socate ap nvessman i sscsite Bice crater — 47 CA SIMENT IN ASSOCIATE ‘TOPIC OVERVIEW: yestment in 80046 the methody oy This chapter ied its nancial statement presentation, forsuch investment “omy LEARN sr, you should be able to: a ican Epes netic wl Be ae ae 2 et nce — 5 TS pe ieemetiel nae, poh ee od cama th eaity method tod che ent Seer at et Seat a NS UT eagion, Sit messurenee, % esememenderecoon and hance statment ps orenanen . Brant sce der fi PRS and ma ae 1. Gene the one amount of ivetnent in assoc md an SS INVESTMENT IN ASSOCIATE ‘an associate isan entity over which the investor has Significant ium Significant influence is the power to participate in the fad operating poli decisions ofthe investee but is not control or jt came of hase polices, "Mey Identification of Associates Wan investor hold, arecty or indirectly (eg. through subsidiaries), 24 ‘more ofthe voting power of the investee, it is presumed thatthe ie ‘as significant influence, unless it can be clearly demonstrated tht no the case. Conversely, ifthe Investor holds, directly or inde {Brough subsidiaries), ess than 209% ofthe voting power of the ines. 's presumed that the investor does not have significant inven: mentenee can be clearly demonstrated. A. substantial 0 ‘Rumersip by another investor does not necessarily preclude 2 {rom having significant intuence, me ‘The existence of iglicantinuence by an investor is usually evo fone ormare of th efllowing ways: 645 ee - qopter 7 = Investment in Jay representation on the board of © cn ives: : siaton fn polcy-makin Or let cy meal teasactns beeen he gees (9 ineréange of manager pera "26 the ves: {6} provision of essential technical intornotion, z tenet dtc ed, t's share ofthe profit or > Increased for gain on acquisition ofan } Decreased for impairment loss {hanges inthe investor's proportionate interest inthe investe arising from changes in the investe's equity that have net beer rocogueed ft investee's profit or loss ae other comprehensive income that wil ot te recassifed to profe or los. essed within equlyovreuinedsaregen 8° PO 2 Changes in revahation supe Remessuroments of ened benefit plans: © Galnsand sss om investment equity struments designate a at FVTOCI, muy ae hang i ar value of rancid designated asa F attributable to credit risk; = ca Gains and losses on hedging instruments hat hedge nvesents in qulty instrament measured wEVTOCK ana ‘Ganges the value a th forward ements of forward contacts hen separating the forward semen and spor coset ots forward contract and designating ate hedging inser aly the changes tn the spot element and changes ite wale ae furlgn currency bass spread of 4 fant intent ee ‘cling it om he designe thet Mnancl seen oe hedginginstrument er comprehensive Income that wil be resid to prof or lose Ge, recsteation adjustment) * “Gaintand ose arising rom rans the nancial statements of A foreign operation as —in associate — 17 twas ments in deBt instrameny ise es ments * pvroct oof ans and 1oss05 On hedging iggy Fo ne pn es et "tied Ey rman sw dart reel OOF whe, Se tEee tear more oe ee anges Is recognized in the in te nestor’ sare of those changes I Toe Ne Ivers Re prehensive income erie in Associate and Joine Venture, an hy Note E Under PAS 28 Invest associate and Inethod. PFRS 1 Joint A there fa joint arongemen isa on venture Under PAS 2 Separate Fnancial Statements, vestments associ, ‘enture and subsidiary may be accounted at i Sjeos, ‘fle valueor <} equty method. ‘Ahough the discussion in this chapter focuses on investment asc ‘counted using the equity methed, same principles will spy counting forthe investment in jnt venture and investment nsbay inthe separate FS using the equlty method, stare should be accounted for incst™eat oat ven cnnt sould be used tn wand in classifying whether a joints i in classifying ang a7 Inassociat using the far value method inthe scala Cash or other account] Investment nao income while under the cost Gash /Dindend recivable Dividend income’ journal enty Te journal enny Memo en nearing of associate cs Fs x co Applied Auting by Aancion, Nona an mi 7m tion sup) 1 ividend receivable | WK Tgalty Method Tnvesomentinsssolate Cash or other account) Tiestinent in associ A : ] H investment in associate Tnvestment income Ocl(eg Reval of | ivertment income Undervaluaton of asset [othe than good “Share iv the net income [Investment inassocate Fi ‘COMPARISON OF COST METHOD AND EQUITY METHOD rode ts the dividend ineane z : z 2 x Tranctions T_fequstion “The investment income under the equity method i the net share in. (belore amortization) ‘component of ssecate ‘Share in lnrease OCT 7__Share dividends resived tes 7 Amortization(Chapter 17 - Investment in Associate "ACCOUNTS ANSINGFRON THE OURNAL ge Invesent in Assoclte@ . Tamers Share inet ncone Cain on acon Shareiniprese 01 Shi indecent venea 9X Share innetione e FO Impairment ose "°C z REREE PRR Rae Toor x ‘Net Investment Income ®@ Equity Method ‘ a KPH Share inthe nec nae Impairment loss x ——e ae ‘Investment in Associate @ Cost Method ‘Beginning balance XK PHO Impairment ose camel 2X Balance ena Tene Toot Netinvestment Income @ Cost Method ‘Tirenion kW 0e_Divitend eects Tox =e — ————— _____ ‘Goodwill (Gain) on Acquisition At the date of acquisition, the goodvill oF gsin should be comput follows ‘Acquisition cost (or purchase price) Less: Book value ofthe netaszet acquired Excess of costaver bool