Mindanao State University

College of Business Administration and Accountancy

INVESTMENT IN ASSOCIATE
Practical Accounting 1 Pre-review Program

PROBLEM 1: On January 1, 2013, Euro Company acquired December 31, 2011, Lek recognized revaluation surplus of
100,000 newly issued shares of Rand, Inc. at P100 per share. P100,000.
Before the acquisition, Rand had 200,000 ordinary shares 5. How much did Dram pay for its 25% interest in Lek? Commented [U5]: 410,000
outstanding. At the end of 2013, Rand reported net income
of P1,500,000 and other comprehensive income of P750,000. PROBLEM 6: Florin Company bought 20% of Taka, Inc.’s
In addition, Rand paid cash dividends of P1.50 to its ordinary ordinary shares on January 1, 2011 for P20,000,000. Carrying
shareholders. amount of Taka’s net assets at purchase date totaled
1. How much should this investment be reported by Euro P60,000,000. Fair value and carrying amounts were the same
on December 31, 2013? for all items, except for land, building and inventory, for
Commented [U1]: 10,600,000
which fair values exceeded their carrying amounts by
PROBLEM 2: On April 1, 2013, Pound Corporation purchased P5,500,000, P10,000,000 and P5,000,000 respectively and
15,000 ordinary shares of Zloty Company at P180 per share. equipment for which the carrying amount exceeded its fair
At the time of purchase, Zloty had 100,000 ordinary shares value by P600,000. The building has a 5 year life while the
outstanding. After the purchase, Pound had a significant equipment is expected to be used for 3 more years. Eighty
interchange of managerial personnel with and took active percent of the inventory was sold during 2011 while the
participation in the policy making process of Zloty. The first remaining 20% was sold in 2012. The land was sold by Taka in
quarter statement ending March 31, 2013 of Zloty recorded 2012. Taka reported net income and paid dividends during
profit of P480,000. For the year ended December 31, 2013, 2011 and 2012 as follows:
Zloty reported profit of P2,400,000. Zloty paid Pound 2011 2012
dividends of P60,000 on June 1, 2013 and again P60,000 on Net income P 40,000,000 P 50,000,000
December 31, 2013. The shares of Zloty are selling at P190 per Cash dividend paid 15,000,000 20,000,000
share on December 31, 2013. 6. What amount would Florin report as investment
2. How much should this investment be reported by income in 2011? Commented [U6]: 9,160,000
Pound on December 31, 2013? 7. What is the balance of the investment in associate
Commented [U2]: 2,868,000
account as of December 31, 2012?
PROBLEM 3: On July 1, 2013, Dinar Corporation paid 8. Assume instead that the purchase price was Commented [U7]: 33,820,000
P30,000,000 for a 25% interest, representing 125,000 ordinary P15,000,000, what amount would Florin report as
shares, in the net assets of Kwanza Company which had a investment income in 2011? Commented [U8]: 10,140,000
net book value of P120,000,000 on the date of purchase.
During the year, Kwanza declared dividends on which Dinar PROBLEM 7: At the beginning of the current year, Ruble
received P250,000. At the end of 2013, Kwanza reported net Corporation purchased 20% of the outstanding ordinary
income of P9,600,000 for the year ended December 31, 2013 shares of Won Company for P5,000,000. The book value of
which was evenly earned during the year. The shares of the net assets acquired was P4,000,000. The excess of cost
Kwanza, Inc. were selling at P250 per share on December 31, over book value was attributable to an equipment which
2013. had a fair value greater than its carrying amount by
Dinar is entitled to appoint two directors to the board which P2,000,000.
