MCQ-

1. Under the cost model of accounting for an investment, changes to the carrying amount of the investment occur if:
 A. the investee earns post-acquisition profits or losses;
 B. goodwill included in the investment is amortized;
 C. the investment is impaired;
 D. dividends are received from the investee.

A Incorrect. The carrying amount is changed only if the investment is impaired.

B Incorrect. The carrying amount is adjusted only if the asset becomes impaired.
C Correct. If the investment is impaired the carrying amount is amended.
D Incorrect. Dividends are not adjusted against the carrying amount of the investment under the cost model.
Section 19.2

2. The method of accounting that applies to an investor and associate relationship is the:
 A. cost method;
 B. fair value method;
 C. consolidation method;
 D. equity method.

A Incorrect. The equity method is used for an investor and associate relationship.
B Incorrect. The equity method is used.
C Incorrect. The consolidation method is used for an investor and its subsidiaries.
D Correct. The method deemed most suitable to reflect the special relationship between an investor and
its associated investments, is the equity method of accounting.
 Section 19.3

3. For the purposes of equity accounting an associate is a business entity including:

 A. an unincorporated entity;
 B. a joint venture;
 C. a subsidiary;
 D. venture capital organisations.

A Correct. An associate can be an unincorporated entity including a partnership.

B Incorrect. A joint venture is not regarded as an associate for the purposes of equity accounting.
C Incorrect. A subsidiary is not included as an associate.
D Incorrect. Venture capital organisations are not regarded as associates for the purposes of equity accounting.
Section 19.1

4. For the purposes of equity accounting, significant influence is regarded as the power of an investor to:
 A. control the financial and operating policies of an associate;
 B. participate in the financial and operating policy decisions of an investee;
 C. participate in the day-to-day management of a joint venture interest;
 D. dominate the financing decisions of an entity.

A Incorrect. Participation, not control, is the condition that characterises significant influence.
B Correct. Participation in financing and operating policy decisions characterises significant influence.
C Incorrect. Joint ventures interests are not equity accounted.
D Incorrect. Dominance is regarded as control not significant influence.
Section 19.2
5. The application of the equity accounting method of accounting is based on the investor owning:
 A. more than 50% of the voting power in an associate;
 B. more than 20% of the voting power in an associate;
 C. less than 20% of the voting power in an associate;
 D. part of the share capital of an associate whether or not there are voting rights attached.

A Incorrect. More than 50% of the voting power indicates the existence of a parent/subsidiary relationship.
B Correct. It is presumed that if an investor holds more than 20% of the voting shares of another entity
then an investor/associate relationship exists.
C Incorrect. It is presumed that where less than 20% of the voting rights are held that an investor/associate
relationship does not exist.
D Incorrect. The level of ownership must be more than 20% and the shares must have voting rights.
Section 19.1

6. The equity method of accounting need not be applied where the investment:
 A. represents more than 20% of the voting shares of an associate;
 B. does not provide the investor with significant influence;
 C. is held exclusively with a view to its disposal within 12 months;
 D. is made by an investor who has no subsidiaries.

A Incorrect. Where the investment is more than 20% of the voting shares of the associate equity accounting must
be applied.
B Incorrect. Where the investment provides the investor with significant influence the equity method must be
applied.
C Correct. If the investment is held with a view to disposing of it within 12 months, equity accounting
need not be applied.
D Incorrect. If the investor has no subsidiaries the equity method is applied directly in the accounting records of
 the investor.
Section 19.2

7. Where all of the following conditions apply an investor need not apply the equity method of accounting:

I.     The investor is a wholly owned subsidiary or a partly owned subsidiary and its owners do not object to the
method not being used.
II.     The investor's debt or equity securities are not traded in a public market.
III.     The investor has not filed financial statements with a regulatory organisation for the purpose of issuing any
class of securities in a public market.
IV.     The ultimate parent of the investor publishes consolidated financial statements that comply with IFRS.
 A. I and IV only;
 B. II and III only;
 C. I, II and III only;
 D. I, II, III and IV.

A Incorrect. All of these conditions must apply.

B Incorrect. Conditions I and IV must also apply.
C Incorrect. Condition IV also applies.
D Correct. Where all of these conditions apply the investor need not apply the equity method of
accounting for an investment in an associate.
Section 19.1

8. In respect to the equity method of accounting, where an investor has no subsidiaries the investor must apply the:
 A. cost method of accounting for investments in associates;
 B. consolidated financial reporting
 C. equity method in its own accounting records;
 D. net present value method to measuring the expected cash flows from an associate.
 A Incorrect. The equity method must be applied in the accounting records of the investor.
B Incorrect. The equity method is used not the consolidated financial reporting method.
C Correct. The equity method must be used but instead of making adjustments on a worksheet the
method is applied directly in the accounting records of the investor.
D Incorrect. The equity method is applied in the accounting records of the investor.
Section 19.2

9. The 'one-line' equity accounting method is used when accounting for an investment in:
 A. a subsidiary;
 B. a unit trust;
 C. a joint venture;
 D. an associate.

A Incorrect. The line-by-line method is used when accounting for an investment in a subsidiary.
B Incorrect. The one-line method is a term used when referring to the equity method of accounting for an
investment in an associate.
C Incorrect. The one-line equity accounting method does not apply to a joint venture.
D Correct. The equity method of accounting for an investment in an associate is referred to as a one-line
method.
Section 19.1

10. The equity method of accounting for an investment in an associate includes the following steps:
  I II III IV
Recognise the initial investment at Yes Yes No No
cost
Recognise the initial investment at Yes No Yes No
fair value
 Reduce the carrying amout by any No Yes No Yes
distributions
Adjust the carrying amount by the No Yes Yes No
investor's share of the associate's
profit or loss

 A. I;
 B. II;
 C. III;
 D. IV.

A Incorrect. The carrying amount is reduced by any distributions from the associate.
B Correct. The initial investment is recognised at cost not fair value.
C Incorrect. The initial investment is recognised at cost not fair value.
D Incorrect. The Initial investment is recognised at cost.
Section 19.2

11. Mandy Limited acquired a 30% share in Sandy Limited for $27 000. Mandy Limited has no other investments. At
the date on which it became an associate, Sandy Limited had the following equity items: Share capital $50 000,
Retained earnings $40 000. At the end of the financial year following acquisition, Sandy Limited generated a
profit of $6 000. The carrying amount of the investment in Sandy Limited at the end of the financial year is:
 A. $25 200;
 B. $27 000;
 C. $28 800;
 D. $33 000.

