Exercise 6 Solutions

Investment in Associate
Additional Exercise Problems

SOLUTIONS
-oOo-
Instruction(s): Try your best to solve the following problems on your own. Solutions will follow later for you to
review whether or not your answers are correct.
PROBLEM 1
On January 1, 2016, Krizelle Company acquired 30% of the outstanding ordinary shares of Arah Company for
P6,000,000. This investment gave Krizelle the ability to exercise significant influence over Arah.
The book value of the acquired shares was P5,000,000. The excess of cost over book value was attributed to a
depreciable asset which was undervalued on Arah’s statement of financial position and which had a remaining
useful life of eight years.
For the year ended December 31, 2016, Arah’s share capital outstanding is as follows:
10% cumulative preference share capital 3,000,000

Ordinary share capital 6,000,000
Questions: Based on the above data, answer the following:
CASE 1
1. What amount should Krizelle record as investment income for the year ended December 31, 2016?
Net income 2,500,000

Less: Total preference dividends (P3,000,000 x 10%) (300,000)
Net income to ordinary shareholders 2,200,000
Multiply by: % of ownership 30%
Share in the net income of associate 660,000
Less: Amortization of undervalued asset (P1M/8) (125,000)
Net investment income 535,000
2. What amount should Krizelle record as investment in associate for the year ended December 31, 2016?
Cost of investment 6,000,000

Add: net investment income 535,000
Less: Dividends received -
Carrying value – 12/31 6,535,000
CASE 2: Assume instead that the preference shares are non-cumulative preference share treated as equity by
Arah and that Arah declared dividends of P450,000 on the preference shares. Answer the following:

Less: Total ACTUAL preference dividends declared (450,000)
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CASE 3: Assuming the cumulative preference share is treated as financial liability by Arah, answer the following:

Less: Total preference dividends -

PROBLEM 2
On January 1, 2015, Myrah Company acquired 30% of the ordinary shares of an associate for P5,000,000. On this
date, all the identifiable assets and liabilities of the associate were recorded as fair value. An analysis of the
acquisition showed that goodwill of P400,000 was acquired.
The net income and dividend of the associate for 2015 and 2016 were as follows:
2015 2016
Net income 2,500,000 4,000,000
Dividend paid 900,000 2,000,000
On January 3, 2015, Myrah Company sold an equipment costing P300,000 to the associate for P400,000. The
equipment has a remaining life of 5 years.
In December 2015, the associate sold inventory to Myrah Company for P350,000. The cost of the inventory was
P300,000. This inventory remained unsold by Myrah Company on December 31, 2015. However, it was sold by
Myrah Company in 2016.
In December 2016, Myrah Company sold inventory to the associate for P550,000. The cost of the inventory was
P400,000. This inventory remained unsold by the associate on December 31, 2016.
Questions: Based on the above data, determine the following: (ignore income tax on intercompany sale)
1. Net share in the net income(loss) of the associate in 2015.

2. Net share in the net income(loss) of the associate in 2016.
2015 2016
Net income of the associate 2,500,000 4,000,000
Multiply by: % of ownership 30% 30%
Share in Net income 750,000 1,200,000
Less: Gain on sale of equipment (100,000) -
Add: depreciation of excess 20,000 20,000
Gain on sale of inventory (upstream) (15,000) 15,000
– 50,000 x 0.30
Less: gain on sale of inventory - (150,000)
(downstream)
Net share in Net income 655,000 1,085,000
3. Carrying amount of the investment in associate on December 31, 2015.

4. Carrying amount of the investment in associate on December 31, 2016.
2015 2016
Cost of investment 5,000,000 5,385,000
Add: net investment income 655,000 1,085,000
Less: Dividends received (270,000) (600,000)
Carrying value – 12/31 5,385,000 5,870,000
5. Assuming the company is a small/medium entity and uses equity method, the carrying a mount of
investment on December 31, 2016.

Add: net investment income 1,085,000
Less: Dividends received (600,000)
Less: Amortization of goodwill (400,000 x 2/10)* 80,000
*Under PFRS for SMEs on Intangible Assets, Goodwill is amortized over its useful life. If an entity cannot
reliably determine the useful life, it is assumed to be 10 years.
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Investment in Associate

Additional Exercise Problems

10% cumulative preference share capital 3,000,000

Questions: Based on the above data, answer the following:

Net income 2,500,000

Cost of investment 6,000,000

Net income 2,500,000

Cost of investment 6,000,000

Net income 2,500,000

Cost of investment 6,000,000

1. Net share in the net income(loss) of the associate in 2015.

3. Carrying amount of the investment in associate on December 31, 2015.

Cost of investment 5,385,000

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