09d Investment in Equity Securities Cost Equity Method PDF

FINANCIAL ACCOUNTING
THEORY & PRACTICE

INVESTMENT IN EQUITY SECURITIES
QUIZZER
Investment in Equity Securities
INVESTMENT IN EQUITY SECURITIES

Essay Questions
Dividends and splits
1. When are dividends considered earned?
In this connection, three dates are important in accounting for dividends, namely:
1. Date of declaration is the date on which the payment of  dividends is approved by the
board of directors.
2. Date of record is the date on which the stock and transfer  book is closed for
registration. Only those shareholders  registered as of this date are entitled to receive
dividends.
3. Date of payment is the date on which the dividends  declared shall be paid.
PAS 18, paragraph 29, provides that "dividends shall be recognized as revenue when the
shareholder's right to receive payment is established". Accordingly, the dividends shall be
recognized as revenue on the date of declaration.
2. Describe and discuss the accounting treatment of the following:
1. Cash dividends
2. Property dividends
3. Liquidating dividends
4. Stock dividends
1. Cash dividends, as the title suggests, are in the form of cash. As a rule, such dividends
are treated as income but if the equity method is used, the same should be credited to
the investment account.
2. Property dividends or dividends in. kind are dividends in the form of property or assets
other than cash. The property may be in the form of another entity's share, inventory,
equipment and other noncash asset. Property dividends are normally treated as
income at the fair value of the property received.
3. Liquidating dividends represent return of investment and therefore are not income.
4. Stock dividends are in the form of the issuing entity's own shares. The IAS term for
Essay Questions Page 1

stock dividend is "bonus issue". Stock dividends may be the same as those held or
different from those held. Stock dividends are not income. Stock dividends of the same
kind are recorded only by means of a memorandum entry on the part of the investor.
Such stock dividends do not affect the total cost of the investment but reduce the cost
of the investment per share.
3. Discuss the accounting treatment of stock dividends which are different from those held.
As stated earlier, stock dividends are not income whether they are the same or different kind.
When the stock dividends are of different kind, the procedure is to allocate the cost of the
original investment between the original shares and the "different" stock dividends on the
basis of fair value.
For example, if the original investment is ordinary share and the investor receives preference
share as stock dividend, the stock dividend is recorded by debiting investment in preference
share and crediting investment in ordinary share for the amount allocated to the stock
dividend.
Accordingly, the stock dividends of different kind reduce the total cost of the original
investment because a new investment account is set up for the stock dividends received.
4. Discuss the accounting treatment for shares received, in lieu of cash dividends.
When cash dividends are declared and received, it is without doubt that they are income. A
problem will arise when shares are received in lieu of cash dividends declared. It is generally
accepted that shares received in lieu of cash dividends are income at the fair value of the
shares received. In the absence of the fair value of the shares received, the income is equal
to the cash dividends that would have been received. Shares received in lieu of cash
dividends are recorded by debiting investment in shares and crediting dividend income.
5. Discuss the accounting treatment for cash received in lieu of stock dividends.
When stock dividends are declared and received, unquestionably they are not income.
A problem will arise when cash is received in lieu of stock dividends.
In this case, the "as if approach is followed. This means that the stock dividends are assumed
to be received and subsequently sold at the cash received. Therefore, gain or loss may be
recognized.

6. Discuss share split.
Share split may be split up or split down.
A share split up is a transaction whereby the outstanding shares are called in and replaced
by a larger number, accompanied by a reduction in the par or stated value of each share.
A share split down is a transaction whereby the outstanding shares are called in and replaced
by a smaller number, accompanied by an increase in the par or stated value.
Share split does not affect the total cost of investment. But there is a decrease or an increase
in the cost per share because the total cost now will apply to a larger or smaller number of
shares.
Only a memorandum entry is made to record the receipt of new shares by virtue of share
split.
Stock rights
7. What is a stock right?
A stock right or preemptive right is a legal right granted to shareholders to subscribe for new
shares issued by a corporation at a specified price during a definite period.
The IAS term for stock right is "right issue".
A stock right is inherent in every share. A shareholder receives one right for one share owned.
A stock right is valuable to an investor because the price at which the new shares are sold is
generally below the prevailing market price.
The purpose of the stock right is to enable the shareholders to preserve their equity or
proportionate interest in the corporation.
The ownership of stock right is evidenced by an instrument or a certificate known as share

warrant.
8. Explain the procedure when stock rights are accounted for separately?
PAS 39 and PFRS 9 do not address this accounting issue categorically. But unquestionably,
a stock right is a form of a financial asset. In this regard, there is a divergence of opinion
among academicians and theoreticians. There are two schools of thought on the matter,
namely:

1. Stock rights are accounted for separately.

2. Stock rights are not accounted for separately.
9. Explain the measurement of stock rights.
Under Application Guidance B5.4.14 of PFRS 9, all investments in equity instruments and
contracts on those instruments must be measured at fair value. Stock rights as a form of
equity financial instrument are measured initially at fair value. In other words, a portion of the
carrying amount of the original investment in equity securities is allocated to the stock rights
at an amount equal to the fair value of the stock rights. The reason for such an allocation is
that stock rights are independent of the original shares from which they are derived. When
stock rights are issued, the investor is now the owner of two financial assets, namely the
original shares and the related stock rights. Stock rights are normally classified as current
assets if the rights are accounted for separately.
10. Explain why stock rights are not accounted for separately.
Stock rights may be recognized as embedded derivative but not a "stand-alone" derivative.
An embedded derivative is a "component of a hybrid or combined contract (host contract) .
with the effect that some of the cash flows of the combined contract vary in a way similar to
a stand-alone instrument".
PFRS 9, paragraph 4.3.3, provides that an embedded derivative shall be separated from the
host contract and accounted for separately under certain conditions. However, PFRS 9,
paragraph 4.3.3, further provides that if the host contract is within the scope of PFRS 9, the
classification requirements of PFRS 9 are applied to. the combined host contract in its
entirety. This simply means that if the host contract is a financial asset, the embedded
derivative is not separated.
Moreover, under PFRS 9, paragraph 4.3.3, if the host contract is measured at fair value
through profit or loss, the embedded derivative is not separated. Accordingly, the stock right
as an embedded derivative is not accounted for separately because the host contract
"investment in equity instrument" is a financial asset measured at fair value through profit or
loss.
11. Which approach is followed in accounting for stock rights?
Admittedly, this subject matter is not a well-settled issue. In fact, PFRS 9, paragraph 4.3.4,
states that "this standard does not address whether an embedded derivative shall be

presented separately in the statement of financial position". The authors strongly believe that
the approach "not accounted for separately" stands on solid and authoritative ground.
However, stay tuned and let us wait and see what the Financial Reporting Standards Council
will say on this accounting issue.
12. What is the meaning of "theoretical" or "parity" value of stock right?
The theoretical or parity value is the assumed fair value of the stock right that is derived from
the market value of the share.
13. What are the formulas for the computation of the theoretical or parity value of stock right?
The formulas for the computation of the theoretical or parity value of the stock right are:
1. When the share is selling right-on:
Market value of share right-on minus subscription
price = Value of one right
Number of rights to purchase  one share plus 1
2. When share is selling ex-right:

Market value of share ex-right minus subscription
price = Value of one right
Number of rights to purchase  one share
Investment in associates
14. Define significant influence, control, associate and subsidiary.
Significance influence is the power to participate in the financial and operating policy
decisions of the investee but not control or joint control over those policies.
Control is the power to govern the financial and operating policies of an entity so as* to obtain
benefits from its activities.
Under PFRS 10, an investor controls an investee when the investor is exposed or has rights
to variable returns from the involvement with the investee and has the ability to affect those
returns through the power over the investee.
PAS 28, paragraph 3, simply defines an associate as "an   entity over which the
investor has significant influence".
Appendix A of PFRS 10 on consolidated financial statements simply defines a subsidiary as

"an entity that is controlled by another entity".

In other words, the party controlling another entity is known as the parent and the party
controlled is known as the  subsidiary. Technically, the parent and the subsidiary are known
as  affiliates.
15. When does an investor have significant influence?
The assessment of significant influence is a matter of judgment. However, PAS 28,

paragraph 5, provides a practical guidance to assist management in making such
assessment If the investor holds, directly or indirectly through subsidiaries, 20% or more of
the voting power of the investee, it is presumed that the investor has significant influence,
unless it can be clearly demonstrated that this is not the case.
Conversely, if the investor holds, directly or indirectly through subsidiaries, 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. A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.
PAS 28, paragraph 6, provides that the existence of significant influence by an investor is
usually evidenced in one or more of the following ways:
a. Representation in the board of directors
b. Participation in policy making process
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information
16. Explain the treatment of potential voting rights in relation to having significant influence.
An entity may own share warrants, debt or equity instruments that are convertible into
common shares that have the potential, if exercised or converted, to give the entity additional
voting power.
PAS 28, paragraph 7, provides that the existence of such potential voting rights is considered
in assessing whether an entity has significant influence.
However, when potential voting rights exist, the investor's share of profit or loss of the
investee and of changes in the investee's equity is determined on the basis of "present
ownership interest" and does not reflect the possible exercise or conversion of potential
voting rights.

17. When does an investor lose significant influence?
An entity loses significant influence over an investee when it loses the power to participate in
the financial and operating policy decisions of the investee. The loss of significant influence
can occur with or without change in the absolute or relative ownership interest. For example,
the loss of significant influence could occur when an associate becomes subject to control of
a government, court, administrator or regulator. The loss of significant influence could also
occur as a result of a contractual agreement.
18. Explain the equity method of accounting.
The equity method is based on the economic relationship between the investor and the
investee. The investor and the investee are viewed as a single economic unit. The equity
method is applicable when the investor has a significance influence over the investee.
Under the equity method, the investment is initially recorded at cost but it is subsequently
increased by the net income of the investee and decreased by the net loss and dividend
payments of the investee. Note that the investment must be in ordinary shares. If the
investment is in preferrence shares, the equity method is not appropriate regardless of the
percentage because the preference share is a nonvoting equity.
The investment in preference shares may be accounted for as at fair value through profit or
loss or at fair value through other comprehensive income or nonmarketable investment.
Technically, if the investor has significant influence but not control over the investee, the
investee is said to be an associate or associated company. The investment in associate
accounted for using the equity method shall be classified as noncurrent asset. Accordingly,
under the equity method, the investment in ordinary shares shall be appropriately described
as investment in associate.
If the investor has control over the investee, the investor is known as the parent and the
investee is known as the subsidiary. In this case, the investment in ordinary shares is
described as investment in subsidiary.
19. What do you understand by the "excess of cost over carrying amount" of interest acquired?
If the cost of an investment exceeds the carrying amount of the underlying net assets
acquired, the difference is termed as "excess of cost over carrying amount". The excess of
cost over carrying amount may be due to the following:
a. Undervaluation of the investee's depreciable assets

b. Goodwill

In practice, it is often difficult to determine which specific identifiable assets are undervalued.
If the assets of the investee- are fairly valued, accountants frequently attribute the excess of
cost over carrying amount of the underlying net assets to goodwill.
If the excess is attributable to undervaluation of depreciable assets, it is amortized over the

remaining life of the depreciable assets. The amortization of the excess of cost over carrying
amount is recorded by debiting investment income and crediting the investment account. If
the excess is attributable to goodwill, it is not amortized but the entire investment in associate
is tested for impairment at each reporting date.
20. What is the treatment of "excess of net fair value over cost"?
PAS 28, paragraph 32, provides that the excess of the investor's share of the net fair value
of the associate's identifiable assets and liabilities over the cost of the investment is included
as income in the determination of the investor's share of the associate's profit or loss in the
period in which the investment is acquired.
21. Discuss the accounting procedure where the associate is with "heavy losses".
PAS 28, paragraph 38, provides that if an investor's share of losses of an associate equals
or exceeds the carrying amount of an investment, the investor discontinues recognizing its
share of further losses. The investment is reported at nil or zero value. The carrying amount
of the investment in associate is not just the balance of the account "investment in associate"
The carrying amount of the investment in associate also includes other long-term interests in
an associate, such as long-term receivables, loans and advances.
However, trade receivables and any long-term receivables for which adequate collateral
exists, such as secured loans, are excluded from the carrying amount of an investment in
associate. 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. If the associate subsequently reports income, the investor resumes including its
share of such income after its share of the income equals the share of losses not recognized.
22. Explain the impairment of an investment in associate.
If there is an indication that an investment in associate may be impaired, PAS 28, paragraph
40 in conjunction with PAS 36 on "impairment of assets" requires that an impairment loss
shall be recognized "whenever the carrying amount of the investment in associate exceeds
its recoverable amount". The recoverable amount is measured as the higher between fair
value less cost of disposal and value in use.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. Value in use
is the present value of the estimated future cash flows expected to arise from the continuing
use of an asset and from the ultimate disposal. The value in use of an investment in associate
is the investor's share in either of the following:
a. Present value of estimated future cash flows expected to  be generated by the investee,
including cash flows from  operations of the investee and the proceeds from the ultimate
disposal of the investment.
b. Present value of the estimated future cash flows expected  to arise from dividends to be
received from the investment  and from the ultimate disposal. Under appropriate
assumptions, both methods give the same result. Any resulting impairment loss for the
investment is allocated first to any remaining goodwill.
23 Explain the treatment when the investee has an outstanding preference shares.
a. 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.
b. When an associate has outstanding noncumulative preference shares, the investor shall
compute its share  of earnings after deducting the preference dividends only  when
declared.
24. Explain the treatment of "other changes in the equity of the investee" that have not been
recognized in profit or loss.
Adjustments to the carrying amount of the investment in associate may be necessary for
changes in the investor's proportionate interest in the investee arising from changes in the
investee's equity that have not been recognized in the investee's profit or loss. Such changes
include those arising from revaluation of property, plant and equipment and from foreign
exchange translation differences. The investor's share of those- changes is recognized
directly in equity of the investor.
25. What are some adjustments in the investee's operations before an investor computes its
share in the investee's profits or losses?
1. The most recent available financial statements of the associate are used by the investor
in applying the equity method.

