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PAS 28 - Investment in Associate - 2019-202
Accountancy (STI College)
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Google Quiz – Answer Key
Theories:
1. If there is any excess of the investor's share of the net fair value of the associate's identifiable assets
and liabilities over the cost of the investment, that is, negative goodwill, how should that excess be
treated?
A. It should be written off against retained earnings.
B. It should be included in the carrying amount of the investment.
C. It should be included as income in the determination of the investor's share of the 3associate's
profit or loss for the period.
D. It should be disclosed separately as part of the investor's equity.
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. Be increased by its share of the earnings of the investee, and decreased by its share of the losses
of the investee
B. Be increased by its share of the earnings of the investee, but not be affected by its share of the
losses of the investee
C. Not be affected by its share of the earnings of the investee, but be decreased by its share of the
losses of the investee
D. Not be affected by its share of the earnings or losses of the investee
3. Under the equity method of accounting for investments, an investor recognizes its share of the earnings
in the period in which the
A. Investor sells the investment
B. Investee pays dividend
C. Invested declares a dividend
D. Earnings are reported by the investee in its financial statements
4. An investor uses the cost method to account for investment in ordinary shares. Dividends received in
excess of the investor's share of investee's earnings subsequent to the date of investment
A. Increase the investment revenue account
B. Increase the investment account
C. Do not affect the investment account
D. Decrease the investment account
5. The equity method causes the balance in the investment account to approximate:
A. original cost of the investment
B. original cost of the investment plus any dividends declared and paid by the investee company
C. original cost of the investment plus a proportionate share of subsequent undistributed earnings of
the investee company
D. market value of the investment
6. The equity method of accounting for an investment in the common stock of another company should
be used when the investment:
a. is obtained by an exchange of stock for stock.
b. is composed of common stock and it is the investor’s intent to vote the common stock.
c. ensures a source of supply such as raw materials.
d. enables the investor to exercise significant influence over the investee.
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7. Goodwill arising from an investment in associate is
A. Included in the carrying amount of the investment and not amortized.
B. Included in the carrying amount of the investment and amortized over the useful life.
C. Excluded from the carrying amount of the investment but charged to retained earnings.
D. Excluded from the carrying amount of the investment but charged to expense immediately.
8. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
A. Investor sells the investment
B. Investee pays dividend
C. Investee declares a dividend
D. Earnings are reported by the investee
9. At the beginning of the current year, an investor acquired 30% of the ordinary shares of another
entity. In the current year, the investee has net earnings which exceeded dividends paid. The
investor mistakenly recorded these transactions using the cost method instead of the equity method
of accounting. What effect would this have on investment account, net earnings and retained
earnings, respectively?
a.
b.
c.
d.
Understate, understate, understate
Understate, overstate, understate
Overstate, understate, understate
Overstae, overstate, overstate
10. An investor uses the equity method to account for investment in ordinary shares. The purchase price
implies a fair value of the investee’s depreciable asset in excess of the investee’s net asset carrying
amount. The investor’s amortization of the excess
a.
b.
c.
d.
Decreases the investment account
Decreases the goodwill account
Increases the investment revenue account
Does not affect the investment account
Problems.
1. Moss Company owned 20% of Dubro Company’s preference share capital and 50% of the ordinary
share capital. The investee reported net income P600,000 for the current year.
10% cumulative preference share capital
Ordinary share capital
1,000,000
7,000,000
What is the investment income for the current year?
Investment income = (P600,000 – P100,000) * 50% = P250,000
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2. On July 1, 2019, Anne Company purchased 20% of the outstanding ordinary shares of Dune
Company which resulted to a goodwill of P1,445,000. Dune Company’s shareholders’ equity at
the beginning of current year was P15,500,000. At the time of acquisition, the fair values of
Dune Company’s identifiable assets and liabilities were equal to their carrying amounts except
for an office equipment which had a fair value in excess of carrying amount of P2,000,000 and
an estimated life of 10 years. During the current year, Dune Company reported net income of
P5,000,000 and paid cash dividend of P2,000,000. Compute for the total amount paid by Anne
to Dune to acquire the investment.
Purchase Price
CA of NA (P15.5M * 20%)
Excess of Cost over CA
Undervalued equipment (P2M * 20%)
Goodwill
P 4,945,000 (squeeze)
3,100,000
1,845,000
( 400,000)
P 1,445,000
Use the following information for the next 2 questions:
At the beginning of the current year, Ronald Company purchased 40% of the outstanding ordinary shares
of New Company, paying P6,400,000 when the carrying amount of the net assets of New Company
equaled P12,900,000. The difference was attributed to equipment which had a carrying amount of
P3,000,000 and a fair market value of P5,000,000 and to building which had a carrying amount of
2,500,000 and a fair market value of P4,000,000. The remaining useful life of the equipment and
building was 4 years and 12 years, respectively. During the current year, New Company reported net
income of 2,300,000 and paid cash dividend of P2,500,000.
3. What amount should be reported as investment income for the current year?
Step 1: Compute if there is GW or Gain on Acquisition
Acquisition Cost
6,400,000
Net assets acquired (40% x 12,900,000)
(5,160,000)
Excess of cost
1,240,000
Excess attributable to equipment (40% x 2,000,000)
(800,000)
Excess attributable to building (40% x 1,500,000)
(600,000)
Excess of fair value over cost (Gain on Acquisition/Neg GW) (160,000)
Step 2: Entries
Step 3: Compute the Investment Income
Gain on acquisition
Share in net income (40% x 2,300,000)
Amortization of excess:
Equipment
(800,000 /4)
Building
(600,000 /12)
Investment income
Or
Net Income
Amortization:
Equipment
Building
Adjusted Net income
*
Share in net income
Gain on Acquisition
Investment income
160,000
920,000
(200,000)
(50,000)
830,000
2,300,000
(500,000)
(125,000)
1,675,000
40%
670,000
160,000
830,000
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4. What is the carrying amount of the investment in associate at year end?
