PROBLEM 1

On January 1, 2021, Cloud 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 for 2021 and 2022 were follows:
2021 2022
Net income 3,000,000 4,000,000
Dividend paid 1,000,000 1,500,000

In December 2021, the associate sold inventory to Cloud Company for P900,000. The
cost of the inventory was P600,000. This inventory remained unsold by Cloud Company
on December 31, 2021. However, it was sold by Cloud Company in 2022.
In December 2022, the associate sold inventory to Cloud Company for P750,000. The
cost of the inventory was P500,000. This inventory remained unsold by Cloud Company
on December 31, 2022.
1. What is the investor’s share in the profit of the associate for 2021?
a. 600,000
b. 540,000
c. 660,000
d. 648,000
2. What is the investor’s share in the profit of the associate for 2022?
a. 710,000
b. 810,000
c. 770,000
d. 730,000
3. What is the carrying amount of the investment in associate on December 31,
2021 and December 31, 2022?
a. 6,850,000
b. 6,000,000
c. 6,900,000
d. 6,810,000

PROBLEM 2
On January 1, 2019, Aboitiz Company acquired 10% of the outstanding ordinary shares
of Light Company for P4,000,000. The investment was appropriately accounted for
under cost method.
On January 1, 2020, Aboitiz gained the ability to exercise significant influence over
financial and operating control of Light by acquiring an additional 20% of Light’s
outstanding ordinary shares for P10,000,000.
The fair value Light’s net assets equaled carrying amount. The fair value of 10% interest
on January 1, 2020 was P6,000,000.
For the years ended December 31,2019 and 2020, the investee reported the following:
2019 2020
Dividend paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000

1. What amount should be reported as dividend income in 2019?

a. 200,000
b. 400,000
c. 600,000
d. 300,000

2. What amount should be reported as investment income in 2020?

a. 1,300,000
b. 1,950,000
c. 1,000,000
d. 1,900,000

3. What is the carrying amount of the investment in associate on December 31, 2020?
a. 16,000,000
b. 17,050,000
c. 15,050,000
d. 16,700,000

Solution: PROBLEM 1
Net income for 2021 3,000,000
Unrealized profit in 12/31/2021 inventory of Cloud
(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 3000,000) (60,000)
Investor’s share 540,000

2. Net income for 2022 4,000,000

Realized profit in 12/31/2021 inventory of
Cloud company 300,000
Unrealized profit in 12/31/2022 inventory of
Cloud company (750,000-500,000) (250,000)
Adjusted net income 3,850,000
Investor’s share 810,000

3.Acquisition cost 6,000,000

Investment income – 2021 540,000
Share in cash dividend – 2021 (20% x 1,000,000) (200,000)
Investment income – 2022 810,000
Share in cash dividend – 2022 (20% x 1,500,000) (300,000)
Carrying amount – December 31, 2020 6,850,000

Solutions: PROBLEM 2
Question 1
Investment income for 2019 equal to the dividend received in 2019
(10% x 2,000,000) 200,000
Question 2
Investment income for 2020 (30% x 6,500,000) 1,950,000
The investor shares in the income of the investee in 2020 because the quality method is
applied starting 2020.

Question 3
Fair value of 10% interest 6,000,000
Cost of 20% new interest 10,000,000
Total cost of investment - January 1, 2020 16,000,000
Investment income for 2020 (30% x 6,500,000) 1,950,000
Share in cash dividend for 2020 (30% x 3,000,000) ( 900,000)
Carrying amount – December 31, 2020 17,050,000

Note that there is no excess of cost over carrying amount because the fair value of the
net assets of the investee equaled carrying amount