When the reporting dates of the investor and the investee are different, the associate
shall prepare for the use of the investor financial statements as of the same date as the
financial statements of the investor unless it is impracticable to do so. In any case, the
difference between the reporting date of the associate and that of the investor shall be
no more than three months.
2. If an associate uses accounting policies other than those of the investor, adjustments
shall be made to conform the associate's accounting policies to those of the investor.
3. Profits and losses resulting from upstream and downstream transactions between an
investor and an associate are recognized in the investor's financial statements only to
the extent of the unrelated investors' interest in the associate.
In other words, the unrealized profit and loss from upstream and downstream transactions
must be eliminated in determining the investor's share in the profit or loss of the
associate.
"Upstream" transactions are sales of assets from an associate to the investor.

"Downstream" transactions are sales from the investor to the associate. The investor's
share in the associate's profits and losses resulting from these transactions is eliminated.
26. When shall an investor discontinue the equity method?
PAS 28, paragraph 22, provides that an investor shall discontinue the use of the equity
method from the date that it ceases to have significant influence over an associate.
Consequently, the investor shall account for the investment as financial asset at fair through
profit or loss, or financial asset at fair value through other comprehensive income or
nonmarketable investment.
However, PAS 28, Basis for Conclusion 18, does not permit an investor that continues to
have significant influence over an associate not to apply the equity method even if the
associate is operating under severe long-term restrictions that significantly impair its ability
to transfer funds to the investor.
Significant influence must be lost before the equity method ceases to be applicable.

27. What is the measurement of the investment in associate on the date significant influence is
lost?
PAS 28, paragraph 22, provides that on the date the significant influence is lost, the investor
shall measure any retained investment in associate at fair value.
The difference between the carrying amount of the investment at the date the significant
influence is lost, and the fair value of the retained investment plus any proceeds received
from disposal of any part interest in the associate, shall be included in profit or loss.
Paragraph 22 further provides that the fair value of the investment at the date it ceases to be
an associate shall be regarded as fair value on initial recognition as a financial asset.
28. What are the specific circumstances when an investment in associate shall not be accounted
for using the equity method?
PAS 28, paragraph 17, provides that an investment in associate shall 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:
a. The investor is a wholly-owned subsidiary, or a  partially-owned subsidiary of another
entity and the other  owners do not object to the investor not applying the  equity method.
b. The investor's debt and equity instruments are not  traded in a public market, meaning
domestic or foreign  stock exchange or "over the counter" market.
c. The investor did not file or it is not in the process of fifing  its financial statements with
the SEC for the purpose of  issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent of the investor  produces consolidated financial
statements available for  public use that comply with Philippine Financial  Reporting
Standards.
In these circumstances, the investment is accounted for as at fair value through profit or loss,
or at fair value through other comprehensive income or nonmarketable investment.
29. Explain the treatment of an investment in associate that is "classified as held for sale".
PAS 28, paragraph 20, provides that if the investment in associate is classified as held for
sale, it is accounted for in accordance with PFRS 5 which specifically mandates that any
noncurrent asset classified as "held for sale" shall be measured at the lower of carrying
amount and fair value less cost of disposal.

30. What is the method of accounting for an investment of less than 20%?
If the investor holds, directly or indirectly, through subsidiaries 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.
In this case, the investment is accounted for either at fair value or at cost.
The fair value method is applicable to financial asset at fair value through profit or loss or
financial asset at fair value through other comprehensive income.
The cost method is usually applied with respect to investment in unquoted equity instrument
or nonmarketable equity investment.
Under the fair value and cost method, the investor does not share in the profit or loss of the
investee because this method is based on the legal relationship between the investor and
the investee.
The investor and the investee are independent of the other.
In applying the fair value and cost method, dividends received from an associate are
recognized as dividend income, regardless of whether the dividends originated from
preacquisition retained earnings or postacquisition retained earnings.
There is no longer a distinction between preacquisition dividends and postacquisition
dividends.
31. Explain investment in associate achieved in stages.
An investor may acquire an ownership interest in an investee on a certain date but the
investee may not be classified as an associate until a later date.
For example, an investor holds a 10% interest in an investee on January 1, 2013. The investor
acquires additional 10% interest in the same investee on January 1, 2014 enabling the
investor to exercise significant influence over the investee.
In 2013, the investment is accounted for under the cost or fair value method.
However, in 2014, the investment is accounted for under the equity method because the
investee is now an associate.

This scenario or phenomenon is known as "investment in associate achieved in stages."
32. Explain the accounting for investment in associate achieved in stages.
The investment in associate achieved in stages is not covered by PAS 28. This investment
in associate is parallel to business combination achieved in stages.
PFRS 3, paragraph 42, provides that in a business combination achieved in stages, the
acquirer shall remeasure the previously held equity interest at fair value and recognize the
resulting gain or loss in profit or loss. By inference, this "fair value approach" should be
followed when an associate is acquired in stages.
33. Explain the "fair value approach" in accounting for investment in associate achieved in
stages.
The following accounting procedures should be followed for investment in associate achieved
in stages:
a. The existing interest in the associate is remeasured at  fair value with any change in fair
value included in profit  or loss.
b. If the existing interest is accounted for at fair value  through other comprehensive
income, any previous  unrealized gain or loss is reclassified to profit or loss.
c. The fair value of the existing interest plus the cost of the  additional interest acquired
constitutes the total cost of  the investment for the initial application of the equity  method.
d. The total cost of the investment for the initial application  of the equity method minus the
carrying amount of the  net assets acquired at the date significant influence is  obtained
equals excess of cost over carrying amount or  excess net fair value.

Multiple Choice - Theory

Dividends & splits
1. It is the date on which the stock and transfer book of the entity is closed for registration.
Only those shareholders registered as of this date are entitled to receive dividends.
A. Date of declaration C. Date of payment
B. Date of mailing the dividend check D. Date of record FA © 2014
2. Dividends are recognized on the

A. Date of declaration C. Date of record FA © 2014
B. Date of issuing statements D. Date of statement of financial position
3. At which of the following dates has the shareholder theoretically realized income from
dividend?
A. The date of record
B. The date the dividend is declared
C. The date the dividend check is mailed by the entity
D. The date the dividend check is received by the  shareholder. TOA © 2013
4. An investor owns 10% of the ordinary shares of an investee throughout the year. The
investee has no preference shares outstanding. The investor's interest gives the right to
A. Be paid 10% of the investee's profits in cash each year.
B. Receive dividend equal to 10% of the par value each year.
C. Receive dividends equal to 10% of the total dividend paid by the investee for the year to
shareholders.
D. Keep investee from issuing any additional shares unless the investor is willing to buy
10% of the newly issued shares. FA © 2014
5. Shares received in lieu of cash dividend are recorded as

A. Stock dividends
B. Income at fair value of the shares received
C. Income at par value of the shares received
D. Income at the cash dividend that would have been received FA © 2014
6. Cash received in lieu of stock dividends is accounted for as

A. Dividend income
B. Return of investment
C. Partly dividend income and partly return of investment FA © 2014
D. If the stock dividends are received and subsequently sold and gain or loss is recognized
MCQ - Theory Page 14

7. Property dividends are recorded

A. By means of memorandum only
B. As dividend income at fair value of the property
C. As dividend income at carrying amount of the  property
D. As return of investment and therefore credited to  investment account FA © 2014
8. Liquidating dividends are credited to

A. Income C. Retained earnings
B. Investment account D. Share capital FA © 2014
9. What is the effect of stock dividend of the same class?

A. Increase in investment account and increase in cost per share
B. No effect on investment account but increase in cost per share
C. No effect on investment account but decrease in cost per share
D. Decrease in investment account and decrease in cost per share FA © 2014
10. When stock dividends of different class are received

A. Cash is debited and dividend income is credited
B. No formal entry is made but only a memorandum
C. A new investment account is debited and dividend income is credited FA © 2014
D. A new investment account is debited and the original investment account is credited
11. Cash received in lieu of stock dividends is accounted for as

A. Dividend income
B. Return of investment
C. Partly dividend income and partly return of  investment
D. If the stock dividends are received and subsequently  sold at the cash received and gain
or loss is recognized TOA © 2013
12. What is the effect of share split up?

A. Increase in number of shares and increase in cost per  share
B. Increase in number of shares and decrease in cost per  share
C. Decrease in number of shares and increase in cost  per share
D. Decrease in number of shares and decrease in cost  per share FA © 2014

Cost method
13. When an investor uses the cost method to account for investment in ordinary shares, cash
dividends received by the investor from the investee should be recorded as
A. Dividend income
B. A deduction from the investment account
C. An addition to the investor's share of the investee's profit
D. A deduction from the investor's share of the investee's profit FA © 2014
14. An investor uses the cost method to account for an investment in ordinary shares. A portion
of the dividends received this year were in excess of the investor's share of investee's
earnings subsequent to the date of investment. The amount of dividend revenue that should
be reported in the investor's income statement for this year would be
A. Zero
B. The total amount of dividends received this year
C. The portion of the dividends received this year that were in excess of the investor's share
of investee's earnings subsequent to the date of investment
D. The portion of the dividends received this year that were not in excess of the investor's
share of investee's earnings subsequent to the date of investment. FA © 2014
15. An investor uses the cost method to account for investment in ordinary shares. Dividends
received in excess of the investor's share of investee's earnings subsequent to the date of
investment FA © 2014
A. Decrease the investment account C. Increase the dividend revenue account
B. Do not affect the investment account D. Increase the investment account
16. An investor uses the cost method of accounting for its 15% ownership in an investee. At year-
end, the investor has a receivable from the investee. How should the receivable be reported?
A. The total receivable should be reported separately.
B. The total receivable should be offset against the investee's payable to the investor.
C. The total receivable should be included as part of the investment, without separate
disclosure.
D. Eighty-five percent of the receivable should be reported separately, with the balance
offset against the investee's payable to the investor. TOA © 2013
Investment in associates
17. It is an entity over which the investor has significant influence.
A. Associate C. Mutual fund
B. Investee D. Venture capital organization FA © 2014

18. Which of the following statements best describes the term "significant influence"?
A. The mutual sharing in the risks and benefits of a  combined entity
B. The contractually agreed sharing of control over an  economic entity
C. The holding of a significant proportion of the share  capital in another entity FA © 2014
D. The power to participate in the financial and  operating policy decisions of an entity
19. Which of the following statements is true 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 have significant influence,  unless it can
be clearly demonstrated that this is not  the case.
III. A substantial or majority ownership by another  investor does not necessarily preclude
an investor  from having significant influence.
A. II only C. I and II only
B. Ill only D. I, II and III FA © 2014
20. When an entity holds between 20% and 50% of the voting  power of an investee, which of
the following statements is true?
A. The investor must use the equity method.
B. The investor must use the fair value method.
C. The investor must use the fair value method unless it can be clearly demonstrated that
the investor has significant influence over the investee.
D. The investor should use the equity method unless circumstances indicate that it is unable
to exercise significant influence over the investee. FA © 2014
21. The equity method is not required to be applied when the associate has been acquired and
held with a view to its disposal within a certain time period. What is the period within which
the associate must be disposed of?
A. In the near future
B. Six months from the end of reporting period
C. Twelve months from the end of reporting period
D. Twelve months from date of classification as held for sale FA © 2014
22. The equity method is not applicable under all of the following circumstances, except
A. The investor is a wholly-owned subsidiary.
B. The investor's debt and equity instruments are not traded.
C. The ultimate parent of the investor produces consolidated financial statements.
D. The investor is in the process of filing financial statements with SEC for the purpose of
issuing debt and equity instruments in a public market. FA © 2014

23. What should happen when the financial statements of an associate are not prepared as of
the same date as the financial statements of the investor?
A. As long as the gap is not greater than three months,  there is no problem.
B. The financial statements of the associate prepared up  to a different date shall be used
as normal.
C. The associate shall prepare financial statements for the use of the investor at the same
date as that of the  investor.
D. Any major transactions between the date of the financial  statements of the investor and
that of the associate shall  be accounted for. FA © 2014
24. The excess of the investor's share of the net fair value of the associate's net assets over the
cost of the investment is
A. A deferred gain.
B. Credited to retained earnings directly
C. Included in other comprehensive income.
D. Included in the determination of the investor's share of the associate's profit or loss in
the period in which the investment is acquired. FA © 2014
25. When an investor purchases sufficient ordinary shares to gain significant influence over the
investee, what is the proper accounting treatment of any excess of cost over carrying amount
of net assets acquired?
A. The excess remains in the investment account until it is sold.
B. The excess is immediately expensed in the period in which the investment is made.
C. The excess is charged to retained earnings at the time the investor resells the
investment.
D. The excess is amortized over the time period that is reasonable in the light of the
underlying cause of the excess. FA © 2014
26. An investor uses the equity method to account for 30% investment. Amortization of the
investor's share of the excess of fair value over carrying amount of depreciable assets at the
date of the purchase shall be reported in the investor's income statement as part of
A. Amortization of goodwill C. Equity in earnings of investee
B. Depreciation expense D. Other expense FA © 2014
27. 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 asset carrying values. The investor's amortization of the excess
A. Decreases the goodwill account
B. Decreases the investment account
C. Does not affect the investment account
D. Increases the investment revenue account FA © 2014

28. An investor uses the equity method to account for purchase of another entity's ordinary
shares at the beginning of the current year. On the date of acquisition, the fair value of the
investee's inventory and land exceeded their carrying amount. How would the inventory
excess and land excess affect respectively the investor's reported equity in earnings of the
investee for the current year?
A. Decrease and Decrease C. Increase and No effect
B. Decrease and No effect D. Increase and Increase FA © 2014
29. Goodwill arising from an investment in associate is

A. Included in the carrying amount of the investment  and not amortized. FA © 2014
B. Excluded from carrying amount of the investment but  charged to retained earnings.
C. Included in the carrying amount of the investment  and amortized over the useful life.
D. Excluded from carrying amount of the investment but  charged to expense immediately.
30. 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. FA © 2014
D. Goodwill is not recognized separately within the  carrying amount of the investment.
31. If there is any excess of the investor's share of the net fair value of the associate's identifiable
assets and liabilities over the cost of the investment, that is, "bargain purchase", how should
that excess be treated?
A. It should be included in retained earnings.
B. It should be included in other comprehensive income.
C. It should be disclosed separately as part of the investor's equity.
D. It should be included as income in the determination of the investor's share of the
associate's profit or loss for the period. TOA © 2013
32. Under the equity method of accounting for investments, an investor recognizes its share of
the earnings in the period in which the
A. Investee pays dividend
B. Investor sells the investment
C. Investee declares a dividend
D. Earnings are reported by the investee in its financial statements FA © 2014

