CHAPTER 6

INVESTMENT IN ASSOCIATE

TOPIC OVERVIEW:
This chapter explains investment in associate, the methods of accounting for such investment,
and its financial statement presentation.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Describe investment in associate and significant influence.
2. Identify the situations which will give rise to the recognition of investment in associate.
3. Apply the equity method and cost method in accounting for investment in associate.
4. Explain the initial recognition, initial measurement, subsequent measurement, derecognition and
financial statement presentation of investment in associate.

Investment in Associate
An associate is an entity over which the investor has significant influence.

Significant influence is the power to participate in the financial and operating policy decisions of
the investee but not control or joint control over those policies.

 If the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting
power of the investee, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case.
 Conversely, 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.
 Beyond the mere 20% threshold of ownership, PAS 28, paragraph 6, provides that the
existence of significant influence is usually evidenced by the following factors:
a. Representation in the board of directors.
b. Participation in policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information

Equity Method
 The equity method is based on the economic relationship between the investor and the
investee.
 The investor and the investee are viewed as a single economic unit. The investor and the
investee are one and the same.
 The equity method is applicable when the investor has a significant influence over the
investee.

Accounting Procedures
a) The investment is initially recognized at cost.
b) The carrying amount is increased by the investor’s share of the profit of the investee and
decreased by the investor’s share of the loss of the investee.
 The investor’s share of the profit or loss of the investee is recognized as investment
income.
c) Distributions or dividends received from an equity investee reduce the carrying amount of
the investment.
d) Note that the investment must be in ordinary shares.
  If the investment is in preference shares, the equity method is not appropriate
regardless of the percentage because the preference share is a nonvoting equity.
 The investment in preference shares may be accounted for as at fair value through
profit or loss or at fair value through other comprehensive income or at cost.
e) Technically, if the investor has significant influence over the investee, the investee is said
to be an associate.
 Accordingly, under the equity method, the investment in ordinary shares should
be appropriately described as investment in associate.
f) The investment in associate accounted for using the equity method shall be classified as
noncurrent asset.

Comparison of Equity Method and Cost Method

Transaction Equity Method Cost Method
1. Acquisition Investment in Associate xx Investment in shares xx
Cash xx Cash xx

2. Amortization of Investment income xx No journal entry

undervaluation of Investment in Associate xx
asset (other than
goodwill)

3. Share in the net Investment in Associate xx No journal entry

income of associate Investment income xx

4. Dividend received Cash xx Cash

Investment in Associate xx Dividend income

5. Share in increase Investment in Associate xx No journal entry

in OCI component of OCI (Revaluation Surplus) xx
associate

6. Impairment of Impairment loss xx Impairment loss xx

investment Investment in Associate xx Investment in shares xx

7. Share dividend
Memo entry Memo entry
received
Note: The investment income under equity method is the net share in net income, while under the
cost model, the investment income is the dividend income.

Investment in Associate
Beginning balance or acquisition cost xxx xxx Dividends received
Share in net income of associate xxx xxx Amortization of excess (exc. goodwill)
Share in increase in OCI xxx xxx Impairment loss
xxx Share in decrease in OCI
xxx Ending balance

Investment Income
Amortization of excess (exc. goodwill) xxx xxx Share in the net income of associate
Impairment loss xxx
Ending balance xxx
Formula:
Acquisition cost (or purchase price) ₱ xxx
Less: Book value of the net asset acquired (xxx)
Excess of cost over book value xxx
Less: Undervaluation of Assets (xxx)
Add: Overvaluation of Assets xxx
Goodwill (Gain on bargain purchase) ₱ xxx

ILLUSTRATION:
ALMA Company paid ₱68M on January 2, 2018 for 4,000,000 ordinary shares of Luke
Corporation. The investment represents a 25% interest in the assets of Luke and gave ALMA the
ability to exercise significant influence over Luke Corporation. On the date of acquisition, the
following data are available:
 The book value of Luke’s net asset was ₱192M.
 The fair value of Luke’s depreciable assets exceeded their book value by ₱32M. These
assets had an average remaining useful life of eight years.
 The remainder of the excess of the cost of investment over the book value of net assets
purchased was attributable to goodwill.
Luke paid ₱1.50 per share dividends on August 25, 2018. Luke reported net income of ₱40M for
the year ended December 31, 2018. The market value of Luke’s ordinary shares at December 31,
2018 was ₱18.50 per share.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018.
2. Compute for the investment income and carrying amount of investment in associate as of
December 31, 2018.