value Less: Undervaluation of Assets ‘Add: Overvaluation of Arsets ‘Good (gan on bargain purchase) m oodwils not shown separately but is subsumed inthe earings ‘ofthe investment. However, forthe gan, is presented as part 07S Included as an increase inthe amount ofthe investment. BRE=B= 649 non / Fale Value Adjustments (FVA Recognition of Amortization —/tben disposal or seas cost of sales] Upon eisposal or sale — [Every year trough depreciation there is impairment] RATION en Pharmaceutical paid P68 milion on january 2202, for 4 mi ye i for 4 milion Rages of uke Corporation ordinary shares. The investment ropes thayen the ability to exercise On the date of acquisition the us 1 the fair value of Luke's depreciable assets exceeded their book value by * 932 million, These assets had an average ‘remaining useful life of eight souuTioN: eqn cost 68,000,000 {es Book value of net assets acquired (PI92Mx25%6) " Ss9n0.000 ‘Sess of cast over book value F 2o.000.000 less Undervaluation of depreciable asset (P22Mx25%) " “ponn.a0n Coot Fizoon000 Segurement No amt is J 2 tnvestmentin associate «68,000,000 cash 18,000,000 W025 cash axes) 6.000.000 lnvestmentin associate 6,000,000en poems — 10800 estan inasocat ee Investment nome (40M x 2596) os ~ Bh ciate [(P32M x 25%6)/8 yrs} E ‘investment in 258 = sees i ae tne ‘Share in Brtization of excess (P32M /8 years x 25%) ii srs aerative, the adjusted net IMcome can Be adhusig gall ime net ncome Asso eam a oxess(P32M /B yeas) Iuted netncome tupied by: Percentage share me come / Equity meanings of associate Ao cone tere smortaton onixzsy” Sit 109000, tess: Amortization of excess (P32M x 25%)/8 years 1000 ess: Dividend received (4M x P50) Investnent in associate ~ 12/31/2021 zit ‘As an alternative, the carrying amount can be computed by win ‘adjusted investment income as follows: siti) Acquisition cost ® e000 ‘Add: Investment income (P32M x 25%) ‘300008 ‘Less: Dividend received (4M x P10) nna, Investmentin associate ~ 12/31/2021 homie mLLusTRATION (On Janary 1, 2021, Blade Company purchased 25,000 shares ofthe 10 ‘outstanding shares of Razor Company for a total of 2,000,000. tte tre Of purchase, the book value of Razor Company's equity was Pmt Razor Company assets having a market value greater than book vast time othe acquisition were a follows; Book value Market value Remaining Inventory 1P800,000 "1,000,000 Less than ye" Equipment 4000,000 4500000 Syesrs Land "200,000 "700,000 indefnte Goodwi ° 800,000 Indefinte esi investment in Associate aie the eect cot tellin ed ae Pi Sen eid Bee ep 2 What nded December 31, 20217 ee a Investment income for the year rt as investment in associate for the 3 Nie rata investment income forthe year amount should Blade report as investment in associate for the 4 Marended December 31,2022" for th sou0TION: ‘equi cost 2,000,000 EE Book value of net assets acquired (P6,000,000%25%) "1.500.000 Higess-undervaluation of tangible asset '500.000 fase Undervaluation of: Toventory [(PIM -P00,000) x 259) P 50,000 Equipment [(P4.5M - PAM) x25%) 125,000 {and {(P700,000 - P200,000) x 259%] 425,000 __300.000 Goodall (P800,000 x 25%) 200,000 Requirement No.1 Associate net income P 1,400,000 Nultipied by: Percentage share 25% {hare n net income before amortization 350,000 Las: Amortization of undervalued inventory (PSOk x 25%) 50,000 lass: Amortization of undervalued equipment (P100K x 25%) ___25.000 Investment income / Equity in earnings of associate ‘275,000 4s an alternative, the adjusted net income can be computed frst before ‘multiplying the entity's share as follow ‘Associate net income, 1,400,000 Les: Amortization of undervalued inventory 200,000 lass: Amortization of undervalued equipment Aajsted net income 7100,000 Multiplied by: Percentage share 259% Investment income / Equity in earnings of associate 2275.00 Note that in the fist solution, since the P350,000 was derived after ‘altipiying the net income into 28%, adjustments for amortization should ‘to be multiplied to 2506. In the alternative solution, the starting point ts sz aye it in Assos — Chapter 17 = Tavestnen a pe net income of & 00% of sae #raoo,000 or iteepresents 100% 2F N60 O69 te tecureneto2 see ae jortization (P32M x: NES ameaeramatni trang "Ny ie age reeatiaasrre " Mn ieee es reer ; urn a ined anton 7 Sy ise nan ees Saas Shee neue soosce” et eh ne re aco a ge eee net tee Ae aan he comets afcountertlancng eran too sao find 2021 Requirement No.4 Beginning balance - 01/01/2022 oy ‘ada: lvestment income aa Less: Dividend received (25,000 x5) aaae Investment associate - 12/31/2022 Pasa ASSOCIATE HAVING OUTSTANDING PREFERENCE SHARES Ian associate has outstanding preference shares that are held by par ther than the investor and classified as equity, the investor comput Share of profit or loses after adjusting forthe dividends as fllows 1 Cumulative = Flied rate x total par value of outstanding peer shates for only one year, declared or not 2 Noneumulative » Actual dividends declared (Le, deducted ony wi declared) Computation of Share in Net Income [Netincome ofthe associate Less: Preference share dividend” Netincome to ordinary share Multiply by: Percentage of ownership - Ordinary shares Share in net income ofthe associate 653 braBs 7 Investment in Associate soci toe oeterene reference Shares jeieeabl Ferenc shares are Acounted as oni ity. Thus 2 feet edaredshallbe accounted as rane comnts a reference