A Incorrect. The investment in the associate is increased not reduced.

B Incorrect. The carrying amount of the investment is directly adjusted.
 C Correct. The investment is increased to recognise the 30% share in the current period profits of the
associate.
Section 19.2

12. Codger Limited acquired a 40% investment in Lodger Limited for $50 000. Lodger declared and paid a dividend
of $10 000. Codger Limited does not prepare consolidated financial statements. The appropriate entry for the
investor to record this dividend is:
 A. DR     Cash                    $4 000
         CR     Investment in associate          $4 000;
 B. DR     Dividends payable          $4 000
         CR     Cash                         $4 000;
 C. DR     Cash                    $4 000
         CR     Dividend revenue               $4 000;
 D. DR     Investment in associate     $4 000
         CR     Dividend revenue               $4 000.

A Correct. The investment in associate is reduced when the investor receives a distribution from the
associate.
B Incorrect. This entry would be recorded by the associate not the investor.
C Incorrect. The distribution from the associate is recognised as a reduction of the investment.
D Incorrect. The investment in the associate should be reduced not increased.
Section 19.2

13. Investor Limited acquired a 25% interest in Investee Limited for $15 000. Investor holds other equity investments
but does not prepare consolidated financial statements. Investee Limited revalued its buildings class of assets by
$50 000 during the current financial period. The balance of the investment in associate account at the end of the
current financial period is:
 A. $12 500;
  B. $15 000;
 C. $16 250;
 D. $27 500.

A Incorrect. This is the investor's share of the revaluation reserve of the associate which must be added to the
carrying amount of the investment.
B Incorrect. This is the initial amount of the investment. The investor's share of the revaluation reserve must be
added.
C Incorrect. This is 25% of the initial investment plus the share of the revaluation reserve.
D Correct. The initial investment of $15 000 is increased by the investor's shares of the revaluation
reserve.
Section 19.2

14. Tea Limited acquired a 35% investment in Cup Limited for $20 000. Tea Limited also owns two subsidiaries and
prepares consolidated financial statements. Cup Limited declared and paid a dividend of $5 000 during the
current financial year. The appropriate consolidation adjustment to record this transaction will include the
following entry:
 A. DR Investment in associate;
 B. DR Cash;
 C. DR Dividend revenue;
 D. DR Share of profit of associate.

A Incorrect. The investment is reduced by distributions from the associate.

B Incorrect. Cash is unaffected by equity adjustments.
C Correct. Dividend revenue previously recognised by the investor is eliminated on the equity
consolidation worksheet.
D Incorrect. The share of profit of associates is not affected by this distribution.
Section 19.2
15. Company A acquired a 30% interest in an associate, Company B, for $25 000. Company A is part of a
consolidated group. In the financial period immediately following the date on which it became an associate,
Company B revalued assets by $4 000, generated profits of $10 000 and declared a dividend of $5 000. The
balance in the investment account after equity accounting has been applied is:
 A. $26 200;
 B. $27 700;
 C. $28 000;
 D. $29 200.

A Incorrect. The investment is also adjusted to reflect the share of the profit and the dividend.
B Correct. The calculation is as follows: Initial investment ($25 000) + share of revaluation (30% x $4 000)
+ share of profit (30% x $10 000) – share of dividend (30% x $1 500).
C Incorrect. The investment is also adjusted to reflect the share of the revaluation and the dividend.
D Incorrect. The investment is reduced by the 30% share of the dividend.
Section 19.2

16. Where goodwill is acquired on an investment in an associate the goodwill is:

 A. amortised across the useful life of the goodwill;
 B. written off immediately against the carrying amount of the investment;
 C. carried as a separate asset in the accounting records of the investor;
 D. not subject to amortisation.

A Incorrect. Goodwill relating to the acquisition of an associate is not subject to amortisation.

B Incorrect. Goodwill is not subject to amortisation either across a period of time or immediately.
C Incorrect. Goodwill relating to the acquisition of an associate is not carried as a separate asset.
D Correct. Goodwill relating to the acquisition of an associate is not subject to the process of
amortisation.
 Section 19.4

17. When an associate declares and pays a dividend out of pre-acquisition profits the application of the equity
method results in the investor making the following adjustment:
 A. DR Investment in associate;
 B. Cr Cash;
 C. CR Dividend revenue;
 D. No adjustment.

A Incorrect. If a dividend is paid out of pre-acquisition profits no equity adjustment is required.

B Incorrect. No equity adjustment is required for dividends paid out of pre-acquisition profits.
C Incorrect. No equity adjustment is required.
D Correct. If the dividend is made out of pre-acquisition profits, no equity adjustment is required.
Section 19.5

18. If an associate incurs losses the investor is required to:

 A. ignore the losses for the purposes of equity accounting adjustments;
 B. recognise losses only to the point where the carrying amount is equal to the initial investment;
 C. recognise losses to the point where the carrying amount of the investment is zero;
 D. reclassify the investment as a current asset.

