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Financial Accounting and Reporting Test Bank 80102016 - 3: Problem 1 - Investment in Associate
Financial Accounting and Reporting Test Bank 80102016 - 3: Problem 1 - Investment in Associate
Financial Accounting and Reporting Test Bank 80102016 - 3: Problem 1 - Investment in Associate
80102016 - 3
On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The
investment was accounted for under the cost method. During 2016, the investee reported net
income of P4,000,000 and paid dividend of P1,000,000.
On January 1, 2017, the entity acquired a further 15% interest in the investee for P8,500,000. On
such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair
value of the 10% existing interest was P3,500,000.
The fair value of the net assets of the investee is equal to carrying amount except for an
equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had a
remaining life of 5 years.
The investee reported net income of P8,000,000 for 2017 and paid dividend of P5,000,000 on
December 31, 2017.
2. What is the implied goodwill arising from the acquisition on January 1, 2017?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0
4. What is the carrying amount of the investment in associate on December 31, 2017?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000
Page 2
SOLUTION - PROBLEM 1
Question 1 Answer B
Under cost method, the investment income is based on dividend declared or paid.
Question 2 Answer B
Question 3 Answer C
If the investment in associate is achieved in stages the old interest is remeasured at fair value
through profit or loss.
Question 4 Answer A
Page 3
PROBLEM 2 – PROPERTY, PLANT AND EQUIPMENT
January 1, 2016, an entity disclosed the following balances:
Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000
* A plant facility consisting of land and building was acquired in exchange for 200,000 shares
of the entity. On the acquisition date, each share had a quoted price of P45 on a stock
exchange. The plant facility was carried on the seller’s books at P1,600,000 for land and
P5,400,000 for the building at the exchange date. Current appraised values for the land and
the building, respectively, are P2,000,000 and P8,000,000. The building has an expected life
of forty years with a P200,000 residual value.
* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional
costs incurred were freight and unloading P100,000 and installation P300,000. The
equipment has a useful life of ten years with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the
entity’s various plant locations. These expenditures had an estimated useful life of fifteen
years.
* A machine costing P200,000 on January 1, 2009 was scrapped on June 30, 2016. Straight
line depreciation had been recorded on the basis of a 10-year life with no residual value.
* A machine was sold for P500,000 on July 1, 2016. Original cost of the machine sold was
P700,000 on January 1, 2013, and it was depreciated on the straight line basis over an
estimated useful life of eight years and a residual value of P50,000.