dividend aber lends shall no lnge be deducted fom the ereoresg of the associate because such were already deducted as an at ee (he» finance cost) In computing for the net Income during the goth folowing sould be csr 1 con Pret aneeaMGeRa Fixed rate x total par value of outstanding preference shares for only one yea, declared or not_ [Actual dividends decared | ‘None, This was already deducted in arriving atthe net Income ‘oncumulat RATION: wsyuary 1, 2021, Jonel Company acquired 20% of the outstanding om Jory shares of Nuezca Company for P4,000,000. This investment gave Hearne ably to exercise signicant influence over Nuezea. The book Jor ofthe acquired shares was P3,000,000. The excess of cost over book abe was attributed to 4 depreciable asset which was undervalued on Naess statement of financial position and which had a remaining useful Iieoten years. sor the year ended December 31, 2021, Nuezca's share capital outstanding teasfalows: 10% cumulative preference share capital 2,500,000 Ordinary share capital 10,000,000, Neaea reported net income of P1,500,000 forthe year ended December 31, 221 ae (ase No, 4: Assuming the cumulative preference share is accounted as tly by Nuevea and that Nuezca declared dividends of 300,000 on the Deference shares, answer the following: 1) What amount should Jonel record as Investment income for the year ended December 31,2021? 2) What amount shouid Jonel record as investment in associate for the year ended December 31,2021? 68n Associate Yt? oe pont NO-2 Investment in Associ cnapter 37 the preference share as easier me instead that the P = are nog ase Mo, 2: fess Dante as equity by Nuezca and that Noctis | 2 preference str go0 on the preference shares Answer the ar te | ae cOE 4,000,000 odontal os mene weaeig'a | Eats ‘eoaao 2) What Socember 3, 20217 the, se bole Poodle ~ 12/31/2021 ar 2) nat ade December 3, 20217 ate | wot ‘SASENO.3 case No. 3 Assuming the cumulative ae share is Account rome fl 1,500,000 [tance oe, answer he lowing: * " Ss | Rey: Percentage of ownership Jyh amount shoul Jone! ‘income for yg | nil Me pet income of associate ee tnded December 31,2021 ‘ee |Site O pation of excess (P1,000,000/10) F toooon 2) What amount should Jone! record as investment in assocng | ie EOC come / Equity earings socate 200.000 gear ended December 31,2021 vas | femenncme/ gon cost * 4000,000 sourion: = A income — ‘Acquistion cst $2005 end received ess Book value ofthe net asset acquired pe Dien races az/a/2oa ama yces attributable to Depreclable assets Tima | feeentin associate 12/91/202 #4200000, CASENO.A peste Scenario of Changes in Ownership Interest Requirement No. 1 teiemencement of Equity method Netincome ¥ ison | * SMto%p plus acquisition of 20% = 20% interest This should be Lese; Preference dividends (P2,500,000 x 10%) Pt secounted under PAS 28 Netincome to ordinary shares Fizsion |, piscontinuance of Equity method Sn Multiply by: Percentage of ownership —— Sov minus 20% sold = 10% retained interest. This shou Share nthe net income of associate 7m ecounted under PERS 9 . Less: Amortization of undervalued asset(P1,000.000/10) ggg | Sosy lus acquisition of 30% = 60% interest. This should be Investment income /Equly in earnings of associate = accounted under PPRS3 and PFRS 10. Requirement No.2 ts: Dividend received XS | muy method Ge step aqui, the usm step auton or oe Dire ECaazagg | eins combination achieved in stagestnder PERS 2 should be app Investment in associate ~ 12/31/2021 Fas | = ae ls busines combination achive in sae, th acer sal ene ASENO.2 ‘previously held equity interest inthe segues ste acqulstion-date far Requirement No.1 r ison | tteand recognise the resulting gan fos ay, nPAL or OCL at Netincome {oproprite In prior reporting periods, te acquirer may have recognise Less: Actual preference dividends declared Fimioo | Stopes inthe atu ofits equ terest nthe acre i OC 3, the Netineome t ordinary shares Pia ‘soount that was recognized in OCI shall be recognised onthe same basis as atch Perea fp Fae | matte arc ree oie spool del of te previously ‘Share inthe net income of associate Frame | Keteguyr iat Less: Amortization of undervalued asset (P1,000,000/10) Investment income / Equity in earnings of associate Ea 655 656pope 7 = rvesenent in fase —. a7 Investment Asecte TRATION ny bought 10% | pent No. 1b eRe Seiten i on? rar 2039, Oa co am OCR eR ong, | netelteem investment in 2020 On Jonny 3 20Fey onstruction Company for mit, Sg, | Ree trom nvESEMEN 2020 | cnt enantio a arb ey | 1 Fens tis action, During 2019 fan eg eae proment ee a ember 31, 2 je buildings have a remained aya" inp retroact tment to retained earnings. The gain or loss to Been ensel Sy eyes | Fate, 1/2/2022 (5.600.000 / 20% 1094) 2,900,000 man's net income forthe year ended December 31, a9, fa carrying valve oe vale, 12/31/2020 i Jena Jen declared and paid cash dividends of P25 ie Yas yy, ‘on Feme: a millon an The fe vale of Davids investment In Jean securities a, ¢00000 cash when the carrying amount of Jean's nS ig £25 00000. The excess was attributable to building having rah ofa years gy Jean's net income forthe year ended December 31, 2021 was ms tnd Jean declared and paid cash dividends of 3 million, ily Required: 4. ‘Based on the above and the result of your audit, determ following: termine Unrealized gain or loss to be inched inthe other eomprehng ‘income as of December 31,2019. ' Income