A Incorrect. The losses are recognised until the carrying amount of the investment is zero.
B Incorrect. The losses are recognised until the carrying amount of the investment is zero.
C Correct. The losses are recognised against the investment until it is reduced to zero.
D Incorrect. The investment remains classified as a non-current asset even if it is incurring losses.
Section 19.6
19. Where an investor has discontinued the use of the equity method because the associate has incurred losses it
must disclose the:
 A. unrecognised share of current period and cumulative losses of the associate;
 B. reason why it has discontinued the method;
 C. accounting policy it has adopted in place of the equity method;
 D. effect on the statement of changes in equity if it had continued to use the method.

A Correct. The unrecognised share of both current period and cumulative losses must be disclosed if
the equity method is discontinued.
B Incorrect. This is not a required disclosure.
C Incorrect. This is not a required disclosure.
D Incorrect. This effect is not required to be disclosed.
Section 19.6

20. Investments in associates accounted for using the equity method are presented in the statement of financial
position amongst:
 A. equity;
 B. non-current liabilities;
 C. current assets;
 D. non-current assets.

A Incorrect. Investments in associates are non-current assets.

B Incorrect. Investments in associates are not liabilities.
C Incorrect. Investments in associates are regarded as non-current assets.
D Correct. Non-current assets is the appropriate classification for investments in associates as the
intention is to hold these investments for longer than the next 12 months.
Section 19.6
1.It is an entity, including an unincorporated entity such as a partnership over which the investor has significant influence and
that is neither a subsidiary nor an interest in joint venture.
a. Associate
b.Investee
c. Venture capital organization
d.Mutual fund

2. Which of the following statements best describes the term “significant influence”?
a. The holding of a significant proportion of the share capital in another entity.
b. The contractually agreed sharing of control over an economic entity.
c. The power to participate in the financial and operating policy decisions of an entity.
d. The mutual sharing in the risks and benefits of a combined entity.
3. Which statement is incorrect concerning the equity method?
a. The investment in associate is initially recorded at cost.
b. The investment in associate is increased or decreased by the investor’s share of the profit or loss of the investee
after the date of acquisition.
c. The investor’s share of the profit or loss of the investee is not recognized in the investor’s profit or loss.
d. Distributions received from the investee reduce the carrying amount of the investment.
Identification of Associates

• A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant influence unless it
can be clearly demonstrated otherwise.

• If the holding is less than 20%, the investor will be presumed not to have significant influence unless such influence
can be clearly demonstrated.

d.
4. Which statement is incorrect concerning significant influence?

I. If an investor holds directly or indirectly, less than 20% of the voting power of the investee, it is presumed that the
investor does not have significant influence, unless such influence can be clearly demonstrated.

II. If an investor holds, directly or indirectly, 20% or more of the voting power of the investee, it is presumed that the
investor does not have significant influence, unless it can be clearly demonstrated that this is not the case.

III. A substantial or majority ownership by another entity does not necessarily preclude an
investor from having significant influence. a. I, II and III
b. I and II only

c. III only

d. II only
Accounting for Associates
In its consolidated financial statements, an investor should use the equity method of accounting for investments in
associates, unless:
• An investment in an associate that is acquired and held exclusively with a view to its disposal within 12 months from
acquisition should be accounted for as held for trading under PFRS 9 (FVPL).
• A parent that is exempted from preparing consolidated financial statements by PAS 27 may prepare separate financial
statements as its primary financial statements. Use cost method or PFRS 9.
Accounting for Associates
• An investor need not use the equity method if all of the following four conditions are met:
1. The investor is itself a wholly owned subsidiary, or is a partially-owned subsidiary of another entity and its
other owners, including those not otherwise entitled to vote, have been informed about, and do not object to,
the investor not applying the equity method;

2. The investor's debt or equity instruments are not traded in a public market;
 3. The investor did not file, nor is it in the process of filing, its financial statements with a securities commission
or other regulatory organization for the purpose of issuing any class of instruments in a public market; and

4. The ultimate or any intermediate parent of the investor produces consolidated financial statements available
for public use that comply with PFRS.
Applying the Equity Method of Accounting
1. Basic principle – The equity investment is initially recorded at cost and is subsequently adjusted to reflect the
investor's share of the net profit or loss of the associate.
2. Distributions and other adjustments to carrying amount Distributions received from the investee reduce the
carrying amount of the investment. Adjustments to the carrying amount may also be required arising from
OTHER changes in the investee's equity (revaluation surplus and translation gains and losses.)
3. An associate with outstanding preference shares
a. The investor computes its share of profits or losses after adjusting for the dividends on such shares, whether
or not the dividends have been declared on cumulative preference shares.
b. However if the preference shares is non-cumulative, adjustments for dividends are made only if there is a
declaration.
5. An investor uses the equity method to account for an investment in ordinary shares. After the date of acquisition, the
investment account of the investor would.
a. Not be affected by its share of the earnings or losses of the investee
b. Not be affected by its share of earnings of the investee, but be decreased by its share of the losses of the
investee
c. Be increased by its share of the earnings of the investee, but not be affected by its share of the losses of the
investee.
d. Be increased by its share of the earnings of the investee, and decreased by its share of the losses of the
investee
6. If an associate has outstanding cumulative preference share, held by outside interests, the investor computes its share of
profits or losses
a. After adjusting for preference dividends which were actually paid during the year.
b. Without regard for preference dividends.
c. After adjusting for the preference dividends only when declared.
d. After adjusting for the preference dividends, whether or not the dividends have been declared.
7. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in
which the
a. Investor sells the investment

b. Investee declares a dividend

c. Investee pays dividend

d. Earnings are reported by the investee in its financial statements

8. When an investor uses the equity method to account for investment in ordinary shares, cash dividends
received by the investor from the investee shall be recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s profits
c. A deduction from the investment account

d. A deduction from the shareholders’ equity account, dividends to shareholder.