Solution:
1. 2018
Jan 2 Investment in Associate 68,000,000
Cash 68,000,000

Aug 25 Cash (4M * ₱1.50) 6,000,000

Investment in Associate 6,000,000

Dec 31 Investment in Associate 10,000,000

Investment Income (₱40M*25%) 10,000,000

Investment income (₱32M * 25%)/8 1,000,000

Investment in Associate 1,000,000

2.
Acquisition cost (or purchase price) ₱ 68,000,000
Less: Book value of the net asset acquired (₱192M * 25%) 48,000,000
Excess of cost over book value 20,000,000
Less: Undervaluation of Assets (₱32M * 25%) (8,000,000)
Goodwill (Gain on bargain purchase) ₱ 12,000,000

Investment in Associate
Acquisition cost 68,000,000 6,000,000 Dividend received
Share in the net income of associate 1,000,000 Amortization of excess
10,000,000 ₱ 71,000,000 Ending balance
 Investment Income
Amortization of excess (exc. Goodwill) 10,000,000 Share in the net income of
1,000,000 associate
Ending balance ₱9,000,000

ILLUSTRATION:
On January 1, 2018, ALMA Company purchased 25,000 shares of the 100,000 outstanding shares
of RB Company for a total of ₱2,000,000. At the time of purchase, the book value of RB
Company’s equity was ₱6,000,000. RB Company’s assets having a market value greater than book
value at the time of the acquisition were as follows:
Book value Market value Remaining Life
Inventory ₱ 800,000 ₱ 1,000,000 Less than 1 year
Equipment 4,000,000 4,500,000 5 years
Land 200,000 700,000 Indefinite
Goodwill 0 800,000 Indefinite

RB Company’s net income in 2018 and 2019 were ₱1,400,000 and ₱1,600,000 respectively.
Dividends per share paid by RB Company amounted to ₱4 in 2018 and ₱5 in 2019. The inventory
was sold in 2018 while the land was sold at the end of 2019 at a gain on sale of ₱50,000.

Required:
Compute for the following:
1. Investment income, 2018
2. Investment in Associate, 2018
3. Investment income, 2019
4. Investment in Associate, 2019

Solution:

Acquisition cost (or purchase price) ₱ 2,000,000

Less: Book value of the net asset acquired (₱6,000,000 * 25%) 1,500,000
Excess of cost over book value 500,000
Less: Undervaluation of Assets
Inventory (₱1,000,000 – 800,000) * 25% (50,000)
Equipment (₱4,500,000 – 4,000,000) * 25% (125,000)
Land (₱700,000 – 200,000) * 25% (125,000)
Goodwill (₱800,000 * 25%) ₱ 200,000

Investment Income (2018)

Amortization of excess 350,000 Share in the net income of associate
Inventory 50,000 (1,400,000 * 25%)
Equipment (125,000 / 5) 25,000
Ending balance ₱275,000

Investment in Associate (2018)

Acquisition cost 2,000,000 100,000 Dividend received (4 * 25,000)
Share in the net income of associate 350,000 50,000 Amortization (Inventory)
25,000 Amortization (Equipment)
₱ 2,175,000 Ending balance
 Investment Income (2019)
Amortization of excess 400,000 Share in the net income of associate
Land 125,000 (1,600,000 * 25%)
Equipment (125,000 / 5) 25,000
Ending balance ₱250,000

