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ASSOCIATES/ FA AT AMORTIZED
COST
INVESTMENT IN ASSOCIATE
Key Definitions
• Associate- Is an entity, including an unincorporated entity such as
a partnership, over which the investor has significant influence
and that is neither a subsidiary nor an interest in a joint venture.
(b) Any excess of the investor’s share of the net fair value
of the associate’s identifiable assets, liabilities and
contingent liabilities over the cost of the investment
MCQ-Theory 10
10. 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
charge to expense immediately.
MCQ-Theory 10
10. 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
charge to expense immediately.
MCQ-Theory 11
11. 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.
MCQ-Theory 11
11. 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.
5. Appropriate adjustments to the investor's
share of the profits or losses after acquisition are
made to account for additional depreciation of
the associate's depreciable assets based on the
excess of their fair values over their carrying
amounts at the time the investment was
acquired. This rule also applies to inventories
since this will have an effect in the associate’s
reported net income.
MCQ-Theory 12
12. 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 assets in excess of the investee’s net
carrying values. The investor’s amortization of the
excess
a. Decrease the investment account
b. Decrease the goodwill account
c. Increase the investment revenue account
d. Does not affect the investment account
MCQ-Theory 12
12. 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 assets in excess of the investee’s net
carrying values. The investor’s amortization of the
excess
a. Decrease the investment account
b. Decrease the goodwill account
c. Increase the investment revenue account
d. Does not affect the investment account
7. Discontinuing the equity method - Use
of the equity method should cease from the
date that significant influence ceases.
The difference between the selling price and
carrying amount of the investment sold shall
be recognized in profit or loss.
The “retained investment” shall be accounted
for under PFRS 9 and shall be remeasured to
fair value on the date significant influence
ceases and recognized in profit or loss.
MCQ Theory 13
13. When the investor discontinues the use of
the 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
MCQ Theory 13
13. When the investor discontinues the use of
the 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
8. Application of the equity method achieved in
stages
The previously held interest that was accounted for under
the cost or fair value method shall be remeasured to fair
value on the date the investor gains significant influence.
The difference between the fair value and the carrying
amount of the previously held investment shall be
recognized in profit or loss.
The total of the fair value of the previously held investment
and the new acquisition cost shall be regarded as the total
cost of the investment classified as “associate”.
If the FVOCI was used to account for the previously held
investment, any cumulative unrealized gain or loss as OCI
shall be reclassified to retained earnings.
9. Losses in excess of investment
The investor’s share in the associates losses cannot
exceed the “interest in the associate” and shall
discontinue the application of the equity method is this
is the case.
After the investor's interest is reduced to zero,
additional losses are recognized by a provision
(liability) only to the extent that the investor has
incurred legal or constructive obligations or made
payments on behalf of the associate.
If the associate subsequently reports profits, the
investor resumes recognizing its share of those profits
only after its share of the profits equals the share of
losses not recognized.
MCQ Theory 14
14. 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 is not correct?
a. The investor discontinues its share of further losses.
b. Additional losses are provided for, or 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 profits, the investor
resumes its share of those profits without regard to the share of
net losses not previously recognized.
d. The investment is reported at NIL value.
MCQ Theory 14
14. 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 is not correct?
a. The investor discontinues its share of further losses.
b. Additional losses are provided for, or 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 profits, the investor
resumes its share of those profits without regard to the share of
net losses not previously recognized.
d. The investment is reported at NIL value.
SAMPLE PROBLEM 1:
Investment in Associates
Problem 1
At the beginning of the current year, Cynosure Company purchased
40% of the ordinary shares of another entity for P 3,500,000. When
the net assets of the investee amounted to P 7,000,000. At
acquisition date, the carrying amounts of the identifiable assets and
liabilities of the investee were equal to their fair value, except for
equipment for which the fair value was P 1,500,000 greater than
carrying amount and inventory whose fair value was P 500,000
greater than cost.
The equipment has a remaining life of 4 years and the inventory
was all sold during the current year. The investee reported net
income of P 4,000,000 and paid P 1,000,000 dividends during the
current year.
Required:
1. Prepare journal entries for the relating to the investment for the
current year.
2. Compute for the investment income for the current year.
3. Compute for the carrying amount of the investment at year end.
Problem 1 (answer)
1. To record the investment:
Investment in associate 3,500,000
Cash 3,500,000
2. To record share in net income:
Investment in associate 3,500,000
Investment income (40%x4,000,000) 3,500,000
3. To record share in cash dividend:
Cash (40%x1,000,000) 400,000
Investment in associate 400,000
Computation:
Acquisition Cost P 3,500,000
CA of net asset acquired
(40%xP7,000,000) 2,800,000
Excess of cost over carrying amount 700,000
Excess attributable to equipment
(40%xP1,500,000) (600,000)
Excess attributable to inventory
(40%xP 500,000) (200,000)
Excess net fair value over cost (100,000)
Problem 1 (answer)
1. To record the investment:
Investment in associate 3,500,000
Cash 3,500,000
2. To record share in net income:
Investment in associate 3,500,000
Investment income (40%x4,000,000) 3,500,000
3. To record share in cash dividend:
Cash (40%x1,000,000) 400,000
Investment in associate 400,000
The excess is fully “expensed” because all the inventory was already sold
during the year.
Required:
1. Compute the goodwill on January 1,2018.
Problem 2 (answer)
Fair value of 10% existing interest 4,500,000
Cost of 15% new interest 6,750,000
Total cost of the investment 11,250,000
Carrying amount of net assets acquired
(25% x 36,000,000) 9,000,000
Excess of cost over carrying amount 2,250,000
Excess attributable to equipment
(25%xP4,000,000) (1,000,000)
Goodwill 1,250,000
SAMPLE PROBLEM 3:
Investment in Associates
Problem 3
On January 1, 2016, Grand company acquired
30% of East Company’s voting stock for P
8,000,000. During 2016, East earned P
5,000,000 and paid dividends of P 2,000,000.
On January 1, 2017, Grand sold ½ of the
investment in East resulting to a loss of
significant influence. On January 1, 2017 the
investment is measured at fair value through
other profit or loss. The fair value of the retained
investment is P 5,000,000 on January 1, 2017.
Required:
Prepare journal entries for 2016 and 2017.
Problem 1 (answer)
1. To record the investment:
Investment in associate 8,000,000
Cash 8,000,000
2. To record share in net income:
Investment in associate 1,500,000
Investment income (30%x5,000,000) 1,500,000
3. To record share in cash dividend:
Cash (30%x2,000,000) 600,000
Investment in associate 600,000
Problem 1 (answer)
5. To record the sale of ½ of the investment:
Cash 8,000,000
Investment in associate 8,000,000
2017
Dec. 31 Cash 300,000
Interest Income 300,000
Dec. 31 Investment in bonds 85,709
Interest income 85,709
Journal Entries
Date Interest Interest Discount Carrying
Received Income Amor. Amount
January 1, 2016 - - - 4,742,000
Dec. 31, 2016 300,000 379,360 79,360 4,821,360
Dec. 31, 2017 300,000 385,709 85,709 4,907,069
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