9. When an investor uses the equity method to account for investment in ordinary shares, the investment account will be
increased when the investor recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from the investee
c. Periodic amortization of the goodwill related to the purchase
d. Depreciation related to the excess of market value over carrying amount of the investee’s depreciable assets at
the date of purchase by the investor
4. Implicit goodwill and fair value adjustments - On acquisition of the investment any difference between the cost of the
investment and the investor’s share of the net fair value of the associate’s identifiable assets, liabilities and
contingent liabilities is accounted for in accordance with PFRS 3 Business Combinations. Therefore:

(a) Goodwill relating to an associate is included in the carrying amount of the investment. However,
amortization of that goodwill is not permitted and is therefore not included in the determination of the
investor’s share of the associate’s profits or losses.

(b) Any excess of the investor’s share of the net fair value of the associate’s identifiable assets, liabilities and
contingent liabilities over the cost of the investment
Theory 10

10. 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 not amortized.
c. Excluded from carrying amount of the investment but charged to retained earnings.
d. Excluded from carrying amount of the investment but charge to expense immediately.
11. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?
a.It is amortized.

b.It is impairment tested individually.

c. It is written off against profit or loss

d.Goodwill is not recognized separately within the carrying amount of the investment.
5. Appropriate adjustments to the investor's share of the profits or losses after acquisition are made to account for
additional depreciation of the associate's depreciable assets based on the excess of their fair values over their carrying
amounts at the time the investment was acquired. This rule also applies to inventories since this will have an effect in the
associate’s reported net income.
12. An investor uses the equity method to account for investment in ordinary shares. The purchase price implies a fair value
of the investee’s depreciable assets in excess of the investee’s net carrying values. The investor’s amortization of the excess

a. Decrease the investment account

b. Decrease the goodwill account
c. Increase the investment revenue account
d. Does not affect the investment account
7. Discontinuing the equity method - Use of the equity method should cease from the date that significant influence
ceases.

 The difference between the selling price and carrying amount of the investment sold shall be recognized in profit or loss.

 The “retained investment” shall be accounted for under PFRS 9 and shall be remeasured to fair value on the date
significant influence ceases and recognized in profit or loss.
13. When the investor discontinues the use of the equity method because significant influence is lost, the investment in
associate retained by the investor shall be measured at
a.Fair value

b.Carrying amount’

c. Amortized cost
 d.Original cost
8. Application of the equity method achieved in stages

 The previously held interest that was accounted for under the cost or fair value method shall be remeasured to fair
value on the date the investor gains significant influence.

 The difference between the fair value and the carrying amount of the previously held investment shall be recognized in
profit or loss.

 The total of the fair value of the previously held investment and the new acquisition cost shall be regarded as the total
cost of the investment classified as “associate”.

 If the FVOCI was used to account for the previously held investment, any cumulative unrealized gain or loss as OCI
shall be reclassified to retained earnings.
9. Losses in excess of investment

 The investor’s share in the associates losses cannot exceed the “interest in the associate” and shall discontinue the
application of the equity method is this is the case.

 After the investor's interest is reduced to zero, additional losses are recognized by a provision (liability) only to the
extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate.

 If the associate subsequently reports profits, the investor resumes recognizing its share of those profits only after its
share of the profits equals the share of losses not recognized.
14. If under the equity method, an investor’s share of losses of an associate equals or exceeds the carrying amount of an
investment, which of the following is not correct?

a. The investor discontinues its share of further losses.

b. Additional losses are provided for, or a liability is recognized, to the extent that the investor has incurred legal or
constructive obligations or made payments on behalf of the associate.
 c. If the associate subsequently reports profits, the investor resumes its share of those profits without regard to the
share of net losses not previously recognized.

d. The investment is reported at NIL value.

SAMPLE PROBLEM 1: Investment in Associates
Problem 1
At the beginning of the current year, Cynosure Company purchased 40% of the ordinary shares of another entity for P
3,500,000. When the net assets of the investee amounted to P 7,000,000. 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 P 1,500,000 greater than carrying amount and inventory whose fair value was P 500,000 greater than cost.
The equipment has a remaining life of 4 years and the inventory was all sold during the current year. The investee reported
net income of P 4,000,000 and paid P 1,000,000 dividends during the current year.
Required:

1. Prepare journal entries for the relating to the investment for the current year.
2. Compute for the investment income for the current year.
3. Compute for the carrying amount of the investment at year end.
Problem 1 (answer)

1. To record the investment:

Investment in associate 3,500,000
Cash 3,500,000

2. To record share in net income:

Investment in associate 3,500,000 Investment income (40%x4,000,000)3,500,000
3. To record share in cash dividend:
Cash (40%x1,000,000) 400,000
Investment in associate 400,000
Computation:

Acquisition Cost P 3,500,000

CA of net asset acquired
(40%xP7,000,000) 2,800,000
Excess of cost over carrying amount 700,000
Excess attributable to equipment
(40%xP1,500,000) (600,000)
Excess attributable to inventory
(40%xP 500,000) (200,000)
Excess net fair value over cost (100,000)
Problem 1 (answer)

1. To record the investment:

Investment in associate 3,500,000
Cash 3,500,000

2. To record share in net income:

Investment in associate 3,500,000
Investment income (40%x4,000,000) 3,500,000

3. To record share in cash dividend:

 Cash (40%x1,000,000) 400,000
Investment in associate 400,000

4. To record amortization of the excess attributable to the equipment

Investment income 150,000
Investment in associate 150,000
(600,000 / 4 years)
Problem 1 (answer)

5. To record the amortization of the excess attributable to inventory:

Investment income 200,000
Investment in associate 200,000

The excess is fully “expensed” because all the inventory was already sold during the year.

