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Chapter 14
Investments in Associates

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. FALSE
7. TRUE
8. FALSE – prospective
9. TRUE
10. FALSE – interest in the associate

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. D
3. C
4. C
5. C
6. D
7. C
8. A
9. C
10. C
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PROBLEM 3: EXERCISES
1. Solutions:

Requirement (a):
Jan. 1, Investment in associate 800,000
20x1
Cash 800,000
Dec. Investment in associate 425,000
31,
Sh. in profit of associate (1.7M x 25%*) 425,000
20x1
Dec. Cash (400,000 x 25%) 100,000
31,
Investment in associate 100,000
20x1
Dec. Share in OCI of associate - translation 20,000
31,
of foreign operation (80K x 25%) 20,000
20x1
Investment in associate
* 15,000 shares acquired ÷ 60,000 shares outstanding = 25%

Requirement (b):
Investment in associate
Jan. 1, 20x1 800,000
Sh. in profit 425,000 100,000 Cash dividends
20,000 Sh. in OCI
1,105,000 Dec. 31, 20x1

2. Solutions:
Requirement (a): Goodwill
Fair Under (Over)
Carrying amount value valuation
Inventories 1,000,000 200,000 (800,000)
Depreciable asset 6,000,000 10,000,000 4,000,000

Pak's equity at book value 10,000,000

Overvaluation (800,000)
Undervaluation 4,000,000
Pak's equity at fair value 13,200,000
 Page |3

Purchase cost 4,000,000

FV of interest acquired (13.2M x 25%) (3,300,000)
Goodwill 700,000

Requirement (b): Journal entries

Jan. 1, Investment in associate 4,000,000
20x1
Cash 4,000,000
Dec. Investment in associate 600,000
31,
Share in profit of associate 600,000
20x1
(2.4M x 25%)
Dec. Cash (1M x 25%) 250,000
31,
Investment in associate 250,000
20x1
Dec. Investment in associate 200,000
31,
Share in profit of associate 200,000
20x1
(800K x 25%)
Dec. Share in profit of associate 100,000
31, (4M x 25%) ÷ 10 yrs.
20x1
Investment in associate 100,000

Requirement (c): Share in profit of associate

Share in profit of associate – net

600,000 Sh. in profit, gross

Undervaluation of Overvaluation of
100,000 200,000
depreciable asset inventory
Sh. in profit, net 700,000

Requirement (d): Carrying amount of investment in associate

Investment in associate
Jan. 1, 20x1 4,000,000
Sh. in profit, gross 600,000 250,000 Dividend
Overvaluation 200,000 100,000 Undervaluation
4,450,000 Dec. 31, 20x1
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3. Solution:

Requirement (a):
 Journal entries in 20x1:
Jan. 1, Investment in associate 6,000,000
20x1
Cash 6,000,000
Dec. Investment in associate 600,000
31,
Share in profit of associate (2M x 30%) 600,000
20x1
Dec. Cash (1.2M x 30%) 360,000
31,
Investment in associate 360,000
20x1
Dec. Share in profit of associate (a) 120,000
31,
Investment in associate 120,000
20x1

(a) Sh. in undervaluation of bldg. (20M – 16M) x 30% 1,200,000

Divide by: Remaining useful life of building 10
Annual adjustment to share in profit of associate 120,000

 Journal entries on July 1, 20x2:

July 1, Investment in associate (1M x 30%) 300,000
20x2
Share in profit of associate 300,000
July 1, Share in profit of associate 60,000
20x2
Investment in associate (120K x 6/12) 60,000
July 1, Cash (30,000 sh. x 60% x ₱240) 4,320,000
20x2
Investment in associate 3,816,000
(6.360M (b) x 60%)
Gain on sale of investment 504,000
July 1, Held for trading securities 2,880,000
20x2 (30,000 sh. x 40% x ₱240)
Investment in associate 2,544,000
(6.360M (b) x 40%)
Gain on reclassification 336,000