fom investment in Jean Company tobe recognizes profit orlos. ‘snes Adjustment o retained earnings a of January 2, 2021 asa muta ‘he acquisition ofthe adltonal 20% interest in jean Compa 4 Income from investment in Jean Company to be recogae 22 profitor los. © Garrying amount o the investment in Jean Company as of ete 1,202 Jean Company 2 Prepare all appropriate journal entree related to the inven 290202 a SOLUTION: Requirement No, 1a Falr value, Dec 31,2019 3,200,000 ‘Less: Acquistion cost * 000.000 Unrealized gain OCI = 200.000 657 ) seis. tat the 1055 OR Temeasurement is recogniaed in the jal inven of 06 ‘was csied a investment in equy aigpated a8 at FVTOCL If the same was initially assed a FVTL the lose desgtnsurement would have been recgnied Inthe PL requirement No. 1d Reawot profit for 2021 (P15,000,000%30%) 4,500,000 Serazaton of excess (See computation below) 2.500) fivestmentincome Fairvalue ofinvestment- 1/2/2021 (10%) 2.800.000 ‘esulsition cost- 2021 (203%) 5.600.000 Foal cost 8,400,000 {es Carnying amount of net assets acquired, “7212024 (25,000,000 x 302%) ——Zs00.000 excess attributable to depreciable assets 2 —s00,000 Amortization of excess (P900,000/8) 2500 Requirement No. te Total cost (see no. 4) P 8,400,000 Investment income ~2021 4387500 Dividends received in 2021 (P3M x 3096) $00,600) Canying amount, 12/21/2021 einse7s00 Requirement No. 2 Jourmalentries are 01/01/2019" FA@FVTOCI 3,000,000 ash 3,000,000, 1y/a1/2019 FA@EVTOCI (P3.2M-P3M) 200,000 ‘Unrealized Gain -OCl 200,000 1/31/2020 Unrealized Gain-OCl (P3.2M-3.1M) 100,000, FA@FVTOC! 100,000 658cite i cage 17 om) puynnes_ inset cement OC ‘FAGFYTOC! Unrealized gain - OCT Retained erized gain tothe reta 1 ee reed ge ned caring "iy earnings ae ene remeasuroment- C1 00 ron Sth ss on FEMeASUTEMEN rene apy 200 boa R 100,00." avn a - Investment income (900,000/8) 112,599 vem een ia a ents rtd een ovate i tt Sater dan, he entyaaueorern iene ee uy ny a acy ae eee on ramet eal emma oni tee ir rer ato tr ee ce ea eh epee nome eee a Pee Ri geer nal re ee ses monet he on epg gegen ie ‘The formula in computing for the total gain or loss to be recognised profit or loss i as fallows: Fatr value of retained investments ‘Ada: Net proceeds Total Less: Carrying amount ofthe investment ‘otal gain or loss Pal, Bape 659 47 Investment in Associate _ set err al gain oF 10ss may be divi ‘Te (ocaton as Follows: Mail eds fet Poet mount ofthe investment so iat tas 2a onsale Pl ie ak on sna pare ctned investments Pa vate amount ofthe rellned Inve ae investment coo = Cras on reclassification ~ Pa anor Z a invfrectly disposed ofthe related aasts or lites gn sur ci roo tearm er) why heii donna wet oe, eae ny ie ea Oe Se ear ce panes oneness weasel tno AUSTRATION 1: Discontinuance of Equity Method Op January 1, 2020, James Company bought 200,000 ordinary shares out of| the 1/000,000 outstanding ordinary shares of Lyn Construction Company for 720 millon. Their book value was 130 million and the difference was stebutable to the fair value of Lyn's buildings and its land exceeding book Value, each accounting for one-half ofthe difference. Lyn’s net income for the year ended December 31, 2020 was P150 million, other comprehensive 20 milion arising from revaluation surplus. During 2020, Lyn declared and paid cash dividends of P30 millon. The buildings ave a remaining life FiO years. On january 2, 2021, James sold half of its investment at P28 million and reclassified its remaining investment to far value through other ‘omprehensive income, The fair value ofthe shares this date amounted to 285 per share. Lyn's net income forthe year ended December 31, 2021, ‘4s P60 million. During 2021, Lym declared and pald cash dividends of P28 milion, On December 31, 2021, the fair value of the shares amounted to "290 per share, 60 a idite in assoc cpapte 17 Imes n BESS Required — NN 1 Compaen December 31, 2020, Investment ould be recognized in profit or, by Total amout "sony 2.20 on Jan " 100,000 shares on January 2,2; Gain on rcs 5 ony, oat. sin the De sn tobe recognize scember 3 Unrealized gan Me youmnal entries related. tg 02S a Prepare all apropi he ive ating January 2.2021 SOLUTION: nS ston cost Acne nt assets acaired (P130M X 2036 09 Bescon overbonkvaue rae Underalation of land a9), 2000005 Building 46x Goodwill a *20,000/,000000 Requirement No.1 ‘eguision cost January 12020 * 3000009 ‘ads investment income 23a000% ‘Ads Share min OCI (F206 x 20%) “sae tes: Dividend receved(P30M x 20%) Soon Investment in assodate = December 31,2020 Pama Associate net income 1sogonae ‘Mulupied by: Pereentage share Share in net income before amortization ison Les: Amoriaton of undervalued bidg (2M + 10) 20301 Investment income / Equity in earnings of associate BE BRAID Requirement No. 1b Netseling price 2g ‘Add Pairvalue ofthe retained investment (100K x285) 28s Tora reso Less: Carrying amount of investment pe Total loss P/t Eissaul ‘Total ovmership interest before th sale (200K/1] a Multipy by Percentage recaned Lead Retained interest = oe 37 = Investment In Associa Geer ement No. 1c _ ttre ome ons jing price netseh ng amount of investment so erent ang Na¢sramey) ——"2engaon es sale ~ PS Loss ® (900,000), sirement NO. 1d auton reclassification Is computed as follows ue ofthe retained Investment (200, 0009 x#265) SJ t of 728,500,000 ves easton (rami aaan. 009 sti sine invert rar ang aout of Toa »_Papageane ee aoe! om ent No.2 euro tna. FAOHVTOGL aasona00 ae [Se onredasiieaon pa ‘oapee aeaiect sm000 fat leon son000 IuusTRATION 2 Discontinnancof Equi Method On anuary 1, 2021, Conceited acquired a $0% interest in Constanding for 50M cash and a land witha carryiagamount PLOM. Conceited already held 4.20% interest which had been acquired for P2OM but which was valued at P2sM at January 1, 2021. The consideration transfered includes a control Dremium of PIM, and the fair value of the identifable net assets of Constanding was PI10M, The existing 20% is appropriately classified as lavestment in associate Required ‘Compute forthe goodwill or gain on acquisition 2 Prepare. all appropriate journal entries related to the investment starting January 2, 2021. 