6. To record the “excess net fair value” as investment income:

Investment in associate 100,000
Investment income 100,000
Determination of investment income
Share in net income 1,600,000
Amortization of excess attributable to equipt. (150,000)
Amortization of excess attributable to inventory (200,000)
Excess net fair value 100,000
Net investment income 1,350,000
Carrying amount of the investment at year end
Acquisition cost 3,500,000

Share in Net Income 1,600,000

Share in Cash Dividend (400,000)

Amortization of excess attributable to equipt. (150,000)

Amortization of excess attributable to inventory (200,000)

Excess net fair value 100,000

Investment in associate, end 4,450,000

SAMPLE PROBLEM 2: Investment in Associates Problem 2
On January 1, 2016, Forensic Company acquired a 10% interest in an investee for P 3,000,000. The investment was
accounted for a fair value through other comprehensive income. The fair value of the investment was P 3,500,000 on
December 31, 2016 and P 4,500,000 on December 31, 2017. On January 1, 2018 the entity acquired a further 15% interest
in the investee for P 6,750,000. On such date the carrying amount of net assets of the investee was P 36,000,000. 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 P 4,000,000. The equipment has a remaining life of 5 years. The investee reported net income of P
8,000,000 for 2018 and paid dividends of P 5,000,000 on December 31, 2018. No dividends was paid in 2016 and 2017 by
the investee.

Required:
1. Compute the goodwill on January 1,2018.
Problem 2 (answer)

Fair value of 10% existing interest 4,500,000

Cost of 15% new interest 6,750,000
Total cost of the investment 11,250,000
Carrying amount of net assets acquired
(25% x 36,000,000) 9,000,000
Excess of cost over carrying amount 2,250,000
Excess attributable to equipment
(25%xP4,000,000) (1,000,000)
Goodwill 1,250,000
SAMPLE PROBLEM 3: Investment in Associates
Problem 3
On January 1, 2016, Grand company acquired
30% of East Company’s voting stock for P 8,000,000. During 2016, East earned P
5,000,000 and paid dividends of P 2,000,000. On January 1, 2017, Grand sold ½ of the investment in East resulting to a loss
of significant influence. On January 1, 2017 the investment is measured at fair value through other profit or loss. The fair
value of the retained investment is P 5,000,000 on January 1, 2017.
Required:
Prepare journal entries for 2016 and 2017.
1. To record the investment:
Investment in associate 8,000,000
Cash 8,000,000

2. To record share in net income:

Investment in associate 1,500,000 Investment income (30%x5,000,000)1,500,000

3. To record share in cash dividend:

Cash (30%x2,000,000) 600,000
Investment in associate 600,000

5. To record the sale of ½ of the investment:

Cash 8,000,000
Investment in associate 8,000,000
Acquisition cost 8,000,000

Share in Net Income 1,500,000

Share in Cash Dividend (600,000)

Carrying amount 1/1/2017 8,900,000

 ½ Sold on 1/1/2017 4,450,000

Remaining balance, 1/1/2017 4,450,000

6. To remeasure the retained investment of 15%:

Investment in associate 550,000
Gain from remeasurement to FV 550,000

Fair value of retained investment 5,000,000

Carrying amount of retained investment 4,450,000
Gain from remeasurement 550,000

7. To reclassify the retained investment as financial asset at fair value through profit or loss:
Financial asset – FVPL 5,000,000
Investment in associate 5,000,000
Financial Assets at Amortized Cost

Requisites for Classification

The asset is held to collect its contractual cash flows and
The asset’s contractual cash flows represent ‘solely payments of principal and interest’
Financial Assets at Amortized Cost

Profit or Loss Implications

• Effective interest income

• Impairments losses and reversal gains

• Gain or loss on derecognition

Effective versus nominal rate

• Nominal rate is the coupon rate or stated rate appearing on the face of the bond.

• Effective rate is the yield rate or market rate which is the actual rate or true interest rate which the bondholder earns
on bond investment. It is the rate that exactly discounts estimated future payments through the expected life of the
bonds.

• Effective rate and nominal rate are the same if the cost of the bond investments is equal to the face value.
• Effective rate is lower than the nominal when the bonds are acquired at a premium.

• Effective rate is higher than the nominal when the bonds are acquired at a discount.
Effective interest method

• Requires the comparison between interest earned and interest or interest income and interest received. The
difference between the two represents the premium or discount amortization.

• Interest earned is computed by multiplying the effective rate and the carrying amount.

• Interest received is computed by multiplying the nominal rate by the face value of the bond.

• The carrying amount of the bond investment is the initial cost plus the amortization of discount or less periodic
amortization of premium.
1.The contractual agreement between an investor and the bond issuer is contained in a formal document known as.
a.Contract of debt

b. Bond indenture

c. Bond certificate

d.Bond agreement

2. Accrued interest on bonds that are purchased between interest dates

a.Is ignored by both the seller and the buyer.

b.Increases the amount a buyer must pay to acquire the bonds.

c. Is recorded as a loss on the sale of the bonds.

d.Decreases the amount a buyer must pay to acquire the bonds.

3. The interest rate written on the face of bond is known as
a.Nominal rate

b.Coupon rate

c. Stated rate

d.Nominal rate, coupon rate or stated rate

4. If the 5 year bond matures on October 1, 2017 and interest is payable semiannually, the interest dates are
a.April 1 and October 1

b.January 1 and July 1

c. May 1 and November 1

d.Not determinable

5. The effective interest method of amortizing discount provides for

a.Increasing amortization and increasing interest income
b.Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d.Decreasing amortization and decreasing interest income.

Schedule of Amortization
Date Interest Interest Discount Carrying

Received Income Amor. Amount

January 1, 2016 - - - 4,742,000

Dec. 31, 2016 300,000 379,360 79,360 4,821,360

Dec. 31, 2017 300,000 385,709 85,709 4,907,069

Dec. 31, 2018 300,000 392,931 92,931 5,000,000

6. Bonds usually sale at a discount when
a.Investors are willing to invest in the bonds at the stated interest rate.

b. Investors are willing to invest in the bonds at rates that are lower than the stated interest rate.
c. Investors are willing to invest in the bonds at rates that are higher than the stated interest rate.
d.A capital gain is expected.