(b) Investment in associate

Jan. 1, 20x1 6,000,000
Share in profit - 20x1 600,000 360,000 Dividend - 20x1

120,000 Undervaluation - 20x1

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Share in profit - 20x2 300,000 60,000 Undervaluation - 20x2

6,360,000 July 1, 20x2

 Journal entries on Dec. 31, 20x2:

Dec. 31, Dividend receivable (2M x 12%*) 240,000
20x2
Dividend income 240,000
Dec. 31, Held for trading securities 360,000
20x2 (270 – 240) x 30,000 sh. x 40% unsold
Unrealized gain – P/L 360,000
* 30% x 40% unsold portion = 12% retained interest

Requirement (b):
Share in profit of associate, net (300K – 60K) 240,000
Gain on sale 504,000
Gain on reclassification 336,000
Dividend income 240,000
Unrealized gain on change in fair value 360,000
Total income recognized in profit or loss – 20x2 1,680,000

4. Solutions:
Case 1:
July 1, Cash 800,000
20x2
Loss on sale of investment 400,000
Investment in associate (2.4M x 1/2) 1,200,000
July 1, Translation of foreign operation 1,000,000
20x2
Gain on reclassification 1,000,000

Case 2:
July 1, Cash 800,000
20x2
Loss on sale of investment 400,000
Investment in associate (2.4M x 1/2) 1,200,000
July 1, Translation of foreign opn. (1M x ½) 500,000
20x2
Gain on reclassification 500,000
 Page |6

Case 3:
July 1, Cash 800,000
20x2
Loss on sale of investment 400,000
Investment in associate (2.4M x 1/2) 1,200,000
July 1, Revaluation surplus (1M x ½) 500,000
20x2
Retained earnings 500,000

5. Solutions:
 Journal entries in 20x1:
Jan. 1, Held for trading securities 1,600,000
20x1
Cash 1,600,000
Dec. Cash (2M x 10%) 200,000
31,
Dividend income 200,000
20x1
Dec. Held for trading securities 100,000
31,
Unrealized gain – P/L 100,000
20x1
[(10,000 sh. x ₱170) – 1.6M]

 Journal entries on July 1, 20x2:

July Investment in associate (15K sh. x ₱140) 2,100,000
1,
Cash 2,100,000
20x2
to record the purchase of additional shares
July Unrealized loss – P/L (a) 300,000
1,
Held for trading securities 300,000
20x2
to remeasure the previously held equity
interest
July Investment in associate 1,400,000
1,
Held for trading securities 1,400,000
20x2
to reclassify the previously held equity
interest to investment in associate
(₱140 fair value on 7/1/x2 - ₱170 fair value on 12/31/x1) x 10,000 sh. =
(a)

300,000

 Journal entries on Dec. 31, 20x2:

Dec. 31, Cash (2M x 25%(b)) 500,000
20x2
Investment in associate 500,000
to record the dividends
Dec. 31, Investment in associate (8M x 25%(b)) 2,000,000
20x2
Share in profit of associate 2,000,000
to record the share in the associate’s
profit in the last half of 20x2
 Page |7

(b) (10,000 sh. + 15,000 sh.) ÷ 100,000 sh. = 25%

6. Solution:
20x1
 Interest in the associate:
Investment in associate 400,000
Investment in preference shares – Del, Inc. 200,000
Advances to associate – Del, Inc. 100,000
Interest in the associate -12/31/x1 (before adjustment) 700,000

Dec. Share in loss of associate (2.8M x 20%) 560,000

31,
Investment in associate 400,000
20x1
Investment in preference sh. (squeeze) 160,000

 Interest in the associate:

Investment in associate 0
Investment in preference shares – Del, Inc. (200K – 160K) 40,000
Advances to associate – Del, Inc. 100,000
Interest in the associate -12/31/x1 (after adjustment) 140,000

20x2

Dec. Share in loss of associate (a) 140,000

31,
Investment in pref. sh. (bal.) 40,000
20x2
Advances to associate 100,000

(1M x 20%) = 200,000 vs. 140,000 int. in the assoc. = 140,000 limit
(a)

