Investment in Associate

THEORIES

1. It is an entity over which the investor has significant influence.

a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund
2. Which of the following statement best describes the term “significant influence”?
a. The holding of a significant proportion of the share capital in another entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of an entity
d. The mutual sharing in the risks and benefits of a combined entity
3. Which of the following statements is true concerning significant influence?
I. If an investor holds, directly or indirectly, less than 20% of the voting power of the
investee, it is presumed that the investor does not have significant influence, unless
such influence can be clearly demonstrated.
II. If an investor holds, directly or indirectly, 20% or more of the voting power of the
investee, it is presumed that the investor does have significant influence, unless it can
be clearly demonstrated that this is not the case.
III. A substantial or majority ownership by another investor does not necessarily
preclude an investor from having significant influence.
a. I, II, and III
b. I and II only
c. III only
d. II only
4. Which of the following statements is incorrect concerning the equity method?
a. The investment in associate is initially recorded at cost.
b. The investment in associate is increased or decreased by the investor’s share of the
profit or loss of the investee after the date of acquisition.
c. The investor’s share of the profit or loss of the investee is not recognized in the
investor’s profit or loss.
d. Distributions received from the investee reduce the carrying amount of the
investment.
5. Goodwill arising from an investment in associate is
a. Included in the carrying amount of the investment and amortized over the useful life.
b. Included in the carrying amount of the investment and not amortized.
c. Excluded from carrying amount of the investment but charged to retained earnings.
d. Excluded from carrying amount of the investment but charged to expense
immediately.
6. If an associate has outstanding cumulative preference shares, held by outside interests,
the investor computes its share of profit or loss
a. After adjusting for preference dividends which were actually paid during the year.
 b. Without regard for preference dividends.
c. After adjusting for the preference dividends only when declared.
d. After adjusting for the preference dividends, whether or not the dividends have been
declared.
7. An investor shall discontinue the use of the equity method from the date
I. The investor cease to have significant influence over an associate.
II. The associates operates under severe long-term restrictions that significantly impair
the ability to transfer funds to the investor.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
8. If under the equity method, an investor’s share of losses of an associate equals or exceeds
the carrying amount of an investment, which of the following statements is incorrect?
a. The investor ordinarily discontinues its share of further losses.
b. Additional losses are provided for a liability is recognized to the extent that the
investor has incurred legal or constructive obligations or made payments on behalf of
the associate.
c. If the associate subsequently reports profit, the investor resumes its share of the profit
without regard to the share of net loss not previously recognized.
d. The investment is reported at NIL value.
9. When the investor discontinues the use of equity method because significant influence is
lost, the investment in associate retained by the investor shall be measured at
a. Fair value
b. Carrying amount
c. Amortized cost
d. Original cost
10. When an entity holds between 20% and 50% of the voting power of an investee, which of
the following statements is true?
a. The investor must use the equity method.
b. The investor should use the equity method unless circumstances indicate that it is
unable to exercise significant influence over the investee.
c. The investor must use fair value method unless it can be clearly demonstrated that the
investor has significant influence over the investee.
d. The investor must use the fair value method.
11. The equity method is not required to be applied when the associate has been acquired and
held with a view to its disposal within a certain time period. What is period within which
the associate must be disposed of?

a. Six months from the end reporting period

b. Twelve months from the end of reporting period
c. Twelve months from date of classification as held for sale
d. In the near future
12. How is goodwill arising on the acquisition of an associate dealt with in the financial
statements?

a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the investment.
13. How is the impairment test carried out for an investment in associate?

a. The goodwill is separated from the rest of the investment and is impairment tested
individually.
b. The entire carrying amount of the investment is tested for impairment by comparing
the recoverable amount with carrying amount.
c. The carrying amount of the investment shall be compared with the market value.
d. The recoverable amounts of all investments in associates shall be assessed together to
determine whether there has been an impairment on all investments.
14. What should happen when the financial statements of an associate are not prepared as of
the same date as the financial statements of the investor?

a. The associate shall prepare financial statements for the use of the investor at the same
date as that of the investor.
b. The financial statements of the associate prepared up to a different date shall be used
as normal.
c. Any major transactions between the date of the financial statements of the investor
and that of the associate shall be accounted for.
d. As long as gap is not greater than three months, there is no problem.
15. 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, “bargain
purchase”, how should that excess be treated?

a. It should be included in other comprehensive income.