7. Bonds usually sell at a premium

a.When the market rate of interest is greater than the stated rate of interest on the bonds.

b.When the stated rate of interest on the bonds is greater than the market rate of interest.

c. When the price of the bonds is greater than their maturity value.

d.In none of the above cases.

Ex. 17-122—Investments in equity securities.

Presented below are unrelated cases involving investments in equity securities.
Case I. The fair value of the trading securities at the end of last year was 30% below original cost, and this
was properly reflected in the accounts. At the end of the current year, the fair value has increased to 20%
above cost.
Case II. The fair value of an available-for-sale security has declined to less than forty percent of the original
cost. The decline in value is considered to be other than temporary.
Case III. An equity security, whose fair value is now less than cost, is classified as trading but is reclassified
as available-for-sale.
Instructions
Indicate the accounting required for each case separately.
Solution 17-122
Case I. At the end of last year, the company would have recognized an unrealized holding loss and recorded
a Fair Value Adjustment (trading). At the end of the current year, the company would record an unrealized
holding gain that would be reported in the other revenue and gains section. The adjustment account would
now have a debit balance.
Solution 17-122 (cont.)
Case II. When the decline in value is considered to be other than temporary, the loss should be recognized
as if it were realized and earnings will be reduced. The fair value becomes a new cost basis.
Case III. The security is transferred at fair value, which is the new cost basis of the security. The Equity
Investments (available-for-sale) account is recorded at fair value, and the Unrealized Holding Loss—Income
account is debited for the unrealized loss. The Equity Investments (trading) account is credited for cost.
Ex. 17-123—Investment in equity securities.
Agee Corp. acquired a 30% interest in Trent Co. on January 1, 2013, for $500,000. At that time, Trent had
1,000,000 shares of its $1 par common stock issued and outstanding. During 2013, Trent paid cash
dividends of $160,000 and thereafter declared and issued a 5% common stock dividend when the fair value
was $2 per share. Trent's net income for 2013 was $360,000. What is the balance in Agee’s equity
investments account at the end of 2013?
Solution 17-123
Cost $500,00
0
Share of net income (.30 × $360,000) 108,00
0
Share of dividends (.30 × $160,000)
(48,000)
Balance in equity investments account $560,00
0

Ex. 17-124—Fair value and equity methods. (Essay)

Compare the fair value and equity methods of accounting for investments in stocks subsequent to acquisition.
Solution 17-124
Under the fair value method, investments are originally recorded at cost and are reported at fair value.
Dividends are reported as other revenues and gains. Under the equity method, investments are originally
recorded at cost. Subsequently, the investment account is adjusted for the investor's share of the investee's
net income or loss and this amount is recognized in the income of the investor. Dividends received from the
investee are reductions in the investment account.
Ex. 17-125—Fair value and equity methods.
Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue
account by each of the following transactions, assuming Crane Company uses (a) the fair value method and
(b) the equity method for accounting for its investments in Hudson Company.
(a) Fair Value Method (b) Equity Method
Investment Dividend Investment Investment
Transaction Account Revenue Account Revenue
———————————————————————————————————————————
1. At the beginning of Year 1, Crane bought 40% of
Hudson's common stock at its book value. Total book
value of all Hudson's common stock was $800,000 on
this date.
———————————————————————————————————————————
2. During Year 1, Hudson reported $60,000 of net
income and paid $30,000 of dividends.
———————————————————————————————————————————
3. During Year 2, Hudson reported $30,000 of net
income and paid $40,000 of dividends.
———————————————————————————————————————————
4. During Year 3, Hudson reported a net loss of $10,000
and paid $5,000 of dividends.
———————————————————————————————————————————
5. Indicate the Year 3 ending balance in the Investment
account, and cumulative totals for Years 1, 2, and 3
for dividend revenue and investment revenue.
———————————————————————————————————————————
 Solution 17-125
(a) Fair Value Method (b) Equity Method
Investment Dividend Investment Investment
Transaction Account Revenue Account Revenue
———————————————————————————————————————————————
1. 320,000 320,000
———————————————————————————————————————————————
2. 24,000 24,000 12,000 (12,000)
———————————————————————————————————————————————
3. 12,000 12,000 16,000 (16,000)
———————————————————————————————————————————————
4. (4,000) (4,000) 2,000 (2,000)
———————————————————————————————————————————————
5. 320,000 30,000 322,000 32,000
———————————————————————————————————————————————
Pr. 17-131—Available-for-sale equity securities.
During the course of your examination of the financial statements of Doppler Corporation for the year ended
December 31, 2013, you found a new account, "Investments." Your examination revealed that during 2013,
Doppler began a program of investments, and all investment-related transactions were entered in this
account. Your analysis of this account for 2013 follows:
Doppler Corporation
Analysis of Investments
For the Year Ended December 31, 2013
Date—2013 Debit
(a) Credit
Harmon Company Common Stock
Feb. 14 Purchased 4,000 shares @ $55 per share. $220,000 July 26 Received
400 shares of Harmon Company common stock as a stock dividend.
(Memorandum entry in general ledger.) Sept. 28 Sold the 400 shares of
Harmon Company common stock
received July 26 @ $65 per share. $26,00
(b) 0
Debit
Taber Inc., Common Stock Credit
Apr. 30 Purchased 20,000 shares @ $40 per share. $800,000
Oct. 28 Received dividend of $1.20 per share. $24,00
0
Additional information:
1. The fair value for each security as of the 2013 date of each transaction follow:
Security Feb. 14 Apr. 30 July 26 Sept. 28 Dec.
31
Harmon Co. $55 $62 $70 $74
Taber Inc. $40 33
Doppler Corp. 25 28 30 33 35

2. All of the investments of Doppler are nominal in respect to percentage of ownership (5% or less).
3. Each investment is considered by Doppler’s management to be available-for-sale.
Instructions
(1) Prepare any necessary correcting journal entries related to investments (a) and (b).
(2) Prepare the entry, if necessary, to record the proper valuation of the available-for-sale equity security
portfolio as of December 31, 2013.

