CHAPTER 35 IN VESTMENT Basic problems IN ASSOCIATE Problem 38-1 (AICPA. Adapteay Atthe beginning of curren; During the current year, the j 7 ', the investee : P7,000,000 and paid cash dividend OFA ated net income of What is the Carrying amount of the investment in, associate at year-end? a. 5,200,000 b. 6,000,000 c. 6,600,000 d. 7,400,000 Solution 38-1 Answer c Acquisition cost 6,000,000 Add: Share innetincome (20%x 7,000,000) 1,400,000 Total 7,400,000 800,000 Less: Share in cash dividend (20% x 4,000,000) 6,600,000 Carrying amount PAS 28, paragraph 5, provides that ifan investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, itis presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. The equity method of: ‘accounting is used if the investment is 20% or more of the voting power of the investee. 459ited) Problem 38-2 (AICPA Adap' i a = ing of UTE EE oo OO Org of the Ate begining of eure pay fr P8000 00, out ing i cies ility to exercise significant j : werd SE ine acquired shares was P6000. 0eg, over Davi ; carrying amount was attributed toa. 4 i sok one eae vaiod on Davis’ statement of financial Position and which had a remaining useful life of ten years. i 1,800,000 and paid cag i rted net income of P1.} aid Genaesecerpuenne and thereafter issued 5% share divideng during the current year. 1. What is the excess of cost over the carrying amount of; Ret assets acquired? a. 2,000,000 b. 3,000,000 c. 1,000,000 d. 0 2. What amount should be reported as investment income for the current year? a. 360,000 b. 160,000 c. 240,000 d. 340,000 a. 7,720,000 b. 7,800,000 c 8,000,000 d. 8,080,000he ee | | solution 38-2 Question I Answer a Acquisition cost Carrying amount of interest acgu; 8,000,000 acquired (6,000,000) s of cost over carrying amo in 2, : 0 t 000,000 excess of cost jr eee ais ee Carrying amount of the underlying equity acg} Tibutable to undervaluation ofa depreciable Such amortization is recorded by debitine i hamo ; lebitin, crediting investment in eacociaiee a Question 2 Answer b Share in net income (20% x 1,800,000) 360,000 Amortization of excess of cost (2,000,000/1 0) 200,000) 160,000 Investment income for current year Under the equity method, the investment account is increased by the investor’s share of the investee’s earnings and decreased by the investor’s share of the investee’s losses. Dividend received from the investee reduces the carrying amount of the investment. Question 3 Answer d Original cost 8,000,000 Share in net income (20% x 1,800,000) een Amortization of excess of cost ' a Share in cash dividend (20% x 400,000) Carrying amount of investment in associate 8,080,000d are problem 38-3 (AICPA ae al Company rey of At : yeas .s for P4,000,000. ot tthe beginning of ur ne ordinary smareS °° Res enlWel s any’s O rin ell’, p le js the largest single share Ector. : ne Well Company ist ot Rea’s Boat ae t officers are a vneome of P5,000-000 For Ee Cre j ted net! 500,000. ‘ 1 The investee reported T° Sep, year and paid cash div! \d be reported as inves stment in Rea Company ay What amount shoul year-end? a. 4,500,000 b. 4,350,000 c. 4,000,000 d. 3,850,000 Solution 38-3 Answer b PAS 28, paragraph 5, provides that 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. Well’s position as Rea’s largest single shareholder and the presence of Well’s officers as a majority of Rea’s board ‘of directors demonstrate that Well does have significant influence despite the 10% ownership. Accordingly, the equity method is used. Acquisition, January | jl : 000 Add: Share in net income (10% x 5,000,000) 500,00 Total Te Less: Share in cash divi bee cash dividend (10% x 1,500,000) 150,000 es Carrying amount of investme r3 000 y! nt, December 31 4,350. pee Eaom problem 38-4 (AICPA Adanteg, acthe beginning of current yeu, AY g-term investment a 20% orgie? Dyer Com 3 Barter rod et Geen se Dyetgsets Was P35,0 s investment : sans PaassetS 000,000. *nt when the fair value of Eason’s ne investee reported net ineo, seca said ah aco poUse e curet et yhat amount of rev. what arr Snue from the investment should be reported for the current year? a, 