b. It should be included in retained earnings.
c. It should be included as income in the determination of the investor’s share of the
associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
16. 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. Not be affected by its share of the earnings or loss of the investee

b. Not be affected by its share of the earnings of the investee, but be decreased by its
share of the losses of the investee
 c. Be increased by its share of the earnings of the investee, but not affected by its share
of the losses of the investee
d. Be increased by its share of the earnings of the investee, and decreased by its share of
the losses of the investee
17. 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 declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee in its financial statements
18. When the investor uses the equity method to account for investment in ordinary shares,
the investment account will be increased when the investor recognizes

a. A proportionate interest in the net income of the investee

b. A cash dividend received from the investee
c. Periodic amortization of the goodwill related to the purchase
d. Depreciation related to the excess of market value over carrying amount of the
investee’s depreciable assets at the date of the purchase by the investor.
19. When an investor uses the equity method to account for investment in ordinary shares,
cash dividends received by the investor from the investee shall be recorded as

a. Dividend income
b. A deduction from the investor’s share of the investee’s profit
c. A deduction from the investment account
d. A deduction from the shareholders’ equity account, dividends to shareholder.
20. 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. Decreases the investment account

b. Decreases the goodwill account
c. Increases the investment revenue account
d. Does not affect the investment account
21. An investor uses the equity method to account for its 30% investment in ordinary shares
of an investee. Amortization of the investor’s share of the excess of fair value over
carrying amount of depreciable assets at the date of the purchase should be reported in
the investor’s income statement as part of

a. Other expense
b. Depreciation expense
 c. Equity in earnings of investee
d. Amortization of goodwill
22. An investor uses the equity method to account for its purchase of another entity’s
ordinary shares. On the date of acquisition, the fair value of the investee’s inventory and
land exceeded their carrying amount. How do these excess of fair value over carrying
amount affected the investor’s reported equity in earnings of the investee for the current
year?

Inventory excess land excess

a. Decrease decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
23. In its financial statements, an investor uses the equity method of accounting for its 30%
ownership in an investee. At year-end, the investor has a receivable from the investee.
How should the receivable be reported in the investor’s financial statements for the
current year?

a. None of the receivable should be reported, but the entire receivable should be offset
against investee’s payable to the investor.
b. Seventy percent of the receivable should be separately reported, with the balance
offset against 30% of investee’s payable to the investor.
c. The total receivable should be disclosed separately.
d. The total receivable should be included as part of the investment in associate, without
separate disclosure
24. When an investor purchases sufficient ordinary shares to gain significant influence over
the investee, what is the proper accounting treatment of any excess of cost over the
carrying amount of the net assets acquired?

a. The excess remains in the investment account until it is sold.

b. The excess is immediately expensed in the period in which the investment is made.
c. The excess is amortized over the time period that is reasonable in the light of the
underlying cause of the excess.
d. The excess is charged to retained earnings at the time the investor resells the
investment.
25. 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. Overstae, overstate, overstate
b. Overstate, understate, understate
c. Understate, overstate, understate
d. Understate, understate, understate
PROBLEM SOLVING

1. On July 1, 2018, Denver Company purchased 30,000 shares of Eagle Company’s 100,000
outstanding ordinary shares for P200 per share. On December 15, 2018, the investee paid
P400,000 in cash dividend to the ordinary shareholders.
The investee’s net income for the year ended December 31, 2018 was P1,200,000, earned evenly
throughout the year.

What amount of income from the investment should be reported in 2018?

a. 360,000
b. 180,000
c. 120,000
d. 60,000

Solution 1 – Answer b
Share in net income from July 1 to December 31, 2018
(1,200,000 x 6/12 x 30%) 180,000

Interest acquired (30,000/100,000) 30%

2. On April 1, 2018, Ben Company purchased 40% of the outstanding ordinary shares of Clarke
Company for P10,000,000. On that date, Clarke’s net assets were P20,000,000 and Ben cannot
attribute the excess of the cost of its investment in Clarke over its equity in Clarke’s net assets to
any particular factor. The investee’s net income for 2018 is P5,000,000

What is the maximum amount which could be included in 2018 income before tax to reflect the
“equity in net income of investee”?
a. 1,400,000
b. 1,500,000
c. 2,000,000
d. 1,850,000

Solution 2 – Answer b
Share in net income from April 1 to December 31, 2018
(5,000,000 x 9/12 x 40%) 1,500,000

Acquisition Cost 10,000,000

Carrying amount of net assets acquired
(40% x 20,000,000) (8,000,000)
Goodwill – not amortized 2,000,000
Questions 3 - 5 are based on the following information:
At the beginning of 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 P12,500,000.
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 5,000,000 and paid cash dividend
of P2,500,000.

