSWER 22-5
The equity method is based on the economic relationship between the investor and the investee. The
investor and the investee are viewed as a single economic unit.

The equity method is applicable when the investor has a significance over the investee.

Under the equity method, the investment is initially recorded at a cost but is subsequently increased by
the net income of the investee and decreased by the net loss and dividend payments of the investee.

Note that the investment must be in ordinary shares. If the investment is in preference shares, the equity
method is not appropriate regardless of the percentage because the preference share is a nonvoting
equity.

The investment in preference shares may be accounted for as at fair value through profit or loss or at fair
value, through other comprehensive income or nonmarketable investment.

Technically, if the investor has significant influence but not control over the investee, the investee is said
to be an associate or associated company. The investment in associate accounted for using the equity
method shall be classified as noncurrent asset.

Accordingly, under the equity method, the investment in ordinary shares shall be appropriately
described as investment in associate.

If the investor has control over the investee, the investor is known as the parent and the investee is
known as the subsidiary.

In the case, the investment in ordinary shares is subscribed as investment in subsidiary.

QUESTION 22-6

What do you understand by the “excess of cost over book value” of interest acquired?

ANSWER 22-6

If the cost of an investment exceeds the book value of the underlying net assets acquired, the difference
is termed as “excess of cost over value”.

The excess of cost over book value may be due to the following:

a. Undervaluation of the investee’s depreciable assets

b. Goodwill

In practice, it is often difficult to determine which specific identifiable assets are undervalued.

If the assets of the investee are fairly valued, accountants frequently attribute the excess of the cost
over book value of the underlying net assets to goodwill.
If the excess is attributable to goodwill to undervaluation of depreciable assets, it is amortized over the
remaining life of the depreciable assets.
The amortization of the excess of the cost over book value is recorded by debiting investment income
and crediting the investment account.

If the excess is attributable to goodwill, it is not amortized but the entire investment in associate is
tested for impairment at each reporting date.

QUESTION 22-7

What do you understand by “excess of net of fair value over cost”?

ANSWER 22-7

If the investor pays less than the net fair value of underlying net assets acquired, the difference is known
as “excess of net fair value over cost”.

PAS 28 a amended, paragraph23, provides that the excess of the investor’s share of the net fair value of
the associate’s identifiable assets and liabilities over the cost of the investment is included in the
determination of the investor’s share of the associate’s profit or loss in the period in which the
investment is acquired.

QUESTION 22-8

Discuss the accounting procedure where the investment is accounted for by the equity method and the
investee is with “heavy losses”.

ANSWER 22-8

Under the equity method, if the investor’s share of losses of an associate equal or exceeds the carrying
amount of an investment, the investor discontinues recognizing its share of further losses. The
investment is reported at nil or zero value.

Under the paragraph 29 of PAS 28, the carrying amount of the investment in associate is not just the
balance of the account “investment in associate”.

The carrying amount of the investment in associate also includes other long-term interests in an
associate, such as long=term receivables, loans and advances.

However, trade receivables and any long-term receivables for which adequate collateral exists, such as
secured loans, are excluded from the carrying amount of an investment in associate.

Additional losses are provided for or a liability is recognized to the extent that the investor has incurred
legal or constructive obligations or made payments on behalf of the associate.

If the associate subsequently reports income, the investor resumes including its share of such income
after its share of the income equals the share of losses not recognized.
QUESTION 22-9

Explain the impairment of an investment in associate.

ANSWER 22-9

If there is an indication that an investment in associate may be impaired, PAS 28 in conjunction with PAS
36 on “impairment of assets” requires that an impairment loss shall be recognized “whenever the
carrying amount of the investment in associate exceeds its recoverable amount”.

The recoverable amount is measured as the higher between fair value less cost of to sell and value in
use.

Fair value less cost to sell is the amount obtainable from the sale of the asset in an arm’s length
transaction between knowledgeable willing parties less disposal cost.

