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Jessa Mae P.

Zerda
BSA 202
CHAPTER 18

QUESTIONS:

1. Define associate.
Associate is an entity over which the investor has significant influence, being
the power to participate in the financial and operating policy decisions of the investee
(but not control or joint control).

2. Define significant influence.


Significance influence is the power to participate in the financial and operating
policy decisions of the associate but not control or joint control over those policies.
The assessment of significant influence is a matter of judgement.

3. What is the practical guidance in determining significant influence?


The concept is used in international financial reporting standards. If an
investor holds at least 20 percent of the voting power of an investee, the investor is
presumed to have significant influence. The assumption of influence can be reversed
through a clear demonstration to the contrary

4. Explain the equity method of accounting for share investment.


The equity method requires the investing company to record the investee's
profits or losses in proportion to the percentage of ownership. The equity method also
makes periodic adjustments to the value of the asset on the investor's balance sheet.

5. What is the meaning of "excess of cost over carrying an amount" with respect
to acquisition of share investment?
If the investor pays more than the carrying amount of the assets required, the
difference is commonly known as “excess of cost over carrying amount” and may be
attributed to the following:
 Undervaluation of the investee’s assets, such as building, land and inventory.
 Goodwill

6. Explain an impairment loss with respect to an investment in associate.


If the carrying amount of an investment in an associate or joint venture
exceeds its recoverable amount, an impairment loss is recognized. The loss is
allocated to the investment as a whole and not to the underlying assets of the investee
that make up the carrying amount of the investment

7. Explain the accounting procedure if an associate has cumulative and


noncumulative preference shares.
Noncumulative describes a type of preferred stock that does not entitle
investors to reap any missed dividends. By contrast, "cumulative" indicates a class
of preferred stock that indeed entitles an investor to dividends that were missed. When
an associate has outstanding cumulative preference shares, the investor shall compute
its share of earnings or losses after deducting the preference dividends, whether or not
such dividends are declared. In contrast, when associate has outstanding
noncumulative preference shares, the investor shall compute its share of earnings after
deducting the preference dividends only when declared.

8. Explain the discontinuance of the equity method.


An investor should discontinue the use of the equity method from the date that
it ceases to have significant influence but retains either in part or in whole its
investment. If the equity method of accounting has been discontinued because the
investor's share of the associate's post-acquisition losses, the carrying amount of the
investment is nil.

9. Explain the measurement of the investment in associate when significant


influence is lost.
On the date the significant influence is lost, the investor shall measure any
retained investment in associate at fair value. The fair value of the investment at the
date it ceases to be an associate shall be regarded as the fair value on initial
recognition as a financial asset.

10. What are the circumstances when the equity method is not applicable?
An associate should not be accounted for using the equity method if the
investor is a parent that is exempt from preparing consolidated financial statements or
if all of the following apply:
 The investor is a wholly-owned subsidiary.
 The investor’s debt and equity instruments are not traded in a public market
or over the counter market.
 The investors did not file or it is not in the process of filing financial
statement with the SEC.
 The ultimate or any intermediate parent of the investor produces consolidated
financial statements available for public use that comply with PFRC.

PROBLEMS:

Problem 18-1 (ACP)


Required:
a. Prepare journal entries to record the transaction under equity method.
b. Compute the implied goodwill.
c. Compute the carrying amount of the investment on December 31, 2021.

Requirement No. 1
1. Investment in associate 2,400,000
Cash 2,400,000
2. Investment in associate 300,000
Investment income (20%x1,500,000) 300,000

3. Memo – Received 2,000 shares as 10% share dividend


on 20,000 original shares. Shares no held 22,0000.
4. Investment loss 60,000
Investment in associate(20%x300,000) 60,000
 

5. Cash (20%x500,000) 100,000


Investment in associate 100,000

Requirement No.2
Acquisition cost 2,400,000
Net assets acquired (20%x8,000,000) (1,600,000)
GOODWILL 800,000

Requirement No. 3

Acquisition cost 2,400,000


Investment income for 2020 300,000
Investment loss for 2021 (60,000)
Cash dividend for 2021 (100,000)
CARRYING AMOUNT DECEMBER 31, 2021 2,540,000

PROBLEM 18-2 (IAA)


Required:
a. Prepare journal entries relating to the investment for the current year.
b. Compute the goodwill
c. Compute the carrying amount of the investment at year-end.

