INVESTMENT IN ASSOCIATE a.

7,720,000
b. 7,800,000
23-1 (AICPA Adapted) c. 8,000,000
On January 1, 2011, Saxe Company purchased 20% of Lex Company’s d. 8,080,000
ordinary shares outstanding for P6,000,000. The acquisition cost is equal to
the carrying amount of the net assets acquired. During 2011, Lex reported net Solution 23-2 Answer d
income of 7,000,000 and paid cash dividend of 4,000,000. What is the Original cost 8,000,000
balance in the investment in Lex Company on December 21, 2011? Share in net income (20% x 1,800,000) 360,000
a. 5,200,000 Share in cash dividends (20% x 400,000) ( 80,000)

a
b. 6,000,000 Amortization of excess of cost (2,000,000/10) ( 200,000)

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c. 6,600,000 Carrying amount of investment – December 31,2011 8,080,000
d. 7,400,000

d
Acquisition cost 8,000,000
Solution 23-1 Answer c Less: Carrying amount of interest acquired 6,000,000

e
Excess of cost over carrying amount 2,000,000

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Acquisition cost 6,000,000
Add: Share in net income (20% x 7,000,000) 1,400,000
Total 7,400,000 The excess of cost over the carrying amount of the underlying equity

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Less: Share in cash dividend (20% x 4,000,000) 800,000 acquired which is attributable to undervaluation of a depreciable asset
Investment balance 6,600,000 should be amortized over the remaining useful life of the depreciable asset.
Such amortization is recorded by debiting investment income and

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PAS 28, paragraph 6, provides that if an investor holds, directly or crediting investment in associate.
indirectly through subsidiaries, 20% or more of the voting power of the

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investee, it is presumed that the investor does have significant influence, 23-3 (AICPA Adapted)
unless it can be clearly demonstrated that it is not the case. On January 1, 2011, Dell Company paid 18,000,000 for 50,000 ordinary
shares of Case Company which represent a 25% interest in the net assets of

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The equity method of accounting is used if the investment is 20% or
Case. The acquisition of cost is equal to the carrying amount of the net assets
more of the voting power of the investee.
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Under the equity method, the investment account is increased by the acquired. Dell has the ability to exercise significant influence over Case. Dell
received a dividend of P35 per share from Case in 2011. Case reported net
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investor’s share of the investee’s earnings and decreased by the investor’s
share of the investee’s losses. Dividend receives from the investee reduces income of P9,600,000 for the year ended December 31, 2011.
the carrying amount of the investment. In the December 31, 2011 statement of financial position, what amount
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should be reported as investment in Case Company?
23-2 (AICPA Adapted) a. 22,150,000
In January 2011, Farley Company acquired 20% of the outstanding ordinary b. 20,400,000
shares of Davis Company for 8,000,000. This investment gave Farley the c. 18,650,000
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ability to exercise significant influence over Davis. The carrying amount of d. 18,000,000
the acquired shares was 6,000,000. The excess of cost over carrying amount
Solution 23-3 Answer c
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was attributed to a depreciable asset which was undervalued on Davis’

statement of financial position and which had a remaining useful life of ten Acquisition cost – January 1 18,000,000
Add: Share in net income (25% x 9,600,000) 2,400,000
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years. For the year ended, December 31, 2011, Davis reported net income of
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1,800,000 and paid cash dividends of 400,000 and thereafter issued 5% stock Total 20,400,000
Less: Cash dividend received (50,000x P35) 1,750,000
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dividend. What is the carrying amount of the investment in Davis Company

on December 31, 2011? Carrying amount of investment – December 31 18,650,000
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 Problem 23-4 (AICPA) Solution 23-5 Answer c
On January 1, 2011, Well Company purchased 10% of Rea Company’s
outstanding ordinary shares for P4,000,000. Well is the largest single Share in net income (20% x 4,000,000) 800,000
shareholder in Rea and Well’s officers are a majority of Rea’s board of
directors. Rea reported net income of P5,000,000 for 2011 and paid Under the equity method, the investor recognizes as net income its
dividends of P1,500,000. share of the investee’s earnings. Cash dividends are not recorded as
In its December 31, 2011 statement of financial position, what amount should income but a reduction of the investment account.
Well report as investment in Rea?
Problem 23-6 (AICPA Adapted)

a
a. 4,500,000 On July 1, 2011, Denver Company purchased 30,000 shares of Eagle

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b. 4,350,000 Company’s 100,000 outstanding ordinary shares for P200 per share.
c. 4,000,000 On December 15, 2011, Eagle paid P400,000 in dividends to its

d
d. 3,850,000 ordinary shareholders. Eagle’s net income for the year ended
December 31, 2011 was P1,200,00, earned evenly throughout the

e
Solution 23-4 Answer b year. In its 2011 income statement, what amount of income from the

