ACCOUNTING 3 INVESTMENT IN ASSOCIATE

1. On January 2, 2022, Parker Company, a medium sized entity, acquired 25% of the equity of each entities, A, B and C for
P100,000, P150,000 and P280,000. Parker Company has significant influence over entities A, B and C. Transaction costs
of 1% of the purchase price of the shares were incurred by Parker Company.
On December 31, 2022, A company declared and paid dividends of P10,000. On December 31, 2022, B Company
declared a dividend of P80,000 for the year ended 2022 which will be paid in 2023. For the year ended December 31, 2022,
A Company and B Company recognized profits of P50,000 and P180,000 respectively. However, C Company recognized
a loss of P200,000 for the year 2022.
Published price quotations do not exist for the shares of entities A, B and C. Using appropriate valuation techniques
Parker Company determined the fair value of its investments in entities A, B and C at December 31, 2022 as P130,000,
P290,000 and P150,000 respectively. Costs to sell are estimated at 5% of the fair value of the investments. Parker Company
has no subsidiaries and therefore does not produce consolidated financial statements.

A B C
Beginning Balances
A. 100,000 x 101% 101,000
B. 150,000 x 101% 151,500
C. 280,000 x 101% 282,800
Share in Profit
A. 25% x 50,000 12,500
B. 25% x 180,000 45,000
Share in Loss
C. 25% x 200,000 (50,000)
Dividends
A. 25% x 10,000 (2,500)
B. 25% x 80,000 (20,000)
Balances 111,000 176,500 232,800

A B C
Carrying Amount 111,000 176,500 232,800
Recoverable Amount
(Fair Value of Investment – Cost to Sell)
A. 130,000 – 6,500 123,500
B. 290,000 – 14,500 275,000
C. 150,000 – 7,500 142,500

Question 1. If Parker Company uses the cost model in measuring its investment in associates, at what amount should the
investment in A, B and C, respectively, be reported in its December 31, 2022 statement of financial position?
a. P100,000, P150,000, P280,000 c. P101,000, P151,500, P142,500
b. P101,000, P151,500, P282,800 d. P123,500, P275,500, P142,500
Question 2. Assume that the shares of A, B and C are publicly traded and Parker Company uses the fair value model to
measure its investment in associates, at what amount should the investment in A, B and C, respectively, be reported in its
December 31, 2022 statement of financial position?
a. P100,000, P150,000, P280,000 c. P123,500, P275,500, P142,500
b. P101,000, P151,500, P282,800 d. P130,000, P290,000, P150,000
Question 3: Assume that Parker Company uses the equity method in measuring its investment in associates, at what amount
should the investment in A, B and C, respectively, be reported in its December 31, 2022 statement of financial position?
a. P100,000, P150,000, P280,000 c. P111,000, P176,500, P142,500
b. P101,000, P151,500, P282,800 d. P111,000, P176,500, P232,800

* Carrying Amount (232,800) is higher than the Recoverable Amount (142,500). *

2. On January 2, 2022, Marco Company purchased 20,000 shares (20%) of Polo Company’s ordinary share for P4,500,000.
The fair value of the net asset acquired is P4,200,000. During 2022, Polo reported the following in its statement of
comprehensive income a P4,000,000 net income and a P500,000 revaluation surplus recognize at the end of the year. Polo
Company paid cash dividends of P3,000,000 on December 31, 2022.
Question 1. What is the carrying value of the investments as of December 31, 2022?
a. P4,600,000 c. P4,770,000
b. P4,670,000 d. P4,800,000

Acquisition Cost P 4,500,000

Share in Net Income
(20% x 4,000,000) 800,000
Share in Cash Dividends
(20% x 3,000,000) (600,000)
Revaluation Surplus
(20% x 500,000) 100,000
Carrying amount of investment P 4,800,000

3. On January 1, 2022, Shell Company acquired a 30% interest in Petron Company’s 1,000,000 outstanding shares for
P15,000,000. During the year Shell Company received P300,000 cash dividend and 300,000 share dividends. At December
31, 2022 Petron Company reported a profit of P5,500,000. On January 2, 2023, Petron Company issued 1,000,000 new
shares for P20 per share. Shell Company did not acquire of those shares.
Question 1. What is the amount of loss from the dilution should Shell Company recognize?
a. None c. P1,450,000
b. P1,250,000 d. P1,550,000

Share in proceeds
(1,000,000 x 20 x 20%) P 4,000,000
Carrying Value
(16,350,000 x 1/3) (5,450,000)
Loss from Dilution P 1,450,000