* Loss not recognized = 200,000 – 140,000 = 60,000

 Interest in the associate:

Investment in associate 0
Investment in preference shares – Del, Inc. 0
Advances to associate – Del, Inc. 0
Interest in the associate -12/31/x2 (after adjustment) 0
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20x3

(200K x 20%) = 40,000 vs. 0 int. in the assoc. = 0 share in loss

* Loss not recognized = 40,000 – 0 = 40,000

Dec. Loss on associate 400,000

31,
Liability incurred on behalf of assoc. 240,000
20x3
Cash 160,000

20x4
Share in profit of associate before adjustment (2M x 20%) 400,000
Cumulative losses not recognized (60K + 40K) (100,000)
Share in profit of associate, adjusted 300,000

Dec. Advances to associate 100,000

31,
Investment in preference shares 200,000
20x4
Share in profit of associate 300,000

7. Solution:
Recoverable value (FVLCD - higher) 1,600,000
Carrying amount of investment (2,000,000)
Impairment loss ( 400,000)

Dec. 31, Impairment loss 400,000

20x1
Investment in associate 400,000
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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Solution:
Investment in associate
Jan. 1, 20x1 900,000
Sh. in profit (2M x 25%) 500,000 150,000 Dividends (600K x 25%)
20,000 Sh. in OCI (80K x 25%)
1,230,000 Dec. 31, 20x1

2. A
Solution:
Investment in associate
Jan. 1, 20x1 1,200,000
Sh. in profit
175,000 210,000 Dividends (600K x 35%)
(1.5M x 35% x 4/12)
1,165,000 Dec. 31, 20x1

3. D
Solution:
Investment in associate
Jan. 1, 20x1 1,000,000
Sh. in profit (2M x 20%*) 400,000 100,000 Dividends
Sh. in OCI (80K x 20%*) 16,000
1,316,000 Dec. 31, 20x1

* 25,000 newly issued shares ÷ (100,000 + 25,000) = 20%

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4. D
Solution:
(1) Goodwill
Carrying amount Fair value Under (Over) valuation
Inventory 300,000 400,000 100,000
Machinery 1,800,000 1,500,000 (300,000)

Mobic's equity at book value 8,000,000

Undervaluation 100,000
Overvaluation (300,000)
Mobic's equity at fair value 7,800,000

Purchase cost 1,600,000

Less: Fair value of net assets acquired (7.8M x 20%) (1,560,000)
Goodwill 40,000

(2) Share in profit of associate

Share in profit of associate – net
Sh. in profit, gross
600,000
(3M x 20%)
Undervaluation Overvaluation
20,000 12,000
(100K x 20%) (300K ÷ 5 yrs.) x 20%
Sh. in profit, net 592,000

(3) Carrying amount of investment in associate

Investment in associate
Jan. 1, 20x1 1,600,000
Sh. in profit, gross 600,000 100,000 Dividends (500K x 20%)
Overvaluation 12,000 20,000 Undervaluation
2,092,000 Dec. 31, 20x1
 P a g e | 11

5. B
Share in the profit of assoc.
Undervaluation of plant
[(90K/18) x 40%] 2,000
Undervaluation of invty.
(1K x 40%) 4,000 48,000 Sh. in profit
42,000 end.

6. C
Investment in associate
Purchase price 1,120,000
Share in profit 50,400 11,200 Dividends
28,000 Undervaluation of asset (a)
1,131,200 end.

(a)The amortization of the undervaluation of an identifiable

intangible asset (i.e., not goodwill) is computed as follows:
(1,120,000 – 840,000) ÷ 10 = 28,000.

Note: The amortization is not multiplied anymore by 20% because

the ₱840,000 book value pertains to the interest acquired and not
the total book value of the associate’s net assets.