Investment in Associate (2019)

Beginning balance 2,175,000 125,000 Dividend received (5 * 25,000)
Share in the net income of associate 400,000 125,000 Amortization (Land)
25,000 Amortization (Equipment)
₱ 2,300,000 Ending balance

Discontinuance of Equity Method

PAS 28, paragraph 22, provides that an investor shall discontinue the use of the equity method
from the date that it ceases to have significant influence over an associate.
Consequently, the investor shall account for the investment as follows:
a) Financial asset at fair value through profit or loss.
b) Financial asset at fair value through other comprehensive income.
c) Nonmarketable investment at cost or investment in unquoted equity instrument.

Measurement
PAS 28, paragraph 22 provides that on the date the significant influence is lost, the investor shall
measure any retained investment in associate at fair value.
 The difference between the carrying amount of the retained investment at the date the
significant influence is lost and the fair value of the retained investment shall be included
in profit or loss.
 Of course, the difference between the net proceeds from disposal of part of the investment
and carrying amount of investment sold is also included in profit or loss.
 Paragraph 22 further provides that the fair value of the investment at the date it ceases to
be an associate shall be regarded as the fair value on initial recognition as a financial asset.

ILLUSTRATION: From Equity Method to Fair Value Method

An entity purchased 30,000 ordinary shares of the 100,000 outstanding shares of another entity
representing 30% interest several years ago. At year-end, the investment in associate has a carrying
amount of ₱6,000,000. On the same date, the investor sold 20,000 shares for net proceeds of
₱5,000,000 resulting to a loss of significant influence. The quoted market price for such investment
is ₱260 per share on the date of sale.

Journal Entries
1. To record the sale of 20,000 shares or 20% interest: (20,000/100,000)
Cash 5,000,000
Investment in associate (6M* 2/3) 4,000,000
Gain on sale of investment 1,000,000

2. To measure the retained investment of 10,000 shares or 10% interest (10,000/100,000):

Investment in associate 600,000*
Gain from remeasurement to fair value 600,000
*₱260 * 10,000 = ₱2,600,000
₱2,600,000 – 2,000,000 = ₱600,000
3. To reclassify the retained investment as financial asset at fair value through profit or loss.
Financial assets - FVPL 2,600,000
Investment in associate 2,600,000

Equity method not applicable

PAS 28, paragraph 17, provides an investment associate shall not be accounted for using the
equity method if the investor is a parent that is exempt from preparing consolidated financial
statements or all of the following apply:
a) The investor is a wholly-owned subsidiary, or a partially owned subsidiary of another entity
and the other owners do not object to the investor not applying the equity method.
b) The investor’s debt and equity instruments are not traded in a public market or ‘over the
counter’ market.
c) The investor did not file or it is not in the process of filing financial statements with the
SEC for the purpose of issuing any class of instruments in public market.
d) The ultimate or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with the Philippine Financial Reporting
Standards.
In these circumstances, the investment is accounted as follows:
 Financial asset at fair value through profit or loss.
 Financial asset at fair value through comprehensive income.
 Nonmarketable investment at cost or investment in unquoted equity instrument.

Investment of less than 20%

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.

Fair value method

This is applicable for financial asset measured at fair value through profit or loss and financial
asset measured through comprehensive income.

Cost method
The cost method is usually applied with respect with the investment in unquoted equity instrument
or nonmarketable equity investment.

 Under the fair value and cost method, the investor does not share on the profit or loss of
the investee because of the legal relationship between the investor and investee.
 The investor and investee are independent of the other.
 Accordingly, dividends received by the investor from the investee are accounted for as
dividend income.

