CHAPTER 17 & 18: INVESTMENT IN ASSOCIATE

Problem 17-8 (AICPA Adapted)

On July 1, 2020 Blush Company purchased 20% of the outstanding ordinary shares of an
investee for P4,000,000 when the fair value of net assets was P20,000,000.

Blush Company has the ability to exercise significant influence over the operating and financial
policies of the investee. The following data concerning the investee are available:

12 months ended 6 months ended

December 31, 2020 December 31, 2020

Net income 3,000,000 1,600,000

Dividend declared and paid 1,900,000 1,000,000

In the income statement for the year ended December 31, 2020, what amount of income should
be reported from the investment?

a. 200,000
b. 320,000
c. 380,000
d. 600,000

Solution:
Investment income - December 31, 2020 (1,600,000 x 20%) 320,000

Problem 17-9 (AICPA Adapted)

On April 1, Aurora Company purchased 40% of the outstanding ordinary share of an associate
for P4,000,000.

On this date, the investee’s net assets totaled P8,000,000 and Aurora Company cannot attribute
the excess of cost of the investment over the equity in the investee’s net assets to any particular
factor.

The investee reported net income of P1,000,000 for the current year.

What is the maximum amount which could be included in Aurora Company’s income before tax
its “equity in earnings of the investee” for the current year?

a. 270,000
b. 360,000
c. 300,000
d. 400,000

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Solution:
Share in net income from April 1 to December 31(1,000,000 x 9/12 x 0.40) 300,000

Problem 17-10 (AICPA Adapted)

At the beginning of current year, Mighty Company acquired 20% of the outstanding ordinary
shares of an investee for P7,000,000.

This investment gave Mighty Company the ability to exercise significant influence over the
investee. The carrying amount of the acquired net assets was P6,000,000.

The excess of cost over carrying amount was attributed to an identifiable intangible asset which
was undervalued on investee’s statement of financial position and which had a remaining useful
life of ten years.

The investee reported net income of P1,800,000 for the current year and paid cash dividend of
P600,000 on the ordinary shares.

What is the carrying amount of the investment in associate at year-end?

a. 6,780,000
b. 7,140,000
c. 7,000,000
d. 6,900,000

Solution:
Cost 7,000,000
Add: Share in net income (0.20 x 1,800,000) 360,000
Total 7,360,000
Less: Amortization (1,000,000/10) 100,000
Share in cash dividend (0.20 x 600,000) 120,000
Carrying amount 7,140,000

Problem 17-11 (AICPA Adapted)

On July 1, 2020, Focus Company purchased 30,000 shares of Eagle Company’s 100,000
outstanding ordinary shares for P200 per share.

On December 15, 2020 Eagle Company paid P1,000,000 in dividends, Eagle Company’s net
income for 2020 was P5,000,000 earned throughout the year.

What amount of income from the investment should be reported for the current year?

a. 500,000
b. 300,000
c. 750,000
d. 150,000

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Solution:
Share in net income from July 1, 2020 to December 31, 2020
(5,000,000 x 6/12 x 0.30) 750,000

Interest acquired (30,000/100,000) 30%

Problem 17-12 (AICPA Adapted)

At the beginning year, Bliss Company purchased 10% of Red Company’s outstanding ordinary
shares for P4,000,000.

Bliss Company is the largest single shareholder in Red Company and Bliss Company’s officers
are a majority on Red Company’s board of directors.

Red Company reported net income of P5,000,000 for the current year and paid dividends of
P1,500,000.
What amount should be reported as investment in associate at year-end?

a. 4,350,000
b. 4,500,000
c. 4,000,000
d. 3,850,000

Solution:
Acquisition, January 1 4,000,000
Add: Share in net income (0.10 x 5,000,000) 500,000
Total 4,500,000
Less: Share in cash dividend (0.10 x 1,500,000) (150,000)
Carrying amount 4,350,000

Problem 17-13 (AICPA Adapted)

At the beginning of current year, Small Company purchased 25% of Big Company. No “excess”
resulted from the purchase.

Small Company appropriately carried this investment at equity and the carrying amount of the
investment was P1,900,000 at year-end.

Big Company reported net income of P1,200,000 for the current year and paid cash dividend of
P480,000 at year-end.

