IAS 28-INVESTMENT IN ASSOCIATE REVIEW

A. On January 1, 2019, Gambit, Inc. purchased 30% of the outstanding ordinary shares of Storm
Corp. for P5,160,000 cash. Gambit gained ability to exercise influence over Gambit as a result of
this acquisition. On the date of acquisition, the fair value of Storm’s net assets was P12,400,000.
Gambit has determined that the excess of the cost of the investment over its share of Storm’s
net assets is attributable to goodwill. Storm’s profit for the year ended December 31, 2019 was
P3,600,000. During 2019, Storm declared and paid cash dividends of P400,000. There were no
other transactions between the two companies. There was no indication of goodwill
impairment.

2019

Jan. 1 Investment in Associates – Storm Ordinary 5,160,000

Cash 5,160,000

Dec. 31 Investment in Associates – Storm Ordinary 1,080,000

Share in Profit of Associates 1,080,000

30% x 3,600,000

31 Cash (30% x 400,000) 120,000

Investment in Associates – Storm Ordinary 120,000

B. On March 1, 2019 Wolverine, Inc. acquired a 30% ownership in one of its customers, Cyclops
Corporation for P1,365,000, when the net assets of Cyclops had carrying value of P3,550,000.
Because of this acquisition, Wolverine exercises significant influence over Cyclops. Wolverine
has no intention of selling Cyclops’ shares within twelve months from the date of acquisition.

All the identifiable assets and liabilities of Cyclops, on March 1, 2019 show carrying values equal
to their fair values, except for inventory which had fair value in excess of carrying amounts by
P50,000 and some depreciable assets which had total fair values in excess of carrying amounts
by P750,000. These depreciable assets, at March 1, 2019, have remaining useful lives of 5 years.

During 2019, Cyclops declared and paid cash dividends of P800,000 and reported net profit of
P1,200,000. On December 31, 2019, the shares of Cyclops held by Wolverine have total market
value of P1,500,000.

(a)

2019
 Mar. 1 Investment in Associates – Cyclops 1,365,000

Cash 1,365,000

Dec. 31 Cash (30% x 800,000) 240,000

Investment in Associates – Cyclops 240,000

31 Investment in Associates – Cyclops 300,000

Share in Profit of Associates 300,000

(1.2M x 10/12) x 30%

31 Share in Profit of Associates – Cyclops 52,500

Investment in Associates – Cyclops 52,500

Amortization of undervaluation of assets

(30% x 750,000)/5 yrs. = 45,000

45,000 x 10/12 = 37,500

50,000 x 30% = 15,000

37,500 + 15,000 = 52,500

(b) Acquisition cost, March 1, 2019 P1,365,000

Cash dividends received ( 240,000)

Share in reported profit of associate 300,000

Adjustment in reported profit ( 52,500)

Investment carrying value, December 31, 2019 P1,372,500

Income reported by Wolverine from its investment in associates:

(300,000 – 52,500) P 247,500

C. On January 1, , Rogue Corporation acquired 10% of the outstanding voting shares of Sentinel,
Inc. for P900,000. These shares were designated as equity investments at fair value through
other comprehensive income.
On January 2, Year 2, Rogue gained the ability to exercise significant influence over financial and
operating policies of Sentinel by acquiring an additional 20% of Sentinel’s outstanding shares for
P2,600,000. The two purchases were made at prices proportionate to the value assigned to
 Sentinel’s net assets, which equaled their carrying amounts. For the years ended December 31,
Year 1 and Year 2, Sentinel reported the following:

Year 1 Year 2
Dividends paid P2,000,000 P3,000,000
Profit for the year 6,000,000 6,500,000

The fair values of the investments on December 31, Year 1 and December 31, Year 2 were
P1,380,000 and P5,100,000, respectively.
(a)

