Guided Exercises

Investment in Associate

PROBLEM 1
Rhayven Pharmaceutical paid P68 million on January 2, 2018 for P4 million shares of Luke
Corporation ordinary shares. The investment represents a 25% interest in the assets of Luke and
gave Rhayven the ability to exercise significant influence over Luke corporation. On the date of
acquisition, the following date are available:
 The book value of Luke’s net assets was P192 million
 The fair value of Luke’s depreciable assets exceeded their book value by P32 million.
These assets had an average remaining useful life of right years.
 The remainder of the excess of the cost of the investment over the book value of net
assets purchased was attributable to goodwill.
Luke paid P1.50 per share dividends on August 25, 2018. Luke reported net income of P40
million for the year ended December 31, 2018. The market value of Luke’s ordinary shares at
December 31, 2018 was P18.50 per share.
Requirement:
a. Prepare the appropriate journal entries
b. Compute for the investment income and carrying amount of the investment in associate
as of December 31, 2018

Solution:
A. 2018
Jan. 2 Investment in Associate 68,000,000
Cash 68,000,000
Aug. 25 Cash (4M x P1.5) 6,000,000
Investment in associate 6,000,000
Dec. 31 Investment in associate 10,000,000
Investment income (40M x 25%) 10,000,000
Dec. 31 Investment income 1,000,000
Investment in associate (32M x 25%)/8 years 1,000,000

B. Acquisition cost 68,000,000

Less: book value of net assets acquired (192M x 25%) 48,000,000
Excess of cost over book value 20,000,000
Less: undervaluation of depreciable asset (32M x 25%) 8,000,000
Goodwill 12,000,000

This study source was downloaded by 100000860691238 from CourseHero.com on 01-30-2023 06:35:41 GMT -06:00

https://www.coursehero.com/file/79618236/Guided-Exercises-Investment-in-Associatedocx/
 Investment in Associate
Acquisition cost 68,000,000 6,000,000 Dividend received
(4M x P1.50)
Share in net 10,000,000 1,000,000 Amortization of
income of excess
associate
71,000,000 Balance ending
Total 78,000,000 78,000,000

Net Investment Income

Amortization: 1,000,000 10,000,000 Share in the net
Depreciable asset income (40M x
(8M / 8) 25%)
Net investment 9,000,000
income
Total 10,000,000 10,000,000

This study source was downloaded by 100000860691238 from CourseHero.com on 01-30-2023 06:35:41 GMT -06:00

https://www.coursehero.com/file/79618236/Guided-Exercises-Investment-in-Associatedocx/
Powered by TCPDF (www.tcpdf.org)