Investment in Associate

Page | 1
Chapter 14
Investments in Associates
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. FALSE
7. TRUE
8. FALSE – prospective
9. TRUE
10. FALSE – interest in the associate
PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. D
3. C
4. C
5. C
6. D
7. C
8. A
9. C
10. C
Page | 2
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
Jan. Investment in associate 800,00
1,
Cash 0 800,000
20x
1
Dec. Investment in associate 425,00
31,
Sh. in profit of associate (1.7M 0 425,000
20x
x 25%*)
1
Dec. Cash (400,000 x 25%) 100,00
31,
Investment in associate 0 100,000
20x
1
Dec. Share in OCI of associate - 20,000
31,
translation of foreign operation 20,000
20x
(80K x 25%)
1
Investment in associate
* 15,000 shares acquired ÷ 60,000 shares outstanding = 25%
Requirement (b):
800,00
Jan. 1, 20x1
0
425,00 100,00
Sh. in profit Cash dividends
0 0
20,000 Sh. in OCI
1,105,
Dec. 31, 20x1
000
2. Solutions:
Requirement (a): Goodwill
Under
Carrying Fair (Over)
amount value valuation
200,
Inventories 1,000,000 000 (800,000)
Depreciable 10,000,
asset 6,000,000 000 4,000,000
Pak's equity at book value 10,000,000

Overvaluation (800,000)
Page | 3
Undervaluation 4,000,000
Pak's equity at fair value 13,200,000
Purchase cost 4,000,000

FV of interest acquired (13.2M x
25%) (3,300,000)
Goodwill 700,000
Requirement (b): Journal entries

Jan. Investment in associate 4,000,00
1,
Cash 0 4,000,0
20x1
00
31,
Share in profit of 600,000
20x1
associate
(2.4M x 25%)
Dec. Cash (1M x 25%) 250,000
31,
Investment in associate 250,000
20x1
31,
20x1
associate
(800K x 25%)
Dec. Share in profit of associate 100,000
31, (4M x 25%) ÷ 10 yrs.
20x1
Requirement (c): Share in profit of associate
Share in profit of associate – net
600,0
Sh. in profit, gross
00
Undervaluation of 100,0 200,0 Overvaluation of
depreciable asset 00 00 inventory
700,
Sh. in profit, net
000
Requirement (d): Carrying amount of investment in

associate
4,000,
Jan. 1, 20x1
000
Page | 4
600,00 250,00
Sh. in profit, gross Dividend
0 0
200,0 100,00
Overvaluation
00 0 Undervaluation
4,450,
Dec. 31, 20x1
000
3. Solution:
Requirement (a):
 Journal entries in 20x1:
Jan. Investment in associate 6,000,0
1,
Cash 00 6,000,0
20x1
00
31,
Share in profit of associate 0 600,00
20x1
(2M x 30%) 0
Dec. Cash (1.2M x 30%) 360,00
31,
20x1
0
Dec. Share in profit of associate (a) 120,00
31,
20x1
00
(a)
Sh. in undervaluation of bldg. (20M – 16M) x 1,200,0
30% 00
Divide by: Remaining useful life of building 10
Annual adjustment to share in profit of 120,0
associate 00
 Journal entries on July 1, 20x2:

July Investment in associate (1M x 300,00
1, 30%) 0 300,00
20x2
Share in profit of associate 0
July Share in profit of associate 60,000
1,
20x2
(120K x 6/12) 0
July Cash (30,000 sh. x 60% x ₱240) 4,320,0
1,
Investment in associate 00 3,816,0
20x2 (b)
(6.360M x 60%) 00
Gain on sale of investment
504,00
0
Page | 5
July Held for trading securities 2,880,0

1, (30,000 sh. x 40% x ₱240) 00
20x2
Investment in associate 2,544,0
(b)
(6.360M x 40%)
00
Gain on reclassification
336,00
0
Investment in
(b)
associate
6,000,0
Jan. 1, 20x1 00
Share in profit - 600,0 360,0
20x1 00 00 Dividend - 20x1
120, Undervaluation -
000 20x1
Share in profit - 300,0 60,00 Undervaluation -

20x2 00 0 20x2
6,360,0
00 July 1, 20x2
 Journal entries on Dec. 31, 20x2:

