Exercise 2.

7- 8A (Journal Entries – Equity Method)

Andrew Company obtained significant influence over Mark Corporation by buying 25% of Mark’s 300,000 outstanding
ordinary shares at a total cost of P 9 per share on July 1, 2020. On October 15, Mark declared and paid a cash
dividend of P 560,000. On December 31, Mark reported a net income of P 850,000 for the year. Also, on this date,
the fair value of Mark’s share in the market is P 12.

On June 30, 2021, Mark declared a cash dividend of P 2 per share. At the of the year, Mark reported a net loss of P
250,000. Also, on this date, the fair value of Mark’s share in the market is P 11.

Instructions:

1. Prepare the necessary journal entries in 2020.

SOLUTION:
Date Account Names Debit Credit
2020
Jul. 1 Investment in Associate 675,000
Cash (300,000 * 25% * P9) 675,000

Oct. 15 Cash 140,000

Investment in Associate (560,000 * 25%) 140,000

Dec. 31 Investment in Associate 106,250

Investment Income (850,000 * 6/12 * 25%) 106,250

2021
Jun. 30 Cash 150,000
Investment in Associate (75,000 x P2) 150,000

Dec. 31 Loss in Investment 62,500

Investment in Associate (250,000 * 25%) 62,5000

2. Compute the balance of Investment in Associate account to be reported in the Statement of Financial Position of
Andrew Corporation as of December 31, 2020.
2020
Jul. 1 Acquisition 675,000
Oct. 15 Collection of dividends (140,000)
Dec 31 Share in net income 106,250
Dec. 31 Balance 641,250

3. Compute the balance of Investment in Associate account to be reported in the Statement of Financial Position of
Andrew Corporation as of December 31, 2021.
2021
Jul. 1 Acquisition 641,250
Jun. 30 Collection of dividends (150,000)
Dec. 31 Share in net loss (62,500)
Dec. 31 Balance 428,750

Exercise 2.7- 8B (Excess of Cost Over Carrying Amount of Net Assets Acquired)

On April 1, 2020, LMC Corporation purchased 30% of the voting rights in MLB Company for P5,000,000. The net
assets of MLB Company on this date have a carrying value of P 15,000,000. These net assets are fairly valued
except for building and inventory. The building’s fair value is P1,000,000 greater than its carrying amount, while the
inventory is undervalued by P110,000. The building has remaining useful life of 10 years and the 3/4 of the
inventories were sold during the current year.

In 2020, MLB Company reported an income of P4,000,000 and paid dividends amounting to P2,000,000.

Instructions:

1. Prepare the journal entry to record the acquisition.

SOLUTION:
Date Account Names Debit Credit
2020
Apr. 1 Investment in Associate 5,000,000
Cash 5,000,000

2. How much is the goodwill during acquisition?

SOLUTION:
Acquisition cost of 30% of net assets 5,000,000
Carrying amount of net assets acquired (P 15,000,000 x 30%) (4,500,000)
Excess 500,000
Adjustments:
Attributable to building – undervaluation (P 1,000,000 x 30%) 300,000
Attributable to inventory – undervaluation (P 110,000x 30%) 33,000 (333,000)
Goodwill during acquisition 167,000

3. Prepare the journal entry to record share in profit or loss.

SOLUTION:
Date Account Names Debit Credit
2020
Dec. 31 Investment in Associate 900,000
Investment Income (4,000,000 * 9/12 * 30%) 900,000

4. Prepare the journal entry to record cash dividends received.

SOLUTION:
Date Account Names Debit Credit
2020
Dec. 31 Cash 600,000
Investment in Associate (2,000,000 * 30%) 600,000

5. Prepare the journal entry to amortize the excess of cost attributable to undervalued assets.

SOLUTION:
Date Account Names Debit Credit
2020
Dec. 31 Investment Income 47,250
 Investment in Associate (300,000/10 * 9/12) + (33,000 * ¾) 47,250

