INVESTMENT IN ASSOCIATE Part 2

1. On July 1, 2017, Q 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 2017 and paid cash dividends of P1,000,000 on ordinary shares and issued 10%
stock dividend on December 31, 2017?

a. 5,900,000
b. 5,400,000
c. 5,300,000
d. 5,800,000

2. On January 1, 2017, R COMPANY acquired 40% of the ordinary share 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 2017.

In December 2017, the investee sold inventory costing P3,000,000 to R COMPANY for P5,000,000. The
inventory remained unsold by S COMPANY on December 31, 2017.

On January 1, 2017, the investee sold an equipment to R 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 R COMPANY for 2017?

a. 1,920,000
b. 1,800,000
c. 3,200,000
d. 2,400,000

3. S COMPANY owned 100% of another entity’s preference shares and 40% of ordinary shares. The
investee’s share capital outstanding on December 31, 2017 included P5,000,000 of 10% cumulative
preference shares and P10,000,000 of ordinary shares. The investee reported net income of P6,000,000 for
2017. No dividend was declared for both preference and ordinary shares in 2015. What amount should be
reported as investment income for 2017?

a. 5,500,000
b. 2,400,000
c. 2,200,000
d. 2,700,000

4. On January 1, 2017, T COMPANY purchased 40% of the outstanding ordinary shares of another entity
for P5,000,000 when the assets of the investee amounted to P10,000,000. At acquisition date, the carrying
amounts of the identifiable assets and liabilities of the investee were equal to their fair value, except for
equipment for which the fair value was P2,000,000 greater than carrying amount and inventory whose fair
value was P1,000,000 greater than cost. The equipment has a remaining life of 5 years and the inventory
was all sold during 2017. The investee reported at net income of P6,000,000 for 2017 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 of the investee for 2017?

a. 2,400,000
b. 2,240,000
c. 2,040,000
d. 1,840,000

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5. U COMPANY owns 20% of V COMPANY’s preference shares and 80% of the ordinary shares. V’s
share capital outstanding on December 31, 2017 as follows:

10% cumulative preference share capital 100,000

Ordinary share capital 700,000

V reported net income of P60,000 for 2017. U does not elect the fair value option to report the investment in
V. What amount should be reported as equity in earnings of V for 2017?

a. 42,000
b. 48,000
c. 48,400
d. 50,000

6. W COMPANY bought 40% of an investee on January 1, 2017 for P400,000. The carrying value of the
investee’s net assets at the purchase date totaled P900,000. Fair values and carrying amounts were the
same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by
P90,000 and P10,000, respectively. The plant has an 18-year life. All inventory was sold during 2017.
During 2017, the investee reported net income of P120,000 and paid a P20,000 cash dividend. What
amount should be reported as income from the investment in associate for 2017?

a. 48,000
b. 42,000
c. 36,000
d. 32,000

7. On July 1, 2017, X COMPANY paid P1,000,000 for 100,000 outstanding shares (40%) of another entity.
At that date, the net assets of the investee totaled P2,500,000 and the fair values of all of the identifiable
assets and liabilities were equal to their carrying amount. The investee reported net income of P500,000 for
2017, of which P300,000 was for the six months ended December 31, 2017. The investee paid cash
dividends of P250,000 on September 30, 2017. The investor does not elect the fair value option for
reporting the investment in associate. What amount of income should be reported from the investment in
associate?

a. 80,000
b. 100,000
c. 120,000
d. 200,000

8. On January 1, 2016, Y COMPANY acquired a 10% interest in an investee for P3,000,000. The
investment was accounted for under the cost method. During 2016, the investee reported net income of
P4,000,000 and paid dividend of P1,000,000. On January 1, 2017, 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 2017 and paid dividend of P5,000,000 on December 31, 2017.

1. What is the goodwill on January 1, 2017 presented separately in the books?

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

2. What total amount of income should be recognized by the investor in 2017?

a. 2,000,000
b. 2,500,000
c. 2,300,000

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 d. 1,800,000

3. What is the carrying amount of the investment in associate on December 31, 2017?

a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000

9. On January 1, 2016, Z 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 2016 and paid dividend of P500,000 on December 31, 2016. The investee reported net
income of P1,000,000 for the six months ended June 30, 2017 and P2,500,000 for the year ended
December 31, 2017 but paid no dividend during 2017. On July 1, 2017, the investor sold half of the
investment for P1,500,000. The fair value of the retained investment was P1,600,000 on July 1, 2017 and
P1,900,000 on December 31, 2017. The retained investment is to be held as non-trading measured at
FVTOCI

1. What is the carrying amount of the investment on December 31, 2016?

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

2. What is the gain on sale of investment that should be reported for 2017?

a. 245,000
b. 305,000
c. 350,000
d. 455,000

3. What amount of gain from remeasurement of investment should be reported for 2017?

a. 405,000
b. 705,000
c. 300,000
d. 0