Investment in associate achieved in stages

An investor owned a 10% interest in an investee on January 1, 2020. The investor acquired
additional 10% interest in the same investee on January 1, 2021 enabling the investor to exercise
significant influence over the investee.
In 2020, the investment is accounted of under the cost or fair value method. However in 2021, the
investment must be accounted for under the equity method because the investee is now an
associate.
This scenario or phenomenon is known as “investment in associate achieved in stages”.
The investment in associate – achieved in stages is not covered by PAS 28 (Investment in Associate
and Joint Venture). However, this is parallel to a business combination achieved on stages.
PFRS 3, paragraph 42, provides that in a business combination achieved in stages, the acquirer
shall remeasure the previously held equity interest at fair value and recognized the resulting gain
or loss in profit or loss.

ILLUSTRATION: From Cost Method to Equity Method

On January 1, 2020, an investor acquired a 10% interest in an investee for ₱2,000,000. The
investment is accounted for under the cost method because the investment is unquoted. On January
1, 2022, the investor acquired another 20% interest in the investee for ₱4,000,000. On such date,
the carrying amount of the net assets of the investee is ₱18,000,000. Any excess of cost over
carrying amount is attributed to an undervalued equipment with remaining useful life to 5 years.
On January 1, 2022, the 10% existing investment has a fair value of ₱2,500,000. The investee
reported the following net income and dividends:
Net Income Dividend
2020 2,000,000 800,000
2021 3,000,000 1,000,000
2022 4,000,000 2,000,000

Journal entries
2020
Jan 1 Investment in shares 2,000,000
Cash 2,000,000

Cash (10% x800,000) 80,000

Dividend income 80,000

2021
Cash (10% x1,000,000) 100,000
Dividend income 100,000

2022
1. To record the new 20% interest.
Jan 1 Investment in Associate 4,000,000
Cash 4,000,000

2. To remeasure the 10% existing interest at fair value:

Investment in shares 500,000
Gain on remeasurement to equity 500,000

3. To reclassify the 10% existing interest:

Investment in Associate 2,500,000
Investment in shares 2,500,000

4. To record the share in 2022 net income:

Investment in Associate 1,200,000
Investment income (4M * 30%) 1,200,000

5. To record the share in 2022 cash dividend:

Cash (2M * 30%) 600,000
Investment in Associate 600,000

6. To record the amortization of excess of cost:

Investment income 220,000*
Investment in Associate 220,000
*
Fair value of 10% interest ₱ 2,500,000
Cost of 20% interest 4,000,000
Less: Carrying amount of the net asset acquired (₱18M * 30%) (5,400,000)
Excess of cost over carrying amount 1,100,000
Divided by the remaining life of the equipment 5
Amortization of excess cost ₱ 220,000

ILLUSTRATION: From Fair value Method to Equity Method

On January 1, 2020, an investor acquired a 10% interest in an investee for ₱3,000,000. The
investment is accounted for at fair value through other comprehensive income. The fair value of
the investment on December 31, 2020 is ₱4,000,000. On January 1, 2021, the investor acquired a
further 30% interest in the investee for ₱8,500,000. On such date, the carrying amount of the net
assets of the investee is ₱25,000,000. The fair value of net assets of the investee is equal to carrying
amount. Any excess of cost over carrying amount is attributable to goodwill.
The investee reported the following net income and cash dividend:
Net Income Dividend
2020 5,000,000 3,500,000
2021 6,000,000 4,000,000

Journal Entries
2020
Financial asset – FVOCI 3,000,000
Cash 3,000,000

Cash (3.5M * 10%) 350,000

Dividend income 350,000

Financial asset - FVOCI 1,000,000

Unrealized gain - OCI 1,000,000

2021
To record the new 30% interest.
Investment in Associate 8,500,000
Cash 8,500,000

To reclassify the unrealized gain to retained earnings.

Unrealized gain - OCI 1,000,000
Retained earnings 1,000,000

 Application Guidance of PFRS 9, paragraph B5.7.1, provides that amount recognized in

other comprehensive income for financial assets measured at fair value through other
comprehensive income is not subsequently reclassified to profit or loss. The cumulative
gain or loss is transferred directly to retained earnings.

To reclassify the 10% interest.