6. How much is the carrying amount of Investment in Associate at December 31, 2020?
4/1 Acquisition 5,000,000
12/31 Share in net income 900,000
12/31 Receipt of dividends (600,000)
12/31 Amortization attributable to building (22,500)
12/31 Amortization attributable to inventories sold (24,750)
Balance 5,252,750

7. How much is the investment income for 2020?

12/3 Share in net income 900,000 This is an INCOME
1
12/3 Amortization attributable to building (22,500) This is an EXPENSE
1
12/3 Amortization attributable to inventories sold (24,750) This is an EXPENSE
1
Balance 852,750

Exercise 2.7- 8C (Excess of Net Fair Value Over Cost of Net Assets Acquired)

On September 1, 2020, JJD Corporation purchased 20% of the voting rights in LGM Company for P4,000,000. JJD
has the ability to exercise significant influence over the operating and financial policies of LGM Company. The net
assets of LGM Company on this date have a carrying value of P18,000,000. These net assets are fairly valued
except for land and equipment. The land’s fair value is P1,500,000 greater than its carrying amount, while the
equipment is undervalued by P900,000. The equipment has remaining useful life of 5 years.

In 2020, LGM Company reported a loss of P1,080,000 and paid dividends amounting to P1,000,000.

Instructions:

1. Prepare the journal entry to record the acquisition.

SOLUTION:
Date Account Names Debit Credit
2020
Sep. 1 Investment in Associate 4,000,000
Cash 4,000,000

2. How much is the goodwill during acquisition?

SOLUTION:
Acquisition cost of 20% of net assets 4,000,000
Carrying amount of net assets acquired (P 18,000,000 x 20%) (3,600,000)
Excess 400,00
Adjustments:
Attributable to building – undervaluation (P 1,500,000 x 20%) 300,000
Attributable to equipment – undervaluation (P 900,000x 20%) 180,000 (480,000)
Excess of net fair value over cost (80,000)
3. Prepare the journal entry to record the share in profit or loss.

SOLUTION:
Date Account Names Debit Credit
2020
Dec, 31 Loss on Investment (P 1,080,000 x 20% x 4/12) 72,000
Investment in Associate 72,000

4. Prepare the journal entry to record the receipt if cash dividends.

SOLUTION:
Date Account Names Debit Credit
2020
Dec. 31 Cash (1,000,000 x 20%) 200,000
Investment in Associate 200,000

5. Prepare the journal entry to amortize the excess attributable of undervalued assets.

SOLUTION:
Date Account Names Debit Credit
2020
Dec. 31 Investment Income 12,000
Investment in Associate 12,000

6. Prepare the journal entry to record the “excess net fair value” as investment income.

SOLUTION:
Date Account Names Debit Credit
2020
Dec. 31 Investment in Associate 80,000
Investment Income 80,000

7. What is carrying amount of Investment in Associate at December 31, 2020?

9/1 Acquisition 4,000,000
12/31 Share in net loss (72,000)
12/31 Receipt of dividends (200,000)
12/31 Amortization attributable to equipment (12,000)
12/31 Excess of net fair value 80,000
Balance 3,796,000

8. How much is the investment income (loss) for 2020?

12/3 Share in net loss (72,000) This is an INCOME

1
12/3 Amortization attributable to equipment (12,000) This is an EXPENSE
1
 12/3 Excess of net fair value 80,000 This is an EXPENSE
1
Investment Loss (4,000)

Exercise 2.7- 8I (Discontinuance of Equity Method)

(Adapted from AICPA Examination)

On January 1, 2020, Hazel Company acquired 30% of East Company’s voting rights for P 8,000,000. During 2020,
East earned P 5,000,000 and paid dividends of P 2,000,000.

East reported earnings of P 6,000,000 for the 6-months ended June 30, 2021, and P 8,000,000 for the year ended
December 31, 2021.