3. What is the excess of cost over the carrying amount of net assets acquired?
a. 5,000,000
b. 1,400,000
c. 3,000,000
d. 0

Solution 3 – Answer b
Acquisition Cost 6,400,000
Net assets acquired (40% x 12,500,000) (5,000,000)
Excess of cost 1,400,000

Excess attributable to equipment (40% x 2,000,000) 800,000

Excess attributable to building (40% x 1,500,000) 600,000
1,400,000

4. What amount should be reported as investment income for the current year?
a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 1,750,000

Solution 4 – Answer d
Share in net income (40% x 5,000,000) 2,000,000
Amortization of excess:
Equipment (800,000 /4) (200,000)
Building (600,000 /12) (50,000)
Investment income 1,750,000
5. What is the carrying amount of the investment in associate at year end?
a. 6,400,000
b. 8,150,000
c. 7,150,000
d. 7,400,000

Solution 5 – Answer c
Acquisition cost 6,400,000
Investment income 1,750,000
Cash dividend received (40% x 2,500,000) (1,000,000)
Carrying amount of investment in associate 7,150,000

6. On January 1, 2015, Bart Company acquired as a long term investment for P7,000,000, a 40%
interest in Hall Company when the fair value of Hall’s net assets was P17,500,000. Hall
Company reported the following net losses:

2015 5,000,000
2016 7,000,000
2017 8,000,000
2018 4,000,000

On January 1, 2017, Bart Company made cash advances of P2,000,000 to Hall Company. On
December 31, 2018, it is not expected that Bart Company will provide further financial support
for Hall Company.

What amount should be reported as loss from investment for 2018?

a. 1,600,000
b. 4,000,000
c. 1,000,000
d. 600,000

Solution 6 – Answer c
Original cost 7,000,000
Cash advances 2,000,000
Total investment 9,000,000
Net loss from 2015 to 2017 (40% x 20,000,000) (8,000,000)
Carrying amount of investment – December 31, 2017 1,000,000

Share in net loss of 2018 (40% x 4,000,000) 1,600,000

Loss to be reported in 2018 should be equal to the investment

balance only 1,000,000
Questions 7 - 10 are based on the following information:

Alpha Company acquired 20,000 shares of Beta Company on January 1, 2018 at P120 per share.
Beta Company had 80,000 shares outstanding with a carrying amount of P8,000,000.

The difference between the carrying amount and fair value of Beta Company on January 1, 2018
is attributable to a broadcast license which is an intangible asset.

Beta Company recorded earnings of P3,600,000 and P3,900,000 for 2018 and 2019, respectively,
and paid per share of P16 in 2018 and P20 in 2019.

Alpha Company has a 20-year straight line amortization policy for the broadcast license.

7. What is the investment income for 2018?

a. 900,000
b. 880,000
c. 320,000
d. 920,000

Solution 7 – Answer b

Acquisition Cost (20,000 x 120) 2,400,000

Net assets acquired (25% x 8,000,000) (2,000,000)
Excess of cost 400,000

Share in net income for 2018 (25% x 3,600,000) 900,000

Amortization of excess for 2018 (400,000 / 20) (20,000)
Investment income for 2018 880,000

Interest acquired (20,000 shares / 80,000 shares) 25%

8. What is the carrying amount of the investment in associate on December 31, 2018?
a. 2,980,000
b. 2,960,000
c. 3,300,000
d. 2,060,000

Solution 8 – Answer b

Acquisition Cost 2,400,000

Investment income 880,000
Share in cash dividend for 2018 (20,000 x 16) (320,000)
Carrying amount of investment 2,960,000
9. What is the investment income for 2019?
a. 975,000
b. 995,000
c. 955,000
d. 935,000

Solution 9 – Answer c

Share in net income for 2019 (25% x 3,900,000) 975,000

Amortization of excess for 2019 (20,000)
Investment income for 2019 955,000

10. What is the carrying amount of the investment in associate on December 31, 2018?
a. 3,515,000
b. 2,400,000
c. 3,555,000
d. 4,275,000

Solution 10 – Answer a

Carrying amount – December 31, 2018 2,960,000

Investment income for 2019 955,000
Share in cash dividend for 2019 (20,000 x 20) (400,000)
Carrying amount – December 31, 2019 3,515,000

Questions 11-12 are based on the following information:

Blue Company purchased 10% of Tot’s Company’s 100,000 outstanding shares on January 1,
2018 for P500,000. On December 31, 2018, Blue Company purchased an additional 20,000
shares of Tot’s Company for P1,500,000. Tot Company had not issued any additional shares
during 2018. The investee reported earnings of P3,000,000 for 2018. The fair value of the 10%
interest is P900,000 on December 31, 2018.

