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Investment in Associate Theories
Investment in Associate Theories
THEORIES
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the investment.
13. How is the impairment test carried out for an investment in associate?
a. The goodwill is separated from the rest of the investment and is impairment tested
individually.
b. The entire carrying amount of the investment is tested for impairment by comparing
the recoverable amount with carrying amount.
c. The carrying amount of the investment shall be compared with the market value.
d. The recoverable amounts of all investments in associates shall be assessed together to
determine whether there has been an impairment on all investments.
14. 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. The associate shall prepare financial statements for the use of the investor at the same
date as that of the investor.
b. The financial statements of the associate prepared up to a different date shall be used
as normal.
c. Any major transactions between the date of the financial statements of the investor
and that of the associate shall be accounted for.
d. As long as gap is not greater than three months, there is no problem.
15. 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. Dividend income
b. A deduction from the investor’s share of the investee’s profit
c. A deduction from the investment account
d. A deduction from the shareholders’ equity account, dividends to shareholder.
20. 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 asset in excess of the
investee’s net asset carrying amount. The investor’s amortization of the excess
a. Other expense
b. Depreciation expense
c. Equity in earnings of investee
d. Amortization of goodwill
22. 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 excess of fair value over carrying
amount affected the investor’s reported equity in earnings of the investee for the current
year?
a. None of the receivable should be reported, but the entire receivable should be offset
against investee’s payable to the investor.
b. Seventy percent of the receivable should be separately reported, with the balance
offset against 30% of investee’s payable to the investor.
c. The total receivable should be disclosed separately.
d. The total receivable should be included as part of the investment in associate, without
separate disclosure
24. 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?
1. On July 1, 2018, Denver Company purchased 30,000 shares of Eagle Company’s 100,000
outstanding ordinary shares for P200 per share. On December 15, 2018, the investee paid
P400,000 in cash dividend to the ordinary shareholders.
The investee’s net income for the year ended December 31, 2018 was P1,200,000, earned evenly
throughout the year.
Solution 1 – Answer b
Share in net income from July 1 to December 31, 2018
(1,200,000 x 6/12 x 30%) 180,000
2. On April 1, 2018, Ben Company purchased 40% of the outstanding ordinary shares 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 2018 is P5,000,000
What is the maximum amount which could be included in 2018 income before tax to reflect the
“equity in net income of investee”?
a. 1,400,000
b. 1,500,000
c. 2,000,000
d. 1,850,000
Solution 2 – Answer b
Share in net income from April 1 to December 31, 2018
(5,000,000 x 9/12 x 40%) 1,500,000
3. What is the excess of cost over the carrying amount of net assets acquired?
a. 5,000,000
b. 1,400,000
c. 3,000,000
d. 0
Solution 3 – Answer b
Acquisition Cost 6,400,000
Net assets acquired (40% x 12,500,000) (5,000,000)
Excess of cost 1,400,000
4. What amount should be reported as investment income for the current year?
a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 1,750,000
Solution 4 – Answer d
Share in net income (40% x 5,000,000) 2,000,000
Amortization of excess:
Equipment (800,000 /4) (200,000)
Building (600,000 /12) (50,000)
Investment income 1,750,000
5. What is the carrying amount of the investment in associate at year end?
a. 6,400,000
b. 8,150,000
c. 7,150,000
d. 7,400,000
Solution 5 – Answer c
Acquisition cost 6,400,000
Investment income 1,750,000
Cash dividend received (40% x 2,500,000) (1,000,000)
Carrying amount of investment in associate 7,150,000
6. On January 1, 2015, 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 P17,500,000. Hall
Company reported the following net losses:
2015 5,000,000
2016 7,000,000
2017 8,000,000
2018 4,000,000
On January 1, 2017, Bart Company made cash advances of P2,000,000 to Hall Company. On
December 31, 2018, it is not expected that Bart Company will provide further financial support
for Hall Company.
Solution 6 – Answer c
Original cost 7,000,000
Cash advances 2,000,000
Total investment 9,000,000
Net loss from 2015 to 2017 (40% x 20,000,000) (8,000,000)
Carrying amount of investment – December 31, 2017 1,000,000
Alpha Company acquired 20,000 shares of Beta Company on January 1, 2018 at P120 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, 2018
is attributable to a broadcast license which is an intangible asset.
