Problem 18-1 (IFRS)

On January 1, 2020, Heaven Company acquired 20% of the ordinary shares of an associate for
P6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded at fair
value.

An analysis of the acquisition showed that goodwill of P300,000 was acquired.

The net income and dividend of the associate were as follows:

2020 2021

Net Income 3,000,000 4,000,000

Dividend paid 1,000,000 1,500,000

In December 2020, the associate sold inventory to Heaven Company for P900,000. The cost of the
inventory was P600,000.

This inventory remained unsold by Heaven Company on December 31,2020. However, it was sold by
Heaven Company in 2021.

In December 2021, the associate sold inventory to Heaven Company for P750,000. The cost of the
inventory was P500,000. This inventory remained unsold by Heaven Company on December 31,2021.

Required:

1. Determine the investor’s share in the profit of the associate for 2020.

2. Determine the investor’s share in the profit of the associate for 2021.

3. Prepare journal entries on the books of Heaven Company in relation to the investment in associate.

4. Determine the carrying amount of the investment in associate on December 31, 2021.

Question 1 ANSWER:B

Net income for 2020 3,000,000

Unrealized profit in12/31/2020 inventory of haven

(900,000 – 600,000) (300,000)

Adjusted Net income 2,700,000

Investor’s share (20%x 2,700,000) 540,000

Another Approach
Share in Net income (20% x 3,000,000) 600,000

Share in Unrealized Profit (20%x 300,000) (60,000)

Investor’s share 540,000

Question 2 Answer C

Net income for 2021 4,000,000

Realized profit in 12/31/2020 inventory of

Haven Company 300,000

Unrealized profit in 12/31/2021 inventory of haven

Company (750,000- 500,000) (250,000)

Unrealized Profit in 12/31/2021 inventory of associate

(400,000 x ½) ( 200,000)

Adjusted net income 3,850,000

Investor’s share 770,000

Question 3

Acquisition cost 6,000,000

Share in profit of associate -2020 540,000

Share in cash dividend-2020 (20%x 1,000,000) (200,000)

Share in profit associate- 2021 700,000

Share in cash dividend-2021(20%xa,500,000 (300,000)

Carrying amount- December 31,2021 6,810,000

Problems 18-2 (IFRS)

Glorious Company acquired 40% interest in an associate, Alta Company for P5,000,000 on January
1,2020.

At the acquisition date, there were no differences between fair value and carrying amount of
identifiable assets and liabilities.

Alta Company reported net income of P2,000,000 for 2020 and P3,000,000 for 2021.

On December 31, 2020 and 2021, Alta Company paid cash dividend of P800,000 and P1,000,000,
respectively.

a. On January 1,2020, Alta Company sold an equipment costing P500,000 to Glorious Company for
P800,000. Glorious Company applies a 10% straight line depreciation.

b. On July 1, 2021, Alta Company sold an equipment for P900,000 to Glorious Company. The carrying
amount of the equipment is P500,000 at the time of sale.

The remaining life of the equipment is 5 years and Glorious Company for P2,800,000.

c. On December 1, 2021, Alta Company sold an inventory to Glorious Company for P2,800,000.

The inventory had a cost of P2,000,000 and was still on hand on December 31,2021.

Required:

1. Determine the investor’s share in the profit of the associate for 2020.

2. Determine the investor’s share in the profit of the associate for 2021.

3. Prepare journal entries on the books of Glorious Company for 2020 and 2021 in relation to the
investment in associate.

4. Determine the carrying amount of the investment in associate on December 31,2020.

Problem 18-3 (IFRS)

On January 1,2020, Interlude Company acquired a 30% interest in an investee at a cost of P3,200,000.
The equity of the investee on the date of acquisition was P6,000,000, consisting of P4,000,000 share
capital and P2,000,000 retained earnings.

All the identifiable assets and liabilities of the investee were recorded at fair value except for an
equipment with a fair value of P3,000,000 greater than carrying amount. The remaining useful life of the
equipment is 5 years.

On December 31, 2019, Interlude Company had inventory costing P2,000,000 on hand which had been
purchased from the investee. A profit of P600,000 had been made on the sale.

During the current year, the investee reported net income of P4,000,000 and paid dividend of
P1,500,000.
The equity of the investee on December 31, 2020 showed the following:

Share capital 4,000,000

Retained earnings 3,500,000

Retained earnings appropriated 1,000,000

Revaluation surplus 2,000,000

The revaluation surplus arose from a revaluation of land made on December 31, 2020.

The retained earnings appropriated arose from a transfer of unappropriated retained earnings to
retained earnings appropriated from contingencies.

