Investment in Associate

1. Which of the following will not affect the investment income reported in profit or loss if the equity
investment is considered having significant influence?
a. share in excess representing increase in depreciation expense.
b. cash dividend received.
c. share in excess of inventories carrying value and fair value on acquisition date when these
inventories were sold during the year.
d. all of these affect the investment income.

2. An investor uses the equity method to account for an investment in ordinary shares. After the date
of acquisition, the investment account of the investor would
a. Not be affected by its share of the earnings or losses of the investee.
b. Not be affected by its share of the earnings of the investee, but be decreased by its share of the
losses of the investee.
c. Be increased by its share of the earnings of the investee, and decreased by its share of the losses
of the investee.
d. Be increased by its share of the earnings of the investee, but not affected by its share of the losses
of the investee.

3. If the combined market value of trading securities at the end of the year is less than the market value
of the same portfolio of Trading securities at the beginning of the year, the difference should be
accounted for by
a. Reporting an unrealized loss in security investments in the stockholders equity section of the
balance sheet
b. Reporting an unrealized loss in security investments in the income statement
c. A debit to Investment in Trading Securities
d. A credit to Investment in Trading Securities

4. An entity has a trading equity securities portfolio acquired in the current year. The aggregate market
value exceeds the aggregate cost. This difference shall
a. Be accounted for a a valuation allowance in the asset section of the statement of financial
position.
b. Be accounted for separately in the shareholders’ equity section of the statement of financial
position.
c. Be accounted for as an unrealized gain in the income statement.
d. Not be accounted for in the financial statement.

5. For marketable debt securities portfolio classified as amortized cost, which of the following amounts
shall be included in the current period’s net income?
I. Unrealized loss during the period.
II. Realized gain during the period.
III. Change in the valuation allowance during the period.

a. I, II, and III b. I and II only c. II only d. III only

6. Under PFRS 9, which of the following is not a category of financial assets?
a. Financial assets at fair value through profit or loss.
b. Financial assets at fair value through other comprehensive income.
c. Financial assets at amortized cost.
d. Financial assets at held for sale.

7. All of the following financial assets shall be measured at fair value through profit or loss, except
a. Financial assets held for trading.
b. Financial assets designated on initial recognition as at fair value through profit or loss.
c. Investment in quoted equity instrument.
d. Financial asset at amortized cost.

8. Financial asset is held for trading if (choose the incorrect one)

a. It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of financial assets that are managed together and
for which there is evidence of a recent actual pattern of short-term profit taking.
c. It is a derivative that is not designated as an effective hedging instrument.
d. It is a derivative that is designated as an effective hedging instrument.

9. Transaction costs include

a. Fees and commission paid to agent, levies by regulatory authorities, transfer taxes and duties.
b. Debt premiums or discounts.
c. Financing costs.
d. Internal administrative costs.

10. Transaction costs that are directly attributable to the acquisition of a financial asset shall be
a. Capitalized as cost of the financial asset.
b. Expensed when incurred.
c. Charged to retained earnings.
d. Included as a component of other comprehensive income.

PROBLEMS

1. On January 1, 2018, Jessyl Company purchased 25% of Joy Company ordinary shares. The purchase
resulted in an excess fair value of P600,000. Jessyl appropriately carried this investment at equity and
the balance in Jessyl’s investment account was P5,600,000 on December 31, 2018. Joy Company
reported net income of P2,000,000 for the year ended December 31, 2018, and paid cash dividends
to ordinary shareholders totaling P1,200,000 during 2018. The fair value of the investment at
December 31, 20218 is P5,700,000. How much did Jessyl pay for the 25% interest in Joy?

2. Same information in number, except that Jessyl Company is a medium enterprise and the company
elected to use fair value model. How much is the carrying amount of the investment in associate?

3. On January 1, 2014, Edgar Company purchased 25,000 shares or 10% interest of Juliet Company for
P2,000,000. Edgar Company used the cost method to account for this investment. Juliet Company
reported net income of P4,000,000 and paid no dividends in 2014. On January 1, 2015, Edgar
Company paid P5,000,000 for 50,000 additional shares of Juliet Company. The fair value of the
existing 10% interest was P1,700,000 on January 1, 2015. The fair value of the identifiable net assets
 of Juliet Company equal the carrying amount of P20,000,000 on such date except for land whose fair
value is greater than carrying amount by P4,000,000. The investee reported net income of P6,000,000
for 2015 and paid dividends of P10 per share. What is the carrying amount of the investment in
associate on December 31, 2015?

4. Same information in number 3, except that Edgard Company is a medium enterprise and they elected
to use the equity method in accounting for the investment. How much is the carrying amount of the
investment in associate?

5. Darwin Company purchased 30% of Joy Company’s ordinary shares on January 1, 2021. The purchase
resulted in no goodwill or excess fair value.

• Joy sold goods costing P500,000 for P750,000 to Darwin in 2021. On December 31, 2021, the
goods remained unsold by Darwin. In 2015, Darwin sold such goods to the regular customers.
• On January 1, 2021, Joy also sold machinery with a carrying amount of P3,000,000 to Darwin for
P4,200,000. The machinery’s remaining life was 6 years.
• Joy reported net income of P3,500,000 and P2,500,000 in 2021 and 2022, respectively.

What amount of equity in earnings of Joy Company should Darwin Company report for 2022?

6. Same information in number 5, except that Darwin Company is a medium enterprise and elected to
use the fair value model. How much is the equity in earnings of Joy Company should Darwin Company
report for 2022?

7. On September 1, Evangeline Company received P500,000 cash dividend from Ocay Company in which
Evangeline Company owned a 50% interest. On October 1, Evangeline Company received P100,000
liquidating dividend from Maine Company. Evangeline Company owned a 5% interest in Maine
Company. Evangeline Company owned a 10% interest of Lee Company which declared a P2,000,000
cash dividend on December 31. What amount of dividend revenue should be reported for the current
year?

8. Tropico Company purchased 10% of Edelyn Corporation’s 200,000 outstanding shares of ordinary
shares on January 2, 2018 for P2,500,000. On January 2, 2018, Tropico Company purchased another
40,000 shares of Edelyn for P6,000,000. There was no goodwill as a result of either acquisition. Edelyn
reported earnings of P6,000,000 and P7,000,000 for the year ended December 31, 2018 and
December 31, 2019, respectively. No dividends were declared in years 2018 and 2019, respectively
by Edelyn Company. What amount of income from investment should Tropico report in its statement
of comprehensive income related to its investment for the year ended December 31, 2019?