1,120,000 “480,000 300,000 a 320,000 solution 38-4 Answer c share in net income (20% x 4,000,000) Under the equity method, the inv. ps : 4 Under tnvedtec’s caret investor recognizes as income its share Cash dividend is not recorded as i ion of scvestment int. income but a reduction of the Problem 38-5 (AICPA Adapted) On July 1, 2017, Diamond Company paid P1,000,000 for 100,000 outstanding shares which represent 40% of Ashley Company. Atthat date, the net assets of Ashley totaled P2,500,000 and the fair values of all of Ashley’s identifiable assets and liabilities were equal to 800.000 their carrying amount. rted net income of P500,000 for 2017, of which P300,000 Ashley report was for the six months ended December 31, 2017. Ashley paid cash dividend of P250,000 on September 30, 2017. Whatamount of income should be reported fiom the investmentin Ashley? a. 200,000 b. 100,000 c. 120,000 4. 80,000 Solution 38-5 Answer ¢ ; Share in net income from July 1 to December 31, 2017 (300,000 x 40%) 120,000 463prot Adapted) sed 30,000 shares ofp. Problem 38-6 (AICPA I ny purchase For P200 per Att OnJ 017. Denver ending ordinary $7140 000 in cash divigat= of t pein 100,000 outs estee pal ng of On December ders. aoe : fo the ordinary sharehold rane yearended December31,2017 a : ak z year. FrsiS5OrSaned evenly hrousnoulthe yee redinag, Be 200,000, ea : it stment s " Fine from the invest am What amount ofincome FS a. 360,000 a b. 180,000 ©. 120,000 . d. 60,000 2 ion 38-6 Answer b Solution oe “hom July 1 to December 31, 2017 Share in net income from 180.000 (1,200,000 x 6/12 x 30%) 30%, Interest acquired (30,000/100,000) 30% Problem 38-7 (AICPA Adapted) 7 / f the outst: On April 1, 2017, Ben Company purchased 40% 1 4 € outstanding ordinary shares of Clarke Company for P. nena 3 1 ‘ke’s net assets were P20,000,000 and Ben cannot ait bute the cous ofthe cost ofits investment in Clarke over its equity in Clarke’s net assets to any particular factor. The investee’s net income for 2017 is P5,000,000. What is the maximum amount which could be included in2017 income before tax to reflect the “equity in net income of investee””? a. 1,400,000 b. 1,500,000 c. 2,000,000 d. 1,850,000 Solution 38-7 Answer b pril 1 to December 31, 2017 Share in net income from Aj (5,000,000 x 9/12 x 40%) 1,500,000 10,000,000 Acquisition cost Carrying amount of net assets acquired (40% x 20,000,000) 8,000,000) Goodwill - not amortized 2,000,000 464problem 38-8 (LAA) atthe beginning of cu, of the outstanding org vet Ronald c naty shares of New, purchased 40% ‘ompany, paying 6,400,000 when the carn} Company equaled P12, 500 01g mount Of the net assets of N’ 500,000" assets of New ‘The difference was attrity amount of P3,000,000 and ko °Wipment whi i arpailding which had ea market value oP. 000000 eed ‘arrying amount of P2,500,000 as The remaining usefil life oft i and 12 years, respectively, the equipment and building was 4 years During the current year, N, year, New Com 5,000,000 and paid cash dividendot Po S000 1. What is the exce: . acquired? eros over the carrying amount of net assets a. 5,000,000 b. 1,400,000 c. 3,000,000 d. 0 2. What amount should be reported as investment income for the current year? is a. 2,000,000 b. 1,000,000 c. 1,800,000 d. 1,750,000 What is the carrying amount of the investment in associate at we year-end? a. 6,400,000 8,150,000 7,150,000 7,400,000 \ s a0 465Solution 38-8 Question 1 Answer b 6406 } ‘4 i 1 isition cos (5,00 net aabets acquired (40% x 12,500,000) ae : 2400, Excess of cost = 000 8 Excess attributable to equipment ne Z 2 SO} coum Excess attributable to building (40% X '+ ; i 0 Question 2 Answer d 2 Share in net income (40% x 5,000,000) 000,009 Amortization of excess: Equipment ( 800,000/4) ¢ 200,009) Building (600,000/12) (30,009) i 17. Investment income 250.000 Question 3 Answer c 6,400,000 1,750,000 Acquisition cost Investment income Cash dividend received (40% x 2,500,000) (1,000,000) Carrying amount of investment in associate 7,150,000 The net investment income increases investment and cash dividend received decreases investment in applying the