Required:

1. Determine the goodwill arising from the acquisition.

2. Determine the investment income for the current year.

3, Prepare journal entries for the current year.

4. Determine the carrying amount of the investment in associate on December 31, 2020.

Problem 18-10 Multiple Choices

1. An investor shall discontinue the use of the equity method when
a. The investor ceases to have significant influence over the associate.
b. The associate operates under severe long-term restrictions.
c. The investors ceases to have control over the associate.
d. The business activities of the investor and associate are dissimilar.
2. When an investment ceases to be an associate, the fair value of the investment at the date
when it ceases to be an associate
a. Is regarded as its cost on initial recognition as a financial asset.
b. Is regarded as its fair value on initial recognition as a financial asset.
c. Is regarded as its fair value on initial recognition as a financial liability.
d. Is regarded as its amortized cost on initial recognition as an investment.
3. On the loss of significant influence, the investor shall recognize in profit or loss any difference
between
a. The initial carrying amount of any retained investment, any proceeds from sale of the part
interest and the carrying amount of the investment at the date when significant influence
is lost.
b. The fair value of any retained investment and the carrying amount of the investment at
the date significant influence is lost.
 c. Any proceeds from sale of the part interest and the carrying amount of the investment at
the date significant influence is lost.
d. Any proceeds from sale of the part interest and the carrying amount of the investment
sold, the difference between the fair value and carrying amount of retained investment.
4. The equity method is not applicable under all of the following circumstances, except
a. The investor is wholly-owned subsidiary.
b. The investor’s debt and equity instruments are not traded.
c. The investor is in the process of filing financial statements with a regulatory body for the
purpose of issuing debt and equity instruments in a public market.
d. The ultimate parent of the investor produces consolidated financial statements.
5. What is the accounting treatment 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 at the same date as that of the investor.
b. The financial statements of the associate prepared up to a different date would be used.
c. Any major transactions during the time gap of the financial statements shall be accounted
for.
d. A long as the gap is not greater than three months, there is no problem.
PROBLEMS

Problem 19-1 (ACP)

At the beginning of current year, Icon Company acquired bonds with face amount of P4,000,000 at
accost of P3,761,000. The bonds are held for trading.

Bonds pay interest of 12% semiannually on January 1 and July 1 and mature after four years.

The bonds have an effective yield of 14% and are quoted at 105 at year-end.

Required:

Prepare journal entries for the current year.

Problem 19-2 (IAA)

Mature Company carried out the following transactions in bond investments held for trading during the
current year.

Aug. 1 Purchased 5,000, P1,000, 12% bonds of Acme Company at 104 plus accrued interest of
P150,000. The bonds pay interest semiannually on May 1 and November 1.

31 Purchased 2,000, P1,000, 12% bonds of Avco Company at 98 plus accrued interest. Semiannual
payment of interest, June 30 and December 31.

Dec. 1 Sold 2,000 of the Acme bonds at 102 plus accrued interest.

31 The following quotations were obtained:

 Acme bonds 98

Avco bonds 99

Required:

a. Prepare journal entries to record the transactions.

b. Present the investments on December 31.

Problem 19-3 (IAA)

Bullish Company had the following transactions in bond investment held as trading for the current year,

Mar. 1 Purchased 2,000, P1,000, 12% bonds of Long Company at 93 excluding accrued interest. Interest
is payable on February 1 and August 1.

Apr. 1 Purchased 4,000, P1,0000, 12% bonds of National Corporation at 95 plus accrued interest.
Interest is payable March 1 and September 1.

Oct. 1 Sold 1,000 of the National bonds at 105 excluding accrued interest.

Dec. 1 Sold all of the Long bonds at 100 plus accrued interest.

31 The market value of the National bonds is 90.

Required:

a. Prepare journal entries to record the transactions including receipt and accrued of interest.

b. Statement presentation of the bond investment on December 31.

Problem 19-9 Multiple Choices

1. Trading bond investments are reported at
a. Amortized cost
b. Face amount
c. Fair value
d. Maturity value
2. Which statement is correct in regard to trading bond investments?
a. Trading bond investments are held with the intention of selling them in a short period of
time.
b. Unrealized gains and losses are reported as a part of net income.
c. Any discount or premium in not amortized.
d. All of these statements are correct.
3. Accrued interest on bonds that are purchased between interest dates
a. Is ignored by both the seller and the buyer.
b. Increases the amount a buyer must pay.
 c. Is recorded as loss on the sale of the bonds.
d. Decreases the amount a buyer must pay.
4. The interest income for the year would be higher if the bond was purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium
5. The interest income for the year would be lower if a bond is purchased at
a. Quoted price
b. Face amount
c. A discount
d. A premium