Problem 2: Multiple choice

1. c

2. d

3. a

4. c

5. a

6. b

7. c

8. d

9. d

10. c

Problem 3: EXERCISES

1.

a. Provide the journal entries in Potato Co.’s books Journal Entries:

Jan. 01, 20x1 Investment in Associate 800,000

Cash 800,000
To record the purchase of investment

Dec.31, 20x1 Investment in Associate 425,000

Share in profit of associate (1.7Mx25%) 425,000
To record the share in the associate’s profit

Dec. 31, 20x1 Cash (400K x 25%) 100,000

Investment in Associate 100,000
To record the dividend received from the
associate
Dec. 31, 20x1 Share in OCI associate- Translation of foreign 20,000
operation
Investment in Associate 20,000
To record the share in the translation loss of
the associate

b. Compute for the carrying amount of the investment in associate on

Dec Investment in Associate
01/01/x1 800,000

Share 425,000 100,000 Cash Dividends-20x1

20,000 Share in translation cost

1,105,000 12/31/20x1

2.

a. Compute for the goodwill (negative goodwill)

Goodwill is computed in the following:

Purchase cost 4,000,000

Less: Fair value of net assets acquire (3,300,000)

Goodwill 700,000

*Fair value of the net assets acquired computed as follows:

Book value (carrying amount) of net assets 10,000,000

Overvaluation of inventory (1M-20K) ( 800,000)

Undervaluation of depreciable asset (10M - 6M) 4,000,000

Fair value of net assets 13,200,000

Multiply by: Interest acquired 25%

Fair value of net assets acquired 3,300,000

*Alternative Solution

Purchase cost 4,000,000

Less: Book value of interest acquired (20M×25%) (2,500,000)
Excess of cost over book value 1,500,000
Share in overvaluation of inventory[(1M-2K)×25%] 200,000
Share in undervaluation of depreciation asset [(10M-6M)×25%] (1,000,000)
700,000

b. Provide the entries in the books of Wer. Co.

Journal Entries
Jan.1, Investment in associate 4,000,000
20x1 Cash 4,000,000
to record the purchase of investment
Dec. 31, Investment in associate 600,000
20x1 Share in profit of associate (2.4M×35%) 600,000
to record the share in the associate's profit
Dec. 31, Cash (1M×25%) 250,000
20x1 Investment in associate 250,000
to record the cash dividends
Dec. 31, Investment in associate (800K×25%) 200,000
20x1 Share in profit of associate 200,000
to account for the overvaluation of inventory
Dec. 31, Share in profit of associate[(4M×25%)÷10yrs] 100,000
20x1 Investment in associate 100,000
to depreciate the undervaluation of asset

c. Compute for the share in the associate's profit in 20x1.

600,000 share in profit, gross
200,000 overvaluation
Undervaluation 100,000
Share in profit, net 700,000

d. Compute for the carrying amount of the investment on Dec. 31, 20x1.
01/01/20x1 4,000,000
Share in profit, gross 600,000 250,000 cash dividends
Overvaluation 200,000 100,000
4,450,000 12/31/20x1

Investment, end. 4,450,000 share in profit, net 700,000

Investment, beg. (4,000,000) share in dividends (250,000,)

Net change 450,000 = 450,000

3.

a. Provide journal entries in 20x1 and 20x2.

Journal Entries:

20x1 entries
Jan. Investment in associate 6,000,000
Cash 6,000,000
1, 20x1 to record the purchase of investment
Dec. 31, Cash (1.2M×30%) 300,000
20x1 Investment in associate(squeeze) 300,000
Share in profit of associate (2M×30%) 600,000
to record the cash dividends and the share in the associate's
profit (compound entry)
Dec. 31, Share in profit of associate[(20M-16M) ÷10yrs] ×30%] 120,000
20x1 Investment in associate 120,000
to record the depreciation of undervalued building

20x2 entries
July Investment in associate (1M×30%) 300,000
Share in profit of associate to record share in associate 300,000
1, 20x2 profit for the six month ended June 30, 20x2

July Share in profit of associate 60,000

Investment in associate(120K×6/12) 60,000
1, 20x2 to record depreciation of undervaluation of building for the six
month ended June 30, 20x2
July Cash (30,000 share × 60% × 240) 4,320,000
Investment in associate (6,420,000×60%) 3,852,000
1, 20x2 Gain on sale of investment(squeeze) to 468,000
record partial sale of investment
July Held for trading securities (a) 2,880,000
Investment in associate (6,420,000×40%) 2,568,000
1, 20x2 Gain on reclassification 312,000
to reclassify the remaining investment

(a) (30,000 share × 40%) = 12,000 remaining share x P240 =

2,880,000
Dec. 31, Dividend receivable (2M×12%)(b) 240,000
20x2 Dividend income 240,000
to record the dividends
(b) (30%×40%) = 12%
Dec. 31, Held for trading securities 360,000
20x2 Unrealized gain - P/L 360,000
to record gain in the change in fair value

(c) (270-240)×12,000 share = 360,000

b. Compute for the total effect of the investment in Cam shares in Melo Co.'s 20x2 profit or loss.