Value in use is the present value of the estimated future cash flows expected to arise from the continuing
use of an asset and from its ultimate disposal.

The value in use of an investment in associate is the investor’s share in either of the following:

a. Present value of estimated future cash flows expected to be generated by the investee, including
cash flows from operations of the investee and the proceeds from the ultimate disposal of the
investment.

b. Present value of the estimated future cash flows expected to arise from dividends to be received
from the investment and from its ultimate disposal.

Under appropriate assumptions, both methods give the same result.

Any resulting impairment loss for the investment is allocated first to any remaining goodwill.

QUESTION 22-10

Explain the treatment when the investee has an outstanding preference share.

ANSWER 22-10

a. When an associate has outstanding cumulative preference shares, the investor shall compute its
share of earnings or losses after deducting the preference dividends, whether or not such
dividends are declared.

b. When an associate has outstanding noncumulative preference shares, the investor shall
compute its share of earnings after deducting the preference dividends only when declared.

QUESTION 22-11
Explain the treatment of “other changes in the equity of the investee” that have not been recognized in
profit or loss.

ANSWER 22-11

Adjustments to the carrying amount of the investment in associate may be necessary for changes in the
investor’s proportionate interest in the investee arising from changes in the investee’s equity that have
not been recognized in the investee’s profit or loss.

Such changes include those arising from revaluation of property, plant and equipment and from foreign
exchange translation differences.

The investor’s share of those changes is recognized directly in equity of the investor.

QUESTION 22-12

What are some adjustments in the investee’s operations before an investor computes its share in the
investee’s profits or losses?

ANSWER 22-12

1. The most recent available financial statement of the associate are used by the investor in
applying the equity method

When the reporting dates of the investor and the investee are different, the associate shall
prepare for the use of the investor financial statements as of the same date as the financial
statements of the investor unless it is impracticable to do so.

In any case, the difference between the reporting date of the associate and that of the investor
shall be no more than three months.

2. If an associate uses accounting policies other than those of the investor, adjustments shall be
made to conform the associate’s accounting policies to those of the investor.

3. Profits and losses resulting from upstream and downstream transactions between an investor
and an associate are recognized in the investor’s financial statements only to the extent of the
unrelated investors’ interest in the associate.

“Upstream” transactions are sales of assets from an associate to the investor.

“Downstream” transactions are sales from the investor to the associate.

The investor’s share in the associate’s profits and losses resulting from these transactions is
eliminated.

In other words, the unrealized profit and loss from upstream and downstream transactions
must be eliminated in determining the investor’s share in the profit or loss of the associate.
QUESTION 22-13

When shall an investor discontinue the use of the equity method?

ANSWER 22-13

PAS 28, paragraph 18, provides that an investor shall discontinue the use of the equity method from the
date that it ceases to have significant influence over an associate.

Consequently, the investor shall account for the investment as financial asset at fair through profit or
loss, or financial asset at fair value through other comprehensive income or nonmarketable investment.

However, PAS 28 does not permit an investor that continues to have significant influence over an
associate not to apply the equity method even if the associate is operating under severe-term
restrictions that significantly impair its ability to transfer funds to the investor.

Significant influence must be lost before the equity method ceases to be applicable.

QUESTION 22-14

What is the measurement of the investment in associate on the date significant influence is lost?

ANSWER 22-14

PAS 28, paragraph 18 as amended, provides that on the date the significant influence is lost, the investor
shall measure any retained investment in associate at fair value.

the different between the carrying amount of the investment at the date the significant influence is lost,
and the fair value of the retained investment plus any proceeds received from disposal of any part
interest in the associate, shall be included in profit or loss.

Paragraph 19 as amended further provides that the fair value of the investment at the date it ceases to
be associate shall be regarded as its fair value on initial recognition as a financial asset.

QUESTION 22-15

What is the treatment of “comprehensive income” of an associate when the investor losses significant
influence over the associate?