652seston a Assos $$ ccngpter 17 = Investne ‘Requirement ‘he prele oso sano sensieraron ane cana prev aa econ aa a eee No.4 as business combination achieved ig, rown a5 Mence, the AMOUNt of goody "Be, er putes al on srred (PSOM + P10M) jous equity held C[tPeont = PIM) 50% x 3095 8 # oy q 2a 5 jue ofdentifiable net asset 7 dill Is subsumed in the investment aq separate ine Item nthe conan hy HB Requirement No.2 Reaatreme resent in subsidiary 84,000.00 foot cash tana Sta, Investment in associate mn, Gain on recassication nH “00 ‘Accounting for deemed disposal of associate If the investee company issued additional shares of stock but the did not acquire any ofthe new shares issued, the share ofthe ‘decrease of willbe diluted and has "deemed disposed certain its ownership of that associate: * me] ‘Accounting for deemed disposal of associate depends on investor loses significant influence or not. The related procedurerae © 1 Loss ofsignicant influence 2.” Recognize gain or los from partial lsposal inthe PL: B Dinconinve the equity metho € Recassythe tote! share In OCI of asoclate in PAL or ets retained earnings 4 Apply the requirements of PERS 9, 2. Nolostofsigniicantin uence 2." Recognize gain a os fram paral disposal nthe PL 1s Continue te equity method &_Reclssfy the share in 02 of associate in PAL or cst ‘xmings in propordon to the decrease in owne' ship ppl the requirements oF PAS 28 Note:The procedures mentioned above also apply to actual digs 662 1-7 = Investment in Associate _ Se RATION Deemed Disposal Rmpany held an interest in Lisbon Hr ey et 2% Gry ory 2 gon sud, 90.00, new shares of P2 each t Alcs Campany a Pe sf company Bas the flowing data rita ea ean, a a ital bef pom Share capital before its increase was P30G per Netassets were P400,000, 100,000 at P2 par. Reda Alison account forthe d fow shoul "the deemed disposal, if originally Alison has: egg NO- 1: 25% interest and the adjusted balances ofthe related secon ASE Ngemed disposal are: translation of forelgn operation is P50,000. oe pee SOLUTION: CASE NO. 1; Loss of Significant Influence outstanding shares of the investee ‘before deemed disposal (P300,000/P2) Muliply by: Old interest held No.of share held before deemed disposal 150,000 2596 —Hs00° No. ofshares held before disposal deemed disposal 37,500 Divide by: Total new shares ‘Outstanding shares ofthe Investee before 150,000 ‘deemed disposal ‘Add: New shares issued 50,000 200,000 ‘Share inthe ownership int. after deemed disposel 18.75% ‘The loss on deemed disposal is computed as follows: Carrying amount of nvestee's net asset before issua 7 400,000, ‘Add lsu price of new shares issued (50,000 x2) 400,000 ‘New carrying amount the nvestee's netassetater issuance 500,000, Mutuply by: New percentage 18.7596 Carrying amount after deemed disposal 93,750, ‘Less: Carrying amount before deemed disposal 400,000 ess on deemed disposal - P&L illsoot copper 37 -tmvesmank Aste Py -svenmentin Asocite ‘pertinent journal entries aF= eT geered ASpOSBE-PRL et : aa pacnetsomen-PA ty Somme = oa is yent in associate a , cs Morea "629 402% os on deemed disposal 1 Sepia io teat i resid ta agg | Seton an steed palpi tere eres reeain bastuse signi sh ‘The new interest of 22.50% still gives Arlu Company significant influence. 1 Heectecoeamaatne mainton ine eycedio nag, | comma coaletantong reyes patore Bie Safatmute andation gsi because signet inne ag nancial asset in srthe mvestment is reclassfed to nancial asset at FVTPL {fae ar vlue ofthe shares is P3. ny, {at ne ancl asets aC FVTPL (37-500 x3) 112.509 Tivestment in associate (PLOOK 6,250) ss Gatn on reasafication ~ P&L me New carrying of PA@FVTPL (37,500 x3) i em: cartying amountafter deemed disposal ‘ay Gainon redassfcation - P&L =e CASENO.2:No Loss of Significant Influence ‘otal oustanding shares ofthe investee before deemed dsposal(P500,000/2) en Multiply by: Old interest held m4 No.of share held before deemed disposal ear No.of shares held before disposal deemed disposal 15080 Divide by: Total new shares 150,000 ‘Outstanding shares ofthe investee before ‘deemed disposal ‘Add: New shares issued 50,000 __z0ns00 Share inthe ownership int after deemed disposal Pa Carrying amount ofinvestee'snet asset before issuance tnt _s. ‘Add: Issue price ofthe new shares Issued Total new carrying amount the nvestee's Inetasset after issuance Multiply by: New percentage Carrying amount after deemed disposal Less: Carrying amount of investee's net asset before deemed disposal 655 the proportionate decrease (se, old interest of 30% minus new Interest Of $2.s0% equal to 7.50%) divide by 3036 interest multiplied by the total Peevulative translation