7. C
Investment in associate
Purchase price 516,000
Share in profit 108,000 12,000 Dividends
612,000 end.

Note: The “excess” is not amortized because it pertains to

goodwill. Goodwill arising from investment in associate is not
accounted for separately, meaning it is neither amortized nor
tested for impairment separately.
 P a g e | 12

8. A
Solution:
Shares presently held 50,000
Potential voting rights 30,000
Total shares 80,000
Divide by: Outstanding shares after conversion of bonds
(300K + 30K) 330,000
Assumed ownership interest 24.24%

 Significant influence is presumed to exist because the assumed

ownership interest meets the 20% threshold. Accordingly, the
investment will be accounted for under the equity method.

Investment in associate
Jan. 1, 20x1 1,200,000
Sh. in profit (a) 550,000 30,000 Dividends (b)
1,720,000 Dec. 31, 20x1

(a) Share in profit of associate: ₱3,300,000 x 16.666667%* = 880,000

(b) Share in cash dividends: ₱180,000 x 16.666667%* = 30,000
* 50,000 actual shares held ÷ 300,000 actual outstanding shares = 16.666667%

9. B
Solution:
Profit of Monkey 2,800,000
Dividends on noncumulative preference sh. (800,000)
Adjusted profit of associate 2,000,000
Multiply by: Ownership interest 25%
Share in profit of associate 500,000

10. A
Solution:
Share in profit of associate (4.2M x 8/12 x 25%) 700,000
Gain on sale (a) 1,005,000
Gain on reclassification (b) 375,000
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Dividend income (1.2M x 25% x 25% unsold) 75,000

Unrealized loss (₱130 – ₱140) x 25,000 sh. x 25% unsold (62,500)
Net effect in 20x1 profit 2,092,500

(a)

Investment in associate
Jan. 1, 20x1 1,300,000
Share in profit 700,000
2,000,000 Sept. 1, 20x1

Sept. Cash [(25,000 sh. x 75% x ₱140) – 120,000] 2,505,000

1,
Investment in associate (2M x 75%) 1,500,000
20x1
Gain on sale of investment (squeeze) 1,005,000
to record the partial sale of investment

(b)

Sept. Held for trading securities 875,000

1, (25,000 sh. x ¼ unsold x ₱140)
20x1
Investment in associate (2M x ¼) 500,000
Gain on reclassification (squeeze) 375,000
to reclassify the remaining investment

11. C
Solution:
(1)
Date Cash 500,000
Investment in associate (1.2M x ¼) 300,000
Gain on sale of investment 200,000
to record the sale
Date Translation of foreign operation 100,000
Gain on reclassification – P/L 100,000
to record the reclassification adjustment of
the OCI to profit or loss

(1) Net effect in P/L = (200,000 + 100,000) = 300,000

 P a g e | 14

(2)
Date Cash 500,000
Investment in associate (1.2M x ¼) 300,000
Gain on sale of investment 200,000
to record the sale
Date Translation of foreign operation (100K x ¼) 25,000
Gain on reclassification – P/L 25,000
to record the reclassification adjustment of the
OCI to profit or loss

(2) Net effect in P/L = (200,000 + 25,000) = 225,000

12. B
Solution:
Date Cash 500,000
Investment in associate (1.2M x ¼) 300,000
Gain on sale of investment 200,000
to record the sale
Date Revaluation surplus – associate (100K x ¼) 25,000
Retained earnings 25,000
to record the reclassification adjustment of the
OCI to profit or loss

Net effect in P/L = 200,000

13. D
Solution:
Investment in associate
Additional sh. (12,000 x 90) 1,080,000
FV of existing sh. Cash dividends
720,000 120,000
(8,000 x 90) (600K x 20%)
Sh. in profit
440,000
(3.3M x 8/12 x 20%)
2,120,000 Dec. 31, 20x1
 P a g e | 15

14. B
Sale price 1,020,000
Carrying amount (820,000)
Unrealized profit from upstream sale 200,000
Multiply by: Michi Co.'s interest 40%
Adjustment (reduction) 80,000

Concept: Gains and losses resulting from intercompany

transactions between an entity and its associate are recognized in
the entity’s financial statements only to the extent of unrelated
investors’ interests in the associate. In other words, the entity’s
share in the unrealized profit or loss resulting from the
intercompany transaction is eliminated.

