FINANCIAL ACCOUNTING AND REPORTING REVIEW – BY SIR ANUAR I.

LOBO, CPA
11.2. INVESTMENT IN ASSOCIATE

1. At the beginning of current year, an entity purchased 20% of the outstanding ordinary shares of
another entity 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.

The investor also paid P500,000 to a business broker who helped find a suitable business and
negotiated the purchase.

The investee’s shareholders’ equity at the beginning of the current year was P13,000,000.

At the time of acquisition, the fair values of the investee’s identifiable assets and liabilities were
equal to their carrying amounts except for an office building which had a fair value in excess of the
carrying amount of P2,000,000 and an estimated life of 10 years.

During the current year, the investee reported net income of P5.000.000 and paid cash dividend of
P2,000,000.

1. 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

2. What is the carrying amount of the investment in associate at year-end?

a. 4,560,000
b. 4,160,000
c. 5,060,000
d. 5,460,000

2. At the beginning of current year, an entity acquired 40% of the outstanding ordinary shares of
another entity for P7,000,000 when the net assets of the investee amounted to P10,000,000.

At acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were
equal to fair value, except for land whose the fair value was P2,000,000 greater than carrying amount
and inventory whose fair value was P1,500,000 greater than cost.

The land was sold in the current year and one-half of the inventory was sold during the current year.
During the current year, the investee reported net income of P8,000,000, issued 10% share dividend
and paid cash dividend on P2,500,000.

1. What is the investment income for current year?

a. 3,200,000
b. 2,100,000
c. 2,900,000
d. 2,400,000

2. What is the carrying amount of the investment in associate at year-end?

a. 8,900,000
b. 8,100,000
c. 9,200,000
d. 8,400,000
3. At the beginning of current year, an entity acquired 40% of the ordinary shares of an associate. On
such date, assets and liabilities of the investee were recorded at fair value and the acquisition showed
that goodwill of P1,000,000 was acquired. The investee reported net income of P8,000,000 for the
current year.

In December, the investee sold inventory costing P3,000,000 to the investor for P5,000,000. The
inventory remained unsold by the investor at year-end.

At the beginning of current year, the investee sold an equipment to the investor with carrying amount
of P2,500,000 for P4,000,000. The remaining life of the equipment is 5 years.

What amount of investment income should be reported for current year?

a. 1,920,000
b. 1,800,000
c. 3,200,000
d. 2,400,000

4. An entity owned 100% of another entity’s preference shares and 20% of ordinary shares. The
investee’s share capital outstanding at year-end included P5,000,000 of 10% cumulative
preference shares and P10,000,000 of ordinary shares.

The investee reported net income of P8,000,000 for the current year. No dividend was declared for
both preference and ordinary shares during the current year.

What amount should be reported as investment income for the current year?
a. 1,600,000
b. 1,500,000
c. 2,000,000
d. 1,000,000

5. On January 1, 2021, an entity acquired a 10% interest in an investee for P3,000,000. The investment
was accounted for under the cost method. During 2021, the investee reported net income of
P4,000,000 and paid dividend of P1,000,000.

On January 1, 2022 the entity acquired a further 15% interest in the investee for P8,500,000. On
such date, the carrying amount of the net assets of the investee was P36,000,000 and the fair value
of the 10% existing interest was P3,500,000. The fair value of the net assets of the investee is equal
to carrying amount except for an equipment whose fair value was P4,000,000 greater than carrying
amount. The equipment had a remaining life of 5 years.

The investee reported net income of P8,000,000 for 2022 and paid dividend of P6,000,000 on
December 31, 2022.

1. What amount of income should be recognized by the investor in 2021?

a. 400,000
b. 100,000
c. 300,000
d. 200,000

2. What total amount of income should be recognized by the investor in 2022?

a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000
 3. What is the carrying amount of the investment in associate on December 31, 2022?
a. 12,300,000
b. 12,500,000
c. 13,800,000
d. 12,900,000

“Do what you feel in your heart to be right – for you’ll be criticized anyway.” ―
Eleanor Roosevelt