consists of eight members. The remaining of the voting rights 9. What is the total goodwill of Won Company based on
are held by two other companies, each of which is entitled the purchase? Commented [U9]: 3,000,000
to appoint three directors. The board makes decisions on the
basis of simple majority. Because board meetings are often PROBLEM 8: Franc Company owns 20% of the ordinary shares
held at very short notices, Dinar does not always have of Rupee, Inc. The records of Franc as of December 31, 2011
representations on the board. Often, the suggestions of the show the following information before any necessary
representative of Dinar are ignored and the decisions of the adjustments:
board seem to take little notice of any representations made Investment in associate P 200,000
by the director from Dinar Corporation. Trade accounts receivable – Rupee 300,000
Investment in preference shares – Rupee 100,000
3. How much should this investment be reported by Dinar
Advances to associate – Rupee 50,000
on December 31, 2013? Commented [U3]: 31, 250,000
Loans receivable – Rupee, secured 120,000
PROBLEM 4: On January 1, 2013, Dollar Company purchased Rupee reported the following net income (loss) from 2011 up
15,000 shares of the 100,000 outstanding ordinary shares of to 2014:
Peso Company at P200 per share. The book value of the 2011 P (1,400,000) 2013 P (100,000)
interest acquired is equal to the acquisition cost. Aside from 2012 (500,000) 2014 1,200,000
the ordinary share investment in Dollar, it also holds 1,000, 10. The amount to be reported as investment in associate
P5,000 bonds of Peso Company convertible at the option of as of December 31, 2011 is: Commented [U10]: 0
Dollar into 25,000 shares of Peso. The conversion option was 11. The amount of loss to be recognized in 2012 in relation
not exercised as of December 31, 2013. During 2013, Peso the investment in associate is: Commented [U11]: 70,000
Company reported net income of 1,000,000. Peso Company 12. The amount to be reported as investment in associate
also declared and paid dividends of P5 per share. as of December 31, 2014 is: Commented [U12]: 40,000
4. What type and amount of income should Dollar
PROBLEM 9: Afghani Company reported the following
Company recognize from its investment in Peso? Commented [U4]: Investment income of P150,000
capital accounts on January 1, 2013:
PROBLEM 5: On January 1, 2011, Dram Company purchased Preference share capital, P100 par, 12%
25% of Lek Corporation’s ordinary shares. No goodwill cumulative, 50,000 shares issued P5,000,000
resulted from the purchase. Dram appropriately carries this Preference share capital, P80 par, 10% non-
investment at equity and the balance in Dram’s investment cumulative, 25,000 shares issued 2,000,000
account was P480,000 at December 31, 2011. Lek reported Ordinary share capital, P50 par, 500,000
profit of P300,000 for the year ended December 31, 2011 and shares authorized and 200,000 shares
paid dividends totaling P120,000 during 2011. In addition on issued 10,000,000
Retained earnings 5,000,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014 Page|1 of 3
On January 1, 2013, Boliviano Company acquired 40,000 P2,000,000. The land was used by Yuan Company
ordinary shares of Afghani Company representing a 20% as the site of its new plant.
interest for P3,000,000. The net assets of the investee are fairly D. On December 16, 2011, Yen Company sold an
valued. Afghani Company reported net income of inventory to Yuan Company for P2,000,000. The
P2,000,000 for 2013 and P3,000,000 for 2014. Afghani did not inventory had a cost of P1,800,000. At December
declare any dividends in 2013 but it paid cash dividends of 31, 2011, one half of said inventory remains on
P500,000 to ordinary shareholders, P1,200,000 to the 12% hand.
cumulative preference shareholders and P200,000 to the E. On January 1, 2012, Yen Company sold an
10% non-cumulative preference shareholders in 2014.9 equipment to Yuan Company for P3,000,000. The
13. Determine the share in profit of associate of Boliviano equipment had a cost of P2,500,000. Yen
Company in 2013. Company regarded this equipment as inventory
Commented [U13]: 280,000
14. Determine the share in profit of associate of Boliviano whereas Yuan Company intended to use it as a
Company in 2014. noncurrent asset. The remaining useful life of the
Commented [U14]: 440,000
equipment is 10 years.