33. 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 cash dividend received from the investee.
B. A proportionate interest in the net income of 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. FA © 2014
34. If an associate has outstanding cumulative preference shares, held by outside interests, the
investor computes its share of profit or loss
A. Without regard for preference dividends.
B. After adjusting for the preference dividends only when  declared, FA © 2014
C. After adjusting for preference dividends which were  actually paid during the year.
D. After adjusting for the preference dividends, whether  or not the dividends have been
declared.
35. An investor uses the equity method to account for its 30% investment in ordinary shares of
an investee. Amortization of the investor's share of the excess of fair value over carrying
amount of depreciable assets at the date of the purchase should be reported in the investor's
income statement as part of
A. Amortization of goodwill C. Equity in earnings of investee
B. Depreciation expense D. Other expense TOA © 2013
36. An investor uses the equity method to account for its purchase of another entity's ordinary
shares. On the date of acquisition, the fair value of the investee's inventory and land
exceeded their carrying amount. How do these excesses of fair value over carrying amount
affect the investor's reported equity in earnings of the investee for the current year?
TOA © 2013 A. B. C. D.
Inventory excess Decrease Decrease Increase Increase
Land excess Decrease No effect Increase No effect
37. 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. Be increased by its share of the earnings of the investee, and 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. Not be affected by its share of the earnings of the investee, but be decreased by its share
of the losses of the investee FA © 2014

38. 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 cash dividend received from the investee
B. A proportionate interest in the net income of 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. TOA © 2013
39. 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 investment account
C. A deduction from the investor's share of the investee's profits FA © 2014
D. A deduction from the shareholders' equity account, dividends to shareholder.
40. When an investor purchases sufficient ordinary shares  to gain significant influence over the
investee, what is  the proper accounting treatment of any excess of cost over  the carrying
amount of the net assets acquired?
A. The excess remains in the investment account until it  is sold.
B. The excess is immediately expensed in the period in  which the investment is made.
C. The excess is charged to retained earnings at the time the investor resells the
investment.
D. The excess is amortized over the time period that is  reasonable in the light of the
underlying cause of the excess. TOA © 2013
41. 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 asset carrying amount. The investor's amortization of the excess TOA © 2013
A. Decreases the goodwill account C. Does not affect the investment account
B. Decreases the investment account D. Increases the investment revenue account
42. On January 1 of the current year, an entity purchased 10% of another entity's ordinary shares.
The entity purchased additional shares bringing the ownership up to 40% of the investee's
ordinary shares outstanding on August 1 of the current year. During October of the current
year, the investee declared and paid a cash dividend on all of the outstanding ordinary shares.
How much income from the investment should be reported for the year?
A. 40% of investee's income for the current year
B. Amount equal to dividends received from the investee
C. 40% of investee's income from August 1 to December 31 only
D. 10% of investee's income from January 1 to July 31, plus 40% of investee's income from
August 1 to December 31 TOA © 2013

43. An investor shall discontinue the use of the equity method when
A. The associate operates under severe long-term restrictions.
B. The investor ceases to have control over the associate.
C. The business activities of the investor and associate are dissimilar.
D. The investor ceases to have significant influence over the associate. FA © 2014
44. An investor shall discontinue the use of the equity method from the date
I. The investor ceases to have significant influence over  an associate.
II. The associate operates under severe long-term  restrictions that significantly impair the
ability to  transfer funds to the investor.
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013
45. 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. Amortized cost C. Fair value
B. Carrying amount D. Original cost FA © 2014
46. 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 statements is incorrect?
A. The investment is reported at NIL value.
B. The investor ordinarily discontinues its share of further losses.
C. If the associate subsequently reports profit, the investor resumes its share of the profit
without regard to the share of net loss not previously recognized. TOA © 2013
D. Additional losses are provided 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.
47. How is the impairment test carried out for an investment in associate?
A. The carrying amount of the investment shall be  compared with the market value.
B. The goodwill is separated from the rest of the  investment and is impairment tested
individually.
C. The entire carrying amount of the investment is tested  for impairment by comparing the
recoverable amount  with carrying amount.
D. The recoverable amounts of all investments in associates  shall be assessed together to
determine whether there  has been an impairment on all investments. TOA © 2013

48. How is the impairment test carried out for an associate?

A. The goodwill is impairment tested individually.
B. The carrying amount of the investment shall be compared with the market value.
C. The recoverable amounts of all investments in associates shall be assessed together.
D. The entire carrying amount of the investment is tested for impairment by comparing the
recoverable amount with the carrying amount. FA © 2014
49. In its financial statements, an investor uses the equity method of accounting for its 30%
ownership in an investee. At year-end, the investor has a receivable from the investee. How
should the receivable be reported in the investor's financial statements for the current year?
A. The total receivable should be disclosed separately.
B. The total receivable should be included as part of the investment in associate, without
separate disclosure.
C. None of the receivable should be reported, but the entire receivable should be offset
against investee's payable to the investor.
D. Seventy percent of the receivable should be separately reported, with the balance offset
against 30% of investee's payable to the investor. TOA © 2013
50. Which of the following statements is incorrect concerning the equity method?
A. The investment in associate is initially recorded at  cost.
B. Distributions received from the investee reduce the  carrying amount of the investment.
C. The investor's share of the profit or loss of the investee  is not recognized in the investor's
profit or loss.
D. 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. TOA © 2013
51. Which of the following statements is incorrect concerning the equity method?
A. The investment in associate is initially recorded at cost.
B. Dividends received from the associate are accounted for as income..
C. The investor's share of the profit or loss of the investee is recognized in the investor's
profit or loss.
D. 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. FA © 2014
52. At the beginning of the current year, an investor acquired 30% of the ordinary shares of
another entity. In the current year, the investee has net earnings which exceeded dividends
paid. The investor mistakenly recorded these transactions using the cost method instead of
the equity method of accounting. What effect would this have on investment account, net
earnings and retained earnings, respectively? FA © 2014

A. Overstate, overstate, overstate C. Understate, overstate, understate

B. Overstate, understate, understate D. Understate, understate, understate
Cost method to equity method

53. On January 1 of the current year, an entity purchased 10% of another entity's ordinary shares.
The entity purchased additional shares bringing the ownership up to 40% on August 1 of the
current year. During October of the current year,' the investee declared and paid a cash
dividend on all of the outstanding ordinary shares. How much income from the investment
should the entity report for the current year?
A. 40% of investee's income for the current year
B. Amount equal to dividends received from the investee
C. 40% of investee's income from August 1 to December 31 only
D. 10% of investee's income from January 1 to July 31, plus 40% of investee's income from
August 1 to December 31 FA © 2014
Presentation & disclosure

54. An investor uses the equity method for 30% interest. At year-end, the investor has a
receivable from the investee. How should the receivable be reported in investor's financial
statements for the current year?
A. The total receivable should be disclosed separately.
B. The total receivable should be included as part of the investment in associate, without
separate disclosure.
C. None of the receivable should be reported, but the entire receivable should be offset
against the investee's payable to the investor.
D. Seventy percent of the receivable should be separately reported, with the balance offset
against 30% of the investee's payable to the investor. FA © 2014
55. An investor uses the cost method for its 15% ownership in an investee. At year-end, the
investor has a receivable from the investee. How should the receivable be reported in the
investor's year-end financial statements?
A. The total receivable should be reported separately.
B. The total receivable should be included as part of the investment, without separate
disclosure.
C. The total receivable should be offset against the investee's payable to the investor,
without separate disclosure.
D. Eighty-five percent of the receivable should be reported separately, with the balance
offset against the investee's payable to the investor. FA © 2014

Multiple Choice – Problems: Cost Method

Nonmonetary exchange
1. On July 1, 2014, Impervious Company exchanged a land for 25,000 ordinary shares of Ace
Company. On this date, the carrying amount of the land was P2,500,000 and the fair value
was P3,000,000.
On July 1, 2014, the carrying amount of Ace Company's share was P60 and the market value
was P150. On December 31, 2014, Ace Company had 250,000 ordinary shares and the
carrying amount per share was P80.
What amount should be reported on December 31, 2014 as investment in Ace Company?
A. 1,500,000 C. 3,000,000
B. 2,500,000 D. 3,750,000 FA © 2014
Dividend income
Cost method
2. On January 1, 2014, Happy Company purchased 10% of Rose Company's ordinary share
capital for P6,000,000. Rose Company reported net income of P500,000 for 2014 and
P2,000,000 for 2015, and paid dividend of P3,000,000 on December 31, 2015. What amount
should be reported as dividend income for 2015?
A. 200,000 C. 300,000
B. 250,000 D. 500,000 FA © 2014
3. Cobb Company purchased 10,000 shares representing 2% ownership of Roe Company on

February 15,2014. Cobb Company received a stock dividend of 2,000 snares on March 31,
2014, when the carrying amount per share was P350 and the market value per share was
P400. Roe Company paid a cash dividend of PI 5 per share on September 15, 2014. In the
income statement for the year ended October 31, 2014, what amount should be reported as
dividend income?
A. 150,000 C. 880,000
B. 180,000 D. 980,000 P1 © 2014
4. Wood Company owns 20,000 shares of Arlo Company's 200,000 shares of P100 par, 6%
cumulative, nonparticipating preference share capital and 10,000 shares representing 2%
ownership of Arlo's ordinary share capital. During 2014, Arlo declared and paid preference
dividends of P2,400,000. No dividends had been declared or paid during 2013. In addition,
Wood received a 5% stock dividend on ordinary share from Arlo when the quoted market
price of Arlo's ordinary share was P10. What amount should be reported as dividend income
in the 2014 income statement?
A. 120,000 C. 240,000
B. 125,000 D. 245,000 P1 © 2014
MCQ – Problems: Cost Method Page 25

5. On January 1, 2014, Wynn Company bought 15% of Parr Company's ordinary shares
outstanding for P6,000,000. Wynn appropriately accounted for this investment by the cost
method. The investee reported net income of P3,000,000 for 2014 and P9,000,000 for 2015.
No dividend was paid in 2014 but the investee paid dividend of P15,000,000 in 2015. What
amount of dividend income should be reported in 2015?
A. 450,000 C. 1,800,000
B. 1,350,000 D. 2,250,000 P1 © 2014
Gain (loss) on disposal

6. On January 1, 2014, Adam Company purchased as a long-term investment 100,000 ordinary
shares of Mill Company for P40 a share. On December 31, 2014, the market price of Mill's
share was P35, reflecting a temporary decline in market price. On December 28, 2015, Adam
Company sold 80,000 shares of Mill Company for P30 a share. For the year ended December
31, 2015, what amount should be reported as loss on disposal of long-term investment?
A. 400,000 C. 900,000
B. 800,000 D. 1,000,000 P1 © 2014
7. During 2014„ Reminiscent Company bought shares of another entity to be held for trading.
June 1 20,000 shares @P100 2,000,000
December 1 30,000 shares @P120 3,600,000
5,600,000
The transactions for 2015 are as follows:
January 10 Received cash dividend at P10 per share.
January 20 Received 20% stock dividend.
December 10 Sold 30,000 shares at P125 per share.
What is the gain on sale of investment using the FIFO approach?
A. 150,000 C. 950,000
B. 550,000 D. 1,150,000 FA © 2014
Stock rights
8. Valedictory Company issued rights to subscribe to its stock, the ownership of 4 shares
entitling the shareholders to subscribe for 1 share at P100. Vast Company owned 50,000
shares of Valedictory Company with total cost of P5,000,000. The share is quoted right-on at
125. The stock rights are accounted for separately. What is the cost of the new investment
if all of the stock rights are exercised by Vast Company?
A. 1,250,000 C. 1,500,000
B. 1,450,000 D. 1,562,500 FA © 2014

9. Haste Company invested in shares of another entity.

Number of shares Cost
2012 20,000 2,000,000
2013 40,000 3,500,000
In 2014, the entity received 60,000 rights to purchase one share at P80. Five rights are
required to purchase the share. At issue date, rights had a market value of P5 each. The
entity used rights to purchase 10,000 additional shares of the investee and allowed the rights
not exercised to lapse. What amount was debited to investment account for the purchase of
the additional new shares?
A. 800,000 C. 1,050,000
B. 900,000 D. 1,100,000 FA © 2014
10. On January 1, 2014, Animosity Company purchased 50,000 shares of another entity for
P3,800,000. On October 1, 2014, the entity received 50,000 stock rights from the investee.
Each right entitled the shareholder to acquire one share for P80. The market price of the
investee's share was P100 immediately before the rights were issued and P90 immediately
after the rights were issued. On December 1, 2014, the entity exercised all stock rights. On
December 31, 2014, the entity sold 25,000 shares at P90 per share. The stock rights are not
accounted for separately. If the FIFO approach is used, what is the gain on sale of investment
that should be recognized in the current year?
A. 250,000 C. 350,000
B. 300,000 D. 600,000 FA © 2014
11. On March 1, 2014, Evan Company purchased 10,000 ordinary shares of LVC at P80 per
share. On September 30, 2014, Evan received 10,000 stock rights to purchase an additional
10,000 shares at P90 per share. The stock rights had an expiration date on February 1, 2015.
On September 30, 2014, LVC's share had a market value P95 and the stock right had a
market value of P5. What amount should be reported on September 30, 2014 for investment
in stock rights?
A. 50,000 C. 100,000
B. 60,000 D. 150,000 P1 © 2014
12. Rice Company owned 30,000 ordinary shares of Wood Company acquired on July 31, 2014,
at a total cost of PI, 100,000. On December 1,2014, Rice received 30,000 stock rights from
Wood. Each right entitles the holder to acquire one share at P45. The market price of Wood's
share on this date was P50 and the market price of each right was P10. Rice sold its rights
on December 31, 2014 for P450,000 less a P10,000 commission. What amount should be
reported as gain from the sale of the rights?
A. 140,000 C. 240,000
B. 150,000 D. 250,000 P1 © 2014