ANSWER 22-15

PAS 28, paragraph 19A, provides that if an investor loses significant influence, the investor shall account
for all amounts recognized in other comprehensive income by the associate on the same basis as would
be required if the associate had directly disposed of the related assets.

In other words, if the gain or loss previously recognized in other comprehensive income by the associate
would be reclassified to profit or loss upon disposal of the related assets, the investor shall reclassify
such gain or loss to profit or loss when the investor loses significant influence over the associate.
For example, if an associate has cumulative exchange difference relating to a foreign operation and the
investor loses significant influence over the associate, the investor shall reclassify to profit or loss any
gain or loss previously recognized in other comprehensive income.

QUESTION 22-16

What are the specific circumstances when an investment in associate shall not be accounted for using
the equity method?

ANSWER 22-16

An investment in associate shall not be accounted for using the equity method under the following
circumstances:

a. The investment is classified as “held for sale”.

b. The investor is a wholly-owned subsidiary, or a partially–owned subsidiary of another entity and
its other owners do not object to the investor not applying the equity method.
c. The investor’s debt and equity instrument are not traded in a public, meaning stock exchange or
“over the counter” market.
d. The investor did not file or it is not in the process of filing its financial statements with the SEC
for the purpose of issuing any class of instruments in a public market.
e. The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with Philippine Financial Reporting Standards.

In these circumstances, the investment is accounted for as at fair value through profit or loss, or at fair
value through other comprehensive income or nonmarketable investment.

However, if the investment in associate is classified as held for sale, it is accounted for in accordance with
PFRS 5 which specifically mandates that any noncurrent asset classified as “held for sale” shall be
measured at the lower carrying amount and fair value less cost to sell.

QUESTION 22-17

What is the method of accounting for an investment of less than 20%?

ANSWER 22-17

If the investor holds, directly or indirectly, through subsidiaries less than 20% of the voting power of the
investee, it is presumed that the investor does not have significant influence, unless such influence can
be clearly demonstrated.

In this case, the investment is accounted for a financial asset at fair value through profit or loss or
financial asset or fair value through other comprehensive income or nonmarketable investment.

QUESTION 22-18

Explain the “cost method” of accounting for investment in equity instrument.

ANSWER 22-18

The cost method is a method of accounting for an investment whereby the investment is recognized at
cost.

The cost method is usually applied with respect to investment in unquoted equity instrument or
nonmarketable equity security.

The investor does not share in the profit or loss of the investee because this method is based on the
legal relationship between the investor and the investee. The investor and the investee are independent
of the other.

Accordingly, dividends received by the investor from the investee are accounted for as dividend income.

QUESTION 22-19

Explain the treatment of cash dividend from preacquisition retained earnings.

ANSWER 22-19

PAS 27, paragraph 4, provides that under the cost method, the investor recognizes income from the
investment only to the extent that the investor receives distributions from accumulated profits of the
investee arising after the date of acquisition.

Distributions received in excess of such profits are regarded as a recovery of investment and are
recognized as a deduction of the cost of the investment.

Such provision is now amended. There is no longer a distinction between

Reacquisition dividends and postacquisition dividends.

Under the amendment, in applying the cost method, dividends received from a subsidiary, jointly
controlled entity or associate are recognized as dividend income, regardless of whether the dividend [s
originated from preacquisition retained earnings or postacquisition retained earnings.

QUESTION 22-20

Explain a change from cost or fair value method to equity method.

ANSWER 22-20

An investor may acquire an ownership interest in an investee on a certain date but the investee may not
be classified as an associate until a later date.

For example, an investor holds 10% interest in an investee on a January 1, 2010. The investor acquires
additional 10% interest in the same investee on January 1, 2011 enabling the investor to exercise
significant influence over the investee.
In 2010, the investment is accounted for under the cost or fair value method. However, in 2011, the
investment is to be accounted for under the equity method because the investee is now an associate.

If the subsequent acquisitions increase the ownership interest to 20% or more, a change must be made
to the equity method.

This scenario is known as “investment in associate achieved in stages”.

