SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

ACCT 1056- Intermediate Accounting 1

First Semester, SY 2023-2024

Exercises
Investment in Associate (IAS 28)

Make sure you have solved the following problems before attending our classroom meeting. Please write your
answers/complete solution in your Journal of Learnings (JoL).

PROBLEM 1 - FAIR VALUE METHOD VS. EQUITY METHOD

On January 4, 2023, Steve Corp paid P30 million for 1 million shares of Jamie Company ordinary shares. The
investment represents a 15% interest in the net assets of Jamie.

Steve received dividends of P1.00 per share on December 15, 2023 and Jamie reported net income of P8
million for the year ended December 31, 2023. Also, Jamie reported on December 31, 2023 a gain on
property revaluation of P500,000 in the OCI. The market value of Jamie’s ordinary shares at December 31,
2023 was P32 per share.

On the purchase date, the book value and fair value of Jamie’s net assets was P200 million.

REQUIRED:
1. In a two-column presentation, provide all journal entries on the books of the Steve under the following
scenarios:
a. Assuming Steve does not exercise significant influence over Jamie Company; and
b. Assuming Steve has the power to participate in the operating and financial policy decisions of
Jamie Company.
2. Compute the balance of the following under each of the scenarios above:
a. Investment account as of December 31, 2023.
b. Net amount charged in the CY2023 profit or loss (label properly this/these item/s).
3. Determine the proper classification of the investment account in the asset section of the statement of
financial position under each of the scenarios above.

PROBLEM 2 - Excess of cost over book value is attributable to DEPRECIABLE and NON-Depreciable
assets
On January 1, 2023, Zardo Co. acquired 20,000 ordinary shares out of the 100,000 outstanding ordinary
shares of V5 Inc. for P3,000,000. V5’s assets and liabilities approximate their fair values except for inventories
with carrying amount of P600,000 and fair value of P650,000, machinery with carrying amount of P1,000,000
and fair value of P1,500,000 and land with carrying amount of P1,500,000 and fair value of P1,200,000. The
remaining useful life of the machinery is 10 years. V5’s net assets have book value of P12,000,000.

On December 31, 2023, V5 reported net income of P8,000,000 and declared and paid dividends of
P2,000,000.

On April 1, 2024, the land of V5 was sold as a gain of P200,000.

On December 31, 2024, V5 reported net income of P10,000,000 and declared and paid dividends of
P3,000,000.

Assuming the acquisition gives Zardo the power to participate in the financial and operating policy
decisions of V5.

REQUIRED:
1. Compute the initial carrying amount of the investment (i.e., cost).
2. How much was the acquired book value of V5’s net identifiable assets?
3. How much was the excess of acquisition costs over acquired book value of V5’s net identifiable
assets?
4. How do we allocate the amount computed in number 2?
5. After allocation in number 3, is there still unallocated excess? If yes, how do we call this item?
 6. Provide journal entries on the books of Zardo Co. in 2023 and 2024, assuming the acquisition gives
Zardo the power to participate in the financial and operating policy decisions of V5.
7. Compute the following balances on December 31, 2023:
a. Carrying amount of the investment.
b. Share in the adjusted profit or loss of the associate.
8. Compute the following balances on December 31, 2024:
c. Carrying amount of the investment.
d. Share in the adjusted profit or loss of the associate.
9. What are the minimum disclosure requirements of IAS 28?

PROBLEM 3 – POTENTIAL VOTING RIGHTS

Hot Co. owns 50,000 shares out of the 300,000 outstanding ordinary shares of Cold, Inc. The investment in
Cold’s shares has a carrying amount of P1,200,000 on January 1, 2023. Hot also owns bonds issued by Cold
that are convertible into 30,000 ordinary shares. The bonds are currently convertible; however, Hot Co. does
not intend to convert them. Cold does not have any other outstanding convertible bonds aside from those held
by Hot. Cold reported profit of P3,300,000 and declared and paid cash dividends of P180,000 in 2023.

REQUIRED: How much is the carrying amount of Hot Co.’s investment in Cold shares as of December 31,
2023?

PROBLEM 4 - CHANGE FROM FAIR VALUE THROUGH PROFIT OR LOSS TO EQUITY METHOD – Step
Acquisition
On January 1, 2021, Zoey Co. acquired 15,000 ordinary shares out of the 100,000 outstanding ordinary
shares of Moira Inc. for P3,150,000. The investment was classified as fair value through profit or loss
(FVTPL). The fair value per share of Moira are as follows: December 31, 2021, P260; December 31, 2022,
P240 and December 31, 2023, P280.

On January 1, 2023, Zoey purchased an additional 15,000 of Moira’s stock for representing 15% additional
interest for P3,600,000 when the carrying amount of Moira’s net assets was P12,500,000. The excess was
attributable to the machinery having a remaining life of ten years.

On December 31, 2021, Moira reported net income of P1,200,000 and declared and paid dividends of
P500,000. On December 31, 2022, Moira reported net income of P1,400,000 and declared and paid dividends
pf P550,000. On December 31, 2023. Moira reported net income of P1,600,000 and declared and paid
dividends of P700,000.

REQUIRED:
1. Provide the journal entries in 2021, 2022, and 2023.
2. What was the initial carrying amount of the investment in associate on January 1, 2023.
3. What was the carrying amount of the investment as of:
a. December 31, 2021.
b. December 31, 2022.
c. December 31, 2023.

PROBLEM 5 - DISCONTINUANCE OF EQUITY METHOD

Marianne Company purchased 300,000 shares of Sexy Co. ordinary shares on January 1, 2022 at P100 per
share, which reflected book value as of that date. At the time of purchase, Sexy Co. has 1,000,000 ordinary
shares outstanding. Marianne had no ownership interest in Sexy prior to this purchase. Sexy reported net
income of P4,000,000 for the year ended December 31, 2022, and declared and paid dividends of
P2,500,000. Also, Sexy Co. reported on December 31, 2022 an unrealized gain in OCI of P250,000 for its
Financial Assets at Fair Value through OCI.