PROBLEM 10: Mark Company acquired 40% interest in Pula F. On December 1, 2012, Yuan Company sold an
Company for P1,700,000 on January 1, 2011. The inventory to Yen Company for P2,800,000. The
shareholders’ equity of Pula Company on January 1 and inventory had a cost of P2,000,000 and was still on
December 31, 2011 is presented below: hand on December 31, 2012.
1/1/2011 12/31/2011 18. What is the balance of the investment in associate
Share capital P 3,000,000 P 3,000,000 account as of December 31, 2011? Commented [U18]: 5,428,000
Revaluation surplus – 1,300,000 19. What is the balance of the investment in associate
Retained earnings 1,000,000 1,500,000 account as of December 31, 2012? Commented [U19]: 5,892,000
On January 1, 2011, all the identifiable assets and liabilities of
Pula Company were recorded at fair value. Pula Company PROBLEM 13: Guilder, Inc. acquired 30% of Krone
reported profit of P650,000 after income tax expense of Corporation’s voting stock on January 1, 2010 for P360,000.
P350,000 and paid dividends of P150,000 to shareholders During 2010, Krone earned P150,000 and paid dividends of
during the current year. The revaluation surplus is the result of P90,000. Guilder’s 30% interest in Krone gives Guilder the
the revaluation of land recognized by Pula Company on ability to exercise significant influence over Krone’s
December 31, 2011. operating and financial policies. During 2011, Krone earned
P180,000 and paid dividends of P60,000 on April 1 and
Additionally, depreciation is provided by Pula Company on
P60,000 on October 1.
the diminishing balance method whereas Mark Company
uses the straight line method. Had Pula Company used the On July 1, 2011, Guilder sold half of its stock in Krone for its fair
straight-line method, the accumulated depreciation would value of P237,000. Thereafter, Guilder designated the
be increased by P200,000. The tax rate is 35%. investment as at fair value through OCI. The remaining shares
of Krone held by Guilder have a fair value of P220,000 at
15. Mark Company should report its investment in
December 31, 2011.
associate on December 31, 2011 at: Commented [U15]: 2,420,000
20. What total amount should be recognized in Guilder,
PROBLEM 11: Real Company has 100,000 ordinary shares Inc.’s 2011 profit or loss relating to its investment in
outstanding. Kyat Company acquired 30,000 shares of Real Krone Corporation? Commented [U20]: 123,000
Company for P120 per share in 2008. The securities are being
held as long-term investment. Changes in retained earnings PROBLEM 14: Birr Company owns 30% of Quetzal, Inc.’s
for Real Company for 2010 and 2011 are as follows: ordinary shares. On July 1, 2012, Birr Company sold three-
Retained earnings, January 1, 2010 P (500,000) fourths of its investment in Quetzal for P1,200,000. The
Net income for 2010 700,000 adjusted balances of the related accounts as of December
Retained earnings, December 31, 2010 P 200,000 31, 2011 are as follows:
Net income for 2011 800,000 Investment in associate P1,400,000
Cash dividend paid during 2011 (400,000) Cumulative share in associate’s exchange
Retained earnings, December 31, 2011 P 600,000 differences on translation of foreign
operation – credit 100,000
16. What is the balance of Kyat Company’s investment in Cumulative share in associate’s unrealized
Real Company on January 1, 2010? gains and losses on investments at fair Commented [U16]: 3,450,000
17. What is the balance of Kyat Company’s investment in value through OCI – credit 150,000
Real Company on December 31, 2011? Commented [U17]: 3,780,000
From January 1, 2012 to June 30, 2012, Quetzal reported a
PROBLEM 12: Yen Company acquired a 40% interest in an net income of P100,000 and an additional P80,000 for the
associate, Yuan Company, for P5,000,000 on January 1, remainder of the year. No dividends were paid during the
2011. At the acquisition date, there were no differences same period. The remaining investment in Quetzal had a fair
between fair value and carrying amount of identifiable value of P400,000 on July 1, 2012 and P415,000 on December
assets and liabilities. Yuan Company reported the following 31, 2012.