gain Remeasurement Gains (Loss) Related To Change In Ownership "FROM. 70 Remeasurement G/1_| Control or FA@EVTOCT PaL icant influence ‘Control or FAGRVTPL Pa significant influence FA@EVTOCL ‘Control or ‘ocr Significant influence FAGHVTPL ‘Control or Pa Significant influence ‘Associate Having Heavy Losses [Tam investor's share of losses ofan associate equals or exceeds its interest In the associate, the investor discontinues recognizing its share of further Ipsses.The interest in an associate Is the carrying amount ofthe investment Inthe associate under the equity method together with any long-term Imerests tat in substance, form par ofthe investor's net investment inthe ssociate, Total interest includes the following: "Carrying amount of investment in associate 2. Investment in preference shares and 3. Unsecured long-term receivables or loans ‘Total nverest does not include the following: Trade receivables; 2 Trade payables; 2 Any longterm recefvables for which adequate collateral exists, such as secured loans 686ssociate ¥* xy twesment 800088 — re ape 1 ee ely method Xcess of g~ Fare renin tt ppd tothe ee oe ay posse i ordnaty SAI ein the reverse Order of roy investors int rest ia oe isp mwas") ms riot for laud er ee ort cee seniority would be as follows: othe reverse ardor of seniority cre Peon : Sec ‘ees Str ee le ag Fa ee ee Cn er ator te nvr ines TeBNCED 2270, aoa ay Provided for, and a ability is recognized, only to the extent dar oie ft ad © coetcinobigatine ce aa see See aaa ie meals eberruenty pe aes teh oo cereegcgts share of those prot only cheese ‘aria ogi sare oetes nor recone ILLUSTRATION: Investment in Associate ~ Share in Losses Rio Company is an associate of Denver Company. Among the ss at ilies of Denver Company, before adjustments, as of December 3.28, are the falling ‘Trade receivables ~ Rio P sue ‘Trade payables Rio sonst Advances from associate ~ Rio ‘eon ‘Advances toassociate- Rio 3000 Loans receivables ~ Rio; due January 1, 2022 secured ro Investment in preference shares ~ Rio 100m Investment in assocate- Rio; 30% interest an Results of Rio's operations ae as follows: Year” Netincome (Loss) 2021 (P 3000000) ze22 2000000, 2023 (1000000) 2008 2.800.000 ype 7 estan a Asoc ‘pen et income (08) othe or (los) ofthe asscate om 202112024 sour 2028 ras in the associat in Pe 2021 before adjustment is computed as pio Inassociate nvesomentin associate | P 275,000 iegnentin preference hares 1,000,000 ances 12 iy 350,000, savarmrrestin the ass0eite before adjustment Laz ano ne journal entry in 20213 follows investment I0S5~ associate (3M x 30%) aves 8) P800,000 Tavestnent in associate 275,000 Investment in preference shares (balancingamount) "625000 cme interest in the associate in 2021 afer adjustment i= computed as faiows: Investment in associate (P275,000 - 275,000) ’ ° Tevestment in preference shares (PIM P525,000) 375000 [Ravances to associate Judy 350000 Aetpaning interest inthe associate afte adjustment o7as.009 2022 ‘The journal entry in 2022 is follows: Tyan Investmentloss associate (2Mx30%6) 7600,000 Investment i preference shares 375,000 “Advances to associate (Dalancagamount) 225,000 ‘he interest in the associate in 2022 after adjustment Is computed as follows: Investment in associate ’ ° Inestment in preference shares (P375,000 -P375,000) ° ‘Advances to asrociate- Judy (F350,000 - 225,000) 125.000, Remaining interest nthe associate aftr adjustment Fazs.000 2023 ‘The journal entry in 2023 iss follows: 12/31 Investmentloss associate 125,000 "Advances to associate 125,000 ‘The amount of investment lss-asociate should be ¥300,000 (1M x 3034) ‘ot the remaining interest in associate is only P125,000. Hence, the "aximum amount chat canbe recognized 1 up to P125,000, Therefore the 6 eein Associate sy vest Stage a etn of P175000. he a inven resumes recognizing its sheet? Sub eines “i eee rear aquals the share of loses re thy Tevater isha ofthe Prof Sy 20 24 eaten ‘ ‘poy tenn foment 2 Shatin the petisn 2023 (P300.000 ~ F125, 090) a las erin net nome a ‘hora ety fr 2024 wld BE 22/81 Maes pnference Shares 350,000 encoun) ae Can come sclate sng para Losses [Aker appiation ofthe equity method. including recognizing th, Sein tonsomes hey eds wo determing wed Skeicernr theese econ oa _ i ty en net gen FS 9 Treas ne avocat ovens that are inthe et that doriot constitute part ofthe net investment. Ope OF PERS Because gpd cue nthe caring aoUnt ofa aves sat osprey recognize tino fete fr ‘separately by applying the requirements for imapatrment testy . PAS 36 imparment of Ants Tnsesg, the entre caring neat ‘nvesmentin PAS 20s tested under PAS 36 for Inpaicet te is recoverable amount (higher of value in use and fair alse area sel witht carrying amount, whenever application ofthe ruin PERS 9 indicates that the investment may be impaired. * tn dtermining the vole in seo the vestment, an enyestiner (its share of the present value of the esmated hare Sah {ected tobe generated by the associate, including the cath ws tee {he operations ofthe associate and the proceeds one sat oy ett emer Ne present value of the estimated fut ih fc — rare cath lows expected {fom dividends tobe received fom the investment and fem Under appropriate same assumptions, both methods give the rent "eroverale amount ofan investment nan assets assed 669 oes inflows fe Lee ot senerate cash inflows from Pendent of those from atherasets of