What amount did Small Company pay for the 25% interest in Big Company?

a. 2,320,000
b. 2,020,000
c. 2,080,000
d. 1,720,000

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Solution:
Acquisition cost (SQUEEZE) 1,720,000
Add: Share in net income (0.25 x 1,200,000) 300,000
Total 2,020,000
Less: Share in cash dividend (0.25 x 480,000) ( 120,000)
Carrying amount 1,900,000

Problem 17-14 (IAA)

At the beginning of current year, Maggie Company purchased 40% of the outstanding ordinary
shares of an investee paying P2,560,000 when the carrying amount of the net assets of the
investee equaled P5,000,000.

The difference was attributed to equipment which had a carrying amount of P1,200,000 and a
fair market value of P2,000,000 and to building with a carrying amount of P1,000,000 and a fair
market value of P1,600,000.

The remaining useful life of the equipment and building was 4 years and 12 years, respectively.
During the current year, the investee reported net income of P1,600,000 and paid dividends of
P1,000,000.

What is the carrying amount of the investment in associate at year-end?

a. 2,550,000
b. 2,700,000
c. 2,800,000
d. 3,050,000

Solution:
Acquisition cost 2,560,000
Carrying amount of net assets (0.40 x 5,000,000) 2,000,000
Excess of cost over carrying amount 560,000

Excess - equipment (4.40 x 800,000) 320,000

Excess - building (0.40 x 600,000) 240,000
560,000

Acquisition, January 1 2,560,000

Add: Share in net income (0.40 x 1,600,000) 640,000
Total 3,200,000

Less: Share in cash dividend (0.40 x 1,000,000) 400,000

Amortization:
Equipment (320,000/4) 80,000
Building(240,000/12) 20,000

Carrying amount 2,700,000

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Problem 17-15 (AICPA Adapted)
Hannah Company owned 20% of Love Company’s preference share capital and 50% of the
ordinary share capital.

Love Company’s share capital outstanding comprised the following at year-end:

10% cumulative preference share capital 2,000,000

Ordinary share capital 7,000,000

Love Company reported net income of P5,000,000 for the current year.

What amount should be recorded as investment income for the current year?

a. 2,400,000
b. 2,500,000
c. 2,600,000
d. 1,700,000

Solution:
When an investee has outstanding cumulative preference share capital, an investor should
compute its share of earnings after deducting the investee’s preference dividends, whether or not
such dividends are declared.

Net income 5,000,000

Preference dividend (0.10 x 2,000,000) ( 200,000)
Net income to ordinary shares 4,800,000

Share in net income (1/2 of 4,800,000) 2,400,000

Problem 18-7 (AICPA Adapted)

On January 1, 2020, Mega Company acquired 10% of the outstanding ordinary shares of Penny
Company for P4,000,000. The investment was appropriately accounted for under cost method.

On January 1, 2021, Mega Company gained the ability to exercise significant influence over
financial and operating control of Penny Company by acquiring an additional 20% of Penny’s
outstanding ordinary shares for P10,000,000.

The fair value Penny’s net assets equaled carrying amount. The fair value of the 10% interest on
January 1, 2021 was P6,000,000.

For the years ended December 31, 2020 and 2021, the investee reported the following:

2020 2021

Dividend paid 2,000,000 3,000,000

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Net income 6,000,000 6,500,000

1. What is the investment income in 2020?

a. 200,000
b. 400,000
c. 600,000
d. 300,000

Solution:
(0.10 x 2,000,000) 200,000

2. What is the investment income in 2021?

a. 1,300,000
b. 1,950,000
c. 1,000,000
d. 1,900,000

Solution:
Investment income (0.30 x 6,500,000) 1,950,000

3. What is the carrying amount of the investment in associate on December 31, 2021?

a. 16,000,000
b. 17,050,000
c. 15,050,000
d. 16,700,000

Solution:
Fair value of 10% interest 6,000,000
Cost of 20% new interest 10,000,000
Total cost of investment - January 1, 2021 16,000,000
Add: Share in net income (0.30 x 6,500,000) 1,950,000
Total 17,950,000
Less: Share in cash dividend (0.30 x 3,000,000) (900,000)
Carrying amount 17,050,000

Problem 18-8 (IFRS)

On January 1, 2020, Forensic Company acquired a 10% interest in an investee for P3,000,000.
The investment was accounted for using the cost method.

