Problem 1

On January 1, 2021, K Company acquired 20,000 ordinary shares out of the 100,000 outstanding shares of B
Company for 500,000. B’s assets and liabilities approximate their fair value except for inventories with carrying
amount of 600,000 and fair value of 650,000, machinery with carrying amount of 1,000,000 and fair value of
1,500,000 and land with carrying amount of 1,500,000 and fair value of 1,200,000. The remaining useful life of
machinery is 10 years. B’s net assets have book value of 12,000,000.

On December 31, 2021, B reported net income of 8,000,000 and declared and paid dividends of 2,000,000. On
April 1, 2022, the land and building were sold at a gain of 200,000.

On December 31, 2022, B reported net income of 10,000,000 and declared and paid dividends of 3,000,000.

1. How much is the goodwill from acquisition?

2. How much is the net share in the profit or loss of the associate in 2021?
3. How much is the carrying amount of the associate as of December 31, 2021?
4. How much is the net share in the profit or loss of the associate in 2022?
5. How much is the carrying amount of the investment as of December 31, 2022?

Problem 2

Your firm has been engaged to examine the financial statements of the B Company for its two years of
operations in 2020 and 2021. In connection with this audit, you have been assigned to audit the investment
account. In reviewing the activity in the investment account during the two years, you discover the following
information:
• On July 1, 2020, B Company purchased 200,000 shares of Y Company ordinary shares at 20 per share,
which reflected book values as of that date. At the time of purchase, Y had 1,000,000 ordinary shares
outstanding. B had no ownership interest in Y prior to this purchase. B reported this purchase by a debit
to investment in associate and credit to cash 4,000,000.
• On August 1, 2020, B received a dividend of 100,000 from Y. The company recorded this transaction by
debit to cash and credit to dividend income for 100,000.
• Y reported net income of 840,000 for the six months ended June 30, 2020 and a net income of 1,800,000
for the year ended December 31, 2020. No journal entry was made by B Company.
• On December 31, 2020, Y paid B dividends of 100,000. The company recorded this transaction by debit
to cash and credit to dividend income of 100,000.
• On January 1, 2021, B sold 50,000 shares of Y ordinary shares for 25 per share, its fair value on that
date, and reclassified the remaining stock as fair value through other comprehensive income. The
company recorded the sale by debit to cash and credit to investment in associate at 1,250,000. However,
no journal entry was made by the company on the reclassification.
• On December 31, 2021, Y Company paid B dividends of 75,000. The company recorded this transaction
by debit to cash and credit to dividend income for 75,000.
• Y reported net income of 1,860,000 for the year ended December 31, 2021. No journal entry was made
by B Company.
• On December 31, 2021, the fair value of Y share is 30. No journal entry was made by B.

6. The investment balance on December 31, 2020 is?

7. The gain on sale of 50,000 shares on January 1, 2021 is?
8. The gain or loss due to reclassification from investment in associate to FVTOCI to be recognized in the
profit or loss in 2021?
9. The amount of the unrealized gain should be reported in the statement of comprehensive income as
component of other comprehensive income?
10. The investment balance of B on December 31, 2021?

Problem 3

On July 1, 2019, M Company acquired 60,000 shares of the 200,000 shares outstanding of S Company at 25 per
share. The company incurred 2 transaction cost per share. The book value of S’s net assets on this date
amounted to 5,000,000. The fair value of one of its identifiable intangibles with a 5-year remaining life higher
than book value by 50,000 while the equipment has a remaining life of 8 years and had a fair value of 160,000
higher than book value. All other identifiable assets had fair value approximating their book values.

S reported total net income in 2019 at 800,000 and distributed dividends at year end at 300,000. Fair value of
shares on this date was 32 per share while cost to sell is at 2 per share.

S reported total comprehensive income in 2020 at 1,250,000 which is net of a foreign translation loss amounting
to 150,000. It also distributed dividends at year end at 500,000. Fair value of shares on this date was at 30 per
share while cost to sell remained 2 per share.
On January 1, 2021, M sold 24,000 S Company shares at 32 per share, it fair value on that date, and reclassified
the remaining shares to investment in equity securities designated as at fair value through other comprehensive
income.

11. The investment in associate balance on December 31, 2019 is?

12. The impairment loss on December 31, 2019 is?
13. The impairment loss on December 31, 2020 is?
14. The investment income to be recognized by the company in its income statement for 2020 should be?
15. The total net gain or loss due to reclassification from investment in associate to FVTOCI to be
recognized in 2021 profit or loss is?