11. What is the carrying amount of the investment in associate on December 31, 2018?
a. 2,300,000
b. 2,000,000
c. 2,400,000
d. 2,900,000
Solution 11 – Answer c

Fair Value of 10% interest 900,000

Cost on December 31 (20,000 / 100,000 shares = 20%) 1,500,000
Carrying amount – December 31, 2018 2,400,000

12. What total amount of income should be recognized for 2018?

a. 500,000
b. 400,000
c. 900,000
d. 0

Solution 12 – Answer b

Fair Value of 10% interest 900,000

Acquisition cost of 10% interest 500,000
Gain on measurement to equity 400,000

13. At the beginning of current year, Well Company purchased 10% of Rea Company’s
outstanding shares for P4, 000,000. Well Company is the largest single shareholder in Rea and
Well’s officers are a majority of Rea’s board of directors. The investee reported net income of
P5, 000,000 for the current year and paid cash dividend of P1,500,000.

What amount should be reported as investment in Rea at year-end?

a. 4,500,000
b. 4,350,000
c. 4,000,000
d. 3,850,000

Solution 13 – Answer b

Acquisition, January 1 4,000,000

Add: Share in net income (10% x 5,000,000) 500,000
Total 4,500,000
Less: Share in cash dividend (10% x P1,500,000) 150,000
Carrying amount of investment, December 31 4,350,000
Questions 14-16 are based on the following information:

At the beginning of current year, Anne Company purchased 20% of the outstanding ordinary
shares of Dune Company for P4,000,000, of which P1,000,000 was paid in cash and P3,000,000
is payable with 12% annual interest at every year-end.
Dune Company’s shareholders’ equity at the beginning of current year was P13,000,000.
Anne Company also paid P500,000 to a business broker who helped find a suitable business and
negotiated the purchase.
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 building 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 0f P2,000,000.

14. What is the implied goodwill from the acquisition?

a. 1,900,000
b. 1,000,000
c. 1,500,000
d. 0

Solution 14 – Answer c

Purchase Price 4,000,000

Broker fee 500,000
Acquisition cost 4,500,000
Carrying amount (20% x 3,000,000) (2,600,000)
Excess of cost 1,900,000
Excess attributable to building (20% x 2,000,000) (400,000)
Excess attributable to goodwill – not amortized 1,500,000

15. What amount of income should be reported for the current year as a result of the investment?
a. 810,000
b. 620,000
c. 960,000
d. 885,000

Solution 15 – Answer c

Share in net income (20% x 5,000,000) 1,000,000

Amortization of excess of cost:
Attributable to building (400,000 / 10) ( 40,000)
Investment Income 960,000
16. What is the carrying amount of the investment in associate at year-end?
a. 4,560,000
b. 4,160,000
c. 5,060,000
d. 5,460,000

Solution 16 – Answer c

Acquisition cost 4,500,000

Investment Income 960,000
Cash dividend (20% x 2,000,000) (400,000)
Carrying amount 5,060,000

17. 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 1,000,000

Ordinary share capital 7,000,000

What is the investment income for the current year?

a. 270,000
b. 300,000
c. 350,000
d. 250,000

Solution 17 – Answer d

Net income 600,000

Preference dividend (10% x 1,000,000) (100,000)
Net income to ordinary shares 500,000

Share in net income – ordinary shares (50% x 500,000) 250,000

18. At the beginning of current year, Alpha Company acquired 40% of the outstanding ordinary
shares of an investee for P6,500,000. The carrying amount of the net assets of the investee
equaled P12,500,000. Any excess of cost over carrying amount is attributable to goodwill. The
investee reported net loss of P4,000,000 and paid cash dividend of P2,500,000.

What is the carrying amount of the investment at year-end?

a. 6,500,000
b. 3,900,000
c. 4,900,000
d. 5,500,000
Solution 18 – Answer b

Acquisition cost 6,500,000

Share in net loss (40% x 4,000,000) (1,600,000)
Share in cash dividend (40% x 2,500,000) (1,000,000)
Carrying amount of investment in associate 3,900,000

Questions 19-21 are based on the following information:

On January 1, 2018, Forensic Company acquired a 10% interest in an investee for P3,000,000.
The investment was accounted for using the cost method. On January 1, 2019, the entity acquired
a further 15% interest in the investee for P6,750,000. On such date, the carrying amount of the
net assets of the investee was P36,000,00 and the fair value of the 10% interest was P4,500,000.
The fair value of the net assets of the investee is equal to carrying amount except for an
equipment whose fair value exceeds carrying amount by P4,000,000. The equipment has a
remaining life of 5 years. The investee reported net income of P8,000,000 for 2019 and paid cash
dividend of P5,000,000 on December 31, 2019.