Dec. Dividend receivable (2M x 12%*) 240,00
31,
Dividend income 0 240,0
20x2
00
Dec. Held for trading securities 360,00
31, (270 – 240) x 30,000 sh. x 40% unsold 0
20x2
Unrealized gain – P/L 360,0
00
* 30% x 40% unsold portion = 12% retained interest
Requirement (b):
Share in profit of associate, net (300K – 60K) 240,000
Gain on sale 504,000
Gain on reclassification 336,000
Dividend income 240,000
Unrealized gain on change in fair value 360,000
Total income recognized in profit or loss – 1,680,00
20x2 0
4. Solutions:
Case 1:
Page | 6
July Cash 800,000

1,
Loss on sale of investment 400,000
20x2
(2.4M x 1/2) 00
July Translation of foreign 1,000,0
1,
operation 00 1,000,0
20x2
Gain on reclassification 00
Case 2:
July Cash 800,000
1,
20x2
(2.4M x 1/2) 00
July Translation of foreign opn. (1M 500,000
1, x ½) 500,000
20x2
Case 3:
July Cash 800,000
1,
20x2
(2.4M x 1/2) 00
July Revaluation surplus (1M x ½) 500,000
1,
Retained earnings 500,000
20x2
5. Solutions:
 Journal entries in 20x1:
Jan. Held for trading securities 1,600,0
1,
Cash 00 1,600,0
20x
1 00
Dec. Cash (2M x 10%) 200,00
31,
20x
1 0
Dec. Held for trading securities 100,00
31,
Unrealized gain – P/L 0 100,00
20x
1
[(10,000 sh. x ₱170) – 1.6M] 0
 Journal entries on July 1, 20x2:

July Investment in associate (15K sh. 2,100,0
1, x ₱140) 00 2,100,0
20x
Cash 00
Page | 7
2 to record the purchase of

additional shares
July Unrealized loss – P/L (a) 300,00
1,
Held for trading securities 0 300,00
20x
2
to remeasure the previously 0
held equity interest
July Investment in associate 1,400,0
1,
Held for trading securities 00 1,400,0
20x
to reclassify the previously 00
2
held equity interest to investment in
associate
(a)
(₱140 fair value on 7/1/x2 - ₱170 fair value on 12/31/x1) x
10,000 sh. = 300,000
Dec. Cash (2M x 25%(b)) 500,00
31,
20x2
to record the dividends 0
Dec. Investment in associate (8M x 2,000,0
31, 25%(b)) 00 2,000,0
20x2
Share in profit of 00
associate
to record the share in the
associate’s profit in the last half of
20x2
(b)
(10,000 sh. + 15,000 sh.) ÷ 100,000 sh. = 25%
6. Solution:
20x1
 Interest in the associate:
Investment in preference shares – Del, Inc. 200,000
Advances to associate – Del, Inc. 100,000
Interest in the associate -12/31/x1
(before adjustment) 700,000
De Share in loss of associate (2.8M x 560,00

c. 20%) 0 400,00
31,
Investment in associate 0
20
x1 Investment in preference sh. 160,00
(squeeze)
0

Investment in preference shares – Del, Inc.
(200K – 160K) 40,000
Page | 8
Advances to associate – Del, Inc. 100,000

Interest in the associate -12/31/x1 (after
adjustment) 140,000
20x2
De Share in loss of associate (a) 140,00

c.
Investment in pref. sh. 0 40,000
31,
20
(bal.) 100,00
x2 Advances to associate 0
(a)
(1M x 20%) = 200,000 vs. 140,000 int. in the assoc. = 140,000
limit
* Loss not recognized = 200,000 – 140,000 = 60,000

Investment in preference shares – Del, Inc. 0
Advances to associate – Del, Inc. 0
Interest in the associate -12/31/x2
(after adjustment) 0
20x3
(200K x 20%) = 40,000 vs. 0 int. in the assoc. = 0 share

in loss
* Loss not recognized = 40,000 – 0 = 40,000
De Loss on associate 400,00

c.
Liability incurred on behalf 0 240,00
31,
20 of assoc. 0
x3 Cash 160,00
0
20x4
Share in profit of associate before
adjustment (2M x 20%) 400,000
(100,000
Cumulative losses not recognized (60K + 40K)
)
Share in profit of associate, adjusted 300,000
De Advances to associate 100,00

c.
Page | 9
31, Investment in preference shares 0

20
Share in profit of associate 200,00 300,00
x4
0 0
7. Solution:
Recoverable value (FVLCD - higher)
1,600,000
Carrying amount of investment
(2,000,000)
Impairment loss
( 400,000)
Dec. Impairment loss 400,00

