INVESTMENT IN ASSOCIATE
23-1 (AICPA Adapted)
On January 1, 2011, Saxe Company purchased 20% of Lex Company’s
ordinary shares outstanding for P6,000,000. The acquisition cost is equal to
the carrying amount of the net assets acquired. During 2011, Lex reported net
income of 7,000,000 and paid cash dividend of 4,000,000. What is the balance
in the investment in Lex Company on December 21, 2011?
a. 5,200,000
b. 6,000,000
c. 6,600,000
d. 7,400,000
Solution 23-1 Answer c
Acquisition cost
Add: Share in net income (20% x 7,000,000)
Total
Less: Share in cash dividend (20% x 4,000,000)
Investment balance
6,000,000
1,400,000
7,400,000
800,000
6,600,000
PAS 28, paragraph 6, provides that if an investor holds, directly or
indirectly through subsidiaries, 20% or more of the voting power of the
investee, it is presumed that the investor does have significant influence,
unless it can be clearly demonstrated that it is not the case.
The equity method of accounting is used if the investment is 20% or
more of the voting power of the investee.
Under the equity method, the investment account is increased by the
investor’s share of the investee’s earnings and decreased by the investor’s
share of the investee’s losses. Dividend receives from the investee reduces the
carrying amount of the investment.
23-2 (AICPA Adapted)
In January 2011, Farley Company acquired 20% of the outstanding ordinary
shares of Davis Company for 8,000,000. This investment gave Farley the
ability to exercise significant influence over Davis. The carrying amount of the
acquired shares was 6,000,000. The excess of cost over carrying amount was
attributed to a depreciable asset which was undervalued on Davis’ statement
of financial position and which had a remaining useful life of ten years. For
the year ended, December 31, 2011, Davis reported net income of 1,800,000
and paid cash dividends of 400,000 and thereafter issued 5% stock dividend.
What is the carrying amount of the investment in Davis Company on
December 31, 2011?
a.
b.
c.
d.
7,720,000
7,800,000
8,000,000
8,080,000
Solution 23-2 Answer d
Original cost
Share in net income (20% x 1,800,000)
Share in cash dividends (20% x 400,000)
Amortization of excess of cost (2,000,000/10)
Carrying amount of investment – December 31,2011
8,000,000
360,000
( 80,000)
( 200,000)
8,080,000
Acquisition cost
Less: Carrying amount of interest acquired
Excess of cost over carrying amount
8,000,000
6,000,000
2,000,000
The excess of cost over the carrying amount of the underlying equity
acquired which is attributable to undervaluation of a depreciable asset should
be amortized over the remaining useful life of the depreciable asset.
Such amortization is recorded by debiting investment income and
crediting investment in associate.
23-3 (AICPA Adapted)
On January 1, 2011, Dell Company paid 18,000,000 for 50,000 ordinary shares
of Case Company which represent a 25% interest in the net assets of Case. The
acquisition of cost is equal to the carrying amount of the net assets acquired.
Dell has the ability to exercise significant influence over Case. Dell received a
dividend of P35 per share from Case in 2011. Case reported net income of
P9,600,000 for the year ended December 31, 2011.
In the December 31, 2011 statement of financial position, what amount should
be reported as investment in Case Company?
a. 22,150,000
b. 20,400,000
c. 18,650,000
d. 18,000,000
Solution 23-3 Answer c
Acquisition cost – January 1
Add: Share in net income (25% x 9,600,000)
Total
Less: Cash dividend received (50,000x P35)
Carrying amount of investment – December 31
18,000,000
2,400,000
20,400,000
1,750,000
18,650,000
Problem 23-4 (AICPA)
On January 1, 2011, Well Company purchased 10% of Rea Company’s
outstanding ordinary shares for P4,000,000. Well is the largest single
shareholder in Rea and Well’s officers are a majority of Rea’s board of
directors. Rea reported net income of P5,000,000 for 2011 and paid dividends
of P1,500,000.
In its December 31, 2011 statement of financial position, what amount should
Well report as investment in Rea?
a.
b.
c.
d.
4,500,000
4,350,000
4,000,000
3,850,000
Solution 23-4 Answer b
PAS 28, paragraph 6, provides that if the investor holds, directly or indirectly
through subsidiaries, less than 20% of the voting power of the investee, it is
presumed that the investor does not have significant influence, unless such
influence can be clearly demonstrated.
