ACCTG 303 BUSINESS COMBINATIONS
JOINT ARRANGEMENTS (PFRS 11) PART 3: ACCOUNTING FOR JONT VENTURES
SEATWORK
THEORIES
1. Under the equity method, on initial recognition the investment in an associate or a joint venture is
recognized __________, and the carrying amount is increased or decreased to recognize the
investor’s share of the profit or loss of the investee after the date of acquisition.
a. At cost
b. At fair value
c. At historical cost
d. At amortized cost
2. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?
a. It is amortized
b. It is impairment tested individually
c. It is written off against profit or loss
d. Goodwill is not recognized separately within the carrying amount of the investment
3. If there is any excess of the investor's share of the net fair value of the associate's identifiable assets
and contingent liabilities over the cost of the investment, that is, negative goodwill, how should that
excess be treated?
a. It should be included in the carrying amount of the investment
b. It should be written off against retained earnings
c. It should be included as income in the in determination of the investor's share of the associate's
profit or loss for the period
d. It should be disclosed separately as part of the investor’s equity
4. Which statement is incorrect regarding an investor's share of losses of an associate?
a. If an entity's share of losses of an associate equals or exceeds its interest in the associate, the
entity discontinues recognizing its share of further losses.
b. After the entity's interest is reduced to zero, additional losses are provided for, and a liability is
recognized, only to the extent that the entity has incurred legal or constructive obligations or
made payments on behalf of the associate.
c. If the associate subsequently reports profits, the entity resumes recognizing its share of those
profits only after its share of the profits equals the share of losses not recognized.
d. None of the above.
5. When an investment in joint venture is held by a venture capital organization, mutual trust fund, unit
trust and insurance-linked fund
a. The entity must apply the equity method of accounting.
b. The entity must apply the fair value method of accounting.
c. The entity may elect to measure the investment in joint venture at fair value through profit or
loss.
d. The entity may elect to measure the investment in joint venture at fair value through other
comprehensive income.
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6. Where all of the following conditions apply an investor need not apply the equity method of
accounting:
I. The investor is a wholly owned subsidiary or a partly owned subsidiary and its owners do not object
to the method not being used.
II. The investor's debt or equity securities are not traded in a public market.
III. The investor has not filed financial statements with a regulatory organization for the purpose of
issuing any class of securities in a public market.
IV. The ultimate parent of the investor publishes consolidated financial statements that comply with
IFRS
a. I and IV only;
b. II and III only;
c. I, II and III only;
d. I, II, III and IV.
7. Under PFRS for SMEs, how shall the joint venture account for its Investment in Joint Venture?
a. Equity method
b. Cost method
c. Fair value through profit or loss under PFRS 9
d. Any of the above
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PROBLEMS
PROBLEM 1
On December 1, 20x5, Heart Corp. purchased 200,000 shares representing 45% of the outstanding stock
of Mind Company for cash of P2,500,000. As a result of this purchase, Heart has the ability to exercise
significant influence over the operating and financial policies of Mind.
o 45% of the net income of Mind amounted to P20,000 for the month of December and P350,000
for the year ended December 31, 20x5.
o On January 15, 2006, cash dividends of P0.30 per share were paid to stockholders of record on
December 31, 20x5.
1. What amount of income should Heart Corp. report for 20X5 as a result of the investment?
2. What amount should Heart Corp. report as investment in Mind on Heart Corp.’s December 31, 20x5
balance sheet?
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PROBLEM 2
On January 1, 20x5, Emotion Company purchased 20% of the outstanding common stock of Logic
Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000 is payable with 12% annual
interest on December 31, 20x6. Emotion also paid P500,000 to a business broker who helped find a
suitable business and negotiated the purchase.
At the time of acquisition, the fair value of Logic’s identifiable assets and liabilities were equal to their
carrying values except for an office building which had a fair value in excess of book value of P2,000,000
and an estimated life of 10 years. Logic’s stockholders’ equity on January 1, 20x5 was P13,000,000.
During 20x5, Logic reported net income of P5,000,000 and paid dividend of P2,000,000.
Answer: P960,000
3. What amount of income should Emotion Company report for 20X5 as a result of the investment?
=960,000
4. What amount should Emotion report as investment in Logic in Emotion’s December 31, 20x6 balance
sheet? = 5,060,000
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PROBLEM 3
On January 1, 2xx14, Happy Company purchased 40% of the outstanding ordinary shares of another entity
for P5,000,000 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 their fair value,
except for equipment for which the fair value was P2,000,000 greater than carrying amount and inventory
whose fair value was P1,000,000 greater than cost. The equipment has a remaining life of 5 years and the
inventory was all sold during 20x4. The investee reported net income of P6,000,000 for 20x4 and paid no
dividends.
2,040,000
5. What amount of income should Happy Company report for 20x4 as a result of the investment?
6. What amount should Happy report as investment in joint venture on the December 31, 20x4 balance
sheet?
5. Solution
Cost
FV
=
5,000,000
(4,000,000)
1,000,000 - Excess of cost over carrying amount/FV
Excess of cost over carrying amount
Excess of equipment (40% x 2,000,000)
Excess of inventory (40% x 1,000,000)
1,000,000
(800,000)
(400,000)
Excess of fair value over cost
(200,000)
Share in net income (40% * 6,000,000)
Excess of fair value over cost
Less: Amortization
Equipment
(800,000/5)
Inventory – all sold
Investment income
2,400,000
200,000
(160,000)
(400,000)
= 2,040,000
Number 6. Solution
?????????????