the xrioN: Ty ce 4228 mr ofthe nt yon December 31, 2021 oe Comet, te Investment In asaxigt ee enment of ‘pose esac dpen! Montes earn iene! "sate aquired Determine the impalmentloss oi SoU, an bee npr Fee ae wn 28 tet ee ADJUSTMENT OF INVESTEE'S OPERATIONS {nercompany Transactions Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions etween an investor (Including its consolidated. subsidiaries) and. an ‘sodate are recognized in the Investor's nancial statements only to the ‘tent of unrelated investor’ interests inthe acsocate. The following table Summarizes the rules on downstream or upstream transactions: Dowastean [Upstream ——] Fransscions | From the investor o an [From an associate to We Tareatzed gan | Eliminate na Elina sare ealaed gain —[ Recogaived nu. ecogaes share Unrated Toss Eiminate in fal, let] Eliminate is shore ones isan, evidence of a[it is am evidence of & eduction inthe” ne |feducton “inthe net Fealtable value of the | reliable value of the sets fo. be sod or| assets tbe sold. or Contrbuted, "or of an contributed, or of Sn ftapurment loss of thove | impatrment loss of thous arses seats (Reaizedioss —[Recognied ll Recognises vias 70 _ =aChapter 17 - Investment in Associate BASIC FORMULA: Netincomex percentage of ownership Utes Unrealized prof on upstream sale XPercenageof 9, [Add Reatied proieon upstream sale x percentage of een Less: Unrealized profit on downstream sale ap? Oy ‘Add Realiae profi on downstream sale ” Tnvestment income / Equity in earnings of associate tay As Downstream Sale ofInventory - Year of Sale (¥os) Netincome of the associate “Multiply by: Percentage of ownership interest Xx Share inte net income before austment =e ites Unresne profit onthe eneing inventory % nso portion) x 100% Investment income / Equlty n earnings of associate Subsequent to Year of Sale ~Saleto Unrelated Pary Net income ofthe associate Multiply by: Percentage of ownership interest ‘Share in the net income before adjustment ‘Add: Realized profit on the beginning inventory. (Gold portion) «100% Investment income / Equlty n earnings of associate Upstream Sle of tventory-Year of Sate [Net income of the associate fn) Multiply by: Percentage of ownership interest a Share in theneincome bear agjustment + less Unreataed proton the ending inventory (unsold portion) Percentage of nership interest _ Investment income / Equity in earnings of associate a Subsequent to Year of Sale - Sale to Unrelated Party (STYOS. ‘Net income of the associate ‘x Multpy by Percentage of ovmership interest a ‘Share in the net income before adjustment x ‘Ad Realied profi onthe begining Inventory (coldportion)xPercentage of ownership interest _XX Investmentincome /Equityin earnings ofassocate, OC Downstream Sate of PPE- Year of ale Net income of the associate oe Bd Multiply by: Percentage of ownership interest x Sharein the net income before adjustment sa less Unrealized gain onsale of PPE on "- BV) x Undepreciated portion (vs? entincome / Equity in WSioentinome/ Ent nermngteaniae BE quent t0 Yea ofSale—Sale = sedomme ofthe associate” U8Tlated Party (St¥0S -STUP) et ly by: Percentage of ownership interest i ‘Sif peated gain onsale of PPE n nal gan ef ie) -assuning IB stright ne metho 1eesnent income / Equity in earninga haere et ings of asaciate arcane: rte quent 0 Year of Sale~Sale to Uarelt Retncome oftheassociate nd Natuply by: Percentage of ovmerhip interest ‘aren the net income before cjustment ‘Rai Realiaed gain onsale of PE (foal ain/ Useful ie) x96 of ovmership Ament income /Equtyinenrings of ssociate be zed Fe she ie 3 [hoe | 1? Undeprecated portion »remalning le divide by useful ie ‘Needless to say there ls unread loss this amount shoul be added to {he share nthe net income before adustment Roaize gain is equal to total gai divide by wef ie assuming straight line method of deprecation s used. Wrnondeprecable eset was sol (land), the unrealized gan is equal the difference ofthe net sling prize (NSP) snd the book value (BY) since ho depreciation on land is recorded. The realized gain shall only be ecorded once the nd sso to unvlated en. Intercompany Adjustment ‘Adjustmentok | Recogaltion ofrealized Assets unrealized gain ross pain orloss Taventory During the inter") Upon disposal or sale (as company sale east of ales) to outside enti “ Tana Daring the Tater | Upon disposal or sale (as company sale om SaDarin te inercompany | Every way | a eatin aa prealted gain on wale of Pee NY ‘0 = Total gain © Reman CSW ing straight line method of ang tng a As capoream an Donte Salon xr ie or ra Hels! Company fr 1 milion. The book value rong. oe Ste irc Led aachinery exceeding Book value. The machinegs f° ira Hesink ny 7 hasan igor 10 year = on December 20, 202, Raquel Company Sold inventory cost fesink Company for #70000 which was stil unsold om pet, 221 Toe companies had o ether transactions dar oeh ind Conpony reported net income of F1000,000 fh Pio0000 were declared and paid by Helsikd Company aye ma ne Required: {Based onthe above dats, compute the following (gnare in 2 flmesorrs a Re potter ee a 8 canryingamountof the investment on December Si 9¢2, 2 Assuming instead tht the inventory was sold by Helseae Raquel Company (ie upstream sl) compute the ft oP a "The investor's share nthe prof ofthe associate sag 8 ‘The crying amount of he mvestment on Deco 24 sowtion: Ice lata ase ee Excess ateibuabl to undervaleed machine aa Requirement No 1a Downstream Sale erincome tomas Mall by: Percentage of ownership interest. 