31,
20x1
0
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. C
Solution:
900,00
Jan. 1, 20x1
0
Sh. in profit (2M x 500,0 150,00 Dividends (600K x
25%) 00 0 25%)
20,000 Sh. in OCI (80K x 25%)
1,230,
Dec. 31, 20x1
000
2. A
Solution:
P a g e | 10
1,200,
Jan. 1, 20x1
000
Sh. in profit 175,0 210,00 Dividends (600K x
(1.5M x 35% x 4/12) 00 0 35%)
1,165,
Dec. 31, 20x1
000
3. D
Solution:
1,000,
Jan. 1, 20x1
000
Sh. in profit (2M x 400,00 100,00
Dividends
20%*) 0 0
Sh. in OCI (80K x
16,000
20%*)
1,316,
Dec. 31, 20x1
000
* 25,000 newly issued shares ÷ (100,000 + 25,000) = 20%
4. D
Solution:
(1) Goodwill
Carrying Fair Under (Over)
amount value valuation
Inventor 400,0
y 300,000 00 100,000
Machine 1,500,0
ry 1,800,000 00 (300,000)
Mobic's equity at book 8,000,00

value 0
Undervaluation 100,000
(300,000
Overvaluation )
P a g e | 11
Mobic's equity at fair 7,800,00

value 0
1,600,00
Purchase cost 0
Less: Fair value of net assets acquired (1,560,00
(7.8M x 20%) 0)
Goodwill 40,000
(2) Share in profit of associate

Share in profit of associate – net
600,0 Sh. in profit, gross
00 (3M x 20%)
Undervaluation 20,00 12,00 Overvaluation
(100K x 20%) 0 0 (300K ÷ 5 yrs.) x 20%
592,
Sh. in profit, net
000
(3) Carrying amount of investment in associate

1,600,
Jan. 1, 20x1
000
Sh. in profit, 600,00 100,00 Dividends (500K x
gross 0 0 20%)
Overvaluation 12,000 20,000 Undervaluation
2,092,
Dec. 31, 20x1
000
5. B
Share in the profit of assoc.
Undervaluation of
plant
[(90K/18) x 40%] 2,000
Undervaluation of
invty. 48,00
(1K x 40%) 4,000 0 Sh. in profit
42,00 end.
P a g e | 12
6. C
Purchase 1,120,
price 000
Share in
profit 50,400 11,200 Dividends
Undervaluation of
28,000 asset (a)
1,131,
200 end.
(a)
The amortization of the undervaluation of an
identifiable intangible asset (i.e., not goodwill) is
computed as follows: (1,120,000 – 840,000) ÷ 10 =
28,000.
Note: The amortization is not multiplied anymore by

20% because the ₱840,000 book value pertains to the
interest acquired and not the total book value of the
associate’s net assets.
7. C
Investment in
associate
516
Purchase price ,000
108 1 Dividend
Share in profit ,000 2,000 s
61
2,000 end.
Note: The “excess” is not amortized because it pertains

to goodwill. Goodwill arising from investment in
associate is not accounted for separately, meaning it is
neither amortized nor tested for impairment separately.
8. A
P a g e | 13
Solution:
Shares presently held 50,000
Potential voting rights 30,000
Total shares 80,000
Divide by: Outstanding shares after conversion 330,00
of bonds (300K + 30K) 0
24.24
Assumed ownership interest
%
 Significant influence is presumed to exist because the

