PROBLEM

17-14 TO 17-16
I N V E S T M E N T I N A S S O C I AT E
Problem 17-14 (AICPA Adapted)

At the beginning of current year, Iceland Company purchased 40% of the outstanding ordinary shares of another entity
for P9,500,000 when the net assets of the investee amounted to P15,000,000.

At acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were equal to their fair
value, except for equipment whose fair value was P5,000,000 greater than carrying amount, land whose fair value was
P2,500,000 greater than cost and inventory whose fair value was P2,000,000 greater than cost. The equipment had a
remaining life of 4 years.

The land was sold and the inventory was one-half sold during the current year. The investee reported net income of
P10,000,000, paid P4,000,000 cash dividend and issued 10% share dividend during the current year. What is the carrying
amount of the investment in associate at year-end?
a 10,000,000

b. 10,300,000

c. 10,700,000

d. 11,900,000
 Solution;
17-14 Cost P9,500,000
CA of interest acquired (15M × 40%) (P6000000)
Excess of cost over carrying amount P3,500,000
ANSWER:
(2,000,000)
b. 10,300,000 Excess attributable to equipment (5M × 40%)
(1,000,000)
Excess attributable to land (2.5M ×40%)
Excess attributable to inventory (2M × 40%) (800000)
Excess fair value over cost (300,000)

Share in net income (10M × 40%) P4,000,000

Excess fair value over cost 300,000
Amortization of excess:
Equipment (2,000,000/4) (500,000)
Land (1,000,000)
Inventory (800,000×6/12) (400000)
Investment income for current year P2,400,000

Acquisition cost P9,500,000

Investment income 2,400,000
Cash dividend received (4,000,000×40%) (1600000)
Carrying amount of investment in associate P10,300,000
Problem 17-15
At the beginning of current year, Mega Company purchased 40% of the outstanding ordinary shares of
an investee paying P2,560,000 when the carrying amount of the net assets of the investee equaled
P5,000,000.

The difference was attributed to equipment which had a carrying amount of P1,200,000 and a fair
market value of P2,000,000, and to building with a carrying amount of P1,000,000 and a fair market
value of P1,600,000.

The remaining useful life of the equipment and building was 4 years and 12 years, respectively. getr
During the current year, the investee reported net income of P1,600,000 and paid dividends of
P1,000,000. What is the carrying amount of the investment in associate at year-end?

a. 2,550,000
b. 2,700,000
c. 2,800,000
d. 3,050,000
 Solution;
17-15 Acquisition cost P2,560,000
Net assets acquired (15M × 40%) (P2000000)
Excess of cost P560,000
ANSWER:
Excess attributable to equipment (800k× 40%) 320,000
b. 2,700,000 240000
Excess attributable to building (600k ×40%)
Excess of cost over carrying amount 560,000

Share in net income (1,600,000×40%) P640,000

Amortization of excess:
Equipment (320,000/4) (80,000)
Building (240,000/12) (20000)
Investment income for current year P540,000

Acquisition cost P2,560,000

Investment income 540,000
Cash dividend received (4,000,000×40%) (400000)
Carrying amount of investment in associate P2,700,000
Problem 17-16 (AICPA Adapted)

Hannah Company owned 20% of Love Company's preference share capital and 50% of the ordinary share capital.

Love Company's share capital outstanding comprised the following at year-end:

10% cumulative preference share capital 2,000,000

Ordinary share capital 7,000,000

Love Company reported net income of P5,000,000 for the current year. What amount should be recorded as investment income
for the current year?

a. 2,400,000
b. 2,500,000
c. 2,600,000
d. 2,700,000
17-15

ANSWER:
a. 2,400,000
Solution:
Net income P5,000,000
Preference dividend (10% × 2,000,000) (200,000)
Net income to ordinary 4,800,000

Share in net income- ordinary shares (4,800,000×50%) P2,400,000