QUESTION 22-21

Explain the accounting for “investment in associate achieved in stages”.

ANSWER 22-21

The investment in associate achieved in stages is not covered by PAS 28. This investment is parallel to
business combinations achieved in stages. Accordingly, the principles for business combinations
achieved in stages must be applied.

PFRS [Link] 42, provides that in business combination achieved in stages, the acquirer shall
remeasure the previously held equity interest at fair value and recognize the resulting gain or loss in
profit or loss.

By inference, the investor shall remeasure the previously held interest in an investee using the equity
method.

The difference between the remeasured equity amount and the carrying amount of the investment shall
be recognized in profit or loss.

Actually, the difference between the remeasured equity amount and the carrying amount of the
investment is the same as the difference between the income previously reported and the income that
would have been reported under the equity method.

QUESTION 22-22 (PAS 28)

1. It is an entity, including an unincorporated entity such as a partnership over which the investor
has significant influence and that is neither a subsidiary nor an interest in joint venture.

a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund

2. Which of the following statements best describes the term “significant influence”?

a. The holding of a significant proportion of the share capital in another entity

b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of an entity
d. The mutual sharing in the risks and benefits of a combined entity
3. Which statement is correct concerning significant influence?
I. If an investor holds, directly or indirectly, less than 20% of the voting power of the investee, it
is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated.
II. If an investor, directly or indirectly, 20% or more of the voting power of the investee, it is
presumed that the investor does have significant influence, unless it can be clearly
demonstrated that this is not the case.
III. A substantial or majority ownership by another investor does not necessarily preclude an
investor from having significant influence.

a. I,II and III

b. I and II only
c. III only
d. II only
4. Which statement is incorrect concerning the equity method?

a. The investment in associate is initially recorded at cost

b. The investment in associate is increased or decreased by the investor’s share of the
profit or loss of the investee after the date of acquisition
c. The investor’s share of the profit or loss of the investee is not recognized in the
investor’s profit or loss
d. Distributions received from the investee reduce the carrying amount of the of the
investment
5. Goodwill arising from investment in associate is

a. Included in the carrying amount of the investment and amortized over the useful life.
b. Included in the carrying amount of the investment and not amortized.
c. Excluded from the carrying amount of the investment but charged to retained earnings.
d. Excluded from the carrying amount of the investment but charged to expense
immediately.
6. If an associate has outstanding cumulative preference shares, held by outside interests, the
investor computes its shares of profits or losses

[Link] adjusting for preference dividends which were actually paid during the year.
[Link] regard for preference dividends.
[Link] adjusting for the preference dividends only when declared.
[Link] adjusting for the preference dividends, whether or not the dividends have been
declared,
7. An investor shall discontinue the use of equity method from the date

I. The investor ceases to have significant influence over an associate.

II. The associate operates under severe long-term restrictions that significantly impair it’s the
ability to transfer funds to the investor.

a. I only
b. II only
c. Both I and II
 d. Neither I nor II

8. If under the equity method, an investor’s share of losses of an associate equals or exceeds the
carrying amount of an investment, which of the following is incorrect?

a. The investor ordinarily discontinues its share of further losses.

b. Additional losses are provided or a liability is recognized to the extent that the investor
has incurred legal or constructive obligations or made payments on behalf of the
associate.
c. If the associate subsequently reports profits, the investor resumes its share of those
profits without regard to the share of net losses not previously recognized.
d. The investment is reported at NIL value.
9. Method because significant influence is lost, the investment in associate retained by the
investor shall be measure at

a. Fair value
b. Carrying amount
c. Amortized cost
d. Original cost
10. When an entity increases its interest in an investment in equity securities accounted for by the
fair value method, and changes to the equity method, what is the initial carrying amount for
purposes of subsequent application of the equity method?

a. Carrying amount at the date of change.

b. Original cost plus or minus the net fair value change since acquisition.
c. Fair value at the date of change.
d. The amount that would be reflected in the investment account had equity method been
in use continually since the purchase of the investment.
ANSWER 22-22
1. a 6. d
2. c 7. a
3. a 8. c
4. c 9. a
5. b 10. d