equity method of accounting,problem 38-9 (AICPA Adapte dl) atthe beginning of ¢ ! . ure interest in Pod Company n dear, or P2,580 Kean Ca Company purchased 30% 0,000, on this date Pod’s shq carrying amounts of Pedr oders* equit their fait values, excep} S identifiable net necets see a Dt For land whose fate selon eocedea the exceeded the tarrying amount by P2,009,099 he investee reported net j aa i q gividends during the ache of P1,000,000 and paid no ‘ar. ° ; What amount sho uld be reported as investment in associate at year-end? a. 2,100,000 b. 2,200,000 c. 2,800,000 d. 2,760,000 Solution 38-9 Answer c Acquisition cost F ep00 aa eG ef net assets acquired “_ 6 x 5,000,000) (4,500,000) Excess of cost over carrying amount 1,000,000 Amount attributable to undervaluation of land ; (30% x 2,000,000) (600,000) Goodwill — not amortized 400,000 Acquisition cost, January | 2,500,000 Share in net income (30% X 1,000,000) 300,000 Carrying amount of investment in associate 2,800,000 ; —o. The excess of cost attributable to the Jand is not amortized because the land is nondepreciable. : The excess of cost attributable to land is expensed when the land ‘is ultimately sold. 467carcra Adapted) eles mast ear, SAB omp: ght 4g0, At the beginning Oo nar, inary shares fOr P4,000,0q9° ot ive C ny’s Eve Company netassets atthe purchase date toy) eg The carrying amount of Eve's P9,000,000. a i ts were the s Call s and carrying oy, FOF Winieh fair values exes iy 900,000 and P100,000, respect’! life. All inventory was sold during Problem 38-10 Fair value: except for plant an! their carrying amounts The plant has an 18-year current year. investee reported net income a 100 sh dividend. During the current year, P1,200,000 and paid a P200,000 ca: of cost over the carrying amount of net assets 1. What is the excess acquired? a. 360,000 b. 400,000 c. 500,000 d. 0 2. What amount should be reported as investment income for the current year? a. 480,000 b. 420,000 c. 360,000 d. 320,000 3. What is the carryin; . yearend?) Ne Amount of the investment in associate at a. 4,400,000 b. 4,420,000 c. 4,340,000 d. 4,220,000solution 38-10 Question 1 Answer b ‘Acquisition cost ? Net assets acquired (40% x 9.999 000,01 jount S : The excess of cost is identified as: understatement of plant Understatement of inventory (40% x 900,000) (40% x 100,000) Total excess of cost Question 2 Answer b Share in net income (40% x 1,200,000) Less: Amortization of excess of cost: Depreciation of plant (360,000/18) Inventory (totally sold) Investment income the inventory is sold. Question 3 Answer c Acquisition cost Investment income Cash dividend (40% x 200,000) Carrying amount of inv estment in associate 4,000,000 ,600,000) 400,000 360,000 40,000 400,000 480,000 20,000 40,000 60,000 420,000 The excess of cost attributable to inventory is expensed when 4,000,000 420,000 (80,000) 4,340,000aE spany. purchased 20% fe Company for P4000, at h ‘a and P3.000,000 is bares Pavan ber 31,2017. January 1, 26} 7 Wy PA Adapted) ‘ uw calc » Cor 7, anne 2017, tes of Dun id in cas! {on Decem| olders’ equity on to a business brok tiated the purchase “a lues of Dune Co} ‘ my al to their carrying ame : Nts, Problem 38- anding ordinar eh P1,000,000 Wa a} interes! with [2% annu! Dune Company’s sharehi P13,000,000. i 0,000 Anne Company also paid P500- helped find a suitable business and nego ‘At the time of acquisition, the fair val identifiable assets and liabilities were ed" a i except for an office building which had a fair value in exces, carrying amount of P2,000,000 and an. estimated life of 19 icy of Ts, During 2017, Dune Company reported and paid cash dividend of P2,000,000. 