On January 1, 2023, Marianne sold 160,000 ordinary shares of Sexy for P120 per share and reclassified the
remaining stock as financial asset at FVTOCI. The quoted market price of such investment on January 1,
2023 was P122 per share. Sexy reported a net income of P6,000,000 for the year ended December 31, 2023
and declared and paid dividends of P2,000,000. The fair value of Sexy ordinary shares at December 31, 2023
was P125 per share.

REQUIRED:
1. Provide the journal entries in 2022 and 2023.
4. What was the carrying amount of the investment as of:
a. December 31, 2022.
b. December 31, 2023.

PROBLEM 6 - ASSOCIATE WITH OUTSTANDING PREFERENCE SHARES

On January 1, 2023, Napoy Company acquired 30% of the outstanding shares of Tasha Company for
P6,000,000. This investment gave Napoy the ability to exercise significant influence over Tasha. The book
value of the acquired shares was P5,000,000. The excess of cost over book value was attributed to a
depreciable asset which was undervalued on Tasha’s statement of financial position and which had a
remaining useful life of eight years.

For the year ended December 31, 2023, Tasha’s share capital outstanding is as follows:

10% cumulative preference share capital P 3,000,000

Ordinary share capital 6,000,000

Tasha reported net income of P2,500,000 for the year ended December 31, 2023.

CASE No. 1: Assuming the cumulative preference share is treated as equity by Tasha and that Tasha
declared dividends of P450,000 in the preference shares, answer the following:
a. What amount should Napoy record as investment income for the year ended December 31, 2023?
b. What amount should Napoy record as investment in associate for the year ended December 31, 2023?

CASE No. 2: Assume instead that the preference shares are non-cumulative preference share treated as
equity by Tasha and that Tasha declared dividends of P450,000 on the preference shares. Answer the
following:
a. What amount should Napoy record as investment income for the year ended December 31, 2023?
b. What amount should Napoy record as investment in associate for the year ended December 31, 2023?

CASE No. 3: Assuming the cumulative preference share is treated as financial liability by Tasha, answer the
following:
a. What amount should Napoy record as investment income for the year ended December 31, 2023?
b. What amount should Napoy record as investment in associate for the year ended December 31, 2023?

PROBLEM 7 - ASSOCIATE HAVING HEAVY LOSSES

Solenn owns 20% of the voting shares of Enrique Inc. Solenn’s account balances on December 31, 2021,
before any necessary adjustment, include the following:
Investment in Associate 400,000
Trade Accounts Receivable – Enrique Inc. 600,000
Investment in preference shares – Enrique Inc. 200,000
Advances to Associate – Enrique Inc. 100,000
Loans Receivable, secured – Enrique Inc. 240,000

Enrique Inc. reported losses of P2,800,000, P1,000,000, and P200,000 in 2021, 2022, and 2023, respectively,
and profit of P2,000,000 in 2024. In 2023, Solenn incurred constructive obligation of P240,000 in favor of
Enrique and made payments of P160,000 on behalf of Enrique.

REQUIRED: Provide journal entries in 2021-2024.

PROBLEM 8 – INTERCORPORATE UPSTREAM SALE

On January 1, 2023, Analyn Company acquired 25% of ordinary shares of an associate. On such date, assets
and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of
P2,000,000 was acquired. The investee reported net income of P16,000,000 for 2023 and P24,000,000 for
2024.

On January 1, 2023, the investee sold an equipment to Analyn Company with carrying amount of P5,000,000
for P8,000,000. The remaining life of the equipment is 5 years.

On July 1, 2023, the investee sold land to Analyn Company for P18,000,000. This land was acquired by the
investee at a cost of P20,000,000.

In December 2023, the investee sold inventory costing P6,000,000 to Analyn Company for P10,000,000. Half
of the inventory remained unsold by Analyn on December 31, 2023.

REQUIRED:
a. What amount of investment income should be reported by Analyn Company for 2023?
b. What amount of investment income should be reported by Analyn Company for 2024?

PROBLEM 9 – INTERCORPORATE DOWNSTREAM SALE

On January 1, 2023, Analyn Company acquired 25% of ordinary shares of an associate. On such date, assets
and liabilities of the investee were recorded at fair value and the acquisition showed that goodwill of
P2,000,000 was acquired. The investee reported net income of P16,000,000 for 2023 and P24,000,000 for
2024.
On January 1, 2023, Analyn Company sold an equipment to its associate with carrying amount of P5,000,000
for P8,000,000. The remaining life of the equipment is 5 years.

On July 1, 2023, Analyn Company sold land to its associate for P18,000,000. This land was acquired by the
investee at a cost of P20,000,000.

In December 2023, Analyn Company sold inventory costing P6,000,000 to its associate for P10,000,000. Half
of the inventory remained unsold by the associate on December 31, 2023.

REQUIRED:
a. What amount of investment income should be reported by Analyn Company for 2023?
b. What amount of investment income should be reported by Analyn Company for 2024?

PROBLEM 10 – IMPAIRMENT LOSS

Erika Co.’s investment in associate, representing 40% ownership interest in Claire’s Co., has a carrying
amount of P2,000,000 on December 31, 2023. This amount includes implied goodwill of P100,000. Erika
assessed that the investment may be impaired. Erika determined the following:
Fair value less costs of disposal of the investment (FVLCD) 1,600,000
Value in use of the investment (VIU) 1,580,000

REQUIRED: Provide journal entry on December 31, 2023.

Prepared by sir je