Acquisition Cost
P
Investment Income
Share in Dividends (P2.5M * 40%)
CA of Investment
P
6,400,000
830,000
(1,000,000)
6,230,000
Use the following information for the next three questions:
On June 30, 2019, Santa Company purchased 30% of the outstanding common stock of Santi Company for
P15,000,000. At that time, Santi Company’s net assets amounted to P40,000,000. The level of
investment is sufficient to provide Santa significant influence over the activities of Santi. The difference
between the purchase price and the underlying book value of Santi’s net assets is due to the following:
a. Inventory is undervalued of P3,000,000.
b. Depreciable assets with a 10-year remaining life are worth P2,000,000 more than the book
value.
c. Goodwill is determined to exist for any remaining difference between cost and book value.
Goodwill is estimated to have a useful life of 15 years from the date of the stock purchase.
By the end of the year, 25% of the inventories left unsold. Santi Company reported net income of
P21,000,000 for the year 2019 and paid cash dividends of P5,000,000 on December 31, 2019.
5. Compute for the goodwill upon acquisition
6. Compute for the investment income.
7. Compute for the carrying amount of the investment for the current year.
Purchase Price
CA of NA (P40M * 30%)
Excess of Cost over CA
Undervalued inventory (P3M * 30%)
Undervalued building (P2M * 30%)
Goodwill
Share in net income (P21M * 6/12 * 30%)
Excess amortization related to:
Inventories (P900,000 * 75%)
Building (P600,000 ÷ 10yrs * 6/12)
Investment income during the period
P 15,000,000
12,000,000
3,000,000
( 900,000)
( 600,000)
P 1,500,000
P 3,150,000
(675,000)
( 30,000)
P2,445,000
Or
Net income (P21M * 6/12)
Excess amortization related to:
Inventories (P3,000,000 * 75%)
Building (P2,000,000 ÷ 10yrs * 6/10)
Adjusted Net income
*
Share in Net income
P 10,500,000
(2,250,000)
(100,000)
8,150,000
30%
2,445,000
Please note that the acquisition of the investment took place in the middle of the year.
Thus, the next income and amortization of depreciable assets must be allocated. Goodwill,
on the other hand, is not amortize by only tested for impairment.
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Acquisition Cost
Investment Income
Share in Dividends (P5M * 30%)
CA of Investment
P 15,000,000
2,445,000
(1,500,000)
P15,945,000
Use the following information for the next two questions.
Civility Company provided the following chronological transactions:
1. Purchased 20,000 ordinary shares on an investee for P2,400,000 representing 25% interest on
January 1, 2018. The net assets of the investee is P7,000,000. At that time, the investee’s
building is undervalued by P2,500,000 with the remaining life of 8 years and its land is
undervalued by P1,000,000. Also, the investee’s has an outstanding cumulative 12% preference
share of 15,000 shares with P50 par value.
2. The entity reported a net income of P1,500,000 for 2018.
3. Received a 15% stock dividend from the investee.
4. The investee reported a net loss of P300,000 for 2019. Also, during this year, the land was sold
for P4,500,000.
5. The investee paid a cash dividend of P500,000 to ordinary shareholders on December 31,2019.
6. Sold 2,500 ordinary shares at P200 per share on December 31, 2019.
Required:
8. Compute for the carrying amount of the investment on December 31, 2018.
9. Compute for the investment income/loss for December 31, 2019. See # 4 below
10. Compute for the carrying amount of the investment on December 31, 2019. 2,093,451
Excess of FV over cost
Share in net income (P1.5M – 90,000) * 25%
Excess amortization related to:
Building (P625,000 ÷ 8yrs)
Investment income during the period
P 225,000
352,500
( 78,125)
P 499,375
Or your may refer to entries in #2
Acquisition Cost
Investment Income
CA of Investment
P 2,400,000
499,375
P 2,899,375
Entries:
1. Investment in Associate
Cash
2,400,000
P2,400,000
Purchase Price
CA of NA (P7M * 25%)
Excess of Cost over CA
Undervalued building (P2.5M * 25%)
P 2,400,000
1,750,000
650,000
( 625,000)
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Undervalued land (P1M * 25%)
Excess of FV over Cost
( 250,000)
(P 225,000)
2. Investment in Associate
Investment income
225,000
225,000
Investment in Associate [(P1.5M – 90,000) * 25%] 352,500
Investment income
352,500
Investment income (P625,000/8)
Investment in Associate
78,125
78,125
3. Received 3,000 shares as 15% dividend on 20,000 shares. Shares now held is 23,000 with the new
cost per share of
4. Investment loss (-300,000 – 90,000) * 25%
Investment in Associate
97,500
97,500
Investment income (sold land - amortization)
Investment in Associate
250,000
250,000
Investment income (P625,000/8)
Investment in Associate
78,125
Share in net loss (-300,000 – 90,000) * 25%
Excess amortization related to:
Land
Building (P625,000 ÷ 8yrs)
Investment loss during the period
78,125
(97,500)
(250,000)
( 78,125)
(P 425,625)
Please note that land was sold during the year. Therefore, the excess allocated to it in #1 will
be fully amortized in year 2019. The excess also related to the building will be continuously
recognized until the end of its remaining life.
5. Cash (P500,000 * 25%)
Investment in Associate
125,000
125,000
CA of Investment in Associate 2,348,750
÷
23,000
Cost per share
102.1195652
6. Cash (2,500 * 200)
P500,000
Investment in Associate (2,500 * 102.11…) 255,299
Gain on Sales on Investment
244,701
CA of investment 2,093,451
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