Dividends
How are dividends from the investee treated under the equity method?
a) Dividends are treated as income
b) Dividends reduce the carrying amount of the investment
c) Dividends increase the carrying amount of the investment
d) Dividends are ignored in the financial statements
Answer: b) Dividends reduce the carrying amount of the investment
What is the primary reason for using the equity method of accounting?
a) To report only the investor’s share of the investee’s net income
b) To eliminate all intercompany transactions
c) To report the full financial position and results of the investee
d) To treat the investee as a subsidiary
Answer:a) To report only the investor’s share of the investee’s net income
When does an investor apply the equity method?
a) When the investor has more than 50% ownership in the investee
b) When the investor has significant influence over the investee
c) When the investee is a subsidiary
d) When the investor has less than 10% ownership
Answer: b) When the investor has significant influence over the investee
Under IFRS, which of the following would NOT be included in the equity method?
A) The investor's share of the investee's profits or losses.
B) The carrying amount of the investment in the associate.
C) The dividends received from the associate.
D) The unrealized profit on transactions between the investor and the associate.
Answer: C) The dividends received from the associate.
According to GAAP, when an investor acquires a significant influence in an investee, which of the following is required?
A) The investor must use the cost method for the investment.
B) The investor must use the equity method for the investment.
C) The investor must consolidate the investee's financial statements.
D) The investor must report the investment as a separate line item.
Answer: B) The investor must use the equity method for the investment.
If the investor’s share of investee profits is greater than dividends received, the carrying value of the investment will:
a) Increase
b) Decrease
c) Stay the same
d) Be reported at fair value
Answer: a) Increase
Which of the following is the key characteristic of the equity method?
a) The investor records its share of the investee's earnings as income
b) The investor records its share of the investee’s liabilities as expenses
c) The investee is not included in the investor's consolidated financial statements
d) The investor records the investee’s assets at fair value
Answer: a) The investor records its share of the investee's earnings as income
How is the initial investment in the equity method recorded?
a) At the fair value of the investee’s stock
b) At the book value of the investee’s net assets
c) At the amount paid for the investment
d) At the market price of the investee’s stock
Answer:c) At the amount paid for the investment
Which of the following is NOT a requirement for an entity to be considered an associate under IFRS for equity method accounting?
A) The investor must have significant influence over the associate.
B) The investor must own at least 20% of the voting power of the associate.
C) The associate must be a private company.
D) The investor must not have control over the associate.
Answer: C) The associate must be a private company.
Which of the following statements is true regarding the equity method under GAAP?
A) The investor adjusts the carrying amount of the investment for its share of the investee’s losses and dividends.
B) The investor records the investment at its fair value and does not adjust for share of net income.
C) The investor records the investment at cost and does not adjust for share of net income.
D) The investor does not account for its share of the investee’s income.
Answer: A) The investor adjusts the carrying amount of the investment for its share of the investee’s losses and dividends.
What happens to the carrying amount of the investment under the equity method when the investee declares and pays dividends?
A) The carrying amount of the investment increases.
B) The carrying amount of the investment decreases.
C) The carrying amount remains unchanged.
D) The carrying amount fluctuates based on market conditions.
Answer: B) The carrying amount of the investment decreases.
What does the equity method primarily involve?
a) Recording only the dividends received
b) Recognizing the proportionate share of the investee's net income or loss
c) Treating the investment as a cash equivalent
d) Using the fair value to measure investments
Answer: b) Recognizing the proportionate share of the investee's net income or loss
Under the equity method, how is the investment in the investee initially recorded?
a) At fair value
b) At the investor’s share of the investee’s book value
c) At the purchase price paid for the investment
d) At the net income of the investee
Answer:c) At the purchase price paid for the investment
Under IFRS, the equity method applies to investments in associates where the investor has significant influence. Which of the following is the definition of significant influence?
A) Ownership of more than 50% of the voting power of the investee.
B) The ability to participate in the financial and operating decisions of the investee, but without controlling those decisions.
C) Ownership of at least 10% of the voting power of the investee.
D) The ability to control the investee’s activities and policies.
Answer: B) The ability to participate in the financial and operating decisions of the investee, but without controlling those decisions.
Under GAAP, which of the following conditions requires an investor to apply the equity method of accounting to its investment in another entity?
A) The investor has the ability to significantly influence the investee.
B) The investor owns less than 20% of the voting stock.
C) The investor only holds preference shares in the investee.
D) The investor does not have any voting rights.
Answer: A) The investor has the ability to significantly influence the investee.
What happens when the investee pays a dividend under the equity method?
a) The investor records dividend income
b) The investor reduces its investment account
c) The investor increases its investment account
d) The investor recognizes a gain
Answer: B) The carrying amount of the investment decreases.
Which of the following is a key characteristic of the equity method under GAAP?
A) The investor recognizes dividends received as revenue
B) The investor's share of the investee's profits or losses is recognized in the investor's income statement
C) The investor eliminates all intercompany transactions
D) The investor consolidates the investee's financial statements with its own
Answer: B) The investor's share of the investee's profits or losses is recognized in the investor's income statement
Which of the following is NOT adjusted under the equity method?
a) The investor’s share of the investee’s net income
b) The investor’s share of dividends received
c) The investor’s share of the investee’s revaluation surplus
d) The investor’s share of the investee’s share capital
Answer:d) The investor’s share of the investee’s share capital
Which of the following situations requires the use of the equity method under IFRS?
A) The investor has a controlling interest in the investee.
B) The investor owns between 20% and 50% of the investee's voting shares.
C) The investor has less than 10% of the investee’s shares.
D) The investor holds less than 5% of the investee's shares but has significant influence.
Answer: B) The investor owns between 20% and 50% of the investee's voting shares.
Which of the following investments typically does NOT qualify for the equity method of accounting under GAAP?
A) An investment where the investor has 25% voting control
B) An investment where the investor has 5% voting control
C) An investment where the investor has significant influence over the investee
D) An investment where the investor has joint control over the investee
Answer: B) An investment where the investor has 5% voting control
Under the equity method, how are dividends received from the investee treated in the investor's financial statements?
A) They are recognized as revenue in the investor’s income statement
B) They reduce the carrying amount of the investment in the balance sheet
C) They are reported as a gain on the income statement
D) They are treated as an increase to the investment’s carrying value
Answer: B) They reduce the carrying amount of the investment in the balance sheet
Which of the following best describes “significant influence” in the context of the equity method?
a) Ownership of more than 50% of the investee’s voting stock
b) Ownership of between 20% and 50% of the investee’s voting stock
c) Ownership of less than 10% of the investee’s stock
d) The ability to vote on the investee’s board of directors
Answer:b) Ownership of between 20% and 50% of the investee’s voting stock
What is the effect of an investor’s share of the investee’s net loss under the equity method?
a) The investor reduces its investment account
b) The investor recognizes an expense
c) The investor increases its investment account
d) The investor does not record the loss
Answer:a) The investor reduces its investment account
Which of the following statements is true regarding the equity method under IFRS?
A) Under the equity method, dividends received from the investee are recognized as income by the investor.
B) The investor’s share of the investee’s profits or losses is reflected as an adjustment to the investment balance.
C) The equity method is applied to all investments, regardless of the level of ownership.
D) The equity method only applies when the investor controls the investee.
Answer: B) The investor’s share of the investee’s profits or losses is reflected as an adjustment to the investment balance.
Under GAAP, the equity method is typically applied when an investor has significant influence over an investee. What is the threshold for determining significant influence?
Ownership of 20% or more of the investee's voting stock