Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

INVESTMENT IN ASSOCIATE
Practical Accounting 1 Pre-review Program

PROBLEM 1: On January 1, 2013, Euro Company acquired 100,000 in 2012. Taka reported net income and paid dividends during 2011 and
newly issued shares of Rand, Inc. at P100 per share. Before the 2012 as follows:
acquisition, Rand had 200,000 ordinary shares outstanding. At the end 2011 2012
of 2013, Rand reported net income of P1,500,000 and other Net income P 40,000,000 P 50,000,000
comprehensive income of P750,000. In addition, Rand paid cash Cash dividend paid 15,000,000 20,000,000
dividends of P1.50 to its ordinary shareholders. 6. What amount would Florin report as investment income in
1. How much should this investment be reported by Euro on 2011?
December 31, 2013? 7. What is the balance of the investment in associate account as of
December 31, 2012?
PROBLEM 2: On April 1, 2013, Pound Corporation purchased 15,000 8. Assume instead that the purchase price was P15,000,000, what
ordinary shares of Zloty Company at P180 per share. At the time of amount would Florin report as investment income in 2011?
purchase, Zloty had 100,000 ordinary shares outstanding. After the
purchase, Pound had a significant interchange of managerial personnel PROBLEM 7: At the beginning of the current year, Ruble Corporation
with and took active participation in the policy making process of Zloty. purchased 20% of the outstanding ordinary shares of Won Company for
The first quarter statement ending March 31, 2013 of Zloty recorded P5,000,000. The book value of the net assets acquired was P4,000,000.
profit of P480,000. For the year ended December 31, 2013, Zloty The excess of cost over book value was attributable to an equipment
reported profit of P2,400,000. Zloty paid Pound dividends of P60,000 which had a fair value greater than its carrying amount by P2,000,000.
on June 1, 2013 and again P60,000 on December 31, 2013. The shares 9. What is the total goodwill of Won Company based on the
of Zloty are selling at P190 per share on December 31, 2013. purchase?
2. How much should this investment be reported by Pound on
December 31, 2013? PROBLEM 8: Franc Company owns 20% of the ordinary shares of
Rupee, Inc. The records of Franc as of December 31, 2011 show the
PROBLEM 3: On July 1, 2013, Dinar Corporation paid P30,000,000 following information before any necessary adjustments:
for a 25% interest, representing 125,000 ordinary shares, in the net Investment in associate P 200,000
assets of Kwanza Company which had a net book value of Trade accounts receivable – Rupee 300,000
P120,000,000 on the date of purchase. During the year, Kwanza Investment in preference shares – Rupee 100,000
declared dividends on which Dinar received P250,000. At the end of Advances to associate – Rupee 50,000
2013, Kwanza reported net income of P9,600,000 for the year ended Loans receivable – Rupee, secured 120,000
December 31, 2013 which was evenly earned during the year. The Rupee reported the following net income (loss) from 2011 up to 2014:
shares of Kwanza, Inc. were selling at P250 per share on December 31, 2011 P (1,400,000) 2013 P (100,000)
2013. 2012 (500,000) 2014 1,200,000
Dinar is entitled to appoint two directors to the board which consists of 10. The amount to be reported as investment in associate as of
eight members. The remaining of the voting rights are held by two other December 31, 2011 is:
companies, each of which is entitled to appoint three directors. The 11. The amount of loss to be recognized in 2012 in relation the
board makes decisions on the basis of simple majority. Because board investment in associate is:
meetings are often held at very short notices, Dinar does not always 12. The amount to be reported as investment in associate as of
have representations on the board. Often, the suggestions of the December 31, 2014 is:
representative of Dinar are ignored and the decisions of the board seem
to take little notice of any representations made by the director from PROBLEM 9: Afghani Company reported the following capital
Dinar Corporation. accounts on January 1, 2013:
3. How much should this investment be reported by Dinar on Preference share capital, P100 par, 12% cumulative,
December 31, 2013? 50,000 shares issued P5,000,000
Preference share capital, P80 par, 10% non-
PROBLEM 4: On January 1, 2013, Dollar Company purchased 15,000 cumulative, 25,000 shares issued 2,000,000
shares of the 100,000 outstanding ordinary shares of Peso Company at Ordinary share capital, P50 par, 500,000 shares
P200 per share. The book value of the interest acquired is equal to the authorized and 200,000 shares issued 10,000,000
acquisition cost. Aside from the ordinary share investment in Dollar, it Retained earnings 5,000,000
also holds 1,000, P5,000 bonds of Peso Company convertible at the On January 1, 2013, Boliviano Company acquired 40,000 ordinary
option of Dollar into 25,000 shares of Peso. The conversion option was shares of Afghani Company representing a 20% interest for P3,000,000.
not exercised as of December 31, 2013. During 2013, Peso Company The net assets of the investee are fairly valued. Afghani Company
reported net income of 1,000,000. Peso Company also declared and reported net income of P2,000,000 for 2013 and P3,000,000 for 2014.
paid dividends of P5 per share. Afghani did not declare any dividends in 2013 but it paid cash
4. What type and amount of income should Dollar Company dividends of P500,000 to ordinary shareholders, P1,200,000 to the 12%
recognize from its investment in Peso? cumulative preference shareholders and P200,000 to the 10% non-
cumulative preference shareholders in 2014.