13. Adam Company owned 50,000 ordinary shares of Bland Company. These 50,000 shares
were purchased by Adam in 2012 for P120 per share. On August 30,2014, Bland distributed
50,000 stock rights to Adam. Adam was entitled to buy one new share of Bland Company for
P90 cash and two of these rights. On August 30,2014, each share had a market value of
P130 and each right had a market value of P20. What total cost should be recorded for the
new shares that are acquired by exercising the rights?
A. 2,250,000 C. 3,250,000
B. 3,050,000 D. 5,500,000 P1 © 2014
14. Excelsia Company issued rights to subscribe to its stock, the ownership of 4 shares entitling
the shareholders to subscribe for 1 share at P100. Jealina Company owns 50,000 shares of
Excelsia Company with total cost of P5,000,000. The share is quoted right-on at 125. The
stock rights are accounted for separately. What is the cost of the new investment if all of the
stock rights are exercised by Jealina Company?
A. 1,250,000 C. 1,500,000
B. 1,450,000 D. 1,562,500 P1 © 2014
15. On January 1, 2014, Mylene Company purchased 50,000 shares of another entity for
P3,600,000. On October 1,2014, the entity received 50,000 stock rights from the investee.
Each right entitled the shareholder to acquire one share for P85. The market price of the
investee's share was P100 immediately before the rights were issued and P90 immediately
after the rights were issued. On December 1, 2014, the entity exercised all stock rights. On
December 31, 2014, the entity sold 25,000 shares at P90 per share. The stock rights are not
accounted for separately. The FIFO approach is used. What is the gain on sale of investment
that should be recognized in 2014?
A. 125,000 C. 450,000
B. 287,500 D. 700,000 P1 © 2014
Comprehensive
Questions 16 & 17 are based on the following information. P1 © 2014
On January 1,2012, Christopher Company purchased 20,000 shares of Bay Company, P100 par,
at P110 per share. On March 1, 2012, Bay Company issued rights to Christopher Company, each
permitting the purchase of 1/4 share at par. No entry was made. The bid price of the share was
140 and there was no quoted price for the rights. On April 1,2012, Christopher Company paid for
the new shares charging the payment to the investment account.
Since Christopher Company felt that it had been assessed by Bay Company, the dividends
received from Bay Company in 2012 and 2013 (10% on December 31 of each year) are credited
to the investment account until the debit was fully offset. Bay Company declared annual dividend

of P2,500,000 for the year ended December 31,2012 and 2013.
On January 1, 2014, Christopher Company received 50% stock dividend from Bay Company. On
same date, the shares received as stock dividend were sold at P160 per share and the proceeds
were credited to income.
On December 31,2014, the shares of Bay Company were split 2 for 1. Christopher Company found
that each new share was worth P5 more than the P110 paid for the original shares. Accordingly,
Christopher Company debited the investment account with the additional shares received at P110
per share and credited income. On June 30,2015. Christopher Company sold one-half of the
investment at P92 per share and credited the proceeds to the investment account.
16. What is the balance of the investment on December 31, 2015 as it was kept by Christopher
Company?
A. 2,200,000 C. 3,150,000
B. 2,650,000 D. 4,950,000
17. Using the average method, what is the correct balance of the investment on December 31,
2015?
A. 0 C. 1,800,000
B. 900,000 D. 2,200.000
Multiple Choice – Problems: Equity Method

Purchase price
18. On January 1, 2014, Power Company purchased 25% of the outstanding ordinary shares of
an investee. During the current year, the investee reported net income of P4,200,000 and
distributed dividends of PI,800,000. The carrying amount of the investment on December 31,
2014 was P3,200,000 after applying the equity method. What was the purchase price paid
for the investment?
A. 1,700,000 C. 3,800,000
B. 2,600,000 D. 4,700,000 FA © 2014
19. On January 1, 2014, Small Company purchased 25% of Big Company. No "excess" resulted
from the purchase. Small Company appropriately carried this investment at equity and the
carrying amount of the investment was PI,900,000 on December 31, 2014. Big Company
reported net income of Pi,200,000 for the current year and paid cash dividend of P480,000
on December 31, 2014. What amount did Small Company pay for the 25% interest in Big
Company?
A. 1,720,000 C. 2,080,000
B. 2,020,000 D. 2,320,000 FA © 2014
MCQ – Problems: Equity Method Page 29

20. On July 1, 2014, Miller Company purchased 25% of Wall Company's outstanding ordinary
shares and no goodwill resulted from, the purchase. Miller appropriately carried this
investment at equity and the balance in Miller's investment account was P1,900,000 at
December 31, 2014. Wall Company reported net income of PI,200,000 for the year ended
December 31, 2014, and paid dividend totaling P480,000 on December 31,2014. How much
did Miller pay for the 25% interest in Wall?
A. 1,720,000 C. 2,020,000
B. 1,870,000 D. 2,170,000 P1 © 2014
Dividend revenue
21. Green Company owned 30% of the outstanding ordinary shares and 100% of the outstanding
noncumulative nonvoting preference shares of Gold Company. In the current year, Gold
Company declared dividend of P1,000,000 on ordinary share capital and P600,000 on
preference share capital. What amount of dividend revenue should be reported for the current
year?
A. 0 C. 600,000
B. 300,000 D. 900,000 FA © 2014
Loss from investment

22. On January 1, 2011, Bart Company acquired as a long term investment for P7,000,000, a
40% interest in Hall Company when the fair value of Hall's net assets was PI 7,500,000. Hall
Company reported the following net losses:
2011 5,000,000
2012 7,000,000
2013 8,000,000
2014 4,000,000
On January 1, 2013, Bart Company made cash advances of P2,000,000 to Hall Company.
On December 31, 2014, it is not expected that Bart Company will provide further financial
support for Hall Company. What amount should be reported in 2014 as loss from investment?
A. 600,000 C. 1,600,000
B. 1,000,000 D. 4,000,000 P1 © 2014
Investment income
Net income
23. On July 1, 2014, Focus Company purchased 30,000 shares of Eagle Company's 100,000
outstanding ordinary shares for P200 per share. On December 15, 2014, Eagle Company
paid P1,000,000 in dividends. Eagle Company's net income for 2014 was P5,000,000 earned
evenly throughout the year. What amount of income from the investment should be reported
for 2014?

A. 150,000 C. 750,000
B. 300,000 D. 1,500,000 FA © 2014
24. On July 1, 2014, Denver Company purchased 30,000 shares of Eagle Company's 100,000
outstanding ordinary shares for P200 per share. On December 15, 2014, the investee paid
P400,000 in dividends to the ordinary shareholders. The investee's net income for the year
ended December 31, 2014 was P1,200,000, earned evenly throughout the year. What
amount of income from the investment should be reported in 2014?
A. 60,000 C. 180,000
B. 120,000 D. 360,000 P1 © 2014
25. On January 1, 2014, Peer Company acquired as a long-term investment a 20% interest in
another entity. Peer Company paid P7,000,000 for this investment when the fair value of the
net assets was P35,000,000. The investor can exercise significant influence over the
investee's operating and financial policies. For the year ended December 31, 2014, the
investee reported net income of P6,000,000 and paid cash dividend of P4,000,000. What
amount of revenue from the investment should be reported for 2014?
A. 400,000 C. 800,000
B. 600,000 D. 1,200,000 FA © 2014
26. On January 1, 2014, Dyer Company acquired as a long-term investment a 20% ordinary
share interest in Eason Company. Dyer paid P7,000,000 for this investment when the fair
value of Eason's net assets was P35,000,000. Dyer can exercise significant influence over
Eason's operating and financial policies. For the year ended December 31,2014, the investee
reported net income of P4,000,000 and declared and paid cash dividends of P1,600,000.
What amount of revenue from the investment should be reported for 2014?
A. 320,000 C. 800,000
B. 480,000 D. 1,120,000 P1 © 2014
27. On July 1, 2014 Blush Company purchased 20% of the outstanding ordinary shares of an
investee for P4,000,000 when the fair value of net assets was P20,000,000. Blush Company
has the ability to exercise significant influence over the operating and financial policies of the
investee. The following data concerning the investee are available:
12 months ended 6 months ended

December 31,2014 December 31,2014
Net income 3,000,000 1,600,000
Dividend declared and paid 1,900,000 1,000,000

In the income statement for the year ended December 31, 2014, what amount of income
should be reported from the investment?
A. 200,000 C. 380,000
B. 320,000 D. 600,000 FA © 2014
28. On January 1, 2014, Mega Company acquired 10% of the outstanding voting shares of Sony
Company. On January 1, 2015, Mega Company gained the ability to exercise significant
influence over financial and operating policies of Sony Company by acquiring 20% of Sony
Company's outstanding ordinary shares.
The two purchases were made at prices proportionate to the value assigned to Sony
Company's net assets which equaled their carrying amounts. Sony Company reported the
following:
2014 2015
Dividends paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000
What amount should be reported as investment income for 2015?
A. 650,000 C. 1,300,000
B. 900,000 D. 1,950,000 FA © 2014
Net income less preferred dividend

29. Norm Company owned 20% of Love Company's preference share capital and 50% of the
ordinary share capital. Love Company's share capital outstanding on December 31, 2014 is
as follows:
10% cumulative preference share capital 2,000,000
Ordinary share capital 7,000,000
Love Company reported net income of P5,000,000 for the year ended December 31, 2014.
What amount should be recorded as investment income for the year ended December 31,
2014?
A. 2,400,000 C. 2,600,000
B. 2,500,000 D. 2,700,000 FA © 2014
30. Moss Company owned 20% of Dubro Company's preference share capital and 80% of the
ordinary share capital on December 31, 2014.
10% cumulative preference share capital 5,000,000

Ordinary share capital 7,000,000
The investee reported net income P3,000,000 for the year ended December 31, 2014. What
is the equity in earnings of the investee for 2014?

A. 2,100,000 C. 2,000,000
B. 2,300,000 D. 2,400,000 P1 © 2014
Net income, amortization of excess cost

31. Breezy Company purchased 35% of an associate on January 1, 2014 for PI 1,200,000 when
the carrying amount of net assets was P32,400,000. On that day, the market value of the net
assets equaled their carrying amount with the following exceptions:
Carrying amount Market
Equipment 7,000,000 5,600,000
Building 1,600,000 2,600,000
The equipment has a remaining useful life of 5 years, and the building has a remaining useful
life of 10 years. The associate reported net income of P3,200,000 and cash dividends of
P1,000,000 for the current year. What is the investment income for the current year?
A. 987,000 C. 1,183,000
B. 1,120,000 D. 1,260,000 FA © 2014
32. On January 1, 2014, Ronald Company purchased 40%) of the outstanding ordinary shares
of New Company, paying P6,400,000 when the carrying amount of the net assets of New
Company equaled PI2,500,000. The difference was attributed to equipment which had a
carrying amount of P3,000,000 and a fair market value of P5,000,000 and to building which
had a carrying amount of P2,500,000 and a fair value of P4,000,000. The remaining useful
life of the equipment and building was 4 years and 12 years, respectively. During 2014, New
Company reported net income of P5,000,000 and paid dividends of P2,500,000. What
amount should be reported as investment income for 2014?
A. 1,000,000 C. 1,800,000
B. 1,750,000 D. 2,000,000 P1 © 2014
33. Sage Company bought 40% of Eve Company's outstanding ordinary shares on January 1,
2014, for P4,000,000. The carrying amount of Eve's net assets at the purchase date totaled
P9,000,000. 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 P900,000 and
P100,000, respectively. The plant has an 18-year life. All inventory was sold during 2014.
During 2014, the investee reported net income of P1,200,000 and paid a P200,000 cash
dividend. What amount should be reported as investment income in the income statement
for the year ended December 31, 2014?
A. 320,000 C. 420,000
B. 360,000 D. 480,000 P1 © 2014

34. On January 1, 2014, Anne Company purchased 20% of the outstanding ordinary shares of
Dune Company for P4,000,000, of which PI,000,000 was paid in cash and P3,000,000 is
payable with 12% annual interest on December 31,2014. Anne also paid P500,000 to a
business broker who helped find a suitable business and negotiated the purchase. At the
time of acquisition, the fair values of Dune's identifiable assets and liabilities were equal to
their carrying amounts except for an office building which had a fair value in excess of carrying
amount of P2,000,000 and an estimated life of 10 years. Dune's shareholders' equity on
January 1,2014 was PI3,000,000. During 2014T Dune Company reported net income of
P5,000,000 and paid dividend of P2,000,000. What amount of income should be reported for
2014 as a result of the investment?
A. 620,000 C. 885,000
B. 810,000 D. 960,000 P1 © 2014
35. On January 1,2014, Occidental Company purchased 40% of the outstanding ordinary shares
of Manapla Company for P3,500,000 when the net assets of Manapla amounted to
P7,000,000. At acquisition date, the carrying amounts of the identifiable assets and liabilities
of Manapla were equal to their fair value, except for equipment for which the fair value was
P1,500,000 greater than its carrying amount and inventory whose fair value was P500,000
greater than its cost. The equipment has a remaining life of 4 years and the inventory was all
sold during 2014. Manapla Company reported net income of P4,000,000 for 2014 and paid
no dividends during 2014. What is the maximum amount of the "equity in earnings of the
investee"?
A. 1,250,000 C. 1,600,000
B. 1,350,000 D. 1,700,000 P1 © 2014
Maximum amount
36. On April 1, 2014, August Company purchased 40% of the outstanding ordinary shares of an
associate for P4,000,000. On this date, the investee's net assets totaled P8,000,000 and
August Company cannot attribute the excess of cost of the investment over the equity in the
investee's net assets to any particular factor. The investee reported net income of PI,000,000
for the current year.
What is the maximum amount which could be included in August Company's income before
tax to reflect its "equity in earnings of the investee" for the current year?
A. 270,000 C. 360,000
B. 300,000 D. 400,000 FA © 2014