Requirement No. 1
1. Investment in associate 7,000,000
Cash 7,000,000
2. Investment in associate 1,250,000
Investment income (25% x 5,000,000) 1,250,000

3. Cash (25% x 3,000,000) 750,000


Investment in associate 750,000

Requirement No. 2
Acquisition cost 7,000,000
Carrying amount of net assets acquired
(25%x24,000,000) (6,000,000)
EXCESS OF COST – IMPLIED GOODWILL 1,000,000

Requirement No. 3
Acquisition cost 7,000,000
Investment income 1,250,000
Share in cash dividend (750,000)
CARRYING AMOUNT AT YEAR END 7,500,000
Problem 18-3 (AICPA Adapted)
What is the carrying amount of the investment in associate at year-end?
ANSWER: C. 6,600,000

Problem 18-4 (AICPA Adapted)


What is the carrying amount of the investment in associate at year-end?
ANSWER: D. 8,280,000

Problem 18-5 (AICPA Adapted)


What amount of revenue from the investment should be reported for the current
year?
ANSWER: C. 800,000

Problem 18-6 (AICPA Adapted)


What amount of income should be reported from the Investment in associate?
ANSWER: C. 120,000

Problem 18-7 (AICPA Adapted)


What amount of income from the investment should be reported in 2020?
ANSWER: B.180,000

Problem 18-8 (AICPA Adapted)


What is the maximum amount which could be included in 2020 income before tax to
reflect the equity in net income of investee?
ANSWER: B. 1,500,000

Problem 18-9 Multiple Choice (PAS 28)


1. A 6. D
2. C 7. D
3. D 8. A
4. B 9. B
5. B 10. D

Problem 18-10 Multiple Choice (AICPA Adapted)


1. D 3. D
2. D 4. A
CHAPTER 19

QUESTIONS:

1. Define impairment of asset.


Impairment is a fall in the market value of an asset so that the recoverable
amount is now less than the carrying amount in the statement of financial position.
When testing an asset for impairment, the total profit, cash flow, or other benefit
expected to be generated by that specific asset is periodically compared with its
current book value. If it is determined that the book value of the asset exceeds the
future cash flow or benefit of the asset, the difference between the two is written off,
and the value of the asset declines on the company's balance sheet.

2. What are the internal sources of information that would indicate possible
impairment?
 Evidence of obsolescence or physical damage of an asset
 Significant change in the manner or extent in which the asset is used with
an adverse effect on the entity. For example, the asset is part of a
restructuring or held for sale or the asset is idle.
 Evidence that the economic performance of an asset will be worse than
expected.

3. What are the external sources of information that would indicate possible
impairment?
 Significant decrease or decline in the market value of the asset as a result
of passage of time or normal use or a new competitor entering the market
 Significant change in the technological, market, legal or economic
environment of the business in which the asset is employed. This could be
as simple as a change in customer taste.
 An increase in the interest rate or market rate of return on investment
which will likely affect the discount rate used in calculating the value in
use.
 The carrying amount of net assets of the entity is more than the "market
capitalization." In other words, the carrying amount exceeds the fair value
of the net assets. The market capitalization simply means the fair value of
the net assets of the entity.

4. What is the recoverable amount of an asset?


The recoverable amount of an asset refers to the present value of the expected
cash flows that are to arise from the sale or use of the asset and is calculated as greater
of the two amounts, namely, the fair value of the asset as reduced by the cost of
disposal or value in use, whichever is higher.

5. Explain fair value less cost of disposal.


Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. Cost of disposal is
an incremental cost directly attributable to the disposal of an asset, excluding finance
cost and income tax expense.
6. Explain value in use
Value in use is measured as the present value or discounted value of future net
cash flows expected to be derived from an asset.