Solution 17-131
(1) (a) Harmon — original purchase 4,000 shares stock dividend
400 shares total holding 4,400 shares

Total cost of $220,000 ÷ Total shares of 4,400 = $50 cost per share
Solution 17-131 (cont.)
Sold 100 shares
Correct entry:
Cash (400 × $65) ....................................................................... 26,00
0
Equity Investments......................................................... 20,000
Gain on Sale of Investments .......................................... 6,000

Entry made:
Cash........................................................................................... 26,00
0
Equity Investments......................................................... 26,000

Correction:
Equity Investments..................................................................... 6,00
0
Gain on Sale of Investments .......................................... 6,000

(b) Taber—should record cash dividend as dividend income.

Correct entry:
Cash........................................................................................... 24,00
0
Dividend Revenue.......................................................... 24,000

Entry made:
Cash........................................................................................... 24,00
0
Equity Investments......................................................... 24,000

Correction:
Equity Investments..................................................................... 24,00
0
Dividend Revenue.......................................................... 24,000
(To properly record dividends under fair value
 method)

(2) Valuation at End of Year:

Increase
Quantity Cost Fair Value (Decreas
e)
Harmon 4,000 shares $ 200,000 $296,000 $ 96,000
Taber 20,000 shares 800,000 660,000
(140,000
)
$1,000,000 $956,000 $
( 44,000)

Year-end Adjustment:
Unrealized Holding Gain or Loss—Equity........................................ 44,000
Fair Value Adjustment (available-for-sale) ........................ 44,000

Ex. 17-132—Investment in equity securities.

Agee Corp. acquired a 25% interest in Trent Co. on January 1, 2019, for £500,000. At that time, Trent had
1,000,000 shares of its $1 par common stock issued and outstanding. During 2019, Trent paid cash dividends
of £160,000 and thereafter declared and issued a 5% ordinary share dividend when the fair value was £2 per
share. Trent's net income for 2019 was £360,000. What is the balance in Agee’s investment account at the end
of 2019?
Solution 17-132
Cost £500,000
Share of net income (.25 × £360,000) 90,000
Share of dividends (.25 × £160,000) (40,000)
Balance in investment account £550,00
Ex. 17-133—Fair value and equity methods. (Essay)
Compare the fair value and equity methods of accounting for investments in shares subsequent to acquisition.
Solution 17-133
Under the fair value method, investments are originally recorded at cost and are reported at fair value.
Dividends are reported as other income and expense. Under the equity method, investments are originally
recorded at cost. Subsequently, the investment account is adjusted for the investor's share of the investee's
net income or loss and this amount is recognized in the income of the investor. Dividends received from the
investee are reductions in the investment account.
Ex. 17-134—Fair value and equity methods.
Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue
account by each of the following transactions, assuming Crane Company uses (a) the fair value method and
(b) the equity method for accounting for its investments in Hudson Company.
(a) Fair Value Method (b) Equity Method
 Investment Dividend Investment Investment
Transaction Account Revenue Account Revenue
———————————————————————————————————————————
1. At the beginning of Year 1, Crane bought 30% of
Hudson's ordinary shares at their book value. Total
book value of all Hudson's ordinary shares was
€800,000 on this date.
———————————————————————————————————————————
2. During Year 1, Hudson reported €60,000 of net income
and paid €30,000 of dividends.
———————————————————————————————————————————
3. During Year 2, Hudson reported €30,000 of net income
and paid €40,000 of dividends.
———————————————————————————————————————————
4. During Year 3, Hudson reported a net loss of €10,000
and paid €5,000 of dividends.
———————————————————————————————————————————
5. Indicate the Year 3 ending balance in the Investment
account, and cumulative totals for Years 1, 2, and 3 for
dividend revenue and investment revenue.
———————————————————————————————————————————
Solution 17-134
(a) Fair Value Method (b) Equity Method
Investment Dividend Investment Investment
Transaction Account Revenue Account Revenue
———————————————————————————————————————————————

1. 240,000 240,000
———————————————————————————————————————————————

2. 18,000 18,000
9,000 (9,000)
———————————————————————————————————————————————

3. 9,000 9,000
12,000 (12,000)
———————————————————————————————————————————————

4. (3,000) (3,000)
 1,500 (1,500)
———————————————————————————————————————————————

5. 240,000 22,500 241,500 24,000

———————————————————————————————————————————————
Pr. 17-139—Trading equity investments.
Korman Company has the following securities in its portfolio of trading equity investments on December 31,
2018:
Cost Fair Value
5,000 ordinary shares of Thomas Corp. €155,000 €139,000
10,000 ordinary shares of Gant 182,000 190,000
€337,000 €329,000

All of the investments had been purchased in 2018. In 2019, Korman completed the following investment
transactions:
March 1 Sold 5,000 ordinary shares of Thomas Corp., @ €31 less fees of €1,500.
April 1 Bought 600 ordinary shares of Werth Stores, @ €45 plus fees of €550.
The Korman Company portfolio of trading equity investments appeared as follows on December 31, 2019:
Cost Fair Value
10,000 ordinary shares of Gant €182,000 €195,500
600 ordinary shares of Werth Stores 27,550 25,500
€209,550 €221,000
Instructions
Prepare the general journal entries for Korman Company for:
(a) the 2018 adjusting entry.
(b) the sale of the Thomas Corp. shares.
(c) the purchase of the Werth Stores' shares.
(d) the 2019 adjusting entry.
Solution 17-139
(a) 12-31-18
Unrealized Holding Gain or Loss—Income................................... 8,000
Fair Value Adjustment....................................................... 8,000
(€337,000 – €329,000)