Investment in Associate 4,000,000
Financial asset - FVOCI 4,000,000

To record the share in 2021 net income:

Investment in Associate (6M * 40%) 2,400,000
Investment income 2,400,000
To record the share in 2021 cash dividend:
Cash (4M * 40%) 1,600,000
Investment in Associate 1,600,000

The excess of cost over carrying amount attributable to goodwill is not amortized.
Fair value of 10% interest ₱ 4,000,000
Cost of 30% interest 8,500,000
Less: Carrying amount of the net asset acquired (₱25M * 40%) (10,000,000)
Excess of cost attributable to goodwill ₱2,500,000

Adjustment of investee’s operations

A. The most recent available financial statements of the associate are used by the investor in
applying the equity method.
• When the reporting dates of the investor and the investee are different and the associate
shall prepare for the use of the investor financial statements as of the same date as the
financial statements of the investors unless it is impracticable to do so.
• In any case, the difference between the reporting date of the associate and that of the
investor shall be no more than three months.
B. If an associate uses accounting policies other than those of the investor, adjustment shall be
made to conform the associates accounting policies to those of the investor.
C. Profits and losses resulting from upstream and downstream transactions between an investor
and an associate are recognized in the investor’s financial statements only to the extent of the
unrelated investors’ interest in the associate.
 The investor’s share in the associates profits and losses resulting from these transactions is
eliminated.

Downstream Upstream
Transactions From the investor to an From an associate to the
associate investor
Unrealized gain Eliminated in full Eliminate its share
Realized gain Recognized in full Recognize its share
Unrealized loss Eliminated in full, unless it is an Eliminated its share, unless it is
evidence of a reduction in the an evidence of a reduction in the
net realizable value of the assets net realizable value of the assets
to be sold or contributed, or of to be sold or contributed, or of
an impairment loss of those an impairment loss of those
assets. assets.
Realized loss Recognized in full Recognize its share

Basic Formula:
Net income * percentage of ownership ₱ xxx
Less: Unrealized profit on upstream sale * percentage of ownership (xxx)
Add: Realized profit on upstream sale * percentage of ownership xxx
Less: Unrealized profit on downstream sale (xxx)
Add: Realized profit on downstream sale xxx
₱ xxx

Investment Income
Amortization of excess (exc. goodwill) xxx xxx Share in the net income of associate
Impairment loss xxx
Ending balance xxx
 Investment Income
Amortization of excess (exc. goodwill) xxx xxx Share in the net income of associate
Impairment loss xxx xxx Realized profit (Downstream)
Share in unrealized profit (Upstream) xxx xxx Share in realized profit (Upstream)
Unrealized profit (Downstream) xxx

Ending balance xxx

ILLUSTRATION: Sale of inventory from associate to investor

On January 1, 2020, an investor acquired 20% interest in an investee enabling the investor to
exercise significant influence over the investee. On this date, the identifiable assets and the
liabilities of the investee at recorded at fair value. During the year, the investee reported net income
of ₱2,000,000 and paid no dividend. Also during the year, the investee sold inventory costing
₱200,000 for ₱300,000 to the investor. The inventory is unsold by the investor on December 31,
2020.
Ignoring income tax, the investor’s share in the profit of the associate for 2020 is determined as:
Investment Income
Share in unrealized profit (Upstream) 20,000 400,000 Share in the net income of associate

Ending balance ₱380,000

Investment in Associate 380,000

Investment income 380,000

Continuing the illustration, the investee reported net income of ₱2,500,000 for 2021. The
inventory sold by the associate to the investor in 2020 is subsequently sold by the investor in 2021.
The investor’s share in the profit of the associate for 2021 is determined as:
Net Investment Income
500,000 Share in the net income of associate
20,000 Share in realized profit (Upstream)
Ending balance ₱520,000