7. Explain the reversal of an impairment loss.


PAS 36, paragraph 114, states that an impairment loss recognized for an asset
in previous years shall be offset if the calculation of the recoverable amount has been
reversed by an impairment loss. In other words, if the recoverable value of an asset
that has previously been compromised happens to be greater than the existing carrying
amount, the carrying amount of the asset shall be raised to the new recoverable
amount.

However, PAS 36, paragraph 117, specifies that, if no impairment loss had
been acknowledged for the asset in previous years, the increased carrying amount of
an asset due to the reversal of an impairment loss does not surpass the carrying
amount that would have been calculated. The impairment loss reversal shall be
recognized immediately in the income statement as a benefit on the impairment loss
reversal. Any reversal of the impairment loss on the revalued asset shall, however, be
attributed to revenue to the degree that it reverses the previous decrease in revaluation
and any surplus directly credited to the revaluation surplus.

8. What is the meaning of cash generating unit?


A cash generating unit is the smallest identifiable group of assets that generate
cash inflows from continuing use that are largely independent of the cash inflows
from other assets or group of assets. Simply stated, a cash generating unit is segment
of business that generates revenue and cash inflows independently.

9. Explain the allocation of impairment loss across the assets of a cash generating
unit.
An impairment loss shall be recognized on a cash-generating unit where the
recoverable amount of the unit is less than the holding amounts of the unit. The
allocation of any impairment loss for the cash-generating unit is then rendered on a
pro rata basis for the cash-generating properties in the cash-generating unit.

10. Explain impairment of a cash generating unit with goodwill


Goodwill does not generate cash flows independently from other assets or
group of assets, and therefore, the recoverable amount of goodwill as an individual
asset cannot be determined. As a consequence, if there is an indication that goodwill
may be impaired, recoverable amount is determined for the cash generating unit to
which goodwill belongs.

PROBLEM:

Problem 19-1 (AICPA Adapted)


What amount should be reported as impairment loss for the year?
ANSWER: A. 1,500,000

Problem 19-2 (AICPA Adapted)


At what amount should the equipment be reported at year-end?
ANSWER: B. 1, 400, 000
Problem 19-3 (AICPA Adapted)
For purposes of determining an impairment, what is the amount of expected future
cash flows that would be used for the machinery?
ANSWER: B. 3,250,000

Problem 19-4 (AICPA Adapted)


What amount of impairment loss should be reported in the income statement for the
year?
ANSWER: C. 750,000

Problem 19-5 (IAA)


What amount of impairment loss should be recognized for 2020?
ANSWER: A. 8,250,000

Problem 19-6 (IAA)


What amount should be recognized as an impairment loss for 2020?
ANSWER: A. 308, 000

Problem 19-7 (IFRS)


1. C 3. B
2. A 4. C

Problem 19-8 (IFRS)


1. A 3. A
2. A 4. A

Problem 19-9 Multiple Choice (IFRS)


1. A 6. A
2. C 7. D
3. A 8. D
4. A 9. A
5. B 10. B

Problem 19-10 Multiple Choice (IFRS)


1. C 4. D
2. C 5. D
3. B
CHAPTER 20

QUESTIONS:

1. Define Intangible asset.


Intangible asset is simply defined as an identifiable nonmonetary asset without
physical substance. The intangible asset must be controlled by the entity as a result of
past event and from which future economic benefits are expected to flow to the entity.

2. Explain “identifiability” of an intangible asset.


Intangible asset requires that an intangible asset must be identifiable in order
to distinguish it clearly from goodwill.

3. Explain “control” of an intangible asset.


Control is the power of the entity to obtain the future economic benefits
flowing from the intangible assets and restrict the access of other to those benefits.

4. Explain “future economic benefit” that may be derived from an intangible


asset.
Future economic benefits may include revenue from the sale of products or
services, cost of savings or other benefits resulting from the use of the asset by the
entity.

5. What are the two conditions that must be present for the recognition of an
intangible asset?
First is that it is probable that future economic benefits attributable to the asset
will flow to the entity. Second condition is the cost of the intangible asset can be
measured reliably.

6. Explain the initial measurement of an intangible asset.


Intangible asset shall be measured initially cost. After initial recognition, an
entity usually measures an intangible asset at cost less accumulated amortization.