In the problem, Michi Co. has erroneously recognized the full

amount of ₱200,000. The correct amount is ₱120,000 (200,000 x 60%
unrelated investors’ interests). Thus, a reduction of ₱80,000 is
necessary.

15. B

Solution:
 The interest in the associate as of Dec. 31, 20x1 before
adjustment is computed as follows:
Investment in associate 100,000
Investment in preference shares – Papa 80,000
Loan receivable – Papa (due in 5 yrs.; unsecured) 50,000
Interest in the associate - before adjustment, 12/31/x1 230,000

 20x1:
Share in loss of associate (800K x 25%) 200,000
Interest in the associate - 12/31/x1 (threshold) 230,000

Share in loss - 20x2 200,000

 P a g e | 16

 Interest in the associate as of Dec. 31, 20x2:

Investment in associate (100,000 – 100,000) 0
Investment in preference shares – Papa (80,000 – 80,000) 0
Loan receivable – Papa (50,000 – 20,000) 30,000
Interest in the associate - 12/31/x2 30,000

 20x2:
Share in loss of associate (400K x 25%) 100,000
Interest in the associate - 12/31/x2 (threshold) 30,000

Share in loss - 20x2 30,000

Loss not recognized, disclosed in notes (100K - 30K) 70,000

 Interest in the associate as of Dec. 31, 20x3:

Investment in associate 0
Investment in preference shares – Papa 0
Loan receivable – Papa (30,000 – 30,000) 0
Interest in the associate - 12/31/x3 0

 20x3:
Share in loss of associate (200K x 25%) 50,000
Interest in the associate - 12/31/x2 (threshold) 0

Share in loss - 20x3 0

Loss not recognized, disclosed in notes (50K - 0) 50,000

Additional loss in 20x3 (payments made) 15,000

 20x4:
Share in profit of associate before adjustment (300K x 25%) 75,000
Cumulative losses not recognized (70,000 + 50,000) ( 120,000)
Share in profit of associate – adjusted 0

Loss not recognized, disclosed in notes in 20x4 (120K – 75K) 45,000

 P a g e | 17

Summary:
20x1 20x2 20x3 20x4
Share in (loss) profit (200,000) (30,000) - -
Additional loss (15,000)
(200,000) (30,000) (15,000) -

16. C
Solution:
Recoverable amount (VIU - higher) 2,120,000
Carrying amount of investment {5M - [(2M + 3M) x 40%]} (3,000,000)
Impairment loss (880,000)
 P a g e | 18

PROBLEM 5: CLASSROOM ACTIVITY

The outstanding number of common shares of the associate is
determined as follows:
Issued shares Treasury shares Outstanding
Dec. 31, 2011 347,329,216 686,250 346,642,966
Share dividends 51,996,445 51,996,445
Dec. 31, 2012 399,325,661 686,250 398,639,411

ABC Co.’s ownership interest in the outstanding shares of the

associate is determined as follows:
No. of sh. held Outstanding Percentage
Jan. 1, 2012 69,328,593 346,642,966 20.00%
Share dividends 10,399,289 51,996,445 20.00%
Dec. 31, 2012 79,727,882 398,639,411 20.00%

Requirement (a): Journal entries

July Dividend receivable 6,932,859.40
24,
Investment in associate 6,932,859.40
2012
(69,328,593 sh. x ₱0.10)
to accrue the dividends declared
Sept. Cash 6,932,859.40
14,
Dividend receivable 6,932,859.40
2012
to record the receipt of dividend
Dec. Investment in associate 92,925,106.20
31,
Share in profit of associate 92,925,106.20
2012
(₱464,625,531 x 20%)
to record the share in the profit of
the associate

Requirement (b): Carrying amount of investment

Investment in associate
beg. 379,592,676.00
Share in profit 92,925,106.20 6,932,859.40 Dividend
465,584,922.80 end.
 P a g e | 19

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:

Requirement (a):
Jan. 1, Investment in associate 500,000
20x1
Cash 500,000
Dec. Investment in associate 300,000
31,
Sh. in profit of associate (1.5M x 20%*) 300,000
20x1
Dec. Cash (100,000 x 20%) 20,000
31,
Investment in associate 20,000
20x1
Dec. Investment in associate (250K x 20%) 50,000
31,
Sh. in OCI of associate - revaluation 50,000
20x1

* 10,000 shares acquired ÷ 50,000 shares outstanding = 20%

Requirement (b):
Investment in associate
Jan. 1, 20x1 500,000
Sh. in profit 300,000 20,000 Cash dividends
Sh. in OCI 50,000
830,000 Dec. 31, 20x1

2. Solutions:

Requirement (a):
Purchase cost 1,200,000
Less: Fair value of net assets acquired (5M x 20%) (1,000,000)
Goodwill 200,000

Bell Co. includes the implied goodwill in the carrying

amount of the investment and does not account for it separately.
Meaning, Bell Co. neither amortizes nor tests separately the
goodwill for impairment.
 P a g e | 20

Requirement (b):
Investment in associate
Jan. 1, 20x1 1,200,000
Sh. in profit (3M x 20%) 600,000 100,000 Dividends (500K x 20%)
Undervaluation
10,000
(5M - 4.7M) x 20% ÷ 6 yrs.
1,690,000 Dec. 31, 20x1

Requirement (c):
Share in profit of associate

600,000 Sh. in profit, gross

Undervaluation 10,000
Sh. in profit, net 590,000

Requirement (d):
Jan. 1, Investment in associate 1,200,000
20x1
Cash 1,200,000
Dec. 31, Investment in associate 600,000
20x1
Share in profit of associate 600,000
Dec. 31, Cash 100,000
20x1
Investment in associate 100,000
Dec. 31, Sh. in profit of associate 10,000
20x1
Investment in associate 10,000

3. Solution:
Shares presently held 40,000
Potential voting rights 30,000
Total shares 70,000
Divide by: Outstanding shares after conversion of bonds
(300K + 30K) 330,000
Assumed ownership interest 21.21%
 P a g e | 21

 Significant influence is presumed to exist because the assumed

ownership interest meets the 20% threshold. Accordingly, the
investment will be accounted for under the equity method.

Share in profit of associate: ₱6,600,000 x 13.333333%* = 880,000

* 40,000 actual shares held ÷ 300,000 actual outstanding shares = 13.333333%

4. Solution:
Profit of Power 3,000,000
One-year dividend on cumulative preference sh. (4M x 10%) (400,000)
Adjusted profit of associate 2,600,000
Multiply by: Ownership interest 30%
Share in profit of associate 780,000

5. Solution:

Requirement (a):
 Journal entries on Oct. 1, 20x1:
Oct. Investment in associate (7M (a) x 20%) 1,400,000
1,
Share in profit of associate 1,400,000
20x1
to record the share in the associate’s profit for
the nine months ended Sept. 30, 20x1
Oct. Cash (2.8M – 140K) 2,660,000
1,
Loss on sale of investment (squeeze) 40,000
20x1
Investment in associate (5.4M (b) x ½) 2,700,000
to record the partial sale of investment

(a) (1,800,000 + 3,000,000 + 2,200,000) = 7,000,000

(b)

Investment in associate
Jan. 1, 20x1 4,000,000
Share in profit 1,400,000
5,400,000 Oct. 1, 20x1
 P a g e | 22

Oct. Held for trading securities 2,800,000

1,
Investment in associate (5.4M (b) x ½) 2,700,000
20x1
Gain on reclassification (squeeze) 100,000
to reclassify the remaining investment

 Journal entries on Dec. 31, 20x1:

Dec. Dividend receivable (1M x 10%(c)) 100,000
31,
Dividend income 100,000
20x1
to record the dividends
Dec. Unrealized loss – P/L (d) 400,000
31,
Held for trading securities 400,000
20x1
to record the gain on the change in fair value