Investment in Associate 520,000

Investment income 520,000

ILLUSTRATION: Sale of depreciable asset

On January 1, 2020, an investor acquired 20% interest in an associate. During the year, the investee
sold an equipment with carrying amount of ₱4,500,000 to the investor for ₱7,000,000. The
equipment has a remaining useful life of 5 years. The investee reported net income of ₱6,000,000
for 2020.
Net Investment Income
Share in unrealized profit (Upstream) 500,000 1,200,000 Share in the net income of
associate
100,000 Share in depreciation of asset
(Upstream)
Ending balance ₱800,000

*Note that the profit on the sale of equipment is unrealized because the equipment is not sold to
an unrelated party. The profit on the sale of equipment is realized as the asset is used or over the
remaining life of the asset. Thus, as the equipment is depreciated on a straight line basis over a 5-
year period, one-fifth of the profit is also recognized each year. After a 5-year period, the whole
of the profit is realized.
Continuing the illustration, if the investee reported net income of ₱8,000,000 for 2021, the
investor’s share in the profit of the associate in 2021 is determined as:
Net Investment Income
1,600,000 Share in the net income of
associate
100,000 Share in depreciation of asset
(Upstream)
Ending balance ₱1,700,000

ILLUSTRATION: Sale of inventory (Downstream)

On January 1, 2018, Greg Company bought 25% outstanding ordinary shares of Ming Company
for ₱1,000,000. The book value of the net asset acquired was ₱3,000,000. The difference was
attributable to the fair value of Ming’s machinery exceeding book value. The machinery has a
remaining useful life of 10 years. On December 20, 2018, Greg Company sold inventory costing
₱50,000 to Ming Company for ₱70,000 which was still unsold on December 31, 2018. The
companies had no other transactions during 2018. In 2018, Ming Company reported net income
of ₱1,000,000. Cash dividends of ₱100,000 were declared and paid by Ming Company on
December 31, 2018.

Required:
Compute for the following:
1. Net investment income, 2018
2. Investment in Associate, 2018

Solution:
Net Investment Income
Amortization of excess (exc. goodwill) xxx xxx Share in the net income of associate
Impairment loss xxx xxx Realized profit (Downstream)
Share in unrealized profit (Upstream) xxx xxx Share in realized profit (Upstream)
Unrealized profit (Downstream) xxx

Ending balance xxx

Acquisition cost ₱ 1,000,000

Less: Carrying amount of the net asset acquired (₱3M * 25%) (750,000)
Excess of cost over carrying amount 250,000
Divided by the remaining life of the equipment 10
Amortization of excess cost ₱ 25,000

Net Investment Income

Amortization of excess 25,000 250,000 Share in the net income of associate
Unrealized profit (Downstream) 20,000

Ending balance ₱205,000

Share in net income before adjustment (1M * 25%) ₱ 250,000

Less: Unrealized profit on inventory (70,000 – 50,000) (20,000)
Total share in net income 230,000
Less: Amortization of excess (25,000)
Investment income ₱ 205,000
 Investment in Associate
Beginning balance or acquisition cost xxx xxx Dividends received
Share in net income of associate xxx xxx Amortization of excess (exc. goodwill)
Share in increase in OCI xxx xxx Impairment loss
xxx Share in decrease in OCI
xxx Ending balance

Investment in Associate
Beginning balance 1,000,000 25,000 Dividends received
Share in net income of associate 230,000 25,000 Amortization of excess

₱1,180,000 Ending balance

ILLUSTRATION: Sale of equipment (Downstream)

On January 1, 2018, Greg Company bought 25% outstanding ordinary shares of Ming Company
for ₱1,000,000. The book value of the net asset acquired was ₱3,000,000. The difference was
attributable to the fair value of Ming’s machinery exceeding book value. The machinery has a
remaining useful life of 10 years. On December 20, 2018, Greg Company sold an equipment
costing ₱600,000 to Ming Company for ₱800,000. The equipment has a remaining life of five
years. The companies had no other transactions during 2018. In 2018, Ming Company reported
net income of ₱1,000,000. Cash dividends of ₱100,000 were declared and paid by Ming Company
on December 31, 2018.