37. On April 1, 2014, Ben Company purchased 40% of the outstanding ordinary snares of Clarke
Company for P10,000,000. On that date, Clarke's net assets were P20,000,000 and Ben
cannot attribute the excess of the cost of its investment in Clarke over its equity in Clarke's
net assets to any particular factor. The investee's net income for 2014 is P5,000,000. What
is the maximum amount which could be included in 2014 income before tax to reflect the
"equity in net income of investee"?
A. 1,400,000 C. 1,850,000
B. 1,500,000 D. 2,000,000 P1 © 2014
Carrying amount
Cost method
38. On January 1, 2014, Subtle Company purchased 20% of Lax Company for P3,000,000. This
investment did not give Subtle Company the ability to exercise significant influence over Lax
Company. During the current year, Lax Company reported net income of P3,500,000 and
paid cash dividends of P4,000,000. What is the carrying amount of the investment in Lax
Company on December 31, 2014?
A. 2,200,000 C. 3,000,000
B. 2,900,000 D. 3,700,000 FA © 2014
Step acquisition
39. Pare Company purchased 10% of Tot Company's 100,000 outstanding ordinary shares on
January 1, 2014 for P500,000. On December 31,2014, Pare purchased an additional 20,000
shares of Tot for P1,500,000. Tot had not issued any additional shares during 2014. The
investee reported earnings of P3,000,000 for 2014. The fair value of the 10% interest is
P900,000 on December 31, 2014.
What is the carrying amount of the investment in associate on December 31, 2014?
A. 2,000,000 C. 2,400,000
B. 2,300,000 D. 2,900,000 P1 © 2014
40. Flame Company purchased 10% of an investee's 100,000 outstanding ordinary shares on
January 1, 2014 for P1,000,000. On December 31, 2014, Flame Company purchased
additional 20,000 shares of the investee for P3,000,000. On same date, the fair value of the
10% interest was Pi,400,000. The investee had not issued any additional shares during 2014.
The investee reported net income of P8,000,000 for the current year but paid no dividends.
What amount should be reported on December 31, 2014 as investment in associate?
A. 4,000,000 C. 4,800,000
B. 4,400,000 D. 5,200,000 FA © 2014

41. On January 1, 2014, Mega Company acquired 10% of the outstanding ordinary shares of
Penny Company for P4,000,000.
On January 1,2015, Mega gained the ability to exercise significant influence over financial
and operating control of Penny by acquiring an additional 20% of Penny's outstanding
ordinary shares for P 10,000,000. The fair value Penny's net assets equaled carrying amount.
The fair value of the 10% interest on January 1,2015 was P6,000,000.
For the years ended December 31, 2014 and 2015, the investee reported the following:
2014 2015
Dividend paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000
A. 15,050,000 C. 16,700,000
B. 16,000,000 D. 17,050,000 P1 © 2014
Percent of net assets

42. Accurate Company acquired 30% of the issued share capital of an investee for Pi,000,000
on January 1, 2013. The accumulated profits of the investee on this date totaled P2,000,000.
The abbreviated statement of financial position of the investee on December 31, 2014 is as
follows:
Sundry net assets 6,000,000
Share capital, P10 par 1,000,000
Share premium 2,000,000
Retained earnings 3,000,000
The fair value of the net assets of the investee at the date of acquisition was P5,000,000.
The recoverable amount of the net assets of the investee is deemed to be P7,000,000 on
December 31, 2014. What amount should be reported on December 31, 2014 as investment
in associate?
A. 1,000,000 C. 1,800,000
B. 1,500,000 D. 2,100,000 FA © 2014
Net income, dividend

43. On January 1, 2014, Bliss Company purchased 10% of Red Company's outstanding ordinary
shares for P4,000,000. Bliss Company is the largest single shareholder in Red Company and
Bliss Company's officers are a majority on Red Company's board of directors. Red Company
reported net income of P5,000,000 for the current year and paid dividends of P1,500,000. On
December 31, 2014, what amount should be reported as investment in associate?
A. 3,850,000 C. 4,350,000
B. 4,000,000 D. 4,500,000 FA © 2014

44. On January 1, 2014, Kean Company purchased 30% interest in Pod Company for
P2,500,000. On this date Pod's shareholders' equity was P5,000,000. The carrying amounts
of Pod's identifiable net assets approximated their fair values, except for land whose fair value
exceeded its carrying amount by P2,000,000. The investee reported net income of
P1,000,000 for 2014 and paid no dividends. On December 31, 2014, what amount should be
reported as investment in associate?
A. 2,100,000 C. 2,760,000
B. 2,200,000 D. 2,800,000 P1 © 2014
45. On January 1, 2014, Saxe Company purchased 20% of Lex Company's ordinary shares
outstanding for P6,000,000. The "acquisition cost is equal to the carrying amount of the net
assets acquired. During 2014, the investee reported net income of P7,000,000 and paid cash
dividend of P4,000,000. What is the balance in the investment in associate on December 31,
2014?
A. 5,200,000 C. 6,600,000
B. 6,000,000 D. 7,400,000 P1 © 2014
46. On January 1, 2014, Dell Company paid PI8,000,000 for 50,000 ordinary shares of Case
Company which represent a 25% interest in the net assets of Case. The acquisition cost is
equal to the carrying amount of the net assets acquired. Dell has the ability to exercise
significant influence over Case. Dell received a dividend of P35 per share from Case in 2014.
The investee reported net income of P9,600,000 for the year ended December 31, 2014. On
December 31, 2014, what amount should be reported as investment in associate?
A. 18,000,000 C. 20,400,000
B. 18,650,000 D. 22,150,000 P1 © 2014
Net income, dividend, amortization of excess cost

47. On January 1, 2014, Flair Company purchased 30% interest in an investee for P2,500,000.
On this date, the investee's shareholders' equity was P5,000,000. The carrying amounts of
the investee's identifiable net assets approximated their fair values, except for land whose
fair value exceeded its carrying amount by P2,000,000. The investee reported net income of
P1,000,000 for the current year and paid no dividend. On December 31, 2014, what amount
should be reported as investment in associate?
A. 2,200,000 C. 2,760,000
B. 2,700,000 D. 2,800,000 FA © 2014
48. On January 1, 2014, Courteous Company purchased 30% of the outstanding ordinary shares
of an investee for P5,160,000. At the date of acquisition, the investee's net assets had a
carrying amount of P11,800,000. Depreciable assets with an average remaining life of 4

years have a current fair value that is P2,600,000 in excess of carrying amount. The
remaining difference cannot be attributed to any identifiable tangible or intangible asset. At
the end of 2014, the investee reported net income of P3,600,000 and paid cash dividends of
P400,000. What amount should be reported as investment in associate on December 31,
2014?
A. 4,715,000 C. 5,925,000
B. 5,883,000 D. 6,120,000 FA © 2014
49. On January 1, 2014, Magic Company purchased 40% of the outstanding ordinary shares of
an investee paying P2,560,000 when the carrying amount of the net assets of the investee
equaled P5,000,000. The difference was attributed to equipment which had a carrying
amount of P1,200,000 and a fair market value of P2,000,000, and to building with a carrying
amount of P1,000,000 and a fair market value of Pi,600,000. The remaining useful life of the
equipment and building was 4 years and 12 years, respectively. During the current year, the
investee reported net income of P1,600,000 and paid dividends of PI,000,000. What is the
carrying amount of the investment in associate on December 31, 2014?
A. 2,550,000 C. 2,800,000
B. 2,700,000 D. 3,050,000 FA © 2014
50. Alpha Company acquired 20,000 shares of Beta Company on January 1, 2014 at PI20 per
share. Beta Company had 80,000 shares outstanding with a carrying amount of P8,000,000.
The difference between the carrying amount and fair value of Beta Company on January
1,2014 is attributable to a broadcast license which is an intangible asset. Beta Company
recorded earnings of P3,600,000 and P3,900,000 for 2014 and 2015, respectively, and paid
per-share dividend of P16 in 2014 and P20 in 2015. Alpha Company has a 20-year straight-
line amortization policy for the broadcast license. What is the carrying amount of the
investment in associate on December 31, 2015?
A. 2,400,000 C. 3,555,000
B. 3,515,000 D. 4,275,000 P1 © 2014
51. On January 1, 2014, Mighty Company acquired 20% of the outstanding ordinary shares of
an investee for P7,000,000. This investment gave Mighty Company the ability to exercise
significant influence over the investee. The carrying amount of the acquired net assets was
P6,000,000. The excess of cost over carrying amount was attributed to an identifiable
intangible asset which was undervalued on investee's statement of financial position and
which had a remaining useful life of ten years.
For the year ended December 31, 2014, the investee reported net income of PI,800,000 and
paid cash dividend of P600,000 on its ordinary shares.
On December 31, 2014, what is the carrying amount of the investment in associate?

A. 6,780,000 C. 7,000,000
B. 6,900,000 D. 7,140,000 FA © 2014
52. In January 2014, Farley Company acquired 20% of the outstanding ordinary shares of Davis
Company for P8,000,000. This investment gave Farley the ability to exercise significant
influence over Davis. The carrying amount of the acquired shares was P6,000,000. The
excess of cost over carrying amount was attributed to a depreciable asset which was
undervalued on Davis' statement of financial position and which had a remaining useful life
often years. For the year ended December 31, 2014, the investee reported net income of
P1,800,000 and paid cash dividends of P400,000 and thereafter issued 5% stock dividend.
A. 7,720,000 C. 8,000,000
B. 7,800,000 D. 8,080,000 P1 © 2014
53. On January 1, 2014, Bing Company purchased 30,000 shares of Latt Company's 200,000
outstanding ordinary shares for P6,000,000. On that date, the carrying amount of the
acquired shares on Latt's books was P4,000,000. Bing attributed the excess of cost over
carrying amount to patent. The patent has a remaining useful life of 10 years. During 2014,
Bing's officers gained a majority on Latt's board of directors. Latt Company reported earnings
of P5,000,000 for the year ended December 31,2014, and declared and paid dividend of
P3,000,000 during 2014. On December 31, 2014, the investee's ordinary share was trading
over-the-counter at P15. What is the carrying amount of the investment in associate on
December 31, 2014?.
A. 6,000,000 C. 6,300,000
B. 6,100,000 D. 6,750,000 P1 © 2014
54. On January 1,2014, Cyber Company bought 30% of the outstanding ordinary shares of Free
Company for P5,000,000 cash. Cyber Company accounts for this investment by the equity
method. At the date of acquisition, Free Company's net assets had a carrying amount of
P12,000,000. Depreciable assets with an average remaining life of five years have a current
market value that is P2,500,000 in excess of their carrying amount. The remaining difference
between the purchase price and the carrying amount of the underlying equity cannot be
attributed to any identifiable tangible or intangible asset. Accordingly, the remaining
difference is allocated to goodwill. At the end of 2014, Free Company reported net income
of P4,000,000. During 2014, Free Company declared and paid cash dividends of
P1,000,000. What is the carrying amount of the investment in associate on December 31,
2014?
A. 5,000,000 C. 5,750,000
B. 5,400,000 D. 5,900,000 P1 © 2014

55. On January 1, 2014, Marie Company purchased 40% of the outstanding ordinary shares of
Lester Company paying P2,560,000 when the carrying amount of the net assets of Lester
equaled P5,000,000. The difference was attributed to equipment which had a carrying
amount of P1,200,000 and a fair value of P2,000,000, and to building with a carrying amount
of P1,000,000 and a fair value of P1,600,000. The remaining useful life of the equipment and
building was 4 years and 12 years, respectively. During 2014, Lester Company reported net
income of P1,600,000 and paid dividends of P1,000,000. What is the carrying amount of the
investment in associate on December 31,2014?
A. 2,550,000 C. 2,800,000
B. 2,700,000 D. 3,050,000 P1 © 2014
56. On January 1, 2014, Bridge Company purchased 25,000 shares of the 100,000 outstanding
shares of River Company for a total of P1,000,000. At the time of the purchase, the carrying
amount of River Company's equity was P3,000,000. River Company assets having a market
value greater than carrying amount at the time of the acquisition were as follows:
Carrying amount Market value Remaining life
Inventory 400,000 500,000 Less than 1 year
Equipment 2,000,000 2,500,000 5 years
Goodwill 0 400,000 Indefinite
River Company's net income in 2014 was P700,000. Dividends per share paid by River
Company amounted to P3 in 2014. What is the carrying amount of the investment in associate
on December 31,2014?
A. 1,000,000 C. 1,075,000
B. 1,050,000 D. 1,100,000 P1 © 2014
Net loss, dividend

57. On January 1,2014, Alpha Company acquired 40% of the outstanding ordinary shares of an
investee for P6,500,000. The carrying amount of the net assets of the investee equaled
P12,500,000. Any excess of cost over carrying amount is attributable to goodwill. During the
year, the investee reported net loss of P4,000,000 and paid dividends of P2,500,000. What
is the carrying amount of the investment on December 31,2014?
A. 3,900,000 C. 5,500,000
B. 4,900,000 D. 6,500,000 P1 © 2014
Deficit, net income, dividends

58. Smart Company had 100,000 ordinary shares outstanding. Globe Company acquired 30,000
shares of Smart Company for P120 per share in 2012. The securities are being held as long-
term investment. Changes in retained earnings for Smart Company are as follows:

Retained earnings (deficit), January 1, 2014 (500,000)

Net income for 2014 700,000
Retained earnings, December 31,2014 200,000
Net income for 2015" 800,000
Cash dividend paid on December 31, 2015 (400,000)
Retained earnings, December 31,2015 600,000
A. 3,600,000 C. 3,930,000
B. 3,780,000 D. 4,080,000 FA © 2014
59. Pillar Company acquired a 30% equity interest in an investee for P400,000 on January 1,
2014. For the year ended December 31, 2014, the investee earned profit of P80,000 and
paid no dividend. For the year ended December 31, 2015, the investee incurred loss of
P32,000 and paid a dividend of P10,000. In the statement of financial position on December
31, 2015, what is the carrying amount of the investment in associate?
A. 400,000 C. 414,400
B. 411,400 D. 438,000 FA © 2014
Net income, cash dividend, revaluation surplus

60. Chur Company acquired a 40% interest in Flim Company for PI,700,000 on January 1, 2014.
The shareholders' equity of Flim Company on January 1 and December 31,2014 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 1,2014, all the identifiable assets and liabilities of Flim Company were recorded
at fair value. Flim Company reported profit of P700,000, after income tax expense of
P300,000 and paid dividend of P200,000 to shareholders during the current year.
The revaluation surplus is the result of the revaluation of land recognized by Flim Company
on December 31,2014. Additionally, depreciation is provided by Flim Company on the
diminishing balance method whereas Chur Company used the straight line. Had Flim
Company used the straight line, the accumulated depreciation would be increased by
P200,000.
What is the carrying amount of the investment in associate on December 31,2014?
A. 1,700,000 C. 2,320,000
B. 1,900,000 D. 2,420,000 P1 © 2014

Comprehensive
Questions 61 thru 63 are based on the following information. P1 © 2014
On January 1,2014, Haven Company acquired 20% of the ordinary shares of an associate for
P6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded
at fair value.
An analysis of the acquisition showed that goodwill of P300,000 was acquired. The net income and
dividend of the associate for 2014 and 2015 were as follows:
2014 2015
Net income 3,000,000 4,000,000
Dividend paid 1,000,000 1,500,000
In December 2014, the associate sold inventory to Haven Company for P900,000. The cost of the
inventory was P600,000. This inventory remained unsold by Haven Company on December 31,
2014. However, it was sold by Haven Company in 2015.
In December 2015, the associate sold inventory to Haven Company for P750,000. The cost of the
inventory was P500,000. This inventory remained unsold by Haven Company on December
31,2015.
61. What is the investor's share in the profit of the associate for 2014?
A. 540,000 C. 648,000
B. 600,000 D. 660,000
A. 750,000 C. 810,000
B. 800,000 D. 860,000
63. What is the carrying amount of the investment in associate on December 31,2015?
A. 6,000,000 C. 6,850,000
B. 6,790,000 D. 6,900,000

On January 1,2014, Marissa Company acquired 25% of the outstanding shares of an investee at
a total cost of P7,000,000. At the time, the carrying amount of net assets of the investee totaled
P24,000,000. The investee owned equipment with 5-year remaining life and with a fair value of
P2,000,000 more than carrying amount. The investee owned land with a fair value of P1,000,000
more than carrying amount. The investee earned net income of P5,000,000 evenly during the
current year. The investee declared and paid a cash dividend of P3,000,000 to shareholders at
year-end. The fair value of the investment at year-end isP7,500,000.