QUESTION 22-23 Multiple choice (IFRS)

1. PAS 28 does not require the equity method to be applied when the associate has been acquired
and held with a view to its disposal within a certain time period. What is the period within which
the associate must be disposed of?

a. Six months from the end of the reporting period

b. Twelve months from the end of the reporting period
c. Twelve months from the date of the classification as held for sale
d. In the near future
2. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?

a. It is amortized
 b. It is impairment tested individually
c. It is written off against profit or loss
d. Goodwill is not recognized separately within the carrying amount of the investment
3. How is the impairment test carried out for an investment in associate?

a. The goodwill is separated from the rest of the investment and is impairment tested
individually.
b. The entire carrying amount of the investment is tested for Impairment by comparing its
recoverable amount with the carrying amount.
c. The carrying value of the investment shall be compared with its market value.
d. The recoverable amounts of all investments in associates shall be assessed together to
determine whether there has been an impairment on all investment.
4. What should happen when the financial statements of an associate are not prepared as of the
same date as the financial statements of the investor?

a. The associate shall prepare financial statements for the use of the investor at the same
date as that of the investor.
b. The financial statements of the associate prepared up to a different date shall be used as
normal.
c. Any major transactions between the date of the financial statements of the investor and
that of the associate shall be accounted for.
d. As long as the gap is not greater than the three months, there is no problem.
5. If there is any excess of the investor’s share of the net value of the associate’s identifiable assets
and liabilities over the cost of the investment, that is, “bargain purchase”, how should that
excess be treated?

a. It should be included in other comprehensive income.

b. It should be included in retained earnings.
c. It should be included as income in the determination of the investor’s share of the
associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.

ANSWER 22-23
1. c
2. d
3. b
4. a
5. c

QUESTION 22-24 Multiple choice (AICPA Adapted)

1. An investor uses the equity method to account for an investment in ordinary shares. after the
date of acquisition, the investment account of the investor would

a. Not be affected by its share of the earnings or losses of the investee

b. Not be affected by its share of the earnings of the investee but be decreased by its share
of the losses of the investee
 c. Be increased by its share of the earnings of the investee, but not be affected by its share
of the losses of the investee
d. Be increased by its share of earnings of the investee, and decreased by its share of the
losses of the investee
2. Under the equity method of accounting for investments, an investor organizes its share of the
earnings in the period in which the

a. Investor sells the investment

b. Investee declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee in its financial statements
3. When an investor uses the equity method to account for investment in ordinary shares, the
investment account will be increased when the investor recognizes

a. A proportionate interest in the net income of the investee

b. A cash dividend received from the investee
c. Periodic amortization of the goodwill related to the purchase
d. Depreciation relate to the excess of market value over book value of the investee’s
depreciable assets at the date of purchase be the investor
4. When an investor uses the equity method to account for investment in ordinary shares, cash
dividends received by the investor from the investee shall be recorded as

a. Dividend income
b. A deduction from the investor’s share of the investee’s profits
c. A deduction from the investment account
d. A deduction from the shareholders’ equity account, dividends to shareholders.
5. An investor uses the equity method to account for the investment in ordinary shares. the
purchase price implies a fair value of the investee’s depreciable assets in excess of the investee’s
net asset carrying value. The investor’s amortization of the excess

a. Decreases the investment account

b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account
6. An investor uses the equity method to account for the investment in ordinary shares of an
investee. Amortization of the investor’s share of the excess of the fair value over carrying
amount of depreciable assets at the date of the purchase should be reported in the investor’s
income statement as a part of

a. Other expense
b. Depreciation expense
c. Equity in earnings of investee
d. Amortization of goodwill
7. An investor uses the equity method to account for its purchase of another entity’s ordinary
shares. On the date of acquisition, the fair value of the investee’s FIFO inventory and land
exceeded their carrying amount. How do these excesses of fair value over carrying amount
affect the investor’s reported equity in earnings of the investee for the current year?
 Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
8. In its financial statements, an investor uses the equity method of accounting for its 30%
ownership in an investee. At year-end, the investor has a receivable from the investee. How
should the receivable be reported in the investor’s financial statements for the current year?