net income and dividend for 2011 and 2012: 21. What amount in total would be recognized in Birr’s
2011 2012 2012 profit or loss assuming the remaining shares were
Net income P 2,100,000 P 3,200,000 reclassified as trading securities? Commented [U21]: 315,000
Dividend paid 800,000 1,000,000 22. What amount in total would be recognized in Birr’s
The following transactions occurred between Yen Company 2012 profit or loss relating to this investment assuming
and Yuan Company: Birr still has significant influence over Quetzal after the
A. On January 1, 2011, Yuan Company sold an sale? Commented [U22]: 238,500
equipment costing P500,000 to Yen Company for
PROBLEM 15: On January 2, 2010, Shekel, Inc. acquired a 15%
P800,000. Yen Company applies 10% straight line
interest in Escudo Corporation by paying P2,000,000 for
depreciation.
10,000 ordinary shares. On this date, the net assets of Escudo
B. On July 1, 2011, Yuan Company sold an equipment
totaled P12,000,000. The fair values of Escudo’s identifiable
for P900,000 to Yen Company. The carrying amount
assets and liabilities were equal to their book values. The
of the equipment is P500,000 at the time of sale. The
investment in Escudo Corporation is not intended for trading.
remaining life of the equipment is 5 years and Yen
On January 1, 2011, Shekel paid P4,500,000 for 30,000
Company uses the straight line depreciation.
additional ordinary shares of Escudo which represents a 25%
C. On September 30, 2011, Yen Company sold land to
interest in Escudo. The fair value of Escudo’s identifiable net
Yuan Company carried in its books at P2,500,000 for
assets was equal to their book values of P13,000,000. During
2010 and 2011, the following occurred for Escudo:

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014 Page|2 of 3
 2010 2011 25. What total amount in relation to this investment would
Net income P 2,000,000 P 5,000,000 be included in the determination of profit or loss in
Dividends paid 1,000,000 1,500,000 2014? Commented [U25]: 4,520,000
The fair value of Shekel’s investment in Escudo securities is as 26. What is the carrying amount of the investment in
follows: December 31, 2010 – P2,700,000 and December 31, associate on December 31, 2014? Commented [U26]: 18,770,000
2011 – P8,700,000.
PROBLEM 16: On January 1, 2012, Ringgit Company acquired
23. What is the balance of the investment in Escudo
10% of the outstanding voting stock of Dirham Company. On
account at December 31, 2011? Commented [U23]: 8,600,000
January 1, 2013, Ringgit gained the ability to exercise
PROBLEM 17: On January 1, 2013, Baht Company acquired a significant influence over the financial and operating control
10% interest in Shilling, Inc. for P3,000,000. The investment was of Dirham by acquiring 30% of Dirham’s outstanding stock.
accounted for at fair value through OCI. The fair value of the The two purchases were made at prices proportionate to the
investment was P5,000,000 on December 31, 2013. On value assigned to Dirham’s net assets which equaled their
January 1, 2014, the entity acquired a further 25% interest in carrying amounts.
the Shilling for P12,500,000. On such date, the carrying For the years ended December 31, 2012 and 2013, Dirham
amount of the net assets of the Shilling was P36,000,000. The reported the following:
fair value of the net assets of the Shilling is equal to the 2012 2013
carrying amount except for an equipment whose fair value Net income P 8,000,000 P 15,000,000
exceeds carrying amount by P4,000,000. The equipment has Dividends paid 5,000,000 10,500,000
a remaining life of 5 years. The Shilling reported net income
of P8,000,000 for 2014 and paid dividend of P5,000,000 on 27. In 2013, what amount should Ringgit report as current
December 31, 2014. No dividend was paid in 2013 by the year investment income? Commented [U27]: 6,000,000
Shilling. 28. In 2013, what amount should Ringgit report as an
adjustment to the 2012 net income? Commented [U28]: 0
24. Under the fair value approach, what is the goodwill on
January 1, 2014? Commented [U24]: 3,500,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014 Page|3 of 3