* Carrying Value = 16,350,000

Cost 15,000,000
Cash Dividends (300,000)
Share in Profit
(30% x 5,500,000) 1,650,000
Carrying Value – Dec. 31 P 16,350,000

* 1/3 – Oustanding Shares of 1,000,000 over Total Oustanding Shares of 3,000,000

Initial Official Share 1,000,000
Share Dividends
(300,000/30%) 1,000,000
Additional New Shares 1,000,000
Total Outstanding Shares P 3,000,000

Question 2. What is the carrying value of the investment in associate immediately after the recognition of loss from dilution?
a. P14,900,000 c. P15,100,000
b. P14,950,000 d. P16,350,000

Carrying Value P 16,350,000

Loss from Dilution (1,450,000)
Carrying Value after the Recognition of Loss from Dilution P 14,900,000
4. Man Company purchased 10% of Kind Corporation’s 200,000 outstanding shares of ordinary shares on January 2, 2021
for P2,500,000. On January 2, 2022, Man Company purchased another 40,000 of Kind for P6,000,000. There was no
goodwill as a result of either acquisition Kind reported earnings of P6,000,000 and P7,000,000 for the year ended December
31, 2021 and December 31, 2022, respectively. No dividends were declared in years 2021 and 2022, respectively by Kind
Company. What amount of income from investment should Man Company report in its statement of comprehensive income
related to its investment for the year ended December 31, 2022?
a. none c. P1,400,000
b. P600,000 d. P2,100,000

Net Income P 7,000,000

% of Aging Interest 30%
Share in Net Income P 2,100,000
* % of Aging Interest
1st Purchase
(10% x 200,000) 20,000
2nd Purchase 40,000
Total Purchased Shares of Man Company 60,000

Total Purchased Shares of Man Company = 60,000 = 30%

Total Shares of Kind Corp. 200,000

5. At the beginning of the current year, Baste Company bought 30% of the outstanding shares of ABC Company for
P5,000,000 cash. Baste accounts for this investment by the equity method.
At the date of acquisition, ABC Company’s net assets has a carrying amount of P12,000,000.
Equipment with an average remaining life of five years had a fair value that was P2,500,000 in excess of their carrying
amount.
The remaining difference between the purchase price and the carrying amount of the underlying equity cannot be
attributed to any identifiable tangible or intangible asset. Accordingly, the remaining difference is allocated to goodwill.
ABC Company reported a net income of P4,000,000 and paid cash dividend of P1,000,000 during the current year.
Question 1. What is the implied goodwill from the acquisition?
a. P1,400,000 c. P650,000
b. P750,000 d. 0

Acquisition Cost P 5,000,000

Carrying Amount of Net Assets Acquired
(12,000,000 x 30%) (3,600,000)
Excess Cost 1,400,000
Excess attributable to equipment
(2,500,000 x 30%) (750,000)
Goodwill P 650,000

Acquisition Cost P 5,000,000

Carrying Amount of Net Assets Acquired
(12,000,000 x 30%) (3,600,000)
Excess attributable to equipment
(2,500,000 x 30%) (750,000) (4,350,000)
Goodwill P 650,000
Question 2. What amount should be reported as investment income for the current year?
a. P1,200,000 c. P1,050,000
b. P1,350,000 d. P920,000

Share in Net Income

(4,000,000 x 30%) P 1,200,000
Amortization of Excess
(750,000/5) (150,000)
Investment Income P 1,050,000

Question 3. What is the carrying amount of the investment in associate at

a. P5,000,000 c. P5,750,000
b. P5,900,000 d. P5,400,000

Acquisition Cost P 5,000,000

Investment Income 1,050,000
Share in Cash Dividend
(1,000,000 x 30%) (300,000)
Carrying Amount of Investment P 5,750,000

6. On July 1, 2020, Zeus Company purchased 25% of Athena Company’s outstanding ordinary shares and no goodwill
resulted from the purchase. Zeus appropriately carried this investment at equity and the balance in Zeus’ investment
account was P1,900,000 on December 31, 2020. Athena Company reported net income of P1,200,000 for the year ended
December 31, 2020 and paid cash dividends totaling P480,000 on December 31, 2020.
How much did Zeus pay for the 25% interest in Athena?
a. P1,720,000
b. P2,020,000
c. P1,870,000
d. P2,170,000

Carrying Amount of Investment P 1,900,000

Net Income
(1,200,000 x 25%) (300,000)
Share in Cash Dividend
(480,000 x 25%) 120,000
Carrying amount of investment P 1,720,000