1. Whatis the implied goodwill from the acquisition? net income of P5,009, 00 009 a. 1,900,000 b. 1,000,000 c. 1,500,000 0 d. 2. What amount of income should be reported for the curr: ‘ent year as a result of the investment? a. 810,000 b. 620,000 c. 960,000 d. 885,000 3. What is th : le carryins December 31, 201 ” amount of the investment in associate on a. 4,560,000 ee 4,160,000 » 9,060,000 d. 5,460,000 damnsolution 38-11 bth 00, oF Question 1 Answer @ va, 7 hs big sitHON COSt (4,000,099 4 atyiNB AMOUNE OF Net age, 920-000) Wag (20% X 13,000,000) “'S Required 4,500,000 cai 7 (2,600,000) Dutable m ma ye : ble to building 20% x20 1,900,000 ss attributable to Boodwilt +000,000) (400,000) . Pe 'll~ not amortized 100 | 's Note that the broker he See or ty i vs capitalized as cost of the Inveciaenn ae cost of P500,000 is : Ssociate. . Question 2 Answer ¢ : 0 : Share in net income (20% ane x5 Amortization of exces 000,000) 1,000,000 Attributabl aad ributable to building : ing (400,000 / 10) (40,000) Investment income 960,000 The excess of cost attributable to goodwill is not amortized but included in the carrying amount of the investment in associate. Question 3 Answer c Acquisition cost 4,500,000 Investment income 960,000 Cash dividend (20% x 2,000,000) ( 400,000) Carrying amount — December 31, 2017 5,060,000Problem 38-12 (IAA) dental Company pur, urrent year, OCC" Chasey sof 1a Cor Shares of Manapla Compay, g ordinal ets of Manapla amountey © mounts of the identifiable ai ee cual to their fair value, excepts Jue was PI ,500,000 greatey “ whose fair value was PSO0,993 At the beginning of ¢' 40% of the outstandin P3,500,000 when the P7,000,000. : i At acquisition date, the carry’ and liabilities of Manapla cee equipment for which the fair carrying amount and inventory greater than cost. oa i and the inv: ing life of 4 years eMOFY ag The equipment has a remainii all sold during the current year. me of P4,000,000 and Paid Manapla Company reported net inco) P1,000,000 cash dividend during the current year. 1. Whatis the excess fair value over the acquisition cost? a. 100,000 - b. 700,000 c. 500,000 d. 0 2. What is the maxi tof the “equity in eam} a ihat is foe maximum amount o e “equity in earnings of the a. 1,350,000 b. 1,250,000 - c. 1,600,000 d. 1,700,000 3, ' : t What is the carrying amount of the investment in associate at year-end? a. 4,450,000 b. 4,350,000 ¢. 4,700,000 4. 4,850,000solution 38-12 Question 7 Answer a Cost CartyiN& AMOUNT Of inter, (40% x 7,000,000) St #auirea Excess fair value over cosy Question 2 Answer q Share in net income (499 Excess of fair vate 2000.00) Amortization of excess of cost: Equipment (600,000/4) Inventory — all sold Investment income income. Question 3 Answer a Acquisition cost Investment income Cash dividend (40% x 1,000,000) Carrying amount of investment in associate 3,500,000 (2,800,000) 700,000 (€ 600,000) (_ 200,000) (100,000) 1,600,000 100,000 ( 150,000) (200,000) PAS 28, paragr: ‘aph 32, provides that any excess of the net fair value of the associate’s identifiable net assets is included in investment 3,500,000 1,350,000 (400,000), 4,450,0007 13 (TAA) company purchased 39, Problem 38-13 warren year Bing COMPANY Ps share At the beginning of curr! 200,000 amount of the acquired Shay™ the carry _ ‘000,000. st over carrying amount to Paten, coal fife of 10 years ares of Lat Company on Latt’s books was P4¥ he excess 0 Bing attributed the excess 0 c emaining : a The patent has a re an aan Srp nee o During the current year. board of directors. ard 0} rted earnings of | P5,000.000 ie sad curren ie ad decided paid dividend of P3,000, What is the carrying amount of the investment in assocjay, a lat is year-end? a. 6,000,000 b. 6,100,000 ¢. 6,300,000 d. 6,750,000 Solution 38-13 Answer b Acquisition cost 6,000,000 Carrying amount of net assets acquired ( 4,000,000) Excess of cost applicable to patent 2,000,000 Acquisition cost 6,000,000 Share in net income (5,000,000 x 15%) 750,000 Share in cash dividend (3,000,000 x 15%) (450,000) Amortization of patent (2,000,000 / 10) (200,000) Carrying amount of investment in associate 6,100,000 Interest acquired (30,000 / 200,000) 15% jheeauity method isused even ifthe investment is less than 20% because the officers Of the investor entity are a majority of the board of the investee entity indicating Significant influence 474Problem 38-14 (Arp, 01 .009 S for On July 1, 2017, y4., S8Pteay lareg Company's outstananget Compan from the purchase ing Ordinary eh urehased 25% of Wall e emeres and no goodwill resulted ent. Miller