On July 1, 2021, Hazel sold half of the investment in East for P 6,000,000 cash resulting to loss of significant
influence. East paid dividends of P 2,500,000 on October 1, 2021.

On July 1, 2021, the investment is measured at fair value through other comprehensive income. The fair value of the
retained investment is P 6,500,000 on July 1, 2021 and P 5,900,000 on December 31, 2021.

Required:

Prepare journal entries for 2020 and 2021.

SOLUTION:

Date Account Names Debit Credit

2020
Jan. 1 Investment in Associate 8,000,000
Cash 8,000,000

Dec. 31 Investment in Associate 1,500,000

Investment Income (5,000,000 * 30%) 1,500,000

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

2021
Jun. 30 Investment in Associate 1,800,000
Investment Income (6,000,000 * 30%) 1,800,000

Jul. 1 Cash 6,000,000

Investment in Associate 5,350,000
Gain on Sale 650,000
Investment in Associate = 8,000,000 + 1,500,000 +1,800,000 –
600,000 = 10,700,000 * ½ = 5,350,000
1 Investment in Associate 1,150,000
Gain from Remeasurement (5,350,000 – 6,500,000) 1,150,000

Date Account Names Debit Credit

2021
Jul. 1 Financial Assets – FVOCI 6,500,000
 Investment in Associate 6,500,000

Oct. 1 Cash 375,000

Dividend Income (2,500,000 * 15%) 375,000

Dec. 31 Unrealized Loss – OCI 600,000

Financial Assets – FVOCI (6,500,000 – 5,900,000) 600,000

Exercise 2.7- 8L (Fair Value Method to Equity Method)

Presented below are the equity investment transactions of Perseverance Company which accounted for at fair value
through other comprehensive income.

2020
Jan 1 - Purchased 15% interest of Prayerful Corporation for P 5,000,000.
Dec 31 - Prayerful Corporation reported net income of P 2,500,000 for the year.
31 - Prayerful declared and paid cash dividend of P 800,000.
31 - The fair value of the investment is P 6,000,000.

2021
Jan. 1 - Purchased additional 25% interest of Prayerful Corporation for P 8,000,000.
On this date, the carrying amount of the net assets of Prayerful is equal to
carrying amount. Any excess of cost over carrying amount is attributable to
Goodwill. On this date, the carrying amount of the net assets of the investee
is P 32,000,000.
Dec 31 - Prayerful Corporation reported net income of P 8,000,000 for the year.
.
31 - Prayerful declared and paid cash dividend of P 3,000,000.

Required:

Prepare the journal entries from 2020 to 2021.

SOLUTION:

Date Account Names Debit Credit

2020
Jan. 1 Financial Assets - FVOCI 5,000,000
Cash 5,000,000

Dec. 31 Cash (P 800,000 x 15%) 120,000

Dividend Income 120,000

31 Financial Assets - FVOCI 1,000,000

Unrealized Gain – Other Comprehensive Income 1,000,000
(P 6,000,000 FV – P 5,000,000 acquisition cost)

2021
Jan. 1 Investment in Associate 8,000,000
 Cash 8,000,000

1 Unrealized Gain – Other Comprehensive Income 1,000,000

Retained Earnings 1,000,000

1 Investment in Associate 6,000,000

Financial Assets - FVOCI 6,000,000

Dec. 31 Investment in Associate 3,200,000

Investment Income [P 8,000,000 x (15% + 25%)] 3,200,000

31 Cash (P 3,000,000 x 40%) 1,200,000

Investment in Associate 1,200,000

NOTES:
Fair value of 15% existing investment 6,000,000
Cost of new 35% new investment or interest 8,000,000
Total cost of investment 14,000,000
Carrying amount of net assets acquired (P 32,000,000 x 40%) (12,800,000)
Excess of Cost attributable to goodwill 1,200,000
GOODWILL IS NOT AMORTIZED.