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ILLUSTRATIVE EXAMPLES - Equity and IIA

The document provides several examples and problems related to accounting for investments in equity and associates. It covers topics such as acquisition of investments, recording dividends, sale of investments using different cost methods, accounting for stock rights, and accounting for investments in associates.

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Cyrss Baldemos
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28 views4 pages

ILLUSTRATIVE EXAMPLES - Equity and IIA

The document provides several examples and problems related to accounting for investments in equity and associates. It covers topics such as acquisition of investments, recording dividends, sale of investments using different cost methods, accounting for stock rights, and accounting for investments in associates.

Uploaded by

Cyrss Baldemos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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INVESTMENTS IN EQUITY AND ASSOCIATES

ILLUSTRATIVE EXAMPLES:

ACQUISITION BY EXCHANGE

1. A Company acquired an investment from B Company by exchanging its equipment. At the time of exchange, the
equipment has a book value of P1,200,000 and has an accumulated depreciation of P700,000 while its fair value
is P600,000. The investment acquired has a fair value of P540,000.
● Prepare the journal entry to record the investment acquired.

LUMPSUM ACQUISITION

2. Akira Company purchased for a lump sum of P3,075,000 the following long-term investments.
A Corp Shares 8,000 shares
B Corp Shares 16,000 shares
C Corp Bond P1,000,000 face value
At the time of purchase, the securities were quoted at the following prices: A share, 100; B share, 150; and C
bond, 90.
● Prepare the journal entry to record the lumpsum acquisition.

EX-DIVIDEND & DIVIDEND ON

3. On October 1, 2023, Harper Company purchased 10,000 ordinary shares of Reaper Company for P100,000.
At the end of the year, Reaper company declared dividends of P3/share. Stock and transfer books of the Reaper
is closed for registration on March 31, 2024. Dividends declared are paid-out on April 30, 2024.
 Case 1: If Harper Company sold all of its share on February 1, 2024 for P14/share, how much is the gain
on sale?
 Case 2: If Harper Company sold all of its share on April 15, 2024 for P12/share, how much is the gain on
sale?
INVESTMENTS IN EQUITY AND ASSOCIATES
DIVIDENDS

4. Makwarta Company acquired shares from different companies last year. For the current year, Makwarta
received dividends.
 25,000 shares of A Company. A Company declared a cash dividend of P5/share.
 500,000 shares of B Company. B Company declared a 15% share dividend.
 5,000 shares of C Company. C Company declared a P4/share liquidating dividend.
 10,000 shares of D Company. D declared a 2:1 stock split.

Compute the income of Makwarta from the dividends

SALE TRANSACTION USING FIFO AND AVERAGE

1. During 2020, Lawan Company bought the shares of Burwood Company.

June 1 20,000 shares @ P100 2,000,000


December 1 30,000 shares @ P120 3,600,000
Transaction for the year 2021:
Jan 10, Received 20% share dividend
July 20, Received cash dividend of P10/share
December 10, Sold 30,000 shares at P125 per share
 Compute for the dividend income that would be reported?
 Compute for the gain on sale of shares using FIFO?
 Compute for the gain on sale of shares using Average?

STOCK RIGHTS

2. Dr. Stone acquired 10,000 shares costing P1,800,000. Subsequently, he received 10,000 stock rights to subscribe
for new shares at P100 per share for every five rights held.
The market value of the share is P150 and the market value of the right is P10.
 Prepare the journal entry of the receipt of stock rights, exercise of stock right if the right is exercised,
sale of stock rights if sold, expiration of stock right if not exercised using the 2-accounting method.
INVESTMENTS IN EQUITY AND ASSOCIATES
INVESTMENT IN ASSOCIATE

3. At the beginning of 2022, Oz Company purchased 20% of Op Corp’s ordinary shares outstanding for P3,000,000.
The transaction cost incurred is 10% of the purchase price of the shares. At the date of acquisition, the carrying
amount of the identifiable net assets were equal to their fair values. During 2022, the investee reported net
income of P3,500,000 and paid cash dividend of P2,000,000.
In 2023, Op reported a loss of P500,000 and issued 10% stock dividend.
 Prepare journal entries for 2022 and 2023.

4. Assuming with the same problem above, but the carrying amount of the identifiable net assets of Op were
P2,500,000. The difference is attributable to the inventory that has a cost of P1,500,000 but its net realizable
value is only P1,200,000, and a plant asset that is undervalued by 600,000. The inventories were sold for the
year 2023 and the plant asset has a remaining useful life of 10 years.
 What amount of goodwill must be recognized by Oz?
 What is the carrying amount of the investment for the year 2022 and 2023?

5. Beginning of the year 2020, Paz company acquired 20% La company’s ordinary share at a cost of P1,500,000.
During the year, due to war happened in Ukraine and Covid lockdowns, La Company’s operation had been
greatly affected. La company incurred a net loss of P5,000,000 and declared no dividends. For the year 2021,
although lockdowns had been lifted for some areas, La still incurred a net loss of P3,000,000. While for the year
2022, La company has already recovered and incurred a net income of P2,500,000.
 Compute for the carrying amount of the investment of Paz for the years 2020, 2021, 2022.
INVESTMENTS IN EQUITY AND ASSOCIATES

6. Saitama Company acquired 10% share of Genos company’s 100,000 shares amounting to P230,000 at the
beginning of year 2022. Genos declared a cash dividend of P5/share and had an income of P9,000,000.
For the year 2023, Saitama acquired an additional 15,000 shares of Genos making its interest equal to 25%. The
15,000 shares were purchased at fair value for P375,000. Genos declared a cash dividend of P7/share and had
an income of P1,200,000 for the year 2023.
 What amount of income must Saitama record for the year 2022 and 2023?

7. The same problem above, assuming for the beginning year 2024, Saitama sold its 17,000 shares of Genos for
P23/share. What is the gain/loss on sale?

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