appropriate} : Miler appropriately catrieg in Miller’s inve; this i : ; i a estment aceon sane a auity and the balance ° 900,000 on December 31, wall Company re Ported net j 2 ended December 31, 2914 come of P1,200,000 for the year 480,000 on December 31 30m paid’cash dividend totaling b. 2,020,000 c. 1,870,000 d. 2,170,000 . Solution 38-14 Answer ¢ Acquisition cost, July | (SQUEEZE: Add: Share in net income from ie to cat December 31 (1,200,000 x 6/12 x 25%) 150,000 Total 2,020,000 120,090 Less: Share in cash dividend (25% x 480,000) 1,900,000 Investment balance, December 31 The acquisition cost is “squeezed” by working back from the investment balance on December 31, 2017. Moreover, the investor shares only in the net income of the investee from the date of acquisition, July 1, 2017 to December 31, 2017. Inthe absence of any statement to the contrary, the net income iseaméd. evenly during the year. However, the investor shares in full in the cash dividend paid on December 31, 2017. A785— AA) per company bought 30% of reurtent YC oye pany for P5,000,000 cat -3 of fi ‘nvestment BY the equity methog » pany’s net assets hada canying Problem 38-15 (L Atthe beginnin: outstanding ord Cyber Company ac Atthe date of acquisivon” amount of P12,000,000- a life of five years hela _ Equipment with fa a their carrying amount. ie that was P2,500,000 in €: . The remaining difference between the parcase Price ihe caving amount of the underlying equity ¢ not be fie Sing ae able tangible or intangible asset. ‘Accordingly, the rem: ENCE jg allocated to goodwill. orted net in 000 during the current year. coun come of P4,000,000 and paid cash Free Company rep: dividend of P1,000, 1. Whatis the implied goodwill from the acquisition? a. 1,400,000 b. 750,000 c. 650,000 d. 0 2. What is the investment income for the current year? a. 1,200,000 b. 1,350,000 c. 1,050,000 d. 920,000 3. What is the carryin, yearend? a. 5,000,000 b. 5,900,000 ©. 5,750,000 5,400,000 amount of the investment in associate atSolution 38-15 Question I Answer ¢ Acquisition cost Net assets acquired (30% x 19 000,00 5,000,000 ere oe eavet caving amount 600,000) xe utable to 3 nt (30% x 2,500,000) lepreciable assets 1,400,000 Excess attributable to goodwill (_750,000) = 850,000 Question 2 Answer ¢ Share mea income (30% x 4,000,000) 1,200,000 Amortization of excess — equipment (750,000/5) (130,000) 1,050,000. Investment income Question 3 Answer c Acquisition cost 5,000,000 Investment income 1,050,000 Share in cash dividend (30% x 1,000,000) (_ 300,000) 5,750,000 Carrying amount of investment in associate The excess attributable to goodwill is not amortized but included in the carrying amount of the investment in associate.spa Adapted) Problem 38-16 (AICPA A‘ “spreference share, . ies cay ev ener of ab, Pecembet BZ The ina « nid 5¢ i e capita 2 cember 3 reported ne eontinay p00 for the year on ec vs au | ee cumulative preference share capita eg Ordinary share capital — sihe investee for 2017? 009 7 What is the equity in earnings of i a. 270,000 E b. 300,000 ©. 350,000 d. 250,000 Solution 38-16 Answer @ . : Whenan investee has outsanding cam eocting te pit ay i ite its sl eamings at estee’s preference dividends whether or not such dividends are declareq. i 600,009 Net income | Preference dividend (10% x 1,000,000) (200.009) Net income to ordinary shares 300.009 250000 Share in net income - ordinary shares (50% x 500,000) Problem 38-17 (IAA) At the beginning of current year, Alpha Company acquired 40% of the outstandin ordinary shares of an investee for P6,500,000. The carrying amount of the net assets of the investee equaled P 12,500,000. Any excess of cost over carrying amount is attributable to goodwill. ~ The investee reported net loss of P4;000,000 and paid cash dividend of P2,500,000, Whats the carrying amount of the investment at year-end? a. 6,500,000 b. 3,900,000 c. 4,900,000 d. 5,500,000 Solution 38-17 Answer b Acquisition cost ~ t eo Share in net loss (40% x 4,000,000) can 000) Share in cash dividend (40% x 2,500,000) (1,000,000) Carrying amount of investment in associate 3,900,00 478