INVESTMENT IN ASSOCIATE

DISCUSSION QUESTIONS

THEORY
1. The following are regarded as factors indicating the existence of significant influence over another entity:
a b c d
 representation on the board of directors Yes Yes Yes Yes
 participation in decisions about dividends No Yes Yes Yes
 interchange of managerial personnel No No No Yes
 ability to control the investee’s operating policies No Yes No No

2. The equity method of accounting for an investment in equity securities of another company should be used when
the investment
a. is composed of common stock and it is the investor’s intent to vote the common stock.
b. ensures a source of supply such as raw materials.
c. enables the investor to exercise significant influence over the investee.
d. gives the investor voting control over the investee.

3. When an investor uses the equity method to account for investments in common stock, the investment account will
be increased when the investor recognizes
a. a proportionate share of the net income of the investee.
b. a cash dividend received from the investee.
c. a proportionate share of the net loss of the investee.
d. depreciation related to the excess of market value over book value of the investee’s depreciable assets at the
date of purchase by the investor.

4. When an investor uses the equity method to account for investments in common stock, cash dividends received by
the investor from the investee should be recorded as
a. an increase in the investment account
b. a deduction from the investment account
c. dividend revenue
d. a deduction from the investor’s share of the investee’s profits

5. Red Inc. owns 35% of Green Corp. During the calendar year 2025, Green had net earnings of P300,000 and paid
dividends of P36,000. Red mistakenly accounted for the investment in Green using the fair value method rather than
the equity method of accounting. what effect would this have on the investment account and net income,
respectively?
a. Understate, overstate c. Overstate, overstate
b. Overstate, understate d. Understate, understate

6. Company A has a 25% investment in the common stock of (carrying value of P1 million), and advances to
(amounting to P0.5 million), Company B. Company B has been incurring significant losses in the past years.
Company A uses the equity method to account for this investment but has no commitment to support Company’s B
operations. Company A should
a. discontinue applying the equity method when the remaining balance of the investment is P1million.
b. discontinue applying the equity method when the investment and advances accounts are reduced to zero.
c. discontinue applying the equity method when the investment account is reduced to zero.
d. recognize a provision for its share of the losses of Company B when its investment account is reduced to zero.

7. Which statement is incorrect concerning presentation of investments in associates?

a. Equity method investments must be classified as non-current assets.
b. The investor's share of the profit or loss of equity method investments, and the carrying amount of those
investments, must be separately disclosed.
c. The investor's share of any discontinuing operations of such associates need not be disclosed separately.
d. The investor's share of changes recognized directly in the associate's equity are also recognized directly in equity
by the investor, with disclosure in the statement of changes in equity.

8. When an entity holds between 20% and 50% of the outstanding ordinary shares, which of the following statements
is true?
a. The investor must use the equity method
b. The investor should use the equity method unless circumstances indicate that it is unable to exercise
significant influence over the investee
c. The investor must use the fair value method
d. The investor must use the fair value method unless it can clearly demonstrate an ability to exercise
significant influence over the investee.

9. Goodwill arising from an investment in associate is

a. Included in the carrying amount of the investment and amortized over the useful life
b. Included in the carrying amount of the investment and mot amortized.
c. Excluded from carrying amount of the investment but charged to retained earnings.

Page 1 of 3
 d. Excluded from carrying amount of the investment but charged to expense immediately

10. The excess of the investor’s share of the net fair value of the associates net assets over the cost of the investment is
a. Included in the determination of the investors share of the associate’s profit or loss in the period in which
the investment is acquired.
b. Credited to the retained earnings directly
c. Included in other comprehensive income
d. A deferred gain.

11. What should happen when financial statements of an associate are not prepared at the same date as the financial
statements of the investor?
a. The associate shall prepare financial statements for the use of the investors at the same date as that of the
investor.
b. The financial statements of the associate prepared up to a different date shall be used
c. Any major transactions between the date of the financial statements of the investor and that of the associate
shall be accounted for.
d. As long as the gap is not greater than three months, there is no problem

12. An investor used the equity method for the 30% interest in an investee, how should the investor report a receivable
from the investee at year-end?
a. None of the receivable should be reported but offset against the investee’s payable to the investor.
b. Only 70% of the receivable should be reported and the balance is eliminated.
c. The total receivable should be reported separately.
d. The total receivable should be included as part of investment in associate without separate disclosure.

PROBLEMS
1. On July 1, 2025, Kim Company acquired 20% of the outstanding ordinary shares of another entity for P5,000,000.
The carrying amount of the acquired shares was P4,000,000. The excess of cost over carrying amount was
attributable to an identifiable intangible asset which was undervalued on the investee’s statement of financial
position and which had a remaining useful life of 5 years. The investee reported net income of P6,000,000 for 2025, of
which P4,000,000 was for the last six months of the year and paid cash dividends of P1,000,000 on ordinary shares
and issued 10% stock dividend on December 31, 2025. What is the carrying amount of the investment in associate
on December 31, 2025?
a. 5,500,000 c. 5,300,000
b. 5,900,000 d. 5,800,000