Year 1

Jan. 1 Equity Investments at FV through OCI – Sentinel 900,000

Cash 900,000

Dec. 31 Cash 200,000

Dividend Revenue 200,000

10% x 2,000,000

31 Equity Investments at FV through OCI – Sentinel 480,000

Unrealized Gains and Losses on Equity

Investments – OCI 480,000

1,380,000 – 900,000

Year 2

Jan. 1 Investment in Associates – Sentinel, Inc. (at FV) 1,380,000

Equity Investments at FV through OCI – Sentinel 1,380,000

Unrealized Gains and Losses on Equity Investments at FV -

OCI
480,000

Retained Earnings 480,000

1 Investment in Associates – Sentinel, Inc. 2,600,000

Cash 2,600,000

Dec. 31 Investment in Associates – Sentinel, Inc. 1,950,000

 Share in Profit of Associates (30% x 6,500,000) 1,950,000

31 Cash 900,000

Investment in Associates (30% x 3,000,000) 900,000

(b) Cost transferred from Equity Investments at FV 1,380,000

Additional investment 2,600,000

Share in profit 1,950,000

Cash dividends received (900,000)

Carrying amount, December 31, Year 2 5,030,000

D. Magneto Corporation purchased 50,000 ordinary shares of Mystique Company on January 1,

Year 1 at P165 per share, which reflected carrying value at that date. Mystique Company had
200,000 ordinary shares outstanding at the time of purchase. Prior to this purchase, Magneto
Corp. had no ownership in Mystique Co. Mystique reported profit of P680,000 in year 1 and
P1,000,000 in Year 2. Magneto received a cash dividend from Mystique of P210,000 on August
1, Year 1 and P240,000 on December 31, Year 2. Because of significant influence acquired by
Magneto over Mystique, the investment was accounted for using the equity method.

Market values of each share of December 31, Year 1 and December 31, Year 2 were P160 and
P175, respectively.

On January 2, Year 3, Magneto sold 20,000 ordinary shares of Mystique for P175 per share. On
January 2, Year 3, Magneto exercised its option to measure the remaining securities at fair value
through other comprehensive income. Mystique reported profit of P3,720,000 for the year
ended December 31, Year 3 and paid Magneto dividends of P120,000. Market value of Mystique
shares on December 31, Year 3 was P190 each. As a result of this sale, Magneto lots its ability to
exercise significant influence over Mystique.
(a)

Year 1

Jan. 1 Investment in Associates – Mystique Company 8,250,000

Cash (50,000 x 165) 8,250,000

Aug. 1 Cash 210,000

 Investment in Associates – Mystique Company 210,000

Dec. 31 Investment in Associates – Mystique Company 170,000

Share in Profit of Associates 170,000

25% x 680,000

Year 2

Dec. 31 Cash 240,000

Investment in Associates – Mystique Company 240,000

31 Investment in Associates – Mystique Company 250,000

Share in Profit of Associates – Mystique Company 250,000

25% x 1,000,000

Year 3

Jan. 2 Cash (20,000 x 175) 3,500,000

Investment in Associates – Mystique Company 3,288,000

Gain on Sale of Investment in Associates 212,000

Acquisition cost 8,250,000

Share in profit (Year1) 170,000

Cash dividends received (Year1) (210,000)

Cash dividends received (Year2) (240,000)

Share in profit (Year 2) 250,000

Investment carrying amount 8,220,000

Portion sold 20/50

CV of investment sold 3,288,000

2 Equity Investments at FV through OCI 5,250,000

Investment in Associates – Mystique Company 4,932,000

Investment Income 318,000

30,000 x 175 = 5,250,000

8,220,000 – 3,288,000 = 4,932,000

 5,250,000 – 4,932,000 = 318,000

Dec. 31 Cash 120,000

Dividend Revenue 120,000

31 Equity Investments at FV through OCI 450,000

Unrealized Gains and Losses on Equity

Investments – OCI 450,000

30,000 x (190 - 175)

(b) Year 1 Year 2 Year 3

Cost/Carrying Value, beg of year P8,250,000 P8,210,000

Income from associates 170,000 250,000

Cash dividends received (210,000 (240,000)

Carrying value, end of year P8,210,000 P8,220,000

Market value 30,000 x 190 P5,700,000