INVESTMENT IN ASSOCIATE An entity acquired 40 of another entitys shares on

Investment in associate an entity acquired 40 of

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PROBLEM 4 INVESTMENT IN ASSOCIATE An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s assets and liabilities at that date were as follows: Carrying amount Fair value Cash 1,000,000 1,000,000 Accounts receivable 4,000,000 4,000,000 Inventory FIFO 8,000,000 9,000,000 Land 5,500,000 7,000,000 Plant and equipment net 14,000,000 22,000,000 Liabilities 7,000,000 7,000,000 The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The entity sold the land in 2018 for P8,000,000 and reported a gain of P2,500,000. The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid P1,000,000 cash dividend on December 31, 2017 and P2,000,000 on December 31, 2018. 1.What is the implied a goodwill arising from the acquisition? a.200,000 b.600,000 c.800,000 d.400,000 2.What is the investment income for 2017? 3.What is the investment income for 2018? 4.What is the carrying amount of the investment in associate on December 31, 2018?
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Page 8 SOLUTION PROBLEM 4 Question 1 Answer B Cash 1,000,000 Accounts receivable 4,000,000 Inventory 8,000,000 Land 5,500,000 Plant and equipment 14,000,000 Liabilities ( 7,000,000) Net assets at carrying amount 25,500,000 Acquisition cost 15,000,000 Net assets acquired (40% x 25,500,000) (10,200,000) Excess of cost 4,800,000 Attributable to inventory (9,000,000 8,000,000 = 1,000,000 x 40%) ( 400,000) Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%) ( 3,200,000) Attributable to land (7,000,000 5,500,000 = 1,500,000 x 40%) ( 600,000) Implied goodwill 600,000 s Question 2 Answer B Share in net income for 2017(40% x 3,000,000) 1,200,000 Amortization of excess inventory ( 400,000) Amortization of excess plant and equipment (3,200,000 / 10 years) ( 320,000) Investment income for 2017 480,000 Question 3 Answer A Share in net income for 2018 (40% x 5,000,000) 2,000,000 Amortization of excess plant and equipment ( 320,000) Amortization of excess land ( 600,000) Investment income for 2018 1,080,000 Question 4 Answer A Acquisition cost 15,000,000 Investment income 2017 480,000 Cash dividend for 2017 (40% x 1,000,000) ( 400,000) Investment income for 2018 1,080,000 Cash dividend for 2018 (40% 2,000,000) ( 800,000) Carrying amount December 31, 2018 15,360,000
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Page 9 PROBLEM 5 BOND INVESTMENT AT FVOCI An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June 30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The business model for this investment is to collect contractual cash flows and sell the bonds in the open market. On December 31, 2017, the bonds were quoted at 106. 1. What amount of interest income should be reported for 2017? a. 400,000 b. 200,000 c. 364,560 d. 363,940 2. What is the adjusted carrying amount of the investment on December 31, 2017? 3. What amount should be recognized in OCI in the statement of comprehensive income for 2017?
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