On January 1, 2021, the entity acquired a further 15% interest in the investee for P6,750,000.

On such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair
value of the 10% interest was P4,500,000.

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The fair value of the net assets of the investee is equal to carrying amount except for an
equipment whose fair value exceeds carrying amount by P4,000,000. The equipment has a
remaining life of 5 years.

The investee reported net income of P8,000,000 for 2021 and paid dividend of P5,000,000 on
December 31, 2021.

1. What is the gain on remeasurement to equity to be recognized for 2021?

a. 1,500,000
b. 4,500,000
c. 2,250,000
d. 0

Solution:
Fair value 4,500,000
Carrying amount 3,000,000
Gain 1,500,000

2. What is the goodwill arising from the acquisition on January 1, 2021?

a. 2,250,000
b. 1,250,000
c. 1,350,000
d. 350,000

Solution:
Fair value of 10% interest 4,500,000
New 15% interest 6,750,000
Total cost 11,250,000
New assets acquired (36,000,000 x 0.25) (9,000,000)
Excess of cost over carrying amount 2,250,000

Excess of cost attributable to equipment (4,000,000 x 0.25) 1,000,000

Goodwill - remainder 1,250,000
Excess of cost over carrying amount 2,250,000

3. What is the carrying amount of the investment in associate on December 31, 2021?

a. 11,250,000
b. 11,800,000
c. 12,000,000
d. 14,300,000

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Solution:
Total cost 11,250,000
Net investment income
Share in net income (8,000,000 x 0.25) 2,000,000
Amortization of excess (1,000,000/5) ( 200,000) 1,800,000
Share in dividends (5,000,000 x 0.25) (1,250,000)
Carrying amount 11,800,000

Problem 18-9 (AICPA Adapted)

Grant Company acquired 30% of South Company’s voting share capital for P2,000,000 on
January 1, 2020.

Grant’s 30% interest in South gave Grant the ability to exercise significant influence over
South’s operating and financial policies.

During 2020, South earned P1,500,000 and paid dividends of P500,000.

South reported earnings of P1,000,000 for the six months ended June 30, 2021, and P2,500,000
for the year ended December 31, 2021, but paid dividend of P1,000,000 on October 1, 2021.

On July 1, 2021, Grant sold half of the investment in South for P2,000,000 cash.

On such date, the investment is measured at fair value through profit or loss.

The fair value of the retained investment is P2,200,000 on July 1, 2021, and P2,400,000 on
December 31, 2021.

1. What amount should be recognized as investment income for 2020 as a result of the
investment?

a. 150,000
b. 450,000
c. 500,000
d. 750,000

Solution:
Share in net income (0.30 x 1,500,000) 450,000

2. What is the carrying amount of the investment on December 31, 2020?

a. 2,000,000
b. 2,450,000
c. 2,600,000
d. 2,300,000

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Solution:
Acquisition 2,000,000
Add: Share in net income (0.30 x 1,500,000) 450,000
Total 2,450,000

Less: Share in cash dividend (0.30 x 500,000) (150,000)

Carrying amount 2,300,000

3. What total amount of income should be reported for 2021?

a. 2,250,000
b. 2,100,000
c. 1,950,000
d. 2,050,000

Solution:
Carrying amount 2,300,000
Share in net income from January 1 to June 30, 2021 (0.30 x 1,000,000) 300,000
Carrying amount – June 30, 2021 2,600,000

Sales price 2,000,000

Cost of investment sold (2,600,000 x 50%) ( 1,300,000)
Gain from sale of investment 700,000

Fair value of retained investment - July 1, 2021 2,200,000

Carrying amount of retained investment ( 1,300,000)
Gain 900,000

Gain on sale of investment 700,000

Gain 900,000
Share in net income from Jan. 1 - June 30, 2021 (0.30 x 1,000,000) 300,000
Dividend income on October 1, 2021 (0.15 x 1,000,000) 150,000
Increase in fair value on December 31, 2021 200,000
Total income 2,250,000

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