64. What is the goodwill arising from the investment in associate?

A. 0 C. 500,000
B. 250,000 D. 750,000
65. What is the investment income for 2014?

A. 650,000 C. 1,150,000
B. 900,000 D. 1,250,000
A. 7,000,000 C. 7,500,000
B. 7,400,000 D. 8,150,000

On January 1,2014, Interlude Company acquired a 30% interest in an investee at a cost of
P3,200,000. The equity of the investee on the date of acquisition was P6,000,000, consisting of
P4,000,000 share capital and P2,000,000 retained earnings. All the identifiable assets and 1
liabilities of the investee were recorded at fair value except for an equipment with a fair value of
P3,000,000 greater than carrying amount. The remaining useful life of the equipment is 5 years.
On December 31, 2014, Interlude Company had inventory costing P2,000,000 on hand which had
been purchased from the investee. A profit of P600,000 had been made on the sale. During the
current year, the investee reported net income of P4,000,000 and paid dividend of PI ,500,000.
The equity of the investee on December 31,2014 showed the following:
Share capital 4,000,000
Retained earnings 3,500,000
Retained earnings appropriated 1,000,000
Revaluation surplus 2,000,000
The revaluation surplus arose from a revaluation of land made on December 31,2014. The retained
earnings appropriated arose from a transfer of unappropriated retained earnings to retained
earnings appropriated for contingencies.
67. What is the goodwill from the acquisition of the investment?
A. 0 C. 700,000
B. 500,000 D. 1,400,000
A. 750,000 C. 1,020,000
B. 840,000 D. 1,200,000
A. 3,200,000 C. 3,690,000
B. 3,590,000 D. 4,190,000


On January 1, 2014, Forensic Company acquired a 10% interest in an investee for P3,000,000.
The investment was accounted for using the cost method. On January 1, 2015, the entity acquired
a further 15% interest in the investee for P6,750,000. On such date, the carrying amount of the
net assets of the investee was P36,000,000 and the fair value of the 10% interest was P4,500,000.
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 P4,000,000. The equipment has a remaining life of
5 years. The investee reported net income of P8,000,000 for 2015 and paid dividend of P5,000,000
on December 31,2015.
70. What is the gain on remeasurement to equity to be recognized for 2015?

A. 0 C. 2,250,000
B. 1,500,000 D. 4,500,000
71. What is the goodwill arising from the acquisition on January 1,2015?
A. 350,000 C. 1,350,000
B. 1,250,000 D. 2,250,000
A. 11,250,000 C. 12,000,000
B. 11,800,000 D. 14,300,000
Questions 73 thru 75 are based on the following information. FA © 2014

Grant Company acquired 30% of South Company's voting share capital for P2,000,000 on January
1, 2014. Grant's 30% interest in South gave Grant the ability to exercise significant influence over
South's operating and financial policies.
During 2014, South earned P800,000 and paid dividends of P500,000. South reported earnings of
P1,000,000 for the six months ended June 30, 2015, and P2,000,000 for the year ended December
31, 2015.
On July 1, 2015, Grant sold half of the investment in South for P1,500,000 cash. On such date, the
investment is measured at fair value through other comprehensive income. South paid dividends
of P600,000 on October 1, 2015. The fair value of the retained investment is Pl.600,000 on July 1,
2015 and Pl,800,000 on December 31, 2015.
73. What amount should be recognized as investment income for 2014 as a result of the
investment?
A. 150,000 C. 500,000
B. 240,000 D. 800,000

74. In the December 31, 2014 statement of financial position, what is the carrying amount of the
investment?
A. 2,000,000 C. 2,240,000
B. 2,090,000 D. 2,300,000
75. What total amount should be included in profit or loss for 2015 from the investment?
A. 305,000 C. 710,000
B. 350,000 D. 910,000
Questions 76 thru 79 are based on the following information. FA © 2014

On January 1, 2014, Mountaineer Company acquired a 30% interest in an associate for
P5,000,000. The equity of the associate at the date of acquisition consisted of share capital of
P16,000,000 and retained earnings of P5,000,000. All the identifiable assets and liabilities of the
associate were recorded at fair value. The associate reported the following:
2014 2015
Profit before tax 3,000,000 4,000,000
Income tax expense 900,000 1,200,000
Dividend paid 2,500,000 . 2,000,000
76. What is the goodwill arising from the acquisition?

A. 0 C. 1,000,000
B. 500,000 D. 2,000,000

A. 0 C. 750,000
B. 630,000 D. 900,000

A. 0 C. 840,000
B. 600,000 D. 1,200,000
79. What is the carrying amount of the investment in associate on December 31, 2015?
A. 4,620,000 C. 5,120,000
B. 5,000,000 D. 6,470,000

Grant Company acquired 30% of South Company's voting share capital for P2,000,000 on January
1, 2014. Grant's 30% interest in South gave Grant the ability to exercise significant influence over
South's operating and financial policies. During 2014, South earned P800,000 and paid dividend

of P500,000. South reported earnings of P1,000,000 for the 6 months ended June 30,2015, and
P2,000,000 for the year ended December 31,2015.OnJulyl,2015, Grant sold half of the investment
in South for PI,500,000 cash. South paid dividend of P600,000 on October 1,2015.
The fair value of the retained investment is P1,600,000 on July 1, 2015 and PI,800,000 on
December 31, 2015. The retained investment is to be held as financial asset at fair value through
other comprehensive income.
80. Before income tax, what amount should be included in the 2014 income statement as a result
of the investment?
A. 150,000 C. 500,000
B. 240,000 D. 800,000
81. In the December 31,2014 statement of financial position, what is the carrying amount ofthe
investment in associate?
A. 2,000,000 C. 2,240,000
B. 2,090,000 D. 2,300,000
82. In the 2015 income statement, what amount should be reported as gain from the sale of
investment?
A. 245,000 C. 350,000
B. 305,000 D. 455,000
83. In the 2015 income statement, what amount should be reported as gain from remeasurement
ofthe retained investment?
A. 405,000 C. 710,000
B. 605,000 D. 910,000

Glorious Company acquired 40% interest in an associate, Alta Company, for P5,000,000 on
January 1,2014. At the acquisition date, there were no differences between fair value and carrying
amount of identifiable assets and liabilities.
Alta Company reported the following net income and dividend for 2014 and 2015:
2014 2015
Net income 2,000,000 3,000,000
Dividend paid 800,000 1,000,000
The following transactions occurred between Glorious Company and Alta Company:
* On January 1,2014, Alta Company sold an equipment costing P500,000 to Glorious
Company for P800,000. Glorious Company applied a 10% straight line depreciation.

* On July 1,2015, Alta Company sold an equipment for P900,000 to Glorious Company.
The carrying amount of the equipment is P500,000 at the time of sale. The remaining life
of the equipment is 5 years and Glorious Company used the straight line depreciation.
* On December 1,2015, Alta Company sold an inventory to Glorious Company for
P2,800,000.
The inventory had a cost of P2,000,000 and was still on hand on December 31,2015.
A. 680,000 C. 800,000
B. 692,000 D. 920,000
A. 720,000 C. 748,000
B. 732,000 D. 880,000
A. 5,000,000 C. 5,372,000
B. 5,360,000 D. 5,692,000
87. What is the carrying amount of the investment in associate on December 31, 2015?
A. 5,692,000 C. 5,720,000
B. 5,704,000 D. 6,120,000
Multiple Choice Problems: Cost Method & Equity Method

Dividend income
Cost & equity method
88. Day Company received dividends from share investments during the year ended December
31, 2014 as follows:
* A stock dividend of 4,000 shares from Parr Company on July 31, 2014 when the
market price of Parr's share was P20. Day owns less than 1% of Parr's share capital.
* A cash dividend of P150,000 from Lark Company in which Day owns a 25% interest. A
majority of Lark's directors are also directors of Day.
What amount of dividend revenue should be reported in 2014?
A. 0 C. 150,000
B. 80,000 D. 230,000 P1 © 2014
89. During the current year, Veto Company held 30,000 shares of Rock Company's 100,000
outstanding shares and 6,000 shares of Sand Company's 300,000 outstanding shares.
During the current year, Veto received P300,000 cash dividend from Rock, P15,000 cash
MCQ – Problems: Cost Method & Equity Method Page 47

dividend and 3% stock dividend from Sand. The closing price of Sand share is P150. What
amount should be reported as dividend revenue for the current year?
A. 15,000 C. 342,000
B. 315,000 D. 442,000 FA © 2014
90. Wray Company provided the following data for 2014:
• On September 1, Wray received a P500,000 cash dividend from Seco Company in
which Wray owns a 30% interest.
• On October 1, Wray received a P60,000 liquidating dividend from King Company. Wray
owns a 5% interest in King.
• Wray owns a 2% interest in Bow Company, which declared a P2,000,000 cash
dividend on November 15,2014 payable on January 15,2015.
What amount should be reported as dividend income for 2014?
A. 40,000 C. 560,000
B. 100,000 D. 600,000 P1 © 2014
91. Salvo Company received the following dividends from share investments during the current
year:
• A cash dividend of P80,000 from Rain Company in which Salvo Company owns a 2%
interest.
• A cash dividend of P450,000 from Water Company in which Salvo Company owns a
30% interest.
• A stock dividend of 5,000 shares from Soil Company was received at year-end when the
market value was P10 per share.
What amount of dividend revenue should be reported for the current year?
A. 80,000 C. 530,000
B. 130,000 D. 580,000 FA © 2014
92. Wry Company provided the following information pertaining to dividends from investments
for the current year:
• On September 1, Wry Company received a P500,000 cash dividend from Seco
Company in which Wry Company owns a 30% interest.
• On October 15, Wry Company received a P60,000 liquidating dividend from King
Company. Wry Company owns a 5% interest in King Company.
• Wry Company owns a 2% interest in Bow Company which declared a P2,000,000 cash
dividend on November 15 to shareholders of record on December 31 payable on January
31 of next year.
What amount should be reported as dividend income for the current year?
A. 40,000 C. 560,000
B. 100,000 D. 600,000 FA © 2014

Income from Investments

93. Solaire Company acquired 100,000 ordinary shares of Sun Company and 300,000 ordinary
shares of Star Company. Both Sun Company and Star Company had 1,000,000 ordinary
shares outstanding. Sun Company reported net income of P3,000,000 and paid dividends of
P2,000,000 during the current year. Star Company reported net income of P4,000,000 and
paid dividends of P1,000,000 during the current year. What total amount of income from the
investments should be reported for the current year?
A. 500,000 C. 1,400,000
B. 1,200,000 D. 1,500,000 FA © 2014

ANSWER KEY THEORY

1.D 26.C 51.B
2.A 27.B 52.D
3.B 28.B 53.C
4.C 29.A 54.A
5.B 30.D 55.A
6.D 31.D
7.B 32.D
8.B 33.B
9.C 34.D
10.D 35.C
11.D 36.B
12.B 37.B
13.A 38.B
14.B 39.B
15.C 40.D
16.A 41.B
17.A 42.C
18.D 43.D
19.D 44.A
20.D 45.C
21.D 46.C
22.D 47.C
23.C 48.D
24.D 49.A
25.D 50.C
Answer Key Page 50

ANSWER KEY PROBLEMS

1.C 26.C 51.D 76.B
2.C 27.B 52.D 77.B
3.B 28.D 53.B 78.C
4.C 29.A 54.C 79.C
5.D 30.C 55.B 80.B
6.B 31.C 56.B 81.B
7.D 32.B 57.A 82.B
8.C 33.C 58.B 83.A
9.C 34.D 59.B 84.B
10.C 35.B 60.D 85.C
11.A 36.B 61.A 86.C
12.A 37.B 62.C 87.C
13.C 38.C 63.C 88.A
14.C 39.C 64.B 89.A
15.C 40.B 65.C 90.A
16.B 41.D 66.B 91.A
17.B 42.C 67.B 92.A
18.B 43.C 68.B 93.C
19.A 44.D 69.D
20.B 45.C 70.B
21.C 46.B 71.B
22.B 47.D 72.B
23.C 48.C 73.B
24.C 49.B 74.B
25.D 50.B 75.C
Answer Key Page 51

ANSWER EXPLANATION
1. Answer is (C). Fair value of asset given (land) 3,000,000
2. Answer is (C).
Cash (10% x 3,000,000) 300,000
Dividend income 300,000
3. Answer is (B).
Original shares 10,000
Stock dividend 2,000
Total shares 12,000
Dividend income (12,000 x P15) 180,000
4. Answer is (C).
Dividend income on preference share (20,000/200,000 = 10% x 2,400,000) 240,000
5. Answer is (D).
Dividend income (15% x 15,000,000) 2,250,000
Under the cost and fair value method, dividends received are now totally recognized as
income. There is no longer a distinction between preacquisition and postacquisition retained
earnings.
6. Answer is (B).
Sale price (80,000 x 30) 2,400,000
Cost of investment sold (80,000 x 40) (3,200,000)
Loss on disposal of investment ( 800,000)
7. Answer is (D).
FIFO approach June 1 December 1
Original shares 20,000 30,000
Stock dividend - 20% 4,000 6,000
Total shares 24,000 36,000
Sale price (30,000x125) 3,750,000
Cost of shares sold:
From June 1 (24,000 shares) 2,000,000
From December 1 ( 6,000 shares)
(6,000/36,000 x 3,600,000) 600,000 2,600,000
Gain on sale 1,150,000
Answer Explanation & Solutions Page 52

Average approach
Sale price 3,750,000
Cost of shares sold (30,000 / 60,000 x 5,600,000) 2,800,000
Gain on sale 950,000
8. Answer is (C).
Theoretical value of right (125 - 100 / 4 + 1) 5.00
Initial cost of rights (50,000 x 5) 250,000
Cash paid for new shares (50,000 / 4 = 12,500 x 100) 1,250,000
Cost of new investment 1,500,000
9. Answer is (C).
Total cost of rights (60,000 x 5) 300,000
10,000 shares x 5 rights 50,000 rights
Cash paid (10,000 x 80 800,000
Cost of rights exercises (50,000 x 5) 250,000
Total cost of 900 shares 1,050,000
10. Answer is (C).