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PROBLEM 4
Lovers Allapacan Company bought 20% of Friends Corporation’s ordinary shares on January 1, 20x6 for
P20,000,000. Carrying amount of Friends’s net assets at purchase date totaled P60,000,000. Fair value
and carrying amounts were the same for all items except for plant and inventory, for which fair values
exceed their carrying amounts by P15,000,000 and P5,000,000 respectively. The plant has a 5-year life. All
inventory was sold during 20x6. During 20x6, Friends reported profit of P40,000,000 and paid a
P15,000,000 cash dividend.
7. What amount should Lovers report as investment income for 2016?
Acquisition cost –
Net assets acquired –
Excess of cost over carrying amount
P20,000,000
12,000,000 (60,000,000 x 40%)
= 8,000,000
The excess of cost is identified as follows:
Understate of plant 20% x 15,000,000
Understatement of inventory 20% x 5,000,000
Total excess of cost
Share in net income (20% x 40,000,000)
Less: Amortization of excess of cost
Depreciation of plant (3,000,000/5)
Inventory totally sold
Investment income
3,000,000
1,000,000
4,000,000
8,000,000
600,000
1,000,000
(1,600,000)
6,400,000
8. What amount should Lovers report as investment in Friends on Lovers’s December 31, 20x6 balance
sheet?
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PROBLEM 5
9. Investor owns 40% of Investee and applies the equity method. In 2012, Investee sells merchandise
costing P50,000 to Investor for P70,000. Investor's ending inventory includes P30,000 purchased from
Investee. What amount of unrealized gross must be deferred in the equity method entry?
=4,000
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PROBLEM 6
10. Patience Company owns 40% of the voting stock of Growth Industries, acquired at book value. Growth
reports income of P600,000 for 20x3. Growth regularly sells merchandise to Patience at a markup of
30% on cost. Patience's 20x3 beginning inventory includes P156,000 purchased from Growth. Its 20x3
ending inventory includes P260,000 purchased from Growth. Patience uses the equity method to
report its investment in Growth. Equity in net income of Growth for 20x3 is
=230,400
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PROBLEM 7
On January 1, 2018, Satisfaction Corp. a public entity, invested P 1,000,000 in a joint venture for 50%
capital interest. The following transactions occurred:
o On July 1, 2018, the joint venture sold equipment to Satisfaction Corp. at a gain of P60,000. The
equipment has remaining useful life of 5 years at the time of sale.
o On December 1, 2018, the joint venture sold inventory to Satisfaction Corp. at a gross profit of
P100,000. Satisfaction Corp. was able to sell 60% of the said inventory to third person during 2018.
Afterwards, Satisfaction Corp. was able to sell 30% of the said inventory to third person during
2019 and the remainder during 2020.
o On October 1, 2019, the joint venture sold a land to Satisfaction Corp. at a loss of P50,000. On
April 1, 2020, Satisfaction Corp. was able to sell the land to third person.
The financial statements of Entity C provided the following data for its three year operation:
Net Income (Net Loss)
Dividend Declaration
2018
P 500,000
P 100,000
2019
(P 2,500,000)
2020
P 3,000,000
P 200,000
11. What is the investment income to be reported by Satisfaction Corp. in relation to its Investment in
Joint Venture in its Statement of Comprehensive Income for the year ended December 31, 2020?
12. What is the amount of Investment in Joint Venture to be reported by Satisfaction Corp in its Statement
of Financial Position as of the year ended December 31, 2020?
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PROBLEM 8
On July 1, 20x3, Athena Corporation acquired 25% of the shares of Aphrodite, Inc. for P1,000,000. At that
date, the equity of Aphrodite was P4,000,000 with all the identifiable assets and liabilities being measured
at amounts equal to fair value. The table below shows the profits and losses made by Aphrodite during
20x3 to 20x7:
Year
Profit (Loss)
20x3
P200,000
20x4
(2,000,000)
20x5
(2,500,000)
20x6
160,000
20x7
300,000
13. How much ‘share of profit of associate’ should Athena report in its 20x6 profit or loss?
14. How much ‘share of profit of associate’ should Athena report in its 20x7 profit or loss?
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PROBLEM 9
On January 1, 20x1, Romantic Company acquired 25% of the outstanding ordinary shares of Love Company
for P5,000,000. Romantic Company and Platonic Company immediately agreed to share control (wherein
unanimous consent is needed to all the parties involved) over Love Company. The book value of the
acquired shares was P4,200,000. The excess of cost over book value was attributed to a depreciable asset
on Love' statement of financial position and which had a remaining useful life of 8 years.
For the year ended December 31, 20x1, Love' share capital outstanding is as follows:
10% preference share capital P 4,000,000
Ordinary share capital
8,000,000
Love reported net income of P2,000,000 for the year ended December 31, 20x1.
Determine the investment income to be reported by Romantic for the year ended December 31, 20x1 in
the following cases:
15. If the preference share is cumulative and treated as equity by Love and that Love declared dividends
of P450,000 on the preference shares
16. If the preference share is cumulative and treated as equity by Love and that Love declared all the
required dividends on the preference shares during the year and the preference share is in arrears for
3 years
17. If the preference share is cumulative and treated as financial liability by Love
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PROBLEM 10
On January 1, 2020, Entity A, an SME, and Entity B, an SME incorporated Entity C by investing P1,000,000
each for 50% interest. For the year ended December 31, 2020, Entity C reported net income of P400,000
and distributed dividends to common stockholders amounting to P100,000. On December 31, 2020, Entity
B estimated that the fair value of its investment in Entity C is P1,500,000. The cost of selling this
investment is estimated at 30%. The value in use of the investment based on the discounted cash flows
of the investment is P1,100,000.
What is the book value of Investment in Entity C to be reported in the statement of financial position of
Entity B as of December 31, 2020 under the different models allowed by PFRS for SMEs for this type of
investment?
18. Fair value model
19. Cost method
20. Equity method
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