– INVESTMENT IN ASSOCIATE

On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000.

The investment was accounted for under the cost method. During 2016, the
investee reported net income of P4,000,000 and paid dividend of P1,000,000.

On January 1, 2017, the entity acquired a further 15% interest in the investee for
P8,500,000. On such date, the carrying amount of the net assets of the investee was
P36,000,000 and the fair value of the 10% existing interest was P3,500,000.

The fair value of the net assets of the investee is equal to carrying amount except
for an equipment whose fair value was P4,000,000 greater than carrying amount.
The equipment had a remaining life of 5 years.

The investee reported net income of P8,000,000 for 2017 and paid dividend of
P5,000,000 on December 31, 2017.

1. What amount of investment income should be recognized in 2016?

a. 400,000
b. 100,000
c. 500,000
d. 300,000

2. What is the implied goodwill arising from the acquisition on January 1, 2017?

a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0

3. What total amount of income should be recognized by the investor in 2017?

a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000

4. What is the carrying amount of the investment in associate on December 31,

2017?

a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000

SOLUTION - PROBLEM 1
 Question 1 Answer B

Dividend income (10% x 1,000,000) 100,000

Under cost method, the investment income is based on dividend declared or paid.

Question 2 Answer B

Existing 10% interest remeasured at fair value 3,500,000

New 15% interest 8,500,000
Total cost – January 1, 2017 12,000,000
Net assets acquired (25% x 36,000,000) ( 9,000,000)
Excess of cost over carrying amount 3,000,000
Excess attributable to equipment whose fair value is greater than carrying
amount (25% x 4,000,000) ( 1,000,000)
Goodwill 2,000,000

Question 3 Answer C
Share in net income (25% x 8,000,000) 2,000,000
Amortization of excess attributable to equipment (1,000,000 / 5 years) ( 200,000)
Net investment income 1,800,000

Fair value of 10% interest 3,500,000

Historical cost 3,000,000
Remeasurement gain 500,000
Net investment income 1,800,000
Total income in 2017 2,300,000

If the investment in associate is achieved in stages the old interest is remeasured at fair
value through profit or loss.

Question 4 Answer A

Total cost 1/1/2017 12,000,000

Net investment income 1,800,000
Share in cash dividend (25% x 5,000,000) ( 1,250,000)
 Carrying amount – 12/31/2017 12,550,000

PROPERTY, PLANT AND EQUIPMENT

January 1, 2016, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000

During the current year, the following transactions occurred:

* A tract of land was acquired for P2,000,000 cash as a building site.

* A plant facility consisting of land and building was acquired in exchange for
200,000 shares of the entity. On the acquisition date, each share had a quoted
price of P45 on a stock exchange. The plant facility was carried on the seller’s
books at P1,600,000 for land and P5,400,000 for the building at the exchange
date. Current appraised values for the land and the building, respectively, are
P2,000,000 and P8,000,000. The building has an expected life of forty years with
a P200,000 residual value.

* Items of machinery and equipment were purchased at a total cost of P4,000,000.

Additional costs incurred were freight and unloading P100,000 and installation
P300,000. The equipment has a useful life of ten years with no residual value.

* Expenditures totaling P1,200,000 were made for new parking lot, street and
sidewalks at the entity’s various plant locations. These expenditures had an
estimated useful life of fifteen years.

* Research and development costs were P1,100,000 for the year.

* A machine costing P200,000 on January 1, 2009 was scrapped on June 30,

2016. Straight line depreciation had been recorded on the basis of a 10-year life
with no residual value.

* A machine was sold for P500,000 on July 1, 2016. Original cost of the machine
sold was P700,000 on January 1, 2013, and it was depreciated on the straight
line basis over an estimated useful life of eight years and a residual value of
P50,000.

1. What is the total cost of land on December 31, 2016?

a. 7,800,000
b. 7,600,000
c. 8,000,000
d. 6,800,000

2. What is the total cost of land improvements on December 31, 2016?

a. 1,200,000
 b. 3,600,000
c. 1,300,000
d. 2,500,000

3. What is the total cost of buildings on December 31, 2016?

a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000

4. What is total cost of machinery and equipment on December 31, 2016?

a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000

SOLUTION – PROBLEM 2
Question 1 Answer A

Land – January 1 4,000,000

Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land – December 31 7,800,000

Quoted price of shares issued for land and building (200,000 x P45) 9,000,000

Current appraized value :

Land 2,000,000
Building 8,000,000
Total 10,000,000

The total cost of the land and building is equal to the quoted price of the shares
which is allocated prorata to the land and building based on the current appraised
value.

Question 2 Answer D
Land improvements – January 1 1,300,000
Expenditures for parking lot, street and sidewalks 1,200,000
Balance – December 31 2,500,000

Question 3 Answer C
Buildings – January 1 20,000,000
Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 27,200,000

Question 4 Answer B
Machinery and equipment - January 1 8,000,000
Machinery and equipment purchased 4,000,000
Freight and unloading 100,000
 Installation 300,000
Machinery scrapped ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 11,500,000

BOND INVESTMENT AT FVOCI

An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2016 with

interest payable on June 30 and December 31. The bonds were purchased for
P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%. The
business model for this investment is to collect contractual cash flows and sell the
bonds in the open market. On December 31, 2016, the bonds were quoted at 106.

1. What amount of interest income should be reported for 2016?

a. 400,000
b. 200,000
c. 364,560
d. 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2016?

a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive

income for 2016?

a. 300,000
b. 125,440
c. 128,060
d. 92,000

4. If the entity elected the fair value option, what total amount of income should be
recognized for 2016?

a. 400,000
b. 492,000
c. 600,000
d. 200,000

SOLUTION - PROBLEM 3

Date Interest Interest Amortization Carrying

received income amount
 1/1/16 5,208,000
6/30/16 200,000 182,280 17,720 5,190,280
12/31/16 200,000 181,660 18,340 5,171,940

Question 1 Answer D
Interest January to June 182,280
Interest July to December 181,660
Interest income for 2016 363,940

Question 2 Answer A
Market value on December 31, 2016 (5,000,000 x 106) 5,300,000

Question 3 Answer C
Market value on December 31, 2016 5,300,000
Carrying amount December 31, 2016 (see table of amortization) 5,171,940
Unrealized gain – OCI 128,060

Question 4 Answer C
Market value on December 31, 2016 5,300,000
Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value 200,000
Interest income (8% x 5,000,000) 400,000
Total income