Examination About Investment 11

EXAMINATION about INVESTMENT 11
General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (20 Points)
1. In October 1, 2010 AB Company acquired 30% of the outstanding ordinary shares of SG Company for
P2,706,000. This investment gave AB Company the ability to exercise significant influence over SG Company.
The book value of the acquired share was P2,400,000. At the time of acquisition, SG Company’s building was
reported at its carrying value with a remaining useful life ten years. The fair value of this building over its
carrying value exceed by P1,500,000. SG Company’s accounting policy is continually measure this building
under the cost model.
For the year ended December 31, 2010, SG Company reported net of tax income of P900,000 and paid cash dividends of
P100,000 on its ordinary share and thereafter issued 5% stock dividend. Income tax rate is 32%. What is the carrying
value of AB’s investment in SG Company account on December 31, 2010?
a. P2,706,000 c. P2,712,900
b. P2,735,940 d. P2,743,500
Answer: B
Original cost P2,706,000
Add/Deduct:
Share in NI 67,500
Share in cash dividend ( 30,000)
Understatement of Dep’r ( 7,560)
Carrying value of investment P2,735,940
Acquisition cost P2,706,000

Less: BV of net asset acquired P2,400,000
Excess P 306,000
÷ Remaining useful life 10 years
Annual understatement of dep’r P 30,600
Multiply by: 3/12
Understatement of Dep’r P 7,560
2. In October 1, 2010, RG Company acquired 30% of the outstanding ordinary shares of BS Company for
P3,000,000. This investment gave RG Company the ability to exercise significant influence over BS Company.
The book value of the acquired shares was P3,000,000. For the year ended December 31, 2010, BS Company
reported net of tax income of P900,000 and paid cash dividends of P100,000 on its ordinary share and thereafter
issued 5% dividend.
On January 1, 2011, BS Company revalued its building. The revaluation of the building has created a revaluation surplus,
net of tax in the amount of P340,000 in the books of BS Company and the revaluation was made known to RG Company.
Both BS Company and RG Company use a uniform income tax rate of 32%for all years. For the year ended December
31, 2011, BS Company reported a net of tax income of P1,200,000 and paid P300,000 cash dividends to all its
shareholders. What is the carrying value of RG Company Investment in BS account on December 31, 2011?
a. P3,022,500 c. P3,307,300
b. P3,409,500 d. P3,637,300
Answer: B
Original cost – 10.1.10 P3,000,000
Add/Deduct:
Share in NI(900,000x 3/12 x 30%) P 67,500
Share in dividends (100,000 x 30%) (30,000)
Carrying value – 12.31.10 P3,037,500
Add/Deduct:
Share in NI (1,200,000 x 30%) P 360,000
Share in dividends(300,000 x 30%) (90,000)
Share in revaluation
(P500,000 x30% x 68%) 102,000
Carrying value – 12.31.11 P3,409,500
Revaluation surplus, net of tax P340,000

÷ Net of tax rate 68%
Revaluation surplus b4 income tax P500,000
3. On September 1, 2010, Tender Company purchased 30% of the outstanding ordinary share of Care Corporation
for P3,000,000 when the book value of net assets of Care Corporation was P9,000,000. The fair values of the
assets are equal to their carrying value except of a land which was undervalued by P1,000,000. Care reported net
earnings throughout the year in the amount of P2,400,000 and paid total paid dividends of P1,000,000. What is
the maximum amount of income Tender Company could include in its 2010 profit or loss as “income from
investment”?
a. P207,500 c. P235,000
b. P237,500 d. P240,000
Answer: D
Net income for the year P2,400,000
÷ Number of months in a year 12
Average monthly income P 200,000
x No, of monsths (Sept – Dec) 4
Net income for 4 months P 800,000
x % of interest 30%
Share in NI P 240,000
4. TMG Company purchased 40% of GHQ Company’s outstanding ordinary share on January 2, 2010 for
P8,000,000. The carrying amount of GHQ’s net assets at the date of purchased totaled P18,504,000. Fair value
and carrying value were the same for all items except for plan and inventory for which fair value exceeded their
carrying amounts by P1,000,00 and P200,000, respectively. The plant has a 20-year life. The entire inventory was
sold during 2010. Goodwill, if any, is not to be amortized and no impairment test has been done since company
believes that the goodwill has yet to decline its value 2010, GHQ Company reported net of P2,400,000 and a
P400,000 cash dividends. Income tax rate is 32%. What amount should TMG Company report in its profit or loss
from its investment in GHQ Company for the year ended December 31, 2010?
a. P836,000 c. P844,000
b. P860,000 d. P892,000
Answer: D
Share in NI (2,400,000 x 40%) P960,000
Less: Amortization of excess (100,000 x 68%) (68,000)
Income from investment P892,000
Original cost P8,000,000

Less: BV of net asset (18,504,000x40%) P7,401,600
Excess P 598,400
Allocation of excess
Plant asset (1,000,000 x 40% x 68%) (272,000)
Inventory (200,000 x 40% x 68%) ( 54,400)
Goodwill P 272,000
Plant asset (400,000 ÷ 20 yrs) P 20,000

Inventory P 80,000
Amortization of excess P100,000
5. MPC Company purchased 10% of KFC Corporation’s 200,000 outstanding shares of ordinary shares on January
2, 2010 for P2,500,000. On October 31, 2010 MPC Company purchased another 40,000 shares of KFC for
P6,000,000. There was no goodwill as a result of either acquisition and KFC had not issued any stock dividends
during 2010. KFC had not issued any stock dividends during 2010. KFC reported earning P6,000,000 for the
ended December 31, 2010. What amount should Company reported in its December 31, 2010 balance sheet as
Investment in KFC?
a. P8,500,000 c. P 9,300,000
b. P9,400,000 d. P10,300,000
Answer: C
Original cost
Jan acquisition P2.500.000
October acquisition P6,000,000
Total P8,500,000
Add: Share in NI
Jan – Oct (6,000,000x10/12 x10%) 500,000
Oct – Dec (6,000,000x 2/12 x30%) 300,000
Carrying value of investment P9,300,000

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EXAMINATION about INVESTMENT 11

Acquisition cost P2,706,000

Revaluation surplus, net of tax P340,000

Original cost P8,000,000

Plant asset (400,000 ÷ 20 yrs) P 20,000

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