ACCTG 3 – INTERMEDIATE ACCOUNTING PART 1 INVESTMENT IN ASSOCIATE

1. On January 2, 2022, Parker Company, a medium sized entity, acquired 25% of the equity of each
entities, A, B and C for P100,000, P150,000 and P280,000. Parker Company has significant influence
over entities A, B and C. Transaction costs of 1% of the purchase price of the shares were incurred by
Parker Company.

On December 31, 2022, A company declared and paid dividends of P10,000. On December 31, 2022,
B Company declared a dividend of P80,000 for the year ended 2022 which will be paid in 2023. For
the year ended December 31, 2022, A Company and B Company recognized profits of P50,000 and
P180,000 respectively. However, C Company recognized a loss of P200,000 for the year 2022.

Published price quotations do not exist for the shares of entities A, B and C. Using appropriate
valuation techniques Parker Company determined the fair value of its investments in entities A, B and
C at December 31, 2022 as P130,000, P290,000 and P150,000 respectively. Costs to sell are estimated
at 5% of the fair value of the investments. Parker Company has no subsidiaries and therefore does
not produce consolidated financial statements.

Question 1: If Parker Company uses the cost model in measuring its investment in associates, at what
amount should the investment in A, B and C, respectively, be reported in its December 31, 2022
statement of financial position?
a. P100,000, P150,000, P280,000 c. P101,000, P151,500, P142,500
b. P101,000, P151,500, P282,800 d. P123,500, P275,500, P142,500

Question 2: Assume that the shares of A, B and C are publicly traded and Parker Company uses the
fair value model to measure its investment in associates, at what amount should the investment in A,
B and C, respectively, be reported in its December 31, 2022 statement of financial position?
a. P100,000, P150,000, P280,000 c. P123,500, P275,500, P142,500
b. P101,000, P151,500, P282,800 d. P130,000, P290,000, P150,000

Question 3: Assume that Parker Company uses the equity method in measuring its investment in
associates, at what amount should the investment in A, B and C, respectively, be reported in its
December 31, 2022 statement of financial position?
a. P100,000, P150,000, P280,000 c. P111,000, P176,500, P142,500
b. P101,000, P151,500, P282,800 d. P111,000, P176,500, P232,800

2. On January 2, 2022, Marco Company purchased 20,000 shares (20%) of Polo Company’s ordinary
share for P4,500,000. The fair value of the net asset acquired is P4,200,000. During 2022, Polo
reported the following in its statement of comprehensive income a P4,000,000 net income and a
P500,000 revaluation surplus recognize at the end of the year. Polo Company paid cash dividends of
P3,000,000 on December 31, 2022.

Question 1: What is the carrying value of the investments as of December 31, 2022?
a. P4,600,000 c. P4,770,000
b. P4,670,000 d. P4,800,000

3. On January 1, 2022, Shell Company acquired a 30% interest in Petron Company’s 1,000,000
outstanding shares for P15,000,000. During the year Shell Company received P300,000 cash dividend
and 300,000 share dividends. At December 31, 2022 Petron Company reported a profit of
P5,500,000. On January 2, 2023, Petron Company issued 1,000,000 new shares for P20 per share.
Shell Company did not acquire of those shares.

Question 1: What is the amount of loss from the dilution should Shell Company recognize?
a. None c. P1,450,000
b. P1,250,000 d. P1,550,000
Question 2: What is the carrying value of the investment in associate immediately after the
recognition of loss from dilution?
a. P14,900,000 c. P15,100,000
 b. P14,950,000 d. P16,350,000

4. Man Company purchased 10% of Kind Corporation’s 200,000 outstanding shares of ordinary shares on
January 2, 2021 for P2,500,000. On January 2, 2022, Man Company purchased another 40,000 of Kind
for P6,000,000. There was no goodwill as a result of either acquisition Kind reported earnings of
P6,000,000 and P7,000,000 for the year ended December 31, 2021 and December 31, 2022,
respectively. No dividends were declared in years 2021 and 2022, respectively by Kind Company.
What amount of income from investment should Man Company report in its statement of
comprehensive income related to its investment for the year ended December 31, 2022?
a. none c. P1,400,000
P P600,000 d. P2,100,000

5. At the beginning of the current year, Baste Company bought 30% of the outstanding shares of ABC
Company for P5,000,000 cash. Baste accounts for this investment by the equity method.

At the date of acquisition, ABC Company’s net assets has a carrying amount of P12,000,000.

Equipment with an average remaining life of five years had a fair value that was P2,500,000 in excess
of their carrying amount.

The remaining difference between the purchase price and the carrying amount of the underlying
equity cannot be attributed to any identifiable tangible or intangible asset. Accordingly, the
remaining difference is allocated to goodwill.

ABC Company reported a net income of P4,000,000 and paid cash dividend of P1,000,000 during the
current year.

Question 1: What is the implied goodwill from the acquisition?

a. P1,400,000 c. 650,000
b. 750,000 d. 0

Question 2: What amount should be reported as investment income for the current year?
a. P 1,200,000 c. 1,050,000
b. 1,350,000 d. 920,000

Question 3: What is the carrying amount of the investment in associate at

a. P5,000,000 c. 5,750,000
b. 5,900,000 d. 5,400,000

6. On July 1, 2020, Zeus Company purchased 25% of Athena Company’s outstanding ordinary shares and
no goodwill resulted from the purchase. Zeus appropriately carried this investment at equity and the
balance in Zeus’ investment account was P1,900,000 on December 31, 2020. Athena Company
reported net income of P1,200,000 for the year ended December 31, 2020 and paid cash dividends
totaling P480,000 on December 31, 2020.

How much did Zeus pay for the 25% interest in Athena?

a. P1,720,000
b. 2,020,000
c. 1,870,000
d. 2,170,000