Shares Cost
Original investment 50,000 3,800,000
New investment acquired thru stock rights (50,000 x 80) 50,000 4,000,000
Total 100,000 7,800,00
FIFO Approach
Sale price (25,000 x 90) 2,250,000
Cost of shares sold (25,000/50,000 x 3,800,000) 1,900,000
Average Approach
Sales price 2,250,000 2,250,000
Cost of shares sold (25,000/100,000 x 7,800,000) 1,950,000
11. Answer is (A).

Initial measurement of stock rights (10,000 rights x 5) 50,000
Under PFRS 9, stock rights are initially measured at fair value.

12. Answer is (A).

Net sale price (450,000 - 10,000) 440,000
Initial cost of rights sold (30,000 x 10) (300,000)
Gain on sale of rights 140,000
13. Answer is (C).

Initial cost of rights (50,000x20) 1,000,000
Cash paid for new shares (25,000 x 90) 2,250.000
Total cost of new shares 3,250,000
14. Answer is (C).

Theoretical value of right (125 - 100 / 4 + 1) 5.00
Initial cost of rights (50,000 x 5) 250,000
Cash paid for new shares (50,000 / 4 = 12,500 x 100) 1,250,000
Cost of new investment 1,500,000
15. Answer is (C).

Shares Cost
Original investment 50,000 3,600,000
New investment acquired through stock rights (50,000 x 85) 50,000 4,250,000
Total 100,000 7,850,000
FIFO approach
Sale price (25,000x90) 2,250,000
Cost of shares sold (25,000 / 50,000 x 3,600,000) 1,800,000
Average approach
Cost of shares sold (25,000 /100,000 x 7,850,000) 1,962,500
16. Answer is (B).

Shares Cost
1/1/2012 (20,000x110) 20,000 2,200,000
4/1/2012 (5,000 x 100) 5,000 500,000
12/31/2012 (10% x 2,500,000) -- (250,000)
12/31/2013 (10% x 2,500,000) -- ( 250,000)
12/31/2014 (25,000x110) 25,000 2,750,000

6/30/2015 (25,000x92) (25,000) (2,300,000)

Investment account per book 25,000 2,650,000
17. Answer is (B).

Shares Cost
1/1/2012 (20,000x110) 20,000 2,200,000
4/1/2012 (5,000x100) 5,000 500,000
1/1/2014 (50% x 25,000) 12,500 .
Balance 37,500 2,700,000
1/1/2014 (12,500/37,500 x 2,700,000) (12,500) (900,000)
Balance 25,000 1,800,000
1231/2014 (2 for split) 25,000 .
Balance 50,000 1,800,000
4/30/2015 (1/2x1,800,000) (25,000) (900,000)
Balance, December 31, 2015 25,000 900,000
18. Answer is (B).

Purchase price (squeeze) 2,600,000
Net income (25% x 4,200,000) 1,050,000
Cash dividend (25% x 1,800,000) (450,000)
Carrying amount, 12/31 3,200,000
19. Answer is (A).

Acquisition cost (squeeze) 1,720,000
Share in net income (25% x 1,200,000) 300,000
Share in cash dividend (25% x 480,000) (120,000)
Carrying amount – 12/31 1,900,000
20. Answer is (B).

Acquisition cost, July 1 (SQUEEZE) 1,870,000
Add: Share in net income from July 1 to December 31
(1,200,000 x 6/12 x 25%) 150,000
Total 2,020,000
Less: Share in cash dividend (25% x 480,000) 120,000
Investment balance, December 31 1,900,000
The acquisition cost is "squeezed" by working back from the investment balance on
December 31,2014.
Moreover, the investor shares only in the net income of the investee from the date of
acquisition, July 1,2014 to December 31, 2014. In the absence of any statement to the

contrary, the net income is earned evenly during the year. However, the investor shares in
full in the dividends paid on December 31, 2014.
21. Answer is (C). (100% x 600,000) 600,000

Only the dividend on preference share capital is recognized as dividend revenue. The equity
method is not applicable to investment in preference shares regardless of the interest.
22. Answer is (B).

Original cost 7,000,000
Cash advances 2,000,000
Total 9,000,000
Net loss from 2011 to 2013 (40% x 20,000,000) (8,000,000)
Carrying amount of investment -12/31/2013 1,000,000
Share in net loss of 2014 (40% x 4,000,000) 1,600,000
Loss to be reported in 2014 should be equal to
the investment balance only 1,000,000
PAS 28, paragraph 38, provides that if under equity method an investor's share of losses of
an associate equals or exceeds the carrying amount of an investment, the investor
discontinues recognizing its share of further losses. The investment is reported at NIL or
zero value.
23. Answer is (C).

Interest (30,000/ 100,000) 30%
Investment income (5,000,000 x 6/12 x 30%) 750,000
24. Answer is (C).

Interest acquired (30,000/100,000) 30%
Share in net income from July 1 to December 31, 2014
(1,200,000 x 6 / 12 x 30%) 180,000
25. Answer is (D). Investment income 20% x 6,000,000 1,200,000
26. Answer is (C).

Under the equity method, the investor recognizes as income its share of the investee's
earnings. Cash dividends are not recorded as income but a reduction of the investment
account.
27. Answer is (B). Investment income (20% x 1,600,000) 320,000

28. Answer is (D). Investment income in 2014 (30% x 6,500,000) 1,950,000
29. Answer is (A).

Net income 5,000,000
Less: Preference dividend (10% x 2,000,000) 200,000
Net income to ordinary shares 4,800,000
Investment income (50% x 4,800,000) 2,400,000
30. Answer is (C). When an investee has outstanding cumulative preference share capital, an
investor should compute its share of earnings after deducting the investee's preference
dividends, whether or not such dividends are declared.
Net income 3,000,000
Preference dividend (10% x 5,000,000) (500,000)
Net income to ordinary shares 2,500,000
Share in net income - ordinary shares (80% x 2,500,000) 2,000,000
31. Answer is (C).
Acquisition cost 11,200,000
Net assets acquired (35% x 32,400,000) 11,340,000
Excess of carrying amount over cost (140,000)
Equipment - carrying amount higher than market value
(1,400,000 x 35%) (490,000)
Building - market value higher than carrying amount
(1,000,000 x 35%) 350,000
(140,000)
Share in net income (35% x 3,200,000) 1,120,000
Amortization of excess:
Overdcprcciation of equipment (490,000/5) 98,000
Underdepreciation of building (350,000/10) (35,000)
Investment income 1,183,000
The amortization of the equipment is added because the equipment is overvalued. The
amortization of the building is deducted because the building is undervalued.
32. Answer is (B).

Excess of cost 1,400,000
Excess attributable to equipment (40% x 2,000,000) 800,000
Excess attributable to building (40% x 1,500,000) 600,000
1,400,000


Equipment (800,000/4) ( 200,000)
Building (600,000/12) (50,000)
33. Answer is (C).

Net assets acquired (40% x 9,000,000) (3,600,000)
Excess of cost over carrying amount 400,000
The excess of cost is identified as follows:

Understatement of plant (40% x 900,000) 360,000
Understatement of inventory (40% x 100,000) 40,000
Total excess of cost 400,000
Share in net-income (40% x 1,200,000) 480,000

Less: Amortization of excess of cost:
Depreciation of plant (360,000/18) 20,000
Inventory (totally sold) 40,000 60,000
Investment income 420,000
34. Answer is (D).

Acquisition cost (4,000,000 + 500,000) 4,500,000
Carrying amount of net assets acquired (20% x 13,000,000) 2,600,000
Excess attributable to building (20% x 2,000,000) 400,000
Excess attributable to goodwill - not amortized 1,500,000
Note that the broker fee or transaction cost of P500,000 is capitalized as cost of the
investment in associate.
Amortization of excess of cost: Attributable to building (400,000 /10) ( 40,000)
35. Answer is (B).

Cost 3,500,000
Carrying amount of interest acquired (40% x 7,000,000) 2,800,000
Excess applicable to equipment (40% x 1,500,000) (600,000)

Excess applicable to inventory (40% x 500,000) ( 200,000)

Excess of fair value over cost ( 100,000)
PAS 28, paragraph 32, provides that any excess of the net fair value of the associate's
identifiable net assets is included in investment income.
Excess of fair value over cost 100,000
Excess of cost over carrying amount:
Equipment (600,000/4) (150,000)
Inventory - all sold ( 200,000)
36. Answer is (B).

Cost 4,000,000
Less: Net assets acquired (40% x 8,000,000) 3,200,000
Excess of cost or goodwill 800,000
Share in net income from April 1 to Dec. 31 (1,000,000 x 9/12 x 40%) 300,000
37. Answer is (B).

Share in net income from April 1 to Dec. 31, 2014
(5,000,000 x 9 / 12 x 40%) 1,500,000

Less: Carrying amount of net assets acquired (40% x 20,000,000) 8,000,000
Goodwill - not amortized 2,000,000
38. Answer is (B). Investment in Lax Company = 3,000,000
39. Answer is (C).

Fair value of 10% interest 900,000
Cost on December 31 (20,000/100,000 shares = 20%) 1,500,000
Carrying amount - December 31, 2014 2,400,000
If the investment in associate is achieved in stages, the existing interest is remeasured at fair
value with any change in fair value included in profit or loss. The fair value of the existing
interest plus the cost of the new interest equals the total cost of investment on the initial
application of the equity method starting 2015.

40. Answer is (B).

Fair value of 10% interest 1,400,000
Acquisition cost – 12/31 3,000,000
Total cost 4,400,000
41. Answer is (D).

Cost of 20% new interest 10,000,000
Total cost of investment - January 1, 2015 16,000,000
Share in net income for 2015 (30% x 6,500,000) 1,950,000
Share in cash dividend for 2015 (30% x 3,000,000) ( 900,000)
Note that there is no excess of cost over carrying amount because the fair value of the net
assets of the investee equaled carrying amount.
42. Answer is (A).

Investment in associate (30% x 6,000,000) 1,800,000
Another approach
Postacquisition profits (3,000,000-2,000,000) x 30% 300,000
Excess net fair value 500,000
Investment in associate 1,800,000
Excess net fair value - included in investment income 500,000
The investment in associate is not impaired because the carrying amount of P1,800,000 is
lower than the recoverable amount of P2,100,000 (30% x 7,000,000).
43. Answer is (C).

PAS 28, paragraph 5, provides that if the investor holds, directly or indirectly through
subsidiaries, 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.
Well's position as Rea's largest single shareholder and the presence of Well's officers as a
majority of Rea's board of directors demonstrate that Well does have significant influence
despite the 10% ownership. Accordingly, the equity method is used.
Acquisition, January 1 4,000,000
Add: Share in net income (10% x 5,000,000) 500,000
Total 4,500,000

Less: Share in cash dividends (10% x 1,500,000) 150,000

Carrying amount of investment, December 31 4,350,000
44. Answer is (D).

Excess of cost over carrying amount 1,000,000
Less: Amount attributable to undervaluation of land (30% x 2,000,000) 600,000
Goodwill - not amortized 400,000
Acquisition cost, January 1 2,500,000

Carrying amount of investment 2,800,000
The excess of cost attributable to the land is not amortized because the land is
nondepreciable.
45. Answer is (C).

Add: Share in net income (20% x 7,000,000) 1,400,000
Total 7,400,000
Less: Share in cash dividend (20% x 4,000,000) 800,000
Carrying amount 6,600,000
PAS 28, paragraph 5, provides that if an investor holds, directly or indirectly through
subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor
does have significant influence, unless it can be clearly demonstrated that this is not the case.
The equity method of accounting is used if the investment is 20% or more of the voting power
of the investee.
Under the equity method, the investment account is increased by the investor's share of the
investee's earnings and decreased by the investor's share ofthe investee's losses. Dividend
received from the investee reduces the carrying amount ofthe investment
46. Answer is (B).

Acquisition cost - January 1 18,000,000
Add: Share in net income (25% x 9,600,000) 2,400,000
Total 20,400,000
Less: Cash dividend received (50,000 x P35) 1,750.000
Carrying amount of investment - December 31 18,650.000

47. Answer is (D).

Less: Amount attributable to undervaluation of land (30% x 2,000,000) 600,000
Acquisition cost, January 1 2,500,000

The excess of cost attributable to the land is not amortized because the land is
nondepreciable.
48. Answer is (C).

