FAR EASTERN UNIVERSITY

FINANCIAL ACCOUNTING AND REPORTING

PROBLEMS
FAR 05 – ACCOUNTING FOR INVESTMENTS IN ASSOCIATE

1. On January 1, 2021, Keith Company acquired 15% of the outstanding voting shares of Roan Incorporated
for P900,000. These shares were designated as equity investments at fair value through other
comprehensive income.

On February 1, 2022, Keith gained the ability to exercise significant influence over financial and operating
policies of Roan by acquiring additional 20% of the outstanding shares for P2,760,000. The two purchases
were made at prices proportionate to the value assigned to Roan’s net assets, which is equal to their carrying
amounts. For the years ended December 31, 2021 and 2022, Roan reported the following:
Description 2021 2022
Dividends paid P2,000,000 P3,500,000
Profit for the year 6,000,000 6,500,000

How much should Keith initially record the investment in associate on February 1, 2022?
a. P4,830,000 c. P3,900,000
b. P4,140,000 d. P3,760,000

2. The carrying value of the investment in associate at the end of 2022 is?
a. P4,225,000 c. P5,792,500
b. P4,855,000 d. P5,652,500

3. On January 2, 2021, Bennett Inc. acquired 15% interest in Miguel Co. by paying P1,500,000 for 7,500
ordinary shares. On this date, the net assets of Miguel Co. totaled P9 million. The investment was classified
as a financial asset at fair value through other comprehensive income. The fair values of Miguel Co.’s
identifiable assets and liabilities approximate their book values. On August 1, 2021, Bennett received
dividends of P4 per share from Miguel Co. Fair value of the stocks on December 31, 2021 was P190. Net
income reported by Miguel for the year ended amounted to P1,500,000.

On July 1, 2022, Bennett Inc. paid P1 million to purchase 5,000 additional shares of Miguel Co. from another
shareholder. On this date the fair value of the net assets exceeds carrying value by P500,000 attributable to
depreciable asset with estimated remaining life of 5 years. On February 1, 2022, cash dividends of P5 were
received while dividends of P6 were received on August 1, 2022. Net income reported for the year ended
amounted to P1,500,000 with P800,000 being earned for the second half six months ended December 31,
2022.

4. What amount of investment income should be reported on Bennett’s income statement for the year ended
December 31, 2022?
a. P315,000 c. P275,000
b. P300,000 d. P225,000

5. What is the ending balance of the investment in associate account as of December 31, 2022?
a. P2,722,500 c. P2,612,500
b. P2,702,500 d. P2,592,500

6. Joseph Corporation purchased 30,000 ordinary shares of Barrera Corporation for P40 per share on January
2, 2022. Barrera Corporation had 100,000 ordinary shares outstanding. During 2022, Barrera paid cash
dividends of P60,000 to Joseph and reported total net income of P500,000. Joseph Corporation should report
investment in 2022 of?
a. P1,332,000 c. P1,287,500
b. P1,290,000 d. P1,277,000

7. On January 2, 2022 Marissa Company purchased 25% of the outstanding ordinary shares of Alec, Inc. and
subsequently used the equity method to account for the investment. During 2022 Alec, Inc. reported net
income of P420,000 and paid dividends to Marissa of P180,000. The ending balance in the Equity
Investments account at December 31, 2022 was P520,000 after applying the equity method during 2022.
What was the purchase price Marissa Company paid for its investment in Alec, Inc?
a. P595,000 c. P460,000
b. P575,000 d. P430,000

8. At the beginning of 2022, Mary Shir Co. purchased 250,000 ordinary shares of Gabrielle Co. at P45 per
share, giving Mary Shir 40% ownership and a significant influence over Gabrielle. On this date, the book
value Gabrielle’s net asset amounted to P23,125,000. On the date of acquisition, the carrying amount of
Gabrielle’s identifiable assets and liabilities approximate their carrying amounts, except for the following:
a. Aggregate fair value of Gabrielle’s depreciable property, plant, and equipment is P2,500,000 greater than
its carrying value. Such items are depreciated over 8-years on the date of acquisition.
b. The fair value of Gabrielle’s inventories was P2,000,000 greater than its carrying amount. All of these
inventories were sold in 2022.
c. A land costing P1,000,000 had fair value of P1,500,000.
 During the year, the Gabrielle earned a net income of P10,200,000, and declared and paid cash dividends
of P1,800,000.

How much is the investment income reported during 2022?

a. P4,295,000 c. P3,155,000
b. P4,080,000 d. P3,080,000

9. Carrying value of the investment at the end of 2022?

a. P13,610,000 c. P14,300,000
b. P13,685,000 d. P14,315,000

10. Assuming that half of the shares were sold on January 1, 2023 at prevailing fair value of P55 per share, how
much is the gain or loss on sale?
a. P59,50 c. P46,000
b. P57,500 d. P32,500

11. Assuming that half of the shares were sold on January 1, 2023 at prevailing fair value of P55 per share, the
remaining shares were reclassified as equity investment at FVTOCI. How much is the total gain (loss)
recognized in PL on the date of sale?
c. P59,50 c. P46,000
d. P57,500 d. no correct answer