FOR CLASSROOM DISCUSSION

Solution:

Investment in associate 1,300,000

   Cash 1,300,000

Investment in associate 99,000

Share in profit of associate (330,000 x 30%) 99,000

Cash 48,000
Investment in associate (160,000 x 30%) 48,000

Solutions:

Requirement (a):
Purchase price 2,900,000
Fair value of net assets acquired (2,880,000)*
Goodwill 20,000
*The fair value of net assets acquired is computed as follows:
Carrying amount of net assets 8,000,000
Net overvaluation (see computation below) (800,000)
Fair value of net assets 7,200,000
Multiply by: 40%
Fair value of net assets acquired 2,880,000

Under Estimated
Assets Book Value Fair Value (Over) Remaining Amortization
valuation Useful Life
Inventories 2,000,000 3,000,000 1,000,000 N/A 1,000,000
Building 12,000,000 12,500,000 500,000 20 25,000
Equipt. 4,000,000 1,500,000 (2,500,000) 6 (416,667)
Patent - 200,000 200,000 10 20,000
(800,000) 628,333

Requirement (b):
The implied goodwill is included in the carrying amount of the investment and is not accounted for
separately, meaning, it is neither amortized nor tested for impairment separately.

Requirement (c):
Sh. In associate's P/L
1,600,000 Sh. In profit
Under - Invty. (1M x 40%) 400,000
Under - Bldg. (25K x 40%) 10,000 166,667 Over - equpt. (416,667 x 40%)
Under - Patent (20K x 40%) 8,000
1,348,667

Requirement (d):
Investment in associate
Jan. 1 2,900,000
Sh. in profit, gross 1,600,000 300,000 Cash dividends
Over - equpt. (416,667 x
166,667
40%) 400,000 Under - Invty. (1M x 40%)
10,000 Under - Bldg. (25K x 40%)
8,000 Under - Patent (20K x 40%)
3,948,667 Dec. 31

Requirement (e):
Investment in associate 2,900,000
Cash 2,900,000

Investment in associate 1,600,000

Sh. in associate’s profit 1,600,000

Investment in associate 166,667

Sh. in associate’s profit 166,667

Sh. in associate’s profit 400,000

Investment in associate 400,000

Sh. in associate’s profit 10,000

 Investment in associate 10,000

Sh. in associate’s profit 8,000

Investment in associate 8,000

Cash 300,000
Investment in associate 300,000

Solution:
2,000,000 – (10,000 x 10% x 10) = 1,990,000 x 20% = 398,000

Solution:
1/1/2001
Investment in associate 660,000
Cash 660,000

12/31/2001
Investment in associate 40,000
Share in associate’s profit 40,000

Cash 9,000
Investment in associate 9,000
1/1/2002
Cash 525,000
Investment in assoc. [(691,000(a) x 70%] 483,700
Gain on sale 41,300
(a)

Investment in associate

1/1/01 660,000  
Dividend
Sh. In profit 40,000 9,000 s

  691,000 12/31/01

Held for trading securities (10,000 x 30% x 75) 225,000

Investment in assoc. [(691,000(a) x 30%] 207,300
Gain 17,700

12/31/2002
Held for trading securities [3,000 sh. x (80 – 75)] 15,000
Unrealized gain – P/L 15,000

Solution:
Cash 1,000,000
Investment in associate 800,000
Gain on sale 200,000

Loss on reclassification 50,000

Translation of foreign operation – assoc. 50,000