assumed ownership interest meets the 20% threshold.
Accordingly, the investment will be accounted for
under the equity method.
1,20
Jan. 1, 20x1 0,00
0
Sh. in profit 550, 30,0
Dividends (b)
(a)
000 00
1,72
0,00 Dec. 31, 20x1
0
(a)
Share in profit of associate: ₱3,300,000 x 16.666667%*
= 880,000
(b)
Share in cash dividends: ₱180,000 x 16.666667%* =
30,000
* 50,000 actual shares held ÷ 300,000 actual outstanding shares
= 16.666667%
9. B
Solution:
2,800,00
Profit of Monkey
0
(800,000
Dividends on noncumulative preference sh.
)
2,000,00
Adjusted profit of associate
0
Multiply by: Ownership interest 25%
Share in profit of associate 500,000
P a g e | 14
10. A
Solution:
Share in profit of associate (4.2M x 8/12 x 25%) 700,000
Gain on sale (a) 1,005,000
Gain on reclassification (b) 375,000
Dividend income (1.2M x 25% x 25% unsold) 75,000
Unrealized loss (₱130 – ₱140) x 25,000 sh. x 25%
unsold (62,500)
2,092,50
Net effect in 20x1 profit
0
(a)
1,300,0
Jan. 1, 20x1 00
700,00
Share in profit 0
2,000,0
00 Sept. 1, 20x1
Se Cash [(25,000 sh. x 75% x ₱140) – 2,505,0

pt. 120,000] 00 1,500,0
1,
Investment in associate (2M x 00
20x
75%)
1 1,005,0
Gain on sale of investment 00
(squeeze)
to record the partial sale of
investment
(b)
Sept Held for trading securities 875,00

. 1, (25,000 sh. x ¼ unsold x ₱140) 0
20x
Investment in associate (2M x 500,000
1
¼)
375,000
(squeeze)
to reclassify the remaining
investment
11. C
Solution:
(1)
Date Cash 500,00
P a g e | 15

(1.2M x ¼) 0
Gain on sale of investment 200,00
to record the sale
0
Date Translation of foreign operation 100,00
Gain on reclassification – 0 100,00
P/L 0
to record the reclassification
adjustment of the OCI to profit or loss
(1) Net effect in P/L = (200,000 + 100,000) = 300,000
(2)
Dat Cash 500,0
e
Investment in associate (1.2M x 00 300,00
¼) 0
to record the sale
0
Dat Translation of foreign operation 25,00
e (100K x ¼) 0 25,000
Gain on reclassification – P/L
(2) Net effect in P/L = (200,000 + 25,000) = 225,000
12. B
Solution:
Dat Cash 500,0
e
Investment in associate (1.2M x 00 300,00
¼) 0
to record the sale
0
Dat Revaluation surplus – associate 25,00
e (100K x ¼) 0 25,000
Retained earnings
Net effect in P/L = 200,000
13. D
Solution:
P a g e | 16
Additional sh. (12,000 1,080,0
x 90) 00
FV of existing sh. 720,00 120,00 Cash dividends
(8,000 x 90) 0 0 (600K x 20%)
Sh. in profit 440,0
(3.3M x 8/12 x 20%) 00
2,120,
Dec. 31, 20x1
000
14. B
Sale price 1,020,000
Carrying amount (820,000)
Unrealized profit from upstream sale 200,000

Multiply by: Michi Co.'s interest 40%
Adjustment (reduction) 80,000
Concept: Gains and losses resulting from intercompany

transactions between an entity and its associate are
recognized in the entity’s financial statements only to the
extent of unrelated investors’ interests in the
associate. In other words, the entity’s share in the
unrealized profit or loss resulting from the intercompany
transaction is eliminated.
In the problem, Michi Co. has erroneously recognized the

full amount of ₱200,000. The correct amount is ₱120,000
(200,000 x 60% unrelated investors’ interests). Thus, a
reduction of ₱80,000 is necessary.
15. B
Solution:
P a g e | 17
 The interest in the associate as of Dec. 31, 20x1

before adjustment is computed as follows:
100,000
Investment in preference shares – Papa
80,000
Loan receivable – Papa (due in 5 yrs.; unsecured) 50,000
Interest in the associate - before adjustment, 12/31/x1
230,000
 20x1:
200,0
Share in loss of associate (800K x 25%) 00
Interest in the associate - 12/31/x1 230,0
(threshold) 00
200,0
Share in loss - 20x2 00
 Interest in the associate as of Dec. 31, 20x2:

Investment in associate (100,000 – 100,000)
0
Investment in preference shares – Papa (80,000 – 80,000)
0
Loan receivable – Papa (50,000 – 20,000)
30,000
Interest in the associate - 12/31/x2
30,000
 20x2:
100,0
(threshold) 0
30,00
Loss not recognized, disclosed in notes (100K - 70,00

30K) 0

P a g e | 18
0
Investment in preference shares – Papa
0
Loan receivable – Papa (30,000 – 30,000)
0
0
 20x3:
50,00
(threshold) 0