Required:
Compute for the following:
1. Net investment income, 2018
2. Investment in Associate, 2018

Net Investment Income

Amortization of excess (exc. goodwill) xxx xxx Share in the net income of associate
Impairment loss xxx xxx Realized profit (Downstream)
Share in unrealized profit (Upstream) xxx xxx Share in realized profit (Upstream)
Unrealized profit (Downstream) xxx

Ending balance xxx

Net Investment Income

Amortization of excess 25,000 250,000 Share in the net income of associate
Unrealized profit (Downstream) 200,000 40,000 Realized profit (Downstream)

Ending balance ₱65,000

Investment in Associate
Beginning balance or acquisition cost xxx xxx Dividends received
Share in net income of associate xxx xxx Amortization of excess (exc. goodwill)
Share in increase in OCI xxx xxx Impairment loss
xxx Share in decrease in OCI
xxx Ending balance
 Investment in Associate
Beginning balance 1,000,000 25,000 Dividends received
Share in net income of associate 90,000 25,000 Amortization of excess

₱1,040,000 Ending balance

References:
Valix, et. al. (2020) Intermediate Accounting Volume. 1, 2020 Revised Edition, GIC Enterprises
Co., Inc. Manila
Asuncion, et. al. (2018). Applied Auditing Book 1 of 2, Baguio City: Real Excellence Publishing
Valix, et. al. (2016). Financial Accounting Volume 1, Manila Philippines
Assessments:
1. At the beginning of the year, ALMA Company acquired 20% of the outstanding ordinary shares
of DC Company for ₱8,000,000. This investment gave ALMA the ability to exercise significant
influence over DC. The carrying amount of the acquired shares was ₱6,000,000. The excess of
cost over carrying amount was attributed to depreciable asset which was undervalued on DC
Company’s financial statements and which had a remaining useful life of ten years. The investee
reported net income of ₱1,800,000 and paid cash dividend of ₱400,000 during the year.

Required:
Compute for the following:
a. Investment income
b. Investment in Associate

2. On January 1, 2018, ALMA Company acquired 10% of the outstanding ordinary shares of PV
Company for ₱4,000,000. The investment was appropriately accounted for under cost method. On
January 1, 2019, ALMA gained the ability to exercise significant influence over PV by acquiring
an additional 20% of PV’s outstanding ordinary shares for ₱10,000,000. The fair value of PV’s
net assets matched their carrying amount. The fair value of the 10% interest on January 1, 2019
was ₱6,000,000. For the years ended December 31, 2018 and December 31, 2019, the investee
reported the following:
2018 2019
Dividend paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000

Required:
Compute for the following:
a. Income from investment, 2018
b. Investment income, 2019
c. Investment in Associate, 2019

3. ALMA Company acquired 40% interest in an associate, Alta Company, for ₱5,000,000 on
January 1, 2018. At the acquisition date, there were no differences between fair value and carrying
amount of identifiable assets and liabilities. Alta Company reported the following net income and
cash dividend for 2018, and 2019:
2018 2019
Dividend paid 800,000 1,000,000
Net income 2,000,000 3,000,000
The following transactions occurred between ALMA and Alta:
 On January 1, 2018, Alta Company sold an equipment costing ₱500,000 to ALMA for
₱800,000. ALMA Company applied a 10% straight line depreciation.
 On July 1, 2019, Alta Company sold an equipment for ₱900,000 to ALMA Company. The
carrying amount of the equipment is ₱500,000 at the time of sale. The remaining life of the
equipment is five years and ALMA Company used the straight line depreciation.
 On December 1, 2019, Alta Company sold an inventory to ALMA Company for
₱2,800,000. The inventory had a cost of ₱2,000,000 and was still on hand on December
31, 2019.

Required:
Compute for the following:
a. Investment income, 2018
b. Investment income, 2019
c. Investment in Associate, 2018
d. Investment in Associate, 2019