7. Explain the measurement of cost of an intangible asset acquired separately.


If an intangible asset is acquired separately, the cost of the intangible asset can
be measured reliably, particularly so if the purchase consideration is in the form of
cash or another monetary asset.

8. What is the cost of an internally generated intangible asset?


The cost of an internally generated intangible asset comprises all directly
attributable costs necessary to create, produce and prepare the asset to be capable of
operating it in the manner intended by management.

9. What is the treatment of internally generated brand, masthead, publishing


title, customer list and other item similar in substance?
Internally generated brand, masthead, publishing title, customer list and other
item similar in substance shall not be recognized as intangible asset. Such items
cannot be identified separately from the cost of developing the business as a whole.
10. Define the terms “research” and “development”.
Research is original and planned investigation undertaken with the prospect of
gaining scientific or technical knowledge and understanding. Development is the
application if research findings or other knowledge to a plan or design for the
production of new or substantially improved material, device, product, process,
system or service, prior to the commencement of commercial production.

11. Identify the research activities.


Research activity is undertaken to discover new knowledge that will be useful
in developing new products. Examples of research activities are laboratory research
aimed at obtaining or discovering new knowledge. Searching for application of
research finding and another knowledge. Conceptual formulation and design of
possible product or process alternative. Last activity is testing in search for product or
process alternative.

12. Identify the development activities.


Development activity involves the application of research findings to develop
a new product. Examples of development activities are design, construction, and
testing of preproduction prototype and model. Design of tools, jigs, molds and dies
involving new technology. Design, construction and operation of a pilot plant that is
not of a scale economically feasible to the entity for commercial production. Last is
the design, construction and testing of a chosen alternative for new or improved
product or process.

13. Explain the accounting for research cost.


Expenditures on research or on the phase of an internal project shall be
recognized as expense when incurred. An entity cannot be certain that future
economic benefits would probably flow to the entity.

14. Explain the accounting for development cost.


Development cost is incurred at a later stage in a project and the probability of
success may be more apparent. Development cost may or may not be recognized as an
intangible asset depending on very strict criteria.

15. What are the criteria for the recognition of development cost as an intangible
asset?
a. The technical feasibility of completing the intangible asset so that it will be
available for use or sale.
b. The intention to complete the intangible asset and use or sell it.
c. The ability to use or sell the intangible asset.
d. How the intangible asset will generate probable future economic benefits.
e. Availability of resources or funding to complete development and to use or
sell the asset.
f. The ability to measure reliably the expenditure attributable to the intangible
asset during its development.
PROBLEM:

Problem 20-1 (IAA)


What total amount should be reported as intangible assets?
Answer: A. 11,100,000

Problem 20-2 (IFRS)


What total cost should be capitalized as intangible noncurrent asset in respect of the
new product?
Answer: B. 3,700,000

Problem 20-3 (AICPA Adapted)


What total amount of research and development costs should be recognized as
expense for the current year?
Answer: C. 1,235,000

Problem 20-4 (AICPA Adapted)


What total amount should be reported as research and development expense for the
current year?
Answer: A. 520,000

Problem 20-5 (AICPA Adapted)


What total amount should be reported as research and development expense for the
current year?
Answer: D. 285,000

Problem 20-6 (AICPA Adapted)


What total amount should be reported as research and development expense?
Answer: C. 290,000

Problem 20-7 Multiple Choice (PAS 38)


1. D 6. D
2. A 7. D
3. D 8. D
4. A 9. D
5. D 10. D

Problem 20-8 Multiple Choice (PAS 38)


1. C 6. D
2. B 7. A
3. D 8. C
4. A 9. C
5. A 10. D

Problem 20-9 Multiple Choice (IFRS)


1. D 6. D
2. D 7. B
3. B 8. B
4. B 9. D
5. C 10. A
Problem 20-10 Multiple Choice (IAA)
1. D 6. D
2. D 7. D
3. D 8. D
4. C 9. C
5. A 10. C

Problem 20-11 Multiple Choice (IAA)


1. C 4. A
2. A 5. B
3. B

Problem 20-12 Multiple Choice (IAA)


1. A 6. D
2. A 7. B
3. D 8. C
4. A 9. A
5. C 10. B

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