PAS 28 - Investment in Associate - 2019-202 PDF

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Google Quiz – Answer KeyTheories: 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 e...

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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.

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

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

2,300,000 (500,000) (125,000) 1,675,000 40% 670,000 160,000 830,000

160,000 920,000 (200,000) (50,000) 830,000

4. What is the carrying amount of the investment in associate at year end? Acquisition Cost P 6,400,000 Investment Income 830,000 Share in Dividends (P2.5M * 40%) (1,000,000) CA of Investment P 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.

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 Purchase Price CA of NA (P7M * 25%) Excess of Cost over CA Undervalued building (P2.5M * 25%)

2,400,000 P2,400,000 P 2,400,000 1,750,000 650,000 ( 625,000)

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...