0) 0
Additional loss in 20x3 (payments made)

15,000
 20x4:
Share in profit of associate before adjustment (300K x 25%)
75,000
Cumulative losses not recognized (70,000 + 50,000)
( 120,000)
Share in profit of associate – adjusted
0
Loss not recognized, disclosed in notes in 45,00

20x4 (120K – 75K) 0
Summary:
20x1 20x2 20x3 20x4
Share in (loss) (200,0 (30,00
profit 00) 0) - -
(15,00
Additional loss 0)
(200,0 (30,0 (15,0
00) 00) 00) -
P a g e | 19
16. C
Solution:
Recoverable amount (VIU - higher)
2,120,000
Carrying amount of investment {5M - [(2M + 3M)
x 40%]}
(3,000,00
0)
Impairment loss (880,000

)
P a g e | 20
PROBLEM 5: CLASSROOM ACTIVITY

The outstanding number of common shares of the
associate is determined as follows:
Issued Treasury Outstand
shares shares ing
346,642,9
Dec. 31, 2011
347,329,216 686,250 66
Share 51,996,4
dividends 51,996,445 45
398,639,4
Dec. 31, 2012
399,325,661 686,250 11
ABC Co.’s ownership interest in the outstanding shares of

the associate is determined as follows:
No. of sh. Outstand Percenta
held ing ge
346,642,9
Jan. 1, 2012
69,328,593 66 20.00%
Share 51,996,4
dividends 10,399,289 45 20.00%
398,639,4
Dec. 31, 2012 79,727,882
11 20.00%
Requirement (a): Journal entries

July Dividend receivable 6,932,859.
24,
Investment in 40 6,932,859
2012
associate .40
(69,328,593 sh. x ₱0.10)
to accrue the dividends
declared
Sept. Cash 6,932,859.
14,
Dividend receivable 40 6,932,859.
2012
to record the receipt of 40
dividend
Dec. Investment in associate 92,925,10
31,
Share in profit of 6.20 92,925,10
2012
associate 6.20
(₱464,625,531 x 20%)
to record the share in
the profit of the associate
Requirement (b): Carrying amount of investment

P a g e | 21
Investment in
associate
379,592,676.
beg. 00
Share in 92,925,106.2
profit 0 6,932,859.40 Dividend
465,584,92
2.80 end.
PROBLEM 6: FOR CLASSROOM DISCUSSION
1. Solutions:
Requirement (a):
Jan. Investment in associate 500,00
1,
Cash 0 500,000
20x
1
31,
Sh. in profit of associate (1.5M 0 300,000
20x
x 20%*)
1
Dec. Cash (100,000 x 20%) 20,000
31,
20x
1
Dec. Investment in associate (250K x 50,000
31, 20%) 50,000
20x
Sh. in OCI of associate -
1
revaluation
* 10,000 shares acquired ÷ 50,000 shares outstanding = 20%
Requirement (b):
500,00
Jan. 1, 20x1
0
300,00
Sh. in profit 20,000 Cash dividends
0
Sh. in OCI 50,000
830,00
Dec. 31, 20x1
0
2. Solutions:
P a g e | 22
Requirement (a):
Purchase cost 1,200,000

Less: Fair value of net assets acquired (5M x (1,000,00
20%) 0)
Goodwill 200,000
Bell Co. includes the implied goodwill in the

carrying amount of the investment and does not account
for it separately. Meaning, Bell Co. neither amortizes
nor tests separately the goodwill for impairment.
Requirement (b):
1,200,
Jan. 1, 20x1
000
Sh. in profit (3M x 600,00 100,00 Dividends (500K x
20%) 0 0 20%)
Undervaluation
10,000 (5M - 4.7M) x 20% ÷
6 yrs.
1,690,
Dec. 31, 20x1
000
Requirement (c):
Share in profit of associate
600,0
Sh. in profit, gross
00
10,00
Undervaluation
0
590,
Sh. in profit, net
000
Requirement (d):
Jan. 1, Investment in associate 1,200,0
20x1
Cash 00 1,200,0
00
31,
20x1
associate
P a g e | 23
Dec. Cash 100,000