(b) 3-1-19
Cash [(5,000  €31) – €1,500]..................................................... 153,500
Loss on Sale of Investments......................................................... 1,500
Equity Investment............................................................. 155,000

(c) 4-1-19
Equity Investments....................................................................... 27,550
Cash [(600  €45) + €550]............................................... 27,550

(d) 12-31-19
Fair Value Adjustment.................................................................. 19,450
Unrealized Holding Gain or Loss—Income....................... 19,450
[(€221,000 – €209,550) + €8,000]
Pr. 17-140—Trading equity investments.
Perez Company began operations in 2017. Since then, it has reported the following gains and losses for its
investments in trading securities on the income statement:

2017 2018 2019

Gains (losses) from sale of trading investments € 15,000 € (20,000) € 14,000
Unrealized holding losses on valuation of trading investments (25,000) — (30,000)
Unrealized holding gain on valuation of trading investments — 10,000 —
At January 1, 2020, Perez owned the following trading securities:
Cost
BKD Ordinary (15,000 shares) €450,000
LRF Preference (2,000 shares) 210,000
Drake Convertible bonds (100 bonds) 115,000
During 2020, the following events occurred:
1. Sold 5,000 shares of BKD for €170,000.
2. Acquired 1,000 ordinary shares of Horton for €40 per share. Brokerage fees totaled €1,000.
At 12/31/20, the fair values for Perez's trading investments were:
BKD Ordinary, €28 per share
LRF Preference, €110 per share
Drake Bonds, €1,020 per bond
Horton Ordinary, €42 per share
Instructions
(a) Prepare a schedule which shows the balance in the Fair Value Adjustment at December 31, 2019 (after
the adjusting entry for 2019 is made).
(b) Prepare a schedule which shows the aggregate cost and fair values for Perez's trading investments
portfolio at 12/31/20.
(c) Prepare the necessary adjusting entry based upon your analysis in (b) above.
Solution 17-140
(a) Balance 12/31/17 (result of that year's adjusting entry) € (25,000)
Deduct unrealized gain for 2018 10,000
Add: Unrealized loss for 2019 (30,000)
Balance at 12/31/19 € (45,000)
(b) Aggregate cost and fair value for trading securities at 12/31/20:
Cost Fair Value
BKD Ordinary 10,000 shares €300,000 €280,000
LRF Preference 2,000 shares 210,000 220,000
Horton Ordinary, 1,000 shares 41,000 42,000
Drake Bonds, 100 bonds 115,000 102,000
Total €666,000 €644,000
(c) Adjusting entry at 12/31/20:
Fair Value Adjustment.................................................................. 23,000
Unrealized Holding Gain or Loss—Income....................... 23,000
(Balance at 1/1/17 €45,000
Balance needed at 12/31/20 22,000
Recovery €23,000)
Pr. 17-141—Non-trading equity investments.
During the course of your examination of the financial statements of Doppler Corporation for the year ended
December 31, 2019, you found a new account, "Investments." Your examination revealed that during 2019,
Doppler began a program of investments, and all investment-related transactions were entered in this account.
Your analysis of this account for 2019 follows:
Doppler Corporation
Analysis of Investments
For the Year Ended December 31, 2019
Date—2019 Debit Credit
(a)
Harmon Company Ordinary Shares
Feb. 14 Purchased 4,000 shares @ £55 per share. £220,000
July 26 Received 400 ordinary shares of Harmon Company
as a share dividend. (Memorandum entry in general ledger.)
Sept. 28 Sold the 400 ordinary shares of Harmon Company
received July 26 @ £70 per share. £28,000
(b)
Debit Credit
Taber Inc., Ordinary Shares
Apr. 30 Purchased 20,000 shares @ £40 per share. £800,000
Oct. 28 Received dividend of £1.20 per share. £24,000
Pr. 17-141 (cont.)
Additional information:
1. The fair value for each security as of the 2016 date of each transaction follow:

Security Feb. 14 Apr. 30 July 26 Sept. 28 Dec. 31

Harmon Co. £55 £62 £70 £74
Taber Inc. £40 32
Doppler Corp. 25 28 30 33 35
2. All of the investments of Doppler are nominal in respect to percentage of ownership (5% or less).
3. Each investment is considered by Doppler’s management to be non-trading.
Instructions
(1) Prepare any necessary correcting journal entries related to investments (a) and (b).
(2) Prepare the entry, if necessary, to record the proper valuation of the non-trading equity investment
portfolio as of December 31, 2019.
Solution 17-141
(1) (a) Harmon — original purchase 4,000 shares
 share dividend 400 shares
total holding 4,400 shares
Total cost of $220,000 ÷ Total shares of 4,400 = £50 cost per share
Sold 400 shares
Correct entry:
Cash (400 × £70)....................................................................... 28,000
Equity Investments (400 × £50)..................................... 20,000
Gain on Sale of Investments.......................................... 8,000
Entry made:
Cash.......................................................................................... 28,000
Equity Investments......................................................... 28,000
Correction:
Equity Investments.................................................................... 8,000
Gain on Sale of Investments.......................................... 8,000
(b) Taber—should record cash dividend as dividend income.
Correct entry:

Cash.......................................................................................... 24,000
Dividend Revenue.......................................................... 24,000
Entry made:

Cash.......................................................................................... 24,000
Equity Investments......................................................... 24,000
Solution 17-141 (cont.)
Correction:

Equity Investments.................................................................... 24,000

Dividend Revenue.......................................................... 24,000
(To properly record dividends under fair value
method)
(2) Valuation at End of Year:
Increase
Quantity Cost Fair Value (Decrease)
Harmon 4,000 shares £ 200,000 £296,000 £ 96,000
Taber 20,000 shares 800,000 640,000 (160,000)
 £1,000,000 £936,000 £ (64,000)
Year-end Adjustment:

Unrealized Holding Gain or Loss—Equity........................................ 64,000

Fair Value Adjustment....................................................... 64,000