(c) (20% previous interest x ½ unsold portion) = 10% retained interest

(d) (2.8M – 2.4M) = 400,000 decrease in fair value

Requirement (b):
Share in profit of associate – Jan. 1 to Sept. 30 1,400,000
Loss on sale (40,000)
Gain on reclassification 100,000
Dividend income 100,000
Unrealized loss on change in fair value (400,000)
Total income recognized in profit or loss – 20x1 1,160,000

6. Solutions:

Case 1:
Date Cash 1,000,000
Investment in associate (1.2M x ¾) 900,000
Gain on sale of investment 100,000
to record the sale
Date Loss on reclassification – P/L 500,000
Translation of foreign operation 500,000
to record the reclassification adjustment of
the OCI to profit or loss
 P a g e | 23

Case 2:
Date Cash 1,000,000
Investment in associate (1.2M x ¾) 900,000
Gain on sale of investment 100,000
to record the sale
Date Loss on reclassification (500K x ¾) 375,000
Translation of foreign operation 375,000
to record the reclassification adjustment of
the OCI to profit or loss

7. Solution:

 Journal entries on Apr. 1, 20x1:

Apr. 1, Investment in associate (10,000 x ₱70) 700,000
20x1
Cash 700,000
to record the acquisition of additional shares
Apr. 1, Held for trading securities 50,000
20x1
Unrealized gain – P/L 50,000
(15% x 100,000 sh. x ₱70) = 1.050M – 1M
to remeasure the previously held equity
interest to current fair value
Apr. 1, Investment in associate 1,050,000
20x1
Held for trading securities 1,050,000
to reclassify the previously held equity
interest to investment in associate

 Compound journal entry on Dec. 31, 20x1:

Dec. 31, Cash (₱12 x 25,000 sh.) 300,000
20x1
Investment in associate (squeeze) 225,000
Share in profit of associate (a) 525,000

(a) (2,800,000 profit for the yr. x 9/12 x 25%*) = 525,000

* (15,000 previously held shares + 10,000 additional shares) = 25,000 ÷ 100,000

outstanding shares = 25% new interest
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8. Solution:

 The interest in the associate as of Dec. 31, 20x1 before

adjustment is computed as follows:
Investment in associate 300,000
Investment in preference shares – Zine 100,000
Loan receivable – Zine (due in 5 yrs.; unsecured) 150,000
Interest in the associate - before adjustment, 12/31/x1 550,000

The ₱550,000 balance of the “interest in the associate” is the

threshold in determining the share in the losses of the associate.

 20x1:
Dec. Share in loss of associate (1.4M x 30%) 420,000
31,
Investment in associate 300,000
20x1
Investment in preference shares 100,000
Loan receivable (squeeze) 20,000

 Interest in the associate as of Dec. 31, 20x2:

Investment in associate 0
Investment in preference shares – Zine 0
Loan receivable – Zine (150,000 – 20,000) 130,000
Interest in the associate - 12/31/x2 130,000

The remaining threshold for determining the share in

losses is ₱130,000.

 20x2:
Share in loss of associate (600K x 30%) 180,000
Interest in the associate - 12/31/x2 (threshold) 130,000

Share in loss - 20x2 130,000

Loss not recognized, disclosed in notes (180K - 130K) 50,000

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Dec. Share in loss of associate 130,000

31,
Loan receivable 130,000
20x2
Dec. Share in loss of associate 40,000
31,
Liability incurred on behalf of assoc. 40,000
20x2

 20x3:
Share in profit of associate before adjustment (400K x 30%) 120,000
Cumulative losses not recognized ( 50,000)
Share in profit of associate – adjusted 70,000

Dec. 31, Loan receivable 70,000

20x3
Share in profit of associate 70,000

Summary:
20x1 20x2 20x3
Share in (loss) profit (420,000) (130,000) 70,000
Additional loss (40,000)
(420,000) (170,000) 70,000

9. Solution:
The impairment loss is computed as follows:
Recoverable amount (VIU - higher) 960,000
Carrying amount of investment (1,200,000)
Impairment loss (240,000)

Journal entry:
Dec. 31, Impairment loss 240,000
20x1
Investment in associate 240,000
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