a. None of the receivable should be reported, but the entire receivable should be offset
against investee’s payable to the investor.
b. Seventy percent of the receivable should be separately reported, with the balance offset
against 30% of investee’s payable to the investor.
c. The total receivable should be disclosed separately
d. The total receivable should be included as part of the investment in associate, without
separate disclosure.
9. When an investor purchases sufficient ordinary shares to gain significant influence over the
investee, what is the proper accounting treatment of any excess of cost over book value
acquired?

a. The excess remains in the investment account until it is sold.

b. The excess is immediately expensed in the period in which the investment is made.
c. The excess is amortized over the time period that is reasonable in the light of the
underlying cause of the excess.
d. The excess is charged to retained earnings at the time the investor resells the
investment.
10. At the beginning of the current year, an investor acquired 30% of the ordinary shares of another
entity. In the current year, the investee has net earnings which exceeded dividends paid. The
investor mistakenly recorded these transactions using the cost method instead of the equity
method of accounting. What effect would this have on investment account, net earnings and
retained earnings, respectively?

a. Overstate, overstate, overstate

b. Overstate, understate, understate
c. Understate, overstate, understate
d. Understate, understate, understate

ANSWER 22-24

1. d 6. c
2. d 7. b
3. a 8. c
4. c 9. c
5. a 10. d

QUESTION 22-25 Multiple choice (AICPA Adapted)

 1. When an investor uses the cost method to account for investment in ordinary shares, cash
dividends received by the investor from the investee should be recorded as

a. Dividend income
b. An addition to the investor’s share of the investee’s profit
c. A deduction from the investor’s share of the investee’s profit
d. A deduction from the investment account
2. An investor uses the cost method to account for an investment in ordinary shares. a portion of
the dividends received this year were in excess of the investor’s share of investee’s earnings
subsequent to the date of investment. The amount of dividend revenue that should be reported
in the investor’s income statement for this year would be

a. Zero
b. The total amount of dividends received this year
c. The portion of the dividends received this year that were in excess of the investor’s
share of investee’s earnings subsequent to the date of investment
d. The portion of the dividends received this year that were not in excess of the investor’s
share of investee’s earnings subsequent to the date of investment
3. An investor uses cost method to account for investment in ordinary shares. dividend received in
excess of the investor’s share of investee’s earnings subsequent to the date of investment

a. Increase the comprehensive income

b. Decrease the investment account
c. Increase the investment account
d. Increase the dividend revenue
4. In its financial statements, an investor uses the cost method of accounting for its 15% ownership
in an investee. At year-end, the investor has a receivable from the investee. How should the
receivable be reported in the statement of financial position of the investor?
a. The total receivable should be reported separately
b. The total receivable should be included as a part of the investment, without separate
disclosure
c. Eighty-five percent of the receivable should be reported separately, with the balance
offset against the investee’s payable to the investor
d. The total receivable should be offset against the investee’s payable to the to the
investor, without separate disclosure
5. On January 1 of the current year, an entity purchased 10% of another entity’s ordinary shares.
the entity purchased additional shares bringing its ownership up to 40% of the investee’s
ordinary shares outstanding on August 1 of the current year. During October of the current year,
the investee declared and paid a cash dividend on all of its outstanding ordinary shares. how
much income from the investment should the entity report for the current year?

a. 10% of the investee’s income from January 1 to July 31, plus 40% of the investee’s
income from August 1 to December 31
b. 40% of investee’s income from August 1to December 31 only
c. 40% of investee’s income for the current year
d. Amount equal to dividends received from the investee

ANSWER 22-25
1. a
2. b
3. d
4. a
5. a