31,
Investment in 100,000
20x1
associate
Dec. Sh. in profit of associate 10,000
31,
20x1
3. Solution:
Shares presently held 40,000
Potential voting rights 30,000
Total shares 70,000
Divide by: Outstanding shares after conversion 330,00
of bonds (300K + 30K) 0
21.21
Assumed ownership interest
%
 Significant influence is presumed to exist because the

assumed ownership interest meets the 20% threshold.
Accordingly, the investment will be accounted for
under the equity method.
Share in profit of associate: ₱6,600,000 x 13.333333%* =

880,000
* 40,000 actual shares held ÷ 300,000 actual outstanding shares
= 13.333333%
4. Solution:
3,000,0
Profit of Power
00
One-year dividend on cumulative preference sh. (400,00
(4M x 10%) 0)
2,600,0
Adjusted profit of associate
00
Multiply by: Ownership interest 30%
780,00
Share in profit of associate
0
5. Solution:
Requirement (a):
P a g e | 24
 Journal entries on Oct. 1, 20x1:

Oct Investment in associate (7M (a)
x 1,400,0
. 1, 20%) 00 1,400,0
20x
Share in profit of associate 00
1
to record the share in the
associate’s profit for the nine months
ended Sept. 30, 20x1
Oct Cash (2.8M – 140K) 2,660,0
. 1,
Loss on sale of investment 00
20x
1
(squeeze) 40,000 2,700,0
Investment in associate (5.4M 00
(b)
x ½)
to record the partial sale of
investment
(a)
(1,800,000 + 3,000,000 + 2,200,000) = 7,000,000
(b)
4,000,0
Jan. 1, 20x1 00
1,400,0
Share in profit 00
5,400,0
00 Oct. 1, 20x1
Oct. Held for trading securities 2,800,0

1,
Investment in associate 00 2,700,0
20x (b)
1
(5.4M x ½) 00
(squeeze)
to reclassify the remaining
investment

Dec. Dividend receivable (1M x 10%(c)) 100,00
31,
20x
to record the dividends 0
1
Dec. Unrealized loss – P/L (d) 400,00
31,
Held for trading securities 0 400,00
20x
1
to record the gain on the change 0
in fair value
(c)
(20% previous interest x ½ unsold portion) = 10% retained
interest
(d)
(2.8M – 2.4M) = 400,000 decrease in fair value
P a g e | 25
Requirement (b):
Share in profit of associate – Jan. 1 to Sept. 30 1,400,000
Loss on sale (40,000)
Dividend income 100,000
Unrealized loss on change in fair value (400,000)
Total income recognized in profit or loss – 1,160,00
20x1 0
6. Solutions:
Case 1:
Date Cash 1,000,0
(1.2M x ¾) 0
to record the sale
0
Date Loss on reclassification – P/L 500,00
Translation of foreign 0 500,00
operation 0
Case 2:
Date Cash 1,000,0
(1.2M x ¾) 0
to record the sale
0
Date Loss on reclassification (500K x 375,00
¾) 0 375,00
Translation of foreign 0
operation
7. Solution:
 Journal entries on Apr. 1, 20x1:

Apr. Investment in associate (10,000 x 700,000
P a g e | 26
1, ₱70) 700,00
20x1 Cash 0
to record the acquisition of
additional shares
Apr. Held for trading securities 50,000
1,
Unrealized gain – P/L 50,000
20x1
(15% x 100,000 sh. x ₱70) =
1.050M – 1M
to remeasure the previously
held equity interest to current fair
value
Apr. Investment in associate 1,050,00
1,
Held for trading securities 0 1,050,0
20x1
to reclassify the previously 00
held equity interest to investment in
associate
 Compound journal entry on Dec. 31, 20x1:

Dec. Cash (₱12 x 25,000 sh.) 300,00
31,
Investment in associate (squeeze) 0
20x1
Share in profit of associate (a) 225,00 525,000
0
(a)
(2,800,000 profit for the yr. x 9/12 x 25%*) = 525,000
* (15,000 previously held shares + 10,000 additional shares) = 25,000 ÷
100,000 outstanding shares = 25% new interest
8. Solution:
 The interest in the associate as of Dec. 31, 20x1

before adjustment is computed as follows:
300,000
Investment in preference shares – Zine
100,000
Loan receivable – Zine (due in 5 yrs.; unsecured)
150,000
Interest in the associate - before adjustment, 12/31/x1
550,000
P a g e | 27
The ₱550,000 balance of the “interest in the

associate” is the threshold in determining the share in
the losses of the associate.
 20x1:
Dec. Share in loss of associate (1.4M 420,00
31, x 30%) 0 300,00
20x1
Investment in preference 100,00
shares 0
Loan receivable (squeeze) 20,000