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PAS 28, paragraph 6, provides that if the investor holds, directly or indirectly investment should Denver report?
through subsidiaries, less than 20% of the voting power of the investee, it is a. 360,000

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presumed that the investor does not have significant influence, unless such b. 180,000
influence can be clearly demonstrated. c. 120,000
Well’s position as Rea’s largest single shareholder and the presence of Well’s d. 60,000

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officers as a majority of Rea’s board of directors demonstrate that Well does
have a significant influence despite the 10% ownership. Accordingly, the Solution 23-6 Answer b

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equity method is used. Share in net income from July 1 to December 31, 2011
(1,200,000 x 6/12 x 30%) 180,000
Acquisition, January 1 4,000,000

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Add: Share in net income (10% x 5,000,000) 500,000 Interest acquired (30,000/100,000) 30%
Total co rc 4,500,000
Problem 23-7 (AICPA Adapted)
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Less: Share in cash dividends (10% x 1,500,000) 150,000
On April 1, 2011, Ben Company purchased 40% of the outstanding
Carrying value of investment, December 31 4,350,000
ordinary shares of Clarke Company for P10,000,000. On that date,
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Clarke’s net assets were P20,000,000 and Ben cannot attribute the
Problem 23-5 (AICPA Adapted)
excess of cost of its investment in Clarke over its equity in Clarke’s
On January 1, 2011, Dyer Company acquired as a long-term investment a
net assets to any particular factor.
20% ordinary share interest in Eason Company. Dyer paid P7,000,000 for
Clarke’s 2011 net income is P5,000,000. Ben plans to retain its
this investment when the fair value of Eason’s net assets was P35,000,000.
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investment in Clarke indefinitely. Ben accounts for its investment in

Dyer can exercise significant influence over Eason’s operating and financial
Clarke by the equity method.
policies. For the year ended December 31, 2011, Eason reported net income
What is the maximum amount which could be included in Ben’s
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of P4,000,000 and declared and paid cash dividends of P1,600,000.

2011 income before tax to reflect the “equity in net income of
What amount of revenue from the investment should Dyer report for 2011?
Clarke”?
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a. 1,120,000
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a. 1,400,000
b. 480,000
b. 1,500,000
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c. 800,000
c. 2,000,000
d. 320,000
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 d. 1,850,000
Solution 23-7 Answer b
Share in net income from April 1 to December 31, 2011 Problem 23-9 (AICPA Adapted)
(5,000,000 x 9/12 x 40%) 1,500,000 On January 1, 2011, Kean Company purchased 30% interest in Pod Company
for P2,500,000. On this date Pod’s shareholders’ equity was P5,000,000. The
Acquisition cost 10,000,000 carrying amounts of Pod’s identifiable net assets approximated their fair
Less: CA of net assets acquired values, except for land whose fair value exceeded its carrying amount by
(40% x 20,000,000) 8,000,000 P2,000,000. Pod reported net income of P1,000,000 for 2011 and paid no
Goodwill – not amortized 2,000,000 dividends. Kean accounts for this investment using the equity method.

a
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Problem 23-8 (IAA) In its December 31, 2011 statement of financial position, what amount should
On January 1, 2011, Ronald Company purchased 40% of the outstanding Kean report as investment in associate?

d
ordinary shares of New Company, paying P6,400,00 when the carrying a. 2,100,000
amount of the net assets of New Company equaled P12,500,000. The b. 2,200,000

e
difference was attributed to equipment which has a carrying amount of c. 2,800,000

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P3,000,000 and a fair market value of P5,000,000 and to building which has d. 2,760,000
a carrying amount of P2,500,000 and a fair value of P4,000,000. The

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remaining useful life of the equipment and building was 4 years and 12 years Solution 23-9 Answer c
respectively. During 2011, New Company reported net income of P5,000,000
and paid dividends of P2,500,000. What amount should be reported as Acquisition cost 2,500,000

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investment income for 2011? Less: Carrying amount of net assets acquired
a. 2,000,000 (30% x 5,000,000) 1,500,000

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b. 1,000,000 Excess of cost over carrying amount 1,000,000
c. 1,800,000 Less: Amount attributable to undervaluation of land
d. 1,750,000 (30% x 2,000,000) 600,000