PROBLEM 5: On January 1, 2011, Dram Company purchased 25% of
Lek Corporation’s ordinary shares. No goodwill resulted from the 13. Determine the share in profit of associate of Boliviano Company
purchase. Dram appropriately carries this investment at equity and the in 2013.
balance in Dram’s investment account was P480,000 at December 31, 14. Determine the share in profit of associate of Boliviano Company
2011. Lek reported profit of P300,000 for the year ended December 31, in 2014.
2011 and paid dividends totaling P120,000 during 2011. In addition on PROBLEM 10: Mark Company acquired 40% interest in Pula
December 31, 2011, Lek recognized revaluation surplus of P100,000. Company for P1,700,000 on January 1, 2011. The shareholders’ equity
5. How much did Dram pay for its 25% interest in Lek? of Pula Company on January 1 and December 31, 2011 is presented
below:
PROBLEM 6: Florin Company bought 20% of Taka, Inc.’s ordinary 1/1/2011 12/31/2011
shares on January 1, 2011 for P20,000,000. Carrying amount of Taka’s Share capital P 3,000,000 P 3,000,000
net assets at purchase date totaled P60,000,000. Fair value and carrying Revaluation surplus – 1,300,000
amounts were the same for all items, except for land, building and Retained earnings 1,000,000 1,500,000
inventory, for which fair values exceeded their carrying amounts by
On January 1, 2011, all the identifiable assets and liabilities of Pula
P5,500,000, P10,000,000 and P5,000,000 respectively and equipment
Company were recorded at fair value. Pula Company reported profit of
for which the carrying amount exceeded its fair value by P600,000. The
P650,000 after income tax expense of P350,000 and paid dividends of
building has a 5 year life while the equipment is expected to be used for
P150,000 to shareholders during the current year. The revaluation
3 more years. Eighty percent of the inventory was sold during 2011
surplus is the result of the revaluation of land recognized by Pula
while the remaining 20% was sold in 2012. The land was sold by Taka
Company on December 31, 2011.

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014 Page|1 of 2
Additionally, depreciation is provided by Pula Company on the
diminishing balance method whereas Mark Company uses the straight
line method. Had Pula Company used the straight-line method, the
accumulated depreciation would be increased by P200,000. The tax rate
is 35%.
15. Mark Company should report its investment in associate on
December 31, 2011 at:
PROBLEM 11: Real Company has 100,000 ordinary shares
outstanding. Kyat Company acquired 30,000 shares of Real Company
for P120 per share in 2008. The securities are being held as long-term
investment. Changes in retained earnings for Real Company for 2010
and 2011 are as follows:
Retained earnings, January 1, 2010 P (500,000)
Net income for 2010 700,000
Retained earnings, December 31, 2010 P 200,000
Net income for 2011 800,000
Cash dividend paid during 2011 (400,000)
Retained earnings, December 31, 2011 P 600,000
16. What is the balance of Kyat Company’s investment in Real
Company on January 1, 2010?
17. What is the balance of Kyat Company’s investment in Real
Company on December 31, 2011?
PROBLEM 12: Yen Company acquired a 40% interest in an associate,
Yuan Company, for P5,000,000 on January 1, 2011. At the acquisition
date, there were no differences between fair value and carrying amount
of identifiable assets and liabilities. Yuan Company reported the
following net income and dividend for 2011 and 2012:
2011 2012
Net income P 2,100,000 P 3,200,000
Dividend paid 800,000 1,000,000
The following transactions occurred between Yen Company and Yuan
Company:
A. On January 1, 2011, Yuan Company sold an equipment
costing P500,000 to Yen Company for P800,000. Yen
Company applies 10% straight line depreciation.
B. On July 1, 2011, Yuan Company sold an equipment for
P900,000 to Yen 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 Yen Company uses the
straight line depreciation.
C. On September 30, 2011, Yen Company sold land to Yuan
Company carried in its books at P2,500,000 for P2,000,000.
The land was used by Yuan Company as the site of its new
plant.
D. On December 16, 2011, Yen Company sold an inventory to
Yuan Company for P2,000,000. The inventory had a cost of
P1,800,000. At December 31, 2011, one half of said
inventory remains on hand.
E. On January 1, 2012, Yen Company sold an equipment to
Yuan Company for P3,000,000. The equipment had a cost of
P2,500,000. Yen Company regarded this equipment as
inventory whereas Yuan Company intended to use it as a
noncurrent asset. The remaining useful life of the equipment
is 10 years.