0
Investment in preference shares – Zine
0
Loan receivable – Zine (150,000 – 20,000)
130,000
130,000
The remaining threshold for determining the share

in losses is ₱130,000.
 20x2:
180,0
(threshold) 00
130,0

130K) 0
Dec. Share in loss of associate 130,00

31,
Loan receivable 0 130,00
20x
2 0
P a g e | 28
Dec. Share in loss of associate 40,000

31,
Liability incurred on behalf of 40,000
20x
2 assoc.
 20x3:
Share in profit of associate before adjustment (400K x 30%)
120,000
Cumulative losses not recognized ( 50,000)
Share in profit of associate – adjusted
70,000
Dec. Loan receivable 70,000

31,
20x3
associate
Summary:
20x1 20x2 20x3
Share in (loss)
profit (420,000) (130,000) 70,000
Additional loss (40,000)
(420,000) (170,000) 70,000
9. Solution:
The impairment loss is computed as follows:
Recoverable amount (VIU - higher)
960,000
Carrying amount of investment (1,200,00

0)
Impairment loss (240,000

)
Journal entry:
Dec. Impairment loss 240,00
31,
20x1
0
P a g e | 29

Investment in Associate

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Investment in Associate

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Page | 1

PROBLEM 2: MULTIPLE CHOICE – THEORY

Pak's equity at book value 10,000,000

Purchase cost 4,000,000

Requirement (b): Journal entries

Requirement (c): Share in profit of associate

Share in profit of associate – net

Requirement (d): Carrying amount of investment in

 Journal entries on July 1, 20x2:

July Held for trading securities 2,880,0

Share in profit - 300,0 60,00 Undervaluation -

 Journal entries on Dec. 31, 20x2:

July Cash 800,000

 Journal entries on July 1, 20x2:

2 to record the purchase of

De Share in loss of associate (2.8M x 560,00

 Interest in the associate:

Advances to associate – Del, Inc. 100,000

De Share in loss of associate (a) 140,00

 Interest in the associate:

(200K x 20%) = 40,000 vs. 0 int. in the assoc. = 0 share

De Loss on associate 400,00

De Advances to associate 100,00

31, Investment in preference shares 0

Dec. Impairment loss 400,00

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

* 25,000 newly issued shares ÷ (100,000 + 25,000) = 20%

Mobic's equity at book 8,000,00

Mobic's equity at fair 7,800,00

(2) Share in profit of associate

(3) Carrying amount of investment in associate

Note: The amortization is not multiplied anymore by

Note: The “excess” is not amortized because it pertains

 Significant influence is presumed to exist because the

Se Cash [(25,000 sh. x 75% x ₱140) – 2,505,0

Sept Held for trading securities 875,00

Investment in associate 0 300,00

(1) Net effect in P/L = (200,000 + 100,000) = 300,000

(2) Net effect in P/L = (200,000 + 25,000) = 225,000

Net effect in P/L = 200,000

Sale price 1,020,000

Carrying amount (820,000)

Unrealized profit from upstream sale 200,000

Adjustment (reduction) 80,000

Concept: Gains and losses resulting from intercompany

In the problem, Michi Co. has erroneously recognized the

 The interest in the associate as of Dec. 31, 20x1

 Interest in the associate as of Dec. 31, 20x2:

Loss not recognized, disclosed in notes (100K - 70,00

 Interest in the associate as of Dec. 31, 20x3:

Share in loss - 20x3 0

Loss not recognized, disclosed in notes (50K - 50,00

Additional loss in 20x3 (payments made)

Loss not recognized, disclosed in notes in 45,00

Impairment loss (880,000

PROBLEM 5: CLASSROOM ACTIVITY

ABC Co.’s ownership interest in the outstanding shares of

Requirement (a): Journal entries

Requirement (b): Carrying amount of investment

PROBLEM 6: FOR CLASSROOM DISCUSSION

Purchase cost 1,200,000

Bell Co. includes the implied goodwill in the

Dec. Cash 100,000