2 Share the net income before adjustment Pam ‘Less: Adjustment unrealized profit on the ending invento {070,000 50,000) 100%] semen To ss: Amortization of undervalued machinery (250,000/10) Investment income / Equity in earnings of associate ora > a 47 = Investment in Associate ee catNo. ib Dovmatren sac srement NO- 1 Downstream Soi say ost= Janay 1202 eezeenicane : ® 1,000,000 nv <0 (ivdend eceved (P100,000 x 259) eta see tte “cane Se oe vraurement NO. 28 UPHAM Sle encom Me iy Percentage of ownership oe ere he te neome Rel ston, #as0000 Ste pause unrealized pret onthe ending inventory ro 50000) 239) eae 1d amorzation of undervalued machinery (2s0000/10) 28.208 sess fent income / Equity earings econ ezine sirement No.2b Upstream Sale eaion cst anuaty 1, 2021 F 1000.000 Mivestnent nea ‘20.000 i tdend received (P300,000 x 25%) “38000 E9500 Fivestment in associate ~ December 31, 2021 ILLUSTRATION: Upstream and Downstream Sale of Equipment (n January 1, 2021, Tokyo Company bought 25% outstanding ordinary Shares of Professor Company fr Pl millon. The book value of the net asset ‘equired was P3 million. The diference was attributable to the far value of Professor's machinery exceeding book value, The machinery has a Femalning life of 10 years. n January 3, 2021, Tokyo Company sold an equipment costing P600,000 to Professor Company for P800,000. The equipment has a remaining feof five sears In 2021, Professor Company reported net income of 1,000,000. Cash ‘vidends of 100,000 were declared and paid by Professor Company on December 31, 2021. Required: 1. "Based on the above data, compute the following ignare income taxes): a. The investor's equity n the earings of the associate in 2021 The carrying amount ofthe investment on December 31, 2021, 2 Assuming instead that the equipment was sold by Professor Company to “Tokyo Company (Le. upstream sale), compute the following 4. The investor's equity inthe earings ofthe associate in 2021 1b. The carrying amount ofthe investment on December 31, 2021 onCostofinvesten sot acquired (3M x 25%) a, dra cees Mx es Bon concer = resurenet os power sae : Neon ‘of ownership interest Pho Ae erenag meri er : yet ea Shae inte tn em dommatream saleofPpe FES ve e.000 600,000) x4/5 x 400%) rre00¢ undervalued machinery (250,000/10) yy Les: Amortization of sotto finn” 8 anata jneraron ie oe end ce 100.00 25%) sa et scate< Deemer 31,2021 ‘Requirement No.2a Upstream Sale Nene -Maltply by: Percentage of ownership interest P1000 Share theetincone before adjuster se ‘Less: Net - Unrealized gain from downstream sale of PPE - {rev0an0Pso0p00) 34/5 x2500) a vest amoriation of uneralved machinery (250.00/10) __ it Investment ince / Equity earungs of escocate pr] Requirement No. 2b Upstream sale ‘chistes’ January 1200 y fib invetneatincime? cm tes: Dien ese (10000 x 25%) on Invenertin associate “December 33,2021 uaa NLUSTRATION: Comprehensive Gu January, 2020, Arturo Company bought 30% outstanding eee {Bars of Monica Company for #3 million. Their book value was 9 ll nd the aiference was attributable to the fair value of Monica's ball ‘exceeding book value. The buildings have a remaining life of 20 Je3= Monica Company report 7 aga GomPsry reported the following net income and dividends! ons opt INEST IOASin 2020 302 -gaweom 3,000,000 Fé n0¢ 00 ai 900 Seiden paid 1,000,000 1,500,000, fe flowin curred between Arturo Company and Monica ComY ary 1, 2020, M ‘On january } », Monica Company sold a land costing © + aro Company for P500.000 tobe used ay anycwsting P6O0.000 co eel fon January 2, 2020, Monica Company sold a machinery costing Freeing of six yeas 0. The machinery sara 1 202, Arto Company sl an equpment vo Mons ag Rin Ta pln ads Seer Sot Se fue ree eeee a eee eee ee ete Para a ry So ce taciea eee poe Scr wn tention axaeahttoeandantereett Pn ee re errr Se terrae lace ins a ephdenlaotreenss 9 Sir dee um ooplaralinanet at roam aeons pedinete ry SOLUTION: Requirement No.1 Aequsition cost 3,000,000 lass Book value of net assets acquired (POM X 30%6*) 2.700.000 cess undervaluation of building 300,000 Las: Undervaluation of building, —— 200.000 ‘ood e o Netincome ofthe associate 3,000,000 Maliply by: Percentage of ownership 209% ® 900,000 Stare in the net income before adjustment Less: Amortization of undervalued building (900,000/20) 181 pstream sale ‘Ad: Unrealized loss on sale of land [(P600,000 - 500,000) x30%] 30,000 ‘Add Net- Unrealized loss onsale of machinery {(900,000 - #600,000) x5/6 30%) 75.000 290.000 lovestment income / Equity in earnings of associate 676 00cups! mm ‘ads lvesmen my ¢Pt,000,000 x 30%) | Les: Dien i eember 31, 2021 oe s es ae ‘ eae vg Grimmett mown FR iceman Er rma 80 je} 30%6) "m0 sora Downstream se Tercunveaiaed otton i! 4 Supment (PIM -7800,00) eee jings of associate C2600, Invesement income / Equity near £ ‘Requirement No.4 Begining balance -januaty 1, 2021 et ‘Add Investment income cna {ess Dividend received (P1,500,000 x 3036) Tnvesomentin associate - December 31, 2021 ae FINANCIALSTATEMENT PRESENTATION [hn invesent in an assoeate oF a joint venture is generally classed ‘on-current asset, unless itis cassfied as held for sale in accordance wi PRS Nom-eurrent Assets Held or Saleand Discontinued Operations. 7 | INVESTMENT IN ASSOCIATE SUMMARY any met y ih p i on ‘APP Auing by Acuncio, Mala & Eat