19. What amount of gain on measurement to equity should be recognized for 2019?
a. 1,500,000
b. 4,500,000
c. 2,250,000
d. 0

Solution 19 – Answer a

Fair value of 10% interest 4,500,000

Carrying amount of 10% (3,000,000)
Gain on measurement to equity 1,500,000

20. What is the goodwill arising from the acquisition on January 1, 2019?
a. 2,250,000
b. 1,250,000
c. 1,350,000
d. 350,000

Solution 20 – Answer b

Fair value of 10% interest 4,500,000

Cost of additional 15% interest 6,750,000
Total cost of investment 11,250,000
Fair value of net assets acquired (25% x 36,000,000) 9,000,000
Excess of cost 2,250,000
Excess attributable to equipment (25% x 4,000,000) 1,000,000
Goodwill 1,250,000
21. What is the carrying amount of investment in associate on December 31, 2019?
a. 11,250,000
b. 11,800,000
c. 12,000,000
d. 14,300,000

Solution 21 – Answer b

Total cost of investment – January 1, 2019 11,250,000

Investment income 1,800,000
Share in cash dividend (25% x 5,000,000) (1,250,000)
Carrying amount – December 31, 2019 11,800,000

Share in net income (25% x 8,000,000) 2,000,000

Amortization of excess (1,000,000 /5) (200,000)
Investment income 1,800,000

22. Seiko Company had 100,000 ordinary shares outstanding. Globe Company acquired 30,000
shares of Seiko for P120 per share in 2016 representing 30% interest.

Changes in retained earnings of Seiko are:

Retained earnings (deficit), January 1, 2018 (500,000)

Net income for 2018 700,000
Retained earnings, December 31, 2018 200,000
Net income for 2019 800,000
Cash dividend paid on December 31, 2019 (400,000)
Retained earnings, December 31, 2019 600,000

What is the carrying amount of the investment in associate on December 31, 2019?

a. 3,600,000
b. 3,930,000
c. 3,780,000
d. 4,080,000

Solution 22 – Answer c

Acquisition Cost (30,000 x 120) 3,600,000

Deficit on January 1, 2018 (30% x 500,000) (150,000)
Carrying amount of investment – January 1, 2018 3,450,000
Net income for 2018 (30% x 700,000) 210,000
Net income for 2019 (30% x 800,000) 240,000
Cash dividend on 12/31/2019 (30% x 400,000) (120,000)
Carrying amount of investment – December 31, 2019 3,780,000
Questions 23-25 are based on the following information:

At the beginning of the current year, Sage Company bought 40% of Eve Company’s outstanding
ordinary shares for P4,000,000. The carrying amount of Eve’s net assets at the purchase date
totaled P9,000,000. Fair values and carrying amounts were the same for all items except for plant
and inventory, for which fair values exceeded their carrying amounts by P900,000 and totaled
P100,000, respectively. The plant has an 18-year life. All inventory was sold during the current
year. During the current year, the investee reported net income of P1,200,000 and paid a
P200,000 cash dividend.

23. What is the excess of cost over the carrying amount of net assets acquired?
a. 360,000
b. 400,000
c. 500,000
d. 0

Solution 23 – Answer b

Acquisition cost 4,000,000

Net assets acquired (40% x 9,000,000) (3,600,000)
Excess of cost over carrying amount 400,000

24. What amount should be reported as investment income for the current year?
a. 480,000
b. 420,000
c. 360,000
d. 320,000

Solution 24 – Answer b

Share in net income (40% x 1,200,000) 480,000

Less: Amortization of excess of cost
Depreciation of plant (360,000 / 18) 20,000
Inventory (totally sold) 40,000 60,000
Investment Income 420,000

25. What is the carrying amount of the investment in associate at year-end?

a. 4,400,000
b. 4,420,000
c. 4,340,000
d. 4,220,000
Solution 25 – Answer c

Acquisition cost 4,000,000

Investment income 420,000
Cash dividend (40% x 200,000) ( 80,000)
Excess of cost over carrying amount 4, 340,000