Attributable to depreciable assets (30% x 2,600,000) 780,000
Attributable to goodwill 840,000

Share in dividends (30% x 400,000) (120,000)
Amortization (780,000/4) (195,000)
Investment balance – 12/31 5,925,000
49. Answer is (B).

Excess of cost 560,000
Attributable to equipment (40% x 800,000) 320,000

Attributable to building (40% x 600,000) 240,000
560,000

Net income (40% x 1,600,000) 640,000
Cash dividend (40% x 1,000,000) (400,000)

Equipment (320,000 / 4) (80,000)

Building (240,000 /12) (20,000
Carrying amount of investment – 12/31/2014 2,700,000
50. Answer is (B).

Acquisition cost (20,000 x 120) 2,400,000

Share in net income:
2014 (25% x 3,600,000) 900,000
2015 (25% x 3,900,000) 975,000
Share in cash dividend:
2014 (20,000 x 16) (320,000)
2015 (20,000 x 20) (400,000)
2014 (400,000/20) (20,000)
2015 (20,000)
Carrying amount of investment - December 31, 2015 3,515,000
51. Answer is (D).

Share in cash dividend (20% x 600,000) (120,000)
Amortization of excess (1,000,000/10) (100,000)
Carrying amount 7,140,000
52. Answer is (D).

Original cost 8,000,000
Share in cash dividends (20% x 400,000) (80,000)
Amortization of excess of cost (2,000,000 / 10) (200,000)
Carrying amount of investment - December 31,2014 8,080,000

Less: Carrying amount of interest acquired 6,000,000
The excess of cost over the carrying amount of the underlying equity acquired which is

attributable to undervaluation of a depreciable asset should be amortized over the remaining

useful life of the depreciable asset. Such amortization is recorded by debiting investment
income and crediting investment in associate.
53. Answer is (B).

Carrying amount of net assets acquired 4,000,000
Excess of cost applicable to patent 2,000,000

Share in net income (5,000,000 x 15%) 750,000
Share in cash dividend (3,000,000 x 15%) (450,000)
Amortization of patent (2,000,000 / 10) (200,000)
Interest acquired (30,000 / 200,000) 15%
The equity method is used even if the investment is less than 20% because the officers of
the investor entity are a majority of the board of the investee entity indicating significant
influence.
54. Answer is (C).

Excess attributable to depreciable assets (30% x 2,500,000) 750,000
Excess attributable to goodwill 650,000

Share in cash dividend (30% x 1,000,000) (300,000)
Amortization of depreciable assets (750,000 / 5) (150,000)
55. Answer is (B).

Attributable to equipment (40% x 800,000) 320,000
Attributable to building (40% x 600,000) 240,000
560,000


Net income (40% x 1,600,000) 640,000
Cash dividend (40% x 1,000,000) ( 400,000)
Equipment (320,000/4 ) (80,000)
Building (240,000/12) ( 20,000)
56. Answer is (B).

Net assets acquired (25% x 3,000,000) 750,000
Excess attributable to inventory (25% x 100,000) 25,000

Excess attributable to equipment (25% x 500,000) 125,000
Excess attributable to goodwill (25% x 400,000) 100,000
250,000
Share in net income (25% x 700,000) 175,000
Inventory (25,000)
Equipment (125,000/5) (25,000)
Cash dividend (25,000x3) ( 75,000)
57. Answer is (A).

Share in net loss (40% x 4,000,000) (1,600,000)
Share in cash dividend (40% x 2,500,000) (1,000,000)
58. Answer is (B).

Acquisition cost (30,000 x 120) 3,600,000
Deficit on January 1, 2014 (30% x 500,000) (150,000)
Carrying amount of investment - January 1, 2014 3,450,000
Net income for 2014 (30% x 700,000) 210,000
Net income for 2015 (30% x 800,000) 240,000
Cash dividend on 12/31/2015 (30% x 400,000) ( 120,000)

Another approach
Share in retained earnings - December 31, 2015 (30% x 600,000) 180,000
59. Answer is (B).

Acquisition cost 400,000
Share in profit – 2014 (30% x 80,000) 24,000
Share in loss – 2015 (30% x 32,000) (9,600)
Share in dividend – 2015 (30% x 10,000) (3,000)
Carrying amount – 12/31/2015 411,400
60. Answer is (D).

Net income (40% x 700,000) 280,000
Cash dividend (40% x 200,000) (80,000)
Revaluation surplus (40% x 1,300,000) 520,000
Carrying amount of investment - December 31,2014 2,420,000
There is no need to adjust for the difference in depreciation method. If both entities have
chosen a method that best reflects the flow of benefits as the assets are consumed, then
there is no policy difference.
61. Answer is (A).

Net income for 2014 3,000,000
Unrealized profit on 12/31/2014 inventory of Haven (900,000-600,000) ( 300,000)
Adjusted net income 2,700,000
Investor's share (20% x 2,700,000) 540,000
Another approach
Share in unrealized profit (20% x 300,000) ( 60,000)
Investor's share 540,000
62. Answer is (C).

Realized profit on 12/31/2014 inventory of Haven Company 300,000

Unrealized profit on 12/31/2015 inventory of Haven

Company (750,000 - 500,000) ( 250,000)
63. Answer is (C).

Share in profit of associate - 2014 540,000
Share in cash dividend - 2014 (20% x 1,000,000) ( 200,000)
Share in cash dividend - 2015 (20% x 1,500,000) (300,000)
64. Answer is (B).

Carrying amount of net assets acquired (25% x 24,000,000) 6,000,000
Attributable to equipment (25% x 2,000,000) ( 500,000)
Attributable to land (25% x 1,000,000) ( 250,000)
Goodwill 250,000
65. Answer is (C).

Amortization of excess attributable to equipment (500,000/5) ( 100,000)
The excess attributable to land and the excess attributable to goodwill are not amortized.
66. Answer is (B).

Share in net income 1,250,000
Share in cash dividend ( 750,000)
Amortization of excess attributable to equipment (500,000/5) (100,000)
There is no impairment loss on the investment in associate because the carrying amount of
P7,400,000 is lower than the fair value of P7,500,000 at year-end.
67. Answer is (B).

Net assets acquired (30% x 6,000,000) (1,800,000)


Excess attributable to equipment (30% x 3,000,000) ( 900,000)
Goodwill 500,000
68. Answer is (B).

Unrealized profit on 12/31/2014 inventory ( 600,000)
Investor's share (30% x 3,400,000) 1,020,000

Depreciation of equipment (900,000 / 5) ( 180,000)
69. Answer is (D).

Cash dividend (30% x 1,500,000) (450,000)
Revaluation surplus (30% x 2,000,000) 600,000
70. Answer is (B).

Carrying amount of 10% interest 3,000,000
Gain on remeasurement to equity 1,500,000
If the investment is achieved in stages, the existing interest is remeasured at fair value with
any change in fair value included in profit or loss.
71. Answer is (B).

Cost of additional 15% interest 6,750,000
Total cost of investment 11,250,000
Fair value of net assets acquired (25% x 36,000,000) 9,000,000
Excess attributable to equipment (25% x 4,000,000) 1,000,000
Goodwill 1,250,000
The fair value of the existing interest plus the cost of the new interest equals the total cost of
the investment on the initial application of the equity method on January 1,2015.
72. Answer is (B).

Total cost - January 1, 2015 11,250,000

Share in cash dividend (25% x 5,000,000) ( 1,250,000
Amortization of excess ( 1,000,000 / 5) ( 200,000)
The excess of cost over carrying amount attributable to goodwill is not amortized.
73. Answer is (B).

Share in 2014 net income (30% x 800,000) 240,000
74. Answer is (B).

Acquisition cost, January 1,2014 2,000,000
Add: Share in 2014 net income 240,000
Total 2,240,000
Less: Share in 2014 dividend (30% x 500,000) 150,000
Carrying amount of investment, December 31,2014 2,090,000
75. Answer is (C).

Carrying amount – 12/31/2014 2,090,000
Share in net income up to 6/30/2015 (30% x 1,000,000) 300,000
Carrying amount – 6/30/2015 2,390,000
Sales price 1,500,000

Carrying amount sold (2,390,000 x ½) 1,195,000
Fair value of retained investment 1,600,000

Carrying amount of retained investment 1,195,000
Gain from remeasurement to fair value 405,000
Total profit and loss (305,000 + 405,000) 710,000
76. Answer is (B). (5,000,000 – 4,500,000) = 500,000
77. Answer is (B).

Investment income (3,000,000 – 900,000) x 30% 630,000
78. Answer is (C).

Investment income (4,000,000 – 1,200,000) x 30% 840,000

79. Answer is (C).

Investment income for 2014 (30% x 2,500,000) 630,000
Cash dividend for 2015 (30% x 2,800,000) (750,000)
Investment income for 2015 (30% x 2,800,000) 840,000
Cash dividend for 2015 (30% x 2,000,000) (600,000)
Carrying amount – 12/31/2015 5,120,000
80. Answer is (B).

Share in 2014 net income (30% x 800,000) 240,000
81. Answer is (B).

Acquisition cost, January 1,2014 2,000,000
Add: Share in 2014 net income 240,000
Total 2,240,000
Less: Share in 2014 dividend (30% x 500,000) 150,000
Carrying amount of investment, December 31,2014 2,090,000
82. Answer is (B).

Carrying amount of investment, December 31, 2014 2,090,000
Add: Share in net income from January 1
to June 30, 2015 (30% x 1,000,000) 300,000
Carrying amount of investment, June 30,2015 2,390,000
Cost of investment sold (2,390,000/2) (1,195,000)
Gain from sale of investment 305,000
83. Answer is (A).

Fair value - July 1, 2015 1,600,000
Carrying amount of retained investment 1,195,000
Gain from remeasurement 405,000
Fair value - December 31,2015 1,800,000

Fair value-July 1,2015 1,600,000
Unrealized gain on financial asset 200,000
The unrealized gain of P200,000 is reported as other comprehensive income in the 2014
statement of comprehensive income because the retained investment is accounted for as
financial asset at fair value through other comprehensive income.

84. Answer is (B).

Unrealized profit on sale of equipment sold on
1/1/2014 (800,000-500,000) ( 300,000)
Realized profit on equipment sold on 1/1/2014 (10% x 300,000) 30,000
85. Answer is (C).

Realized profit on equipment sold on 1/1/2014 (10% x 300,000) 30,000
Unrealized profit on sale of equipment on 7/1/2015 (900,000-500,000) ( 400,000)
Realized profit on equipment sold on 7/1/2015 (400,000/5x1/2) 40,000
Unrealized profit on ending inventory on 12/31/2015
(2,800,000-2,000,000) (800,000)
86. Answer is (C).

Cash dividend-2014 (40% x 800,000) (320,000)
87. Answer is (C).

Carrying amount - January 1,2015 5,372,000
Cash dividend - 2015 (40% r. 1,000,000) ( 400,000)
88. Answer is (A).

The stock dividend from Parr Company is not an income. The cash dividend from Lark
Company is not also an income because the interest is 25% and therefore the equity method
is used.
89. Answer is (A). Cash dividend from Rock = P15,000
90. Answer is (A).

Cash dividend from Bow Company (2% x 2,000,000) 40,000

The cash dividend from Seco and the liquidating dividend from King are not income but
reduction of the investment account.
91. Answer is (A). Cash dividend of P80,000 from Rain Company.
92. Answer is (A). Dividend income (2,000,000 x 2%) 40,000
93. Answer is (C).

Sun P2,000,000 x 10% 200,000
Star P4,000,000 x 30% 1,200,000
Total income from investments 1,400,000

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FINANCIAL ACCOUNTING

THEORY & PRACTICE

INVESTMENT IN EQUITY SECURITIES

2. Describe and discuss the accounting treatment of the following:

Essay Questions Page 1

Essay Questions Page 2

6. Discuss share split.

Share split may be split up or split down.

The ownership of stock right is evidenced by an instrument or a certificate known as share

Essay Questions Page 3

1. Stock rights are accounted for separately.

9. Explain the measurement of stock rights.

11. Which approach is followed in accounting for stock rights?

Essay Questions Page 4

12. What is the meaning of "theoretical" or "parity" value of stock right?

2. When share is selling ex-right:

Appendix A of PFRS 10 on consolidated financial statements simply defines a subsidiary as

Essay Questions Page 5

15. When does an investor have significant influence?

The assessment of significant influence is a matter of judgment. However, PAS 28,

Essay Questions Page 6

17. When does an investor lose significant influence?

18. Explain the equity method of accounting.

a. Undervaluation of the investee's depreciable assets

Essay Questions Page 7

If the excess is attributable to undervaluation of depreciable assets, it is amortized over the

22. Explain the impairment of an investment in associate.

Essay Questions Page 8

Essay Questions Page 9

"Upstream" transactions are sales of assets from an associate to the investor.

26. When shall an investor discontinue the equity method?

Essay Questions Page 10

Essay Questions Page 11

The investor and the investee are independent of the other.

31. Explain investment in associate achieved in stages.

Essay Questions Page 12

This scenario or phenomenon is known as "investment in associate achieved in stages."

32. Explain the accounting for investment in associate achieved in stages.

Essay Questions Page 13

Multiple Choice - Theory

2. Dividends are recognized on the

5. Shares received in lieu of cash dividend are recorded as

6. Cash received in lieu of stock dividends is accounted for as

MCQ - Theory Page 14

7. Property dividends are recorded

8. Liquidating dividends are credited to

9. What is the effect of stock dividend of the same class?

10. When stock dividends of different class are received

11. Cash received in lieu of stock dividends is accounted for as

12. What is the effect of share split up?

MCQ - Theory Page 15

MCQ - Theory Page 16

19. Which of the following statements is true concerning significant influence?

MCQ - Theory Page 17

MCQ - Theory Page 18

29. Goodwill arising from an investment in associate is

MCQ - Theory Page 19

MCQ - Theory Page 20

MCQ - Theory Page 21

MCQ - Theory Page 22

48. How is the impairment test carried out for an associate?

MCQ - Theory Page 23

A. Overstate, overstate, overstate C. Understate, overstate, understate