Well’s position as Rea’s largest single shareholder and the presence of Well’s
officers as a majority of Rea’s board of directors demonstrate that Well does
have a significant influence despite the 10% ownership. Accordingly, the
equity method is used.
Acquisition, January 1
Add: Share in net income (10% x 5,000,000)
4,000,000
500,000
Total
Less: Share in cash dividends (10% x 1,500,000)
Carrying value of investment, December 31
4,500,000
150,000
4,350,000
Problem 23-5 (AICPA Adapted)
On January 1, 2011, Dyer Company acquired as a long-term investment a 20%
ordinary share interest in Eason Company. Dyer paid P7,000,000 for this
investment when the fair value of Eason’s net assets was P35,000,000. Dyer
can exercise significant influence over Eason’s operating and financial
policies. For the year ended December 31, 2011, Eason reported net income of
P4,000,000 and declared and paid cash dividends of P1,600,000.
What amount of revenue from the investment should Dyer report for 2011?
a. 1,120,000
b. 480,000
c. 800,000
d. 320,000
Solution 23-5 Answer c
Share in net income (20% x 4,000,000)
800,000
Under the equity method, the investor recognizes as net income its
share of the investee’s earnings. Cash dividends are not recorded as
income but a reduction of the investment account.
Problem 23-6 (AICPA Adapted)
On July 1, 2011, Denver Company purchased 30,000 shares of Eagle
Company’s 100,000 outstanding ordinary shares for P200 per share.
On December 15, 2011, Eagle paid P400,000 in dividends to its
ordinary shareholders. Eagle’s net income for the year ended
December 31, 2011 was P1,200,00, earned evenly throughout the year.
In its 2011 income statement, what amount of income from the
investment should Denver report?
a. 360,000
b. 180,000
c. 120,000
d. 60,000
Solution 23-6 Answer b
Share in net income from July 1 to December 31, 2011
(1,200,000 x 6/12 x 30%)
Interest acquired (30,000/100,000)
180,000
30%
Problem 23-7 (AICPA Adapted)
On April 1, 2011, Ben Company purchased 40% of the outstanding
ordinary shares of Clarke Company for P10,000,000. On that date,
Clarke’s net assets were P20,000,000 and Ben cannot attribute the
excess of cost of its investment in Clarke over its equity in Clarke’s
net assets to any particular factor.
Clarke’s 2011 net income is P5,000,000. Ben plans to retain its
investment in Clarke indefinitely. Ben accounts for its investment in
Clarke by the equity method.
What is the maximum amount which could be included in Ben’s 2011
income before tax to reflect the “equity in net income of Clarke”?
a. 1,400,000
b. 1,500,000
c. 2,000,000
d. 1,850,000
Solution 23-7 Answer b
Share in net income from April 1 to December 31, 2011
(5,000,000 x 9/12 x 40%)
Acquisition cost
Less: CA of net assets acquired
(40% x 20,000,000)
Goodwill – not amortized
1,500,000
10,000,000
8,000,000
2,000,000
Problem 23-8 (IAA)
On January 1, 2011, Ronald Company purchased 40% of the outstanding
ordinary shares of New Company, paying P6,400,00 when the carrying amount
of the net assets of New Company equaled P12,500,000. The difference was
attributed to equipment which has a carrying amount of P3,000,000 and a fair
market value of P5,000,000 and to building which has a carrying amount of
P2,500,000 and a fair value of P4,000,000. The remaining useful life of the
equipment and building was 4 years and 12 years respectively. During 2011,
New Company reported net income of P5,000,000 and paid dividends of
P2,500,000. What amount should be reported as investment income for 2011?
a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 1,750,000
Solution 23-8 Answer d
Acquisition cost
Net assets acquired (40% x 12,500,000)
Excess of cost
Excess attributable to equipment
(40% x 2,000,000)
Excess attributable to building
(40% x 1,500,000)
Share in net income (40% x 5,000,000)
Amortization of excess:
Equipment (800,000/4)
Building (600,000/12)
Investment Income
6,400,000
5,000,000
1,400,000
800,000
600,000
1,400,000
2,000,000
( 200,000)
( 50,000)
1,750,000
Problem 23-9 (AICPA Adapted)
On January 1, 2011, Kean Company purchased 30% interest in Pod Company
for P2,500,000. On this date Pod’s shareholders’ equity was P5,000,000. The
carrying amounts of Pod’s identifiable net assets approximated their fair
values, except for land whose fair value exceeded its carrying amount by
P2,000,000. Pod reported net income of P1,000,000 for 2011 and paid no
dividends. Kean accounts for this investment using the equity method.
