ILLUSTRATIONS – INVESTMENT IN ASSOCIATE
1. At the beginning of current year, Rose Company purchased 40%of the ordinary shares of another company for
P 3,000,000 when the net assets acquired amounted to P 6,000,000.
At the acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were equal to their
fair value, except for the equipment for which the fair value was P 500,000 greater than the carrying amount, Land
whose fair value was P 200,000 greater than the cost and the inventory whose fair value was P 400,000 greater than
the cost.
The equipment has a remaining life of 5 years and the inventory was all sold during the current year.
The investee reported net income of P 3,000,000 and paid P 500,000 dividends during the current year.
REQUIRED:
1. Prepare journal entries for the current year.
2. Compute the investment income for the current year.
Solution:
Acquisition cost
Carrying cost of net assets acquired ( 40% x 6,000,000)
Excess of cost over carrying amount
Allocation of excess:
Excess attributable to inventory ( 40% x 400,000)
Excess attributable to equipment ( 40% x 500,000)
Excess attributable to Land ( 40% x 200,000)
Goodwill
6,000,000
2,400,000
600,000
(160,000)
(200,000)
( 80,000)
(440,000)
160,000
Journal entries:
Date
2021
Jan, 1
Dec. 31
Particulars
PR
Debit
Investment in associate
Cash
To record investment
3,000,000
Investment in associate
Investment income
To share in the net income
( 40% x 3,000,000)
1,200,000
Cash
Investment in Associate
To record cash dividend received.
Credit
3,000,000
1,200,000
200,000
200,000
Investment income
Investment in associate
Amortization of the excess
attributable to equipment.
40,000
Investment income
Investment in associate
Amortization of the excess
attributable to inventory
160,000
40,000
160,000
Note: 1. The excess attributable to Land is not amortized because land is nondepreciable.
2. Goodwill is included in the carrying amount of Investment in Associate. The excess attributable to Goodwill
is not amortized but tested for impairment annually.
To compute for net investment income for the current year:
Share in net income
Amortization of excess attributable to equipment
Amortization of excess attributable to inventory
Net investment income
1,200,000
(40,000)
(160,000)
1,000,000
Investment in Associate
1/1
12/31
3,000,000
1,200,000
________
4,200,000
3,800,000
Bal.
12/31
200,000
40,000
160,000
400,000
Investment Income
12/31
40,000
160,000
200,000
12/31
1,200,000
________
1,200,000
Balance: 1,000,000
Problem 2: Same as Problem 1, except that the equipment whose fair value was P 500,000 lower than the carrying
amount.
Solution:
Acquisition cost
Carrying cost of net assets acquired ( 40% x 6,000,000)
Excess of cost over carrying amount
Allocation of excess:
Excess attributable to inventory ( 40% x 400,000)
Excess attributable to equipment ( 40% x 500,000)
Excess attributable to Land ( 40% x 200,000)
Goodwill
6,000,000
2,400,000
600,000
(160,000)
200,000
( 80,000)
(40,000)
560,000
Journal entries:
Date
2021
Jan, 1
Dec. 31
Particulars
PR
Debit
Investment in associate
Cash
To record investment
3,000,000
Investment in associate
Investment income
To share in the net income
( 40% x 3,000,000)
1,200,000
Credit
3,000,000
1,200,000
Cash
Investment in Associate
To record cash dividend received.
200,000
200,000
Investment in Associate
Investment income
Amortization of the excess
attributable to equipment.
40,000
Investment income
Investment in associate
Amortization of the excess
attributable to inventory
160,000
40,000
160,000
To compute for net investment income for the current year:
Share in net income
Amortization of excess attributable to equipment
Amortization of excess attributable to inventory
Net investment income
1,200,000
40,000
(160,000)
1,080,000
Investment in Associate
1/1
12/31
Bal.
3,000,000
1,200,000
40,000
4,240,000
3,880,000
12/31
200,000
160,000
Investment Income
12/31
160,000
160,000
360,000
12/31
1,200,000
__ 40,000
1,240,000
Balance: 1,080,000
Problem 3: Same as Problem 1, except that the equipment whose fair value was P 1,500,000 greater than the
carrying amount.
Solution:
Acquisition cost
Carrying cost of net assets acquired ( 40% x 6,000,000)
Excess of cost over carrying amount
Allocation of excess:
Excess attributable to inventory ( 40% x 400,000)
Excess attributable to equipment ( 40% x 1,000,000)
Excess attributable to Land ( 40% x 200,000)
Excess of net fair value over cost
6,000,000
2,400,000
600,000
(160,000)
(400,000)
( 80,000)
(640,000)
(40,000)
Journal entries:
Date
2021
Jan, 1
Dec. 31
Particulars
PR
Debit
Investment in associate
Cash
To record investment
3,000,000
Investment in associate
Investment income
To share in the net income
( 40% x 3,000,000)
1,200,000
Credit
3,000,000
1,200,000
Cash
Investment in Associate
To record cash dividend received.
200,000
Investment Income
Investment in Associate
Amortization of the excess
attributable to equipment.
400,000
Investment income
Investment in associate
Amortization of the excess
attributable to inventory
160,000
200,000
400,000
160,000
Investment in Associate
Investment income
Excess of net fair value
40,000
40,000
To compute for net investment income for the current year:
Share in net income
Amortization of excess attributable to equipment
Amortization of excess attributable to inventory
Excess net fair value
Net investment income
1,200,000
(400,000)
(160,000)
40,000
680,000
Investment in Associate
1/1
12/31
Bal.
3,000,000
1,200,000
40,000
4,240,000
3,480,000
12/31
200,000
400,000
160,000
760,000
Investment Income
12/31
400,000
160,000
560,000
12/31
1,200,000
__ 40,000
1,240,000
Balance:
680,000