Problems - Investment in Associates and Reclassification

INVESTMENT IN ASSOCIATES
PROBLEM 1
The following transactions pertain to Bulacan Company.
1. Purchased 20,000 ordinary shares of P100 par of Batangas Company for P2,000,000 on January
1, 2019. This purchase represents 20% of interest in the net assets of Batangas which is fairly valued
at P8,000,000. The shares give Bulacan significant influence over Batangas.
2. Batangas reported profit of P1,500,000 for 2019.
3. In 2020, Bulacan received a 10% bonus issue from Batangas.
4. Batangas reported profit of P3,000,000 for 2020.
5. Batangas paid a cash dividend of P1,000,000 on the ordinary shares on December 31, 2020.
Required:
1. Journal entries to record the transactions.
2. Carrying value of investment on December 31, 2019, and 2020.
PROBLEM 2
On July 1, 2019, Laguna Corporation acquired 20% of the outstanding ordinary shares of another entity
for P5,000,000. The carrying amount of the acquired shares was P4,000,000. The excess of cost over
carrying amount was attributable to equipment which was undervalued on the investee’s statement of
financial position and which had a remaining useful life of 5 years. For the year ended December 31, 2019,
the investee reported net income of P6,000,000 and paid cash dividends of P1,000,000 on ordinary shares
capital and issued 10% stock dividend on December 31, 2019.
Required: What is the carrying amount of the investment in associate on December 31, 2019?
PROBLEM 3
On July 1, 2019, Cavite Corporation purchased 40% of the outstanding ordinary shares of another entity
for P500,000 when the net assets of the investee amounted to P1,000,000. 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 P200,000 greater than carrying amount and inventory whose fair
value was P100,000 greater than the cost. The equipment has a remaining life of 5 years and the inventory
was all sold during 2019. The investee reported net income of P550,000 for 2019 and paid dividends
amounting to P800,000.
Required: What is the maximum amount which could be included in income before tax to reflect the investor’s
equity in earnings of the investee for 2019?
PROBLEM 4
On March 31, 2020, Quezon Company purchased 120,000 ordinary shares of Rizal Company for
P1,700,000, representing 30% of Rizal Company’s outstanding ordinary shares and an underlying equity
of P1,400,000 in Rizal Company’s net assets on that date. The excess of the acquisition cost over the equity
acquired cannot be attributed to any tangible asset. As a result of Quezon’s 30% ownership of Rizal
Company, Quezon has the ability to exercise significant influence over Rizal Company’s financial and
operating policies.
On March 1, June 1, September 1 and December 1, all of 2020, Rizal Company paid quarterly dividend
of P0.50 per ordinary share on each of these dates. Rizal Company’s profit for the year ended December
31, 2020 was P1,200,000 that was earned evenly throughout the year. At December 31, 2020, each
ordinary share of Rizal Company was selling at P16.
Required:
1. What is Quezon Company’s income from associates for the year 2020?
2. What is the investment carrying amount on December 31, 2020?
3. Assuming the excess of acquisition cost over the underlying equity acquired is attributable to a piece of
equipment with a remaining life of 5 years on the date of investment acquisition, and depreciation on a
straight-line basis, what is the investment carrying amount on December 31, 2020?
PROBLEM 5
On January 1, 2020, Albay Company acquired a 30% interest in Bataan Company for P2,430,000. On this
date, Bataan Company’s shareholders’ equity was P5,000,000. At acquisition date, the carrying amount of
Bataan Company’s identifiable net assets approximated their fair values, except for the following:
Excess of Fair Value
Over Carrying Value
Land P2,000,000
Inventory 600,000
Machinery 500,000
All of the inventories that are undervalued on January 1, 2020 was sold during the year. The machinery is
being depreciated using the straight-line method and had a remaining useful life of 4 years on January 1,
2020. For the year 2020, Bataan Company reported profit of P1,520,000 and paid its shareholders
dividends of P650,000.
Required: What is the carrying amount of the investment in associates on December 31, 2020?
Problem 6
On January 1, Year 1, Richmonde Corporation acquired 10% of outstanding voting shares of Pen Inc. for
P900,000. These shares were designated as equity investment at fair value through OCI.
On January 2, Year 2, Richmonde gained the ability to exercise significant influence over financial and
operating policies of Pen by acquiring additional 20% of Pen’s outstanding shares for P2,600,000. The two
purchases were made at prices proportionate to the value assigned to Pen’s net assets, which equaled their
carrying amounts. For the years ended December 31, Year 1 and Year 2, Pen reported the following:
Year 1 Year 2
Dividends paid 2,000,000 3,000,000
Profit for the year 6,000,000 6,500,000
The fair values of the investments on December 31, Year 1 and December 31, Year 2 were P1,380,000
and P5,100,000, respectively.
Required:
1. Journal entries to record the transactions.
2. Carrying value of investment on December 31, Year 2.
Problem 7
E Corporation purchased 50,000 ordinary shares of F Company on January 1, Year 1 at P165 per share,
which reflected carrying value as of that date. F Company had 200,000 ordinary shares outstanding at the
time of purchase. Prior to this purchase, E Corp. had no ownership interest in F. F reported a profit of
P680,000 from Year 1 and P1,000,000 in Year 2. E receive a cash dividend from F of P210,000 on August
1, Year 1 and P240,000 on December 31, Year 2. Because of significant influence acquired by E over F,
the investment was accounted for using equity method.
Market values of each share on December 31, Year 1 and December 31, Year 2 were P160 and P175,
respectively.
On January 2, Year 3, E sold 20,000 ordinary shares of F for P175per share. On January 2, Year 3, E
exercised its option to measure the remaining securities at fair value through other comprehensive income. F.
reported profit of P3,720,000 for the year ended December 31, Year 3 and paid E dividends of P120,000.
Market values of F shares on December 31, Year 3 was P190 each. As a result of sale, E lost its ability to
exercise significant influence over F.
Required:
1. Give the entries in the books of E to account for the investment in F during Year 1 through Year 3.
2. Determine the carrying amount of the investment in the statement of financial position on December 31,
Year 1, Year 2 and Year 3.
Source:
Robles, N. S. and Empleo, P. M. (2019). Intermediate Accounting 1 Series
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