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Goodwill – not amortized 400,000
Solution 23-8 Answer d
Acquisition cost co rc
6,400,000 Acquisition cost, January 1 2,500,000
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Net assets acquired (40% x 12,500,000) 5,000,000 Add: Share in net income (30% x 1,000,000) 300,000
Excess of cost 1,400,000 Carrying amount of investment 2,800,000
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Excess attributable to equipment The excess of cost attributable to the land is not amortized because the land
(40% x 2,000,000) 800,000 is nondepreciable.
Excess attributable to building
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(40% x 1,500,000) 600,000 Problem 23-10 (AICPA Adapted)

1,400,000 Sage company bought 40% of Eve’s Company’s outstanding ordinary shares
in January1, 2011 for P4,000,000. The carrying amount of Eve’s net assets at
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Share in net income (40% x 5,000,000) 2,000,000 the purchase date totaled P9,000,000. Fair values and carrying amounts were
Amortization of excess: the same for all items except for plant and inventory, for which fair values
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Equipment (800,000/4) ( 200,000) exceeded their carrying amounts by P900,000 and P100,000, respectively.
Building (600,000/12) ( 50,000) The plant has an 18-year life. All inventory was sold during 2011. During
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Investment Income 1,750,000

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 2011, Eve reported net income of P1,200,000 and paid a P200,000 cash
dividend. a. 810,000
b. 620,000
c. 960,000
What amount should Sage report as investment income in its income d. 885,000
statement for the year ended December 31, 2011?
a. 480,000 Solution 23-11 Answer c
b. 420,000 Acquisition cost (4,000,000 + 500,000) 4,500,000
c. 360,000 CA of net assets acquired (20% x 13m) 2,600,000

a
d. 320,000 Excess of cost 1,900,000

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Excess attributable to building (20% x 2m) 400,000
Solution 23-10 Answer b Excess attributable to goodwill – not amortized 1,500,000

d
Acquisition cost 4,000,000
Net assets acquired (40% x 9,000,000) (3,600,000) Share in net income (20% x 5m) 1,000,000

e
Excess of cost over carrying amount 400,000 Amortization of excess of cost:

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Attributable to building (400k/10) ( 40,000 )
The excess of cost is identified as follows: Investment income 960,000

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Understatement of plant (40% x 900,000) 360,000
Understatement of inventory (40% x 100,000) 40,000 Problem 23-12 (IAA)
Total excess of cost 400,000 On January 1, 2011, Occidental Company purchased 40% of the outstanding

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ordinary shares of Manapla Company for P3,500,000 when the net assets of
Share in net income (40% x 1,200,000) 480,000 Manapla amounted to P7,000,000. At acquisition date, the carrying amounts

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Less: amortization of excess of cost: of the identifiable assets and liabilities of Manapla were equal to their fair
Depreciation of plant (360,000/18) 20,000 value, except for equipment for which the fair value was P1,500,000 greater
Inventory (totally sold) 40,000 60,000 than its carrying amount and inventory whose fair value was P500,000

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Investment income 420,000 greater than its cost. The equipment has a remaining life of 4 years and the

Problem 23-11 (CGAC) co rc inventory was all sold during 2011. Manapla Company reported net income
of P4,000,000 for 2011 and paid no dividends during 2011.
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On January 1, 2011, Anne Company purchased 20% of the outstanding
shares of Dune Company for P4,000,000 of which P1,000,000 was paid in What is the maximum amount of the “equity in earnings of Manapla
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cash and P3,000,000 is payable with 12% annual interest on December 31, Company”?
2012. Anne also paid P500,000 to a business broker who helped find a a. 1,350,000
suitable business and negotiated the purchase. b. 1,250,000
At the time of acquisition, the fair values of Dune’s identifiable assets and c. 1,600,000
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liabilities were equal to their carrying amounts except for an office building d. 1,700,000
which had a fair value in excess of carrying amount of P2,000,000 and an
estimated life of 10 years. Dune’s shareholder’s equity on January 1, 2011 Solution 23-12 Answer a
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was P13,000,000. During 2011, Dune Company reported net income of Cost 3,500,000
P5,000,000 and paid dividend of P2,000,000. CA of interest acquired (40% x 7m) 2,800,000
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Excess of cost over carrying amount 700,000

What amount of income should Anne Company report for 2011 as a result of Excess applicable to equipment (40% x 1.5m) ( 600,000)
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investment? Excess applicable to inventory (40% x 500k) ( 200,000)

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 Excess of fair value over cost ( 100,000)

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