Beta Company recorded earnings of P3,600,000 and P3,900,000 for 2018 and 2019, respectively,
and paid per share of P16 in 2018 and P20 in 2019.
Alpha Company has a 20-year straight line amortization policy for the broadcast license.
Solution 7 – Answer b
8. What is the carrying amount of the investment in associate on December 31, 2018?
a. 2,980,000
b. 2,960,000
c. 3,300,000
d. 2,060,000
Solution 8 – Answer b
Solution 9 – Answer c
10. What is the carrying amount of the investment in associate on December 31, 2018?
a. 3,515,000
b. 2,400,000
c. 3,555,000
d. 4,275,000
Solution 10 – Answer a
Blue Company purchased 10% of Tot’s Company’s 100,000 outstanding shares on January 1,
2018 for P500,000. On December 31, 2018, Blue Company purchased an additional 20,000
shares of Tot’s Company for P1,500,000. Tot Company had not issued any additional shares
during 2018. The investee reported earnings of P3,000,000 for 2018. The fair value of the 10%
interest is P900,000 on December 31, 2018.
11. What is the carrying amount of the investment in associate on December 31, 2018?
a. 2,300,000
b. 2,000,000
c. 2,400,000
d. 2,900,000
Solution 11 – Answer c
Solution 12 – Answer b
13. At the beginning of current year, Well Company purchased 10% of Rea Company’s
outstanding shares for P4, 000,000. Well Company is the largest single shareholder in Rea and
Well’s officers are a majority of Rea’s board of directors. The investee reported net income of
P5, 000,000 for the current year and paid cash dividend of P1,500,000.
Solution 13 – Answer b
At the beginning of current year, Anne Company purchased 20% of the outstanding ordinary
shares of Dune Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000
is payable with 12% annual interest at every year-end.
Dune Company’s shareholders’ equity at the beginning of current year was P13,000,000.
Anne Company 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 Company’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.
During the current year, Dune Company reported net income of P5,000,000 and paid cash
dividend 0f P2,000,000.
Solution 14 – Answer c
15. What amount of income should be reported for the current year as a result of the investment?
a. 810,000
b. 620,000
c. 960,000
d. 885,000
Solution 15 – Answer c
Solution 16 – Answer c
17. Moss Company owned 20% of Dubro Company’s preference share capital and 50% of the
ordinary share capital. The investee reported net income P600,000 for the current year.
Solution 17 – Answer d
18. At the beginning of current year, 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. The
investee reported net loss of P4,000,000 and paid cash dividend of P2,500,000.
On January 1, 2018, 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, 2019, 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 P36,000,00 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 2019 and paid cash
dividend of P5,000,000 on December 31, 2019.
19. What amount of gain on measurement to equity should be recognized for 2019?
a. 1,500,000
b. 4,500,000
c. 2,250,000
d. 0
Solution 19 – Answer a
20. What is the goodwill arising from the acquisition on January 1, 2019?
a. 2,250,000
b. 1,250,000
c. 1,350,000
d. 350,000
Solution 20 – Answer b
Solution 21 – Answer b
22. Seiko Company had 100,000 ordinary shares outstanding. Globe Company acquired 30,000
shares of Seiko for P120 per share in 2016 representing 30% interest.
What is the carrying amount of the investment in associate on December 31, 2019?
a. 3,600,000
b. 3,930,000
c. 3,780,000
d. 4,080,000
Solution 22 – Answer c
At the beginning of the current year, Sage Company bought 40% of Eve Company’s outstanding
ordinary shares 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 totaled
P100,000, respectively. The plant has an 18-year life. All inventory was sold during the current
year. During the current year, the investee reported net income of P1,200,000 and paid a
P200,000 cash dividend.
23. What is the excess of cost over the carrying amount of net assets acquired?
a. 360,000
b. 400,000
c. 500,000
d. 0
Solution 23 – Answer b
24. What amount should be reported as investment income for the current year?
a. 480,000
b. 420,000
c. 360,000
d. 320,000
Solution 24 – Answer b