F. On December 1, 2012, Yuan Company sold an inventory to
Yen Company for P2,800,000. The inventory had a cost of
P2,000,000 and was still on hand on December 31, 2012.
18. What is the balance of the investment in associate account as of
December 31, 2011?
19. What is the balance of the investment in associate account as of
December 31, 2012?
PROBLEM 13: Guilder, Inc. acquired 30% of Krone Corporation’s
voting stock on January 1, 2010 for P360,000. During 2010, Krone
earned P150,000 and paid dividends of P90,000. Guilder’s 30% interest
in Krone gives Guilder the ability to exercise significant influence over
Krone’s operating and financial policies. During 2011, Krone earned
P180,000 and paid dividends of P60,000 on April 1 and P60,000 on
October 1.
On July 1, 2011, Guilder sold half of its stock in Krone for its fair value
of P237,000. Thereafter, Guilder designated the investment as at fair
value through OCI. The remaining shares of Krone held by Guilder
have a fair value of P220,000 at December 31, 2011.
20. What total amount should be recognized in Guilder, Inc.’s 2011
profit or loss relating to its investment in Krone Corporation?
Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014
PROBLEM 14: Birr Company owns 30% of Quetzal, Inc.’s ordinary
shares. On July 1, 2012, Birr Company sold three-fourths of its
investment in Quetzal for P1,200,000. The adjusted balances of the
related accounts as of December 31, 2011 are as follows:
Investment in associate P1,400,000
Cumulative share in associate’s exchange differences
on translation of foreign operation – credit 100,000
Cumulative share in associate’s unrealized gains and
losses on investments at fair value through OCI –
credit 150,000
From January 1, 2012 to June 30, 2012, Quetzal reported a net income
of P100,000 and an additional P80,000 for the remainder of the year.
No dividends were paid during the same period. The remaining
investment in Quetzal had a fair value of P400,000 on July 1, 2012 and
P415,000 on December 31, 2012.
21. What amount in total would be recognized in Birr’s 2012 profit
or loss assuming the remaining shares were reclassified as
trading securities?
22. What amount in total would be recognized in Birr’s 2012 profit
or loss relating to this investment assuming Birr still has
significant influence over Quetzal after the sale?
PROBLEM 15: On January 2, 2010, Shekel, Inc. acquired a 15%
interest in Escudo Corporation by paying P2,000,000 for 10,000
ordinary shares. On this date, the net assets of Escudo totaled
P12,000,000. The fair values of Escudo’s identifiable assets and
liabilities were equal to their book values. The investment in Escudo
Corporation is not intended for trading. On January 1, 2011, Shekel paid
P4,500,000 for 30,000 additional ordinary shares of Escudo which
represents a 25% interest in Escudo. The fair value of Escudo’s
identifiable net assets was equal to their book values of P13,000,000.
During 2010 and 2011, the following occurred for Escudo:
2010 2011
Net income P 2,000,000 P 5,000,000
Dividends paid 1,000,000 1,500,000
The fair value of Shekel’s investment in Escudo securities is as follows:
December 31, 2010 – P2,700,000 and December 31, 2011 –
P8,700,000.
23. What is the balance of the investment in Escudo account at
December 31, 2011?
PROBLEM 17: On January 1, 2013, Baht Company acquired a 10%
interest in Shilling, Inc. for P3,000,000. The investment was accounted
for at fair value through OCI. The fair value of the investment was
P5,000,000 on December 31, 2013. On January 1, 2014, the entity
acquired a further 25% interest in the Shilling for P12,500,000. On such
date, the carrying amount of the net assets of the Shilling was
P36,000,000. The fair value of the net assets of the Shilling is equal to
the 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 Shilling reported net income of P8,000,000 for 2014 and
paid dividend of P5,000,000 on December 31, 2014. No dividend was
paid in 2013 by the Shilling.
24. Under the fair value approach, what is the goodwill on January
1, 2014?
25. What total amount in relation to this investment would be
included in the determination of profit or loss in 2014?
26. What is the carrying amount of the investment in associate on
December 31, 2014?
PROBLEM 16: On January 1, 2012, Ringgit Company acquired 10%
of the outstanding voting stock of Dirham Company. On January 1,
2013, Ringgit gained the ability to exercise significant influence over
the financial and operating control of Dirham by acquiring 30% of
Dirham’s outstanding stock. The two purchases were made at prices
proportionate to the value assigned to Dirham’s net assets which
equaled their carrying amounts.
For the years ended December 31, 2012 and 2013, Dirham reported the
following:
2012 2013
Net income P 8,000,000 P 15,000,000
Dividends paid 5,000,000 10,500,000
27. In 2013, what amount should Ringgit report as current year
investment income?
28. In 2013, what amount should Ringgit report as an adjustment to
the 2012 net income?
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