Investment in associates – Theory Questions

1. Which of the following is true regarding Equity securities?

a. If it is quoted, the entity must use fair value model
b. If it is unquoted and there is no significant influence, it must be accounted using cost
method
c. If it is unquoted and there is significant influence, it must be accounted using equity method
d. All of the choices

2. All of the following except one are evidence of significant influence.

a. Being a president of the company
b. Being one of the Board of the Directors
c. Involvement in the policy making process of the corporation
d. Providing the essential technical information to the corporation
e. Interchange of the managerial/executive position between the investor and investee
f. Material transaction between the investee and investor
g. All of the above

3. Which of the following is true regarding the reclassification of Equity securities?

a. FVPL can be reclassified to FVOCI if there is change in business model
b. FVOCI can be reclassified to FVPL if there is change in business model
c. Investment in equity securities can be reclassify to either the FVPL or FVOCI
d. Equity securities cannot be reclassified.

4. Which of the following is an exception to the rule that “Equity securities cannot be reclassified”?
a. If the transaction results in gaining significant influence. FVPL, FVOCI, and investment in
equity securities can now be reclassified to Investment in associates
b. If the transaction results in losing significant influence. Investment in associates can now be
reclassified to either FVPL, FVOCI, or Investment in equity securities
c. FVPL can be reclassified to FVOCI if the entity decided that the investment is no longer held
for trading
d. Both A and B

5. Which of the following is not a necessary accounting procedure in Investment in associates

achieved in stage or step acquisition?
a. Recording the new investment
b. Remeasuring the old investment using either the explicit market value or implicit market
value if the former is not available
c. Reclassifying the old investment to investment in associates
d. None of the above

6. Which of the following is false in a step acquisition?

a. If the old investment is FVPL, the gain or loss on remeasurement is included in the profit or
loss
b. If the old investment is FVOCI, the gain or loss on remeasurement will go directly to the
Retained earnings
c. If the old investment is Investment in equity securities, the gain or loss on remeasurement
will not be recorded because there should be no gain in cost model, only the impairment
loss can be recorded in case of changes in market value
Investment in associates – Theory Questions

d. If the old investment is Investment in Equity securities, the gain or loss is included in the
profit or loss

7. Which of the following is not a necessary accounting procedure if the entity losses significant
influence because of sale of Investment in associates?
a. The entity should record gain or loss on sale
b. The carrying amount of the investment in associates must be updated using the fair market
value before recording the gain or loss on sale
c. The carrying amount of the remaining investment in associates must be updated using the
fair market value after selling the investment.
d. The gain or loss on remeasurement must be recorded regardless of the account title of the
remaining investment
8. Which of the following is use as evidence of fair market value of shares in case of step
acquisition, and sale resulting in losing significant influence for the purpose of recording gain or
loss on remeasurement?
a. The fair market value at year end
b. The fair market value at the date of purchase of additional shares in case of step acquisition
or the fair market value at the date of sale in case of transaction that will result in losing the
significant influence. Also called as “Explicit market value”
c. The purchase price of additional share, or the selling price of the share in case that there is
no explicit market value. Also called as “Implicit market value”
d. Both B and C
9. As a rule, Investment in associates should be accounted for using equity method. Which of the
following is an exception?
a. The investor is exempt from preparing consolidated financial statements
b. The investor is a wholly owned subsidiary, or a partially-owned subsidiary and the other
owners do not object for not applying equity method
c. The investor’s debt and equity instrument are traded in the public market
d. The investor did not file or not in the process of filing Financial statements with regulatory
authority for the purpose of issuing shares to the public
e. The ultimate or any parent of the investor produces consolidated financial statements
f. None of the choices

10. Which of the following is true regarding significant influence?

a. If an investor holds, directly or indirectly, at least 20% ownership it is presume that the
investor has significant influence unless it can be clearly demonstrated that this is not the
case
b. The percentage of ownership is just a presumption in knowing whether there is significant
influence or non
c. Equity method is use if there is significant influence
d. All of the choices

11. Which of the following is true regarding potential shares?

a. It is not included in computing the share in net income and share in dividends
b. Potential shares might be included in the determination of the percentage of ownership
when assessing whether there is significant influence or not
Investment in associates – Theory Questions

c. Potential shares are excluded in the determination of the percentage of ownership when
assessing whether there is significant influence or not if the potentials are not currently
exercisable.
d. Potential shares should be included in the computation

12. The equity method is not required when the associate has been acquired and held with the
purpose of disposing within what time period?
a. 12 months from the end of reporting period
b. 12 months from the date of purchase
c. 12 months from the date of classification as held for sale
d. Any of the choices

13. Which of the following is not recorded as Investment income when using Investment in
associates?
a. Gain or loss on remeasurement
b. Gain or loss on sale
c. Dividends
d. Gain in fair market value at year end

14. If the investee has cumulative preference shares. How will the investor compute for its share in
the net income ?
a. After adjusting the preference dividends which were actually paid during the year
b. After adjusting the preference dividends only when declared
c. After adjusting for the preference dividends, whether declared or not.
d. All of the choices

15. Which of the following is not true regarding goodwill?

a. Already Included in the purchase price of the investment
b. Not part of profit or loss
c. Amortized at year end
d. Tested for impairment at year end

16. Which of the following is true regarding excess of fair value over acquisition cost?
a. Already included in the purchase price of the investment
b. Not part of profit or loss
c. Amortized at year end
d. Included in the investment income for the year

17. What is the accounting treatment for goodwill arising from purchase of Investment in
associates?
a. It is recorded separately.
b. It is tested for impairment individually.
c. It is not amortized at year end
d. It is not part of the purchase price of the investment

18. Can the associate prepare financial statements with a different date than the investor's financial
statements?
a. Yes, as long as the gap is not greater than 3 months
Investment in associates – Theory Questions

b. No, it must prepare an FS with the same date of the investor’s FS

c. Yes, if there is no upstream and downstream transaction
d. All of the choices

19. An investor uses equity method. What is the effect in the 2023 net income of the undervalued
inventory and overvalued inventory if the investor purchased the investment in 2023. The land
was sold in 2023 while the inventory was sold in 2024
Land Inventory
a. Increase Decrease
b. Decrease Increase
c. Increase No effect
d. Decrease No effect

20. An investor uses equity method. What is the net effect in the 2023 net income of Upstream
transaction regarding Sale of Equipment with useful life of 3 years if the selling price is higher
than cost. The entity uses straight line method
a. Will decrease the net income
b. Will increase the net income
c. Will not affect the net income
d. None of the choices

21. Which of the following is a similarity of Related party transaction, and Undervalued and
overvalued identifiable asset at the date of purchase
a. Their amortization concepts.
b. Their effect in the initial recognition
c. Their effect in the net income
d. Their effect in the carrying amount.

22. On January 1,2023, the entity has 15% ownership, the entity purchased further 20% on April
1,2023. Which of the following is true in computing the share in net income during the year
2023?
a. 15% share in the Net income from January to April, 20% in the net income from April to
December 31
b. 20% share in the net income from April 1 to December 31
c. 35% share in the net income from April 1 to December 31
d. 35% share in the net income for the current year

23. Which of the following is the accounting treatment for Related party transaction that is
connected to Investment in associates?
a. It must be properly disclosed in the notes to financial statements
b. The gain or loss must be excluded in the net income during the year the transaction took
place
c. The amortization of the gain or loss is different depending upon the kind of asset sold in the
related party transaction
d. All of the choices