2. On January 1, 2025, Lucille Company acquired 40% of the ordinary shares of an associate. On such date, assets
and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of P1,000,000
was acquired. The investee reported net income of P8,000,000 for 2025.
In December 2025, the investee sold inventory costing P3,000,000 to Lucille Company for P5,000,000. The inventory
remained unsold by Lucille Company on December 31, 2025.
On January 1, 2025, the investee sold an equipment to Lucille Company with carrying amount of P2,500,000 for
P4,000,000. The remaining life of the equipment is 5 years.
What amount of investment income should be reported by Lucille Company for 2025?
a. 1,920,000 c. 3,200,000
b. 1,800,000 d. 2,400,000

3. Danielle Company owned 100% of another entity’s preference shares and 40% of ordinary shares. The investee’s
share capital outstanding on December 31, 2025 included P5,000,000 of P10% cumulative preference shares and
P10,000,000 of ordinary shares. The investee reported net income of P8,000,000 for 2025. No dividend was
declared for both preference and ordinary shares in 2025. What amount should be reported as investment income
for 2025?
a. 3,200,000 c. 3,500,000
b. 3,000,000 d. 2,800,000

4. On January 1, 2025, Lily Company purchased 40% of the outstanding ordinary shares of another entity for P5,000,000
when the net assets of the investee amounted to P10,000,000. At acquisition date, the carrying amounts if the
identifiable assets and liabilities of the investee were equal to their fair value, except for equipment whose the fair
value was P2,000,000 greater than carrying amount and inventory whose fair value was P1,500,000 greater than cost.
The equipment has a remaining life of 4 years and the inventory was all sold during 2025. The investee reported net
income P8,000,000 for 2025 and paid no dividends. What is the maximum amount which could be included in
income before tax to reflect the investor’s equity in earnings for 2025?
a. 3,200,000 c. 2,800,000
b. 2,400,000 d. 3,000,000

5. Chu Company acquired a 40% interest in Wawa Company for P1,700,000 on January 1, 2024. The shareholders' equity
of Wawa Company on January 1 and December 31, 2024 is presented below:
January 1 December 31
Share capital 3,000,000 3,000,000
Revaluation surplus - 1,300,000
Retained earnings 1,000,000 1,500,000
On January 1, 2024, all the identifiable assets and liabilities of Wawa Company were recorded at fair value. Wawa
Company reported profit of P650,000, after income tax expense of P350,000 and paid dividends of P150,000 to
shareholders during the current year.
The revaluation surplus is the result of the revaluation of land recognized by Wawa Company on December 31,
2024. Additionally, depreciation is provided by Wawa Company on the diminishing balance method whereas Chu
Company

Page 2 of 3
Page 3 of 3
 uses the straight-line. Had Wawa Company used the straight line, the accumulated depreciation would be increased
by P200,000. The tax rate is 35%. Chu Company should report its investment in associate on December 31, 2024 at
a. P2,920,000 c. P2,420,000
b. P2,550,000 d. P1,900,000

6. On July 1, 2020, Cleopatra Corporation acquired 25% of the shares of Marcus, Inc. for P1,000,000. At that date, the
equity of Marcus was P4,000,000, with all the identifiable assets and liabilities being measured at amounts equal to
fair value. The table below shows the profits and losses made by Marcus during 2020 to 2024:

Year Profit (Loss)

2020 P 200,000
2021 (2,000,000)
2022 (2,500,000)
2023 160,000
2024 300,000

What is the carrying amount of the investment in Marcus, Inc. as of December 31, 2024?
a. P40,000 c. P75,000
b. P15,000 d. P 0

7. On January 1, 2025, Rowena Company acquired a 10% interest in an investee for P3,000,000. The investment was
accounted for under the cost method. During 2015, the investee reported net income of P4,000,000 and paid
dividend of P1,000,000. On January 1, 2026, the entity acquired a further 15% interest in the investee for P8,500,000.
On such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10%
existing interest was P3,500,000. The fair value of the net assets of the investee is equal to carrying amount except
for an equipment whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining
life of 5 years. The investee reported net income of P8,000,000 for 2026 and paid dividend of P5,000,000 on
December 31, 2026?

1. What amount of investment income should be recognized in 2025?

a. 400,000
b. 100,000
c. 500,000
d. 300,000

2. What is the goodwill arising from the acquisition on January 1, 2026?

a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0

3. What total amount of income should be recognized by the investor in 2026?

a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2026?
a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000

8. On January 1, 2025, Eloisa Company acquired 30% of the voting share capital of another entity for P2,000,000 which
was equal to the carrying amount of interest acquired. The investee reported net income of P800,000 for 2025 and
paid dividend of P500,000 on December 31, 2025. The investee reported net income of P1,000,000 for the six months
ended June 30, 2026 and P2,500,000 for the year ended December 31, 2026 but paid no dividend during 2016. On July
1, 2026, the investor sold half of the investment for P1,500,000. The retained investment is to be measured at FVPL.

1. What is the carrying amount of the investment in December 31, 2025?

a. 2,090,000
b. 2,390,000
c. 2,240,000
d. 2,000,000

2. What is the carrying amount of the investment before the disposal on June 30, 2026?
a. 2,390,000
b. 2,090,000
c. 1,195,000
d. 1,790,000

3. What is the gain on sale of investment that should be reported for 2026?
a. 245,000
b. 305,000
c. 350,000
d. 455,000

Page 4 of 3