In its December 31, 2011 statement of financial position, what amount should
Kean report as investment in associate?
a. 2,100,000
b. 2,200,000
c. 2,800,000
d. 2,760,000
Solution 23-9 Answer c
Acquisition cost
Less: Carrying amount of net assets acquired
(30% x 5,000,000)
Excess of cost over carrying amount
Less: Amount attributable to undervaluation of land
(30% x 2,000,000)
Goodwill – not amortized
2,500,000
Acquisition cost, January 1
Add: Share in net income (30% x 1,000,000)
Carrying amount of investment
2,500,000
300,000
2,800,000
1,500,000
1,000,000
600,000
400,000
The excess of cost attributable to the land is not amortized because the land
is nondepreciable.
Problem 23-10 (AICPA Adapted)
Sage company bought 40% of Eve’s Company’s outstanding ordinary shares
in January1, 2011 for P4,000,000. The carrying amount of Eve’s net assets at
the purchase date totaled P9,000,000. Fair values and carrying amounts were
the same for all items except for plant and inventory, for which fair values
exceeded their carrying amounts by P900,000 and P100,000, respectively. The
plant has an 18-year life. All inventory was sold during 2011. During 2011,
Eve reported net income of P1,200,000 and paid a P200,000 cash dividend.
What amount should Sage report as investment income in its income statement
for the year ended December 31, 2011?
a. 480,000
b. 420,000
c. 360,000
d. 320,000
Solution 23-10 Answer b
Acquisition cost
Net assets acquired (40% x 9,000,000)
Excess of cost over carrying amount
The excess of cost is identified as follows:
Understatement of plant (40% x 900,000)
Understatement of inventory (40% x 100,000)
Total excess of cost
Share in net income (40% x 1,200,000)
Less: amortization of excess of cost:
Depreciation of plant (360,000/18)
20,000
Inventory (totally sold)
40,000
Investment income
4,000,000
(3,600,000)
400,000
360,000
40,000
400,000
480,000
60,000
420,000
Problem 23-11 (CGAC)
On January 1, 2011, Anne Company purchased 20% of the outstanding shares
of Dune 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, 2012. Anne
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 values of Dune’s identifiable assets and
liabilities were equal to their carrying amounts except for an office building
which had a fair value in excess of carrying amount of P2,000,000 and an
estimated life of 10 years. Dune’s shareholder’s equity on January 1, 2011 was
P13,000,000. During 2011, Dune Company reported net income of P5,000,000
and paid dividend of P2,000,000.
What amount of income should Anne Company report for 2011 as a result of
investment?
a. 810,000
b. 620,000
c. 960,000
d. 885,000
Solution 23-11 Answer c
Acquisition cost (4,000,000 + 500,000)
CA of net assets acquired (20% x 13m)
Excess of cost
Excess attributable to building (20% x 2m)
Excess attributable to goodwill – not amortized
Share in net income (20% x 5m)
Amortization of excess of cost:
Attributable to building (400k/10)
Investment income
4,500,000
2,600,000
1,900,000
400,000
1,500,000
1,000,000
( 40,000 )
960,000
Problem 23-12 (IAA)
On January 1, 2011, Occidental Company purchased 40% of the outstanding
ordinary shares of Manapla Company for P3,500,000 when the net assets of
Manapla amounted to P7,000,000. At acquisition date, the carrying amounts
of the identifiable assets and liabilities of Manapla were equal to their fair
value, except for equipment for which the fair value was P1,500,000 greater
than its carrying amount and inventory whose fair value was P500,000 greater
than its cost. The equipment has a remaining life of 4 years and the inventory
was all sold during 2011. Manapla Company reported net income of
P4,000,000 for 2011 and paid no dividends during 2011.
What is the maximum amount of the “equity in earnings of Manapla
Company”?
a. 1,350,000
b. 1,250,000
c. 1,600,000
d. 1,700,000
Solution 23-12 Answer a
Cost
CA of interest acquired (40% x 7m)
Excess of cost over carrying amount
Excess applicable to equipment (40% x 1.5m)
Excess applicable to inventory (40% x 500k)
Excess of fair value over cost
3,500,000
2,800,000
700,000
( 600,000)
( 200,000)
( 100,000)