Share in profit of associate, net - Jan-July(200K-600K) 240,000

Gain on sale 468,000

Gain on reclassification 312,000

Dividend income 240,000

Unrealized gain on change in fair value 360,000

Total income recognized in P/L - 20x2 1,620,000

4.

Case 1:

Requirement: Provide the journal entries in July 1, 20x2.

Answers:
July 1, 20x2 Cash 800,000
Loss on sale of investment 400,000
Investment in associate(2.4M×1/2) 1,200,000
to record sale
July 1, 20x2 Translation of foreign operation 1,000,000
Gain on reclassification - P/L 1,000,000
to record the reclassification adjustment of the
OCI to P/L

Case 2:

Requirement: Provide journal entries on July 1, 20x2 Answers:

July 1, 20x2 Cash 800,000
Loss on sale of investment 400,000
Investment in associate(2.4M×1/2) 1,200,000
to record sale
July 1, 20x2 Translation of foreign operation 500,000
Gain on reclassification (1M×1/2) 500,000
to record the reclassification adjustment of the OCI
to P/L

Case 3:

Requirement: Provide the journal entries on July 1, 20x2 Answers:

July 1, 20x2 Cash 800,000
Loss on sale of investment 400,000
Investment on associate (2.4M×1/2) 1,200,000
to record the sale
July 1, 20x2 Revaluation surplus - associate 1,000,000
Retained earnings 1,000,000
to record the transfer of OCI arising from property
revaluation directly to retained earnings

5. Requirement: Provide the journal entries in 20x1 and 20x2.

Jan. 1, 20x1 Held for trading securities 1,600,000
Cash 1,600,000
Dec. 31, 20x1 Cash (2M×10%) 200,000
Dividend income 200,000
Dec. 31, 20x1 Held for trading securities 100,000
Unrealized gain - P/L [(10K×P170)-1.6M] 100,000

Analysis:

Number of shares previously held 10,000

 Additional shares purchased 15,000 Total shares held
25,000

Divided by: Pinikpikan Inc.'s outstanding share 100,000

New ownership interest 25%

*The carrying amount of the investment on Dec. 31, 20x1 id P1,700,000, equal to the year-end fair
value.
July 1, 20x2 Investment in associate (15,000×P140) 2,100,000
Cash 2,100,000
to record the purchase of additional share

Acquisition - date for fair value of the previously held investment:

Number of shares previously held 10,000
Multiply by: Fair value per share on July 1, 20x2 P140
Acquisition-date fair value of existing investment 1,400,000

July 1, 20x2 Investment in associate 1,400,000

Held for trading securities 1,400,000
July 1, 20x2 Unrealized loss - P/L (1.7M-1.4M) 300,000
Held for trading securities 300,000

Carrying amount
Purchase cost of additional shares acquired 2,100,000
Reclassification date fair value existing inventory 1,400,000
Carrying amount of investment in associate - 7/1/x2 3,500,000

Dec. 31, 20x2 Cash (2M×25%) 500,000

Investment in associate (squeeze) 1,500,000
Share in profit of associate (8M×25%) 2,000,000

6. Requirement: Provide the journal entries in 20x1 to 20x4.

Answers:
*Del, Inc. reported loss of P2,800,000 in 20x1.
>Interest in the associate as of Dec. 31,20x1:
Investment in associate 400,000
Investment in preference shares - Del, Inc. 200,000
Advances to associate - Del, Inc. 100,000

Interest in the associate - before adjustment, 12/31/x1 700,000 >Share in

loss of the associate in 20x1:

Share in loss of the associate (2.8M×20%) (560,000)

Dec. 31, 20x1 Share in loss of associate 560,000

Investment of associate 400,000
Investment in preference shares 160,000
to recognize the share in the loss

>balances of the relevant accounts are:

Investment in associate (400K-400K) 0

 Investment in preference shares - Del,Inc. 40,000

Advances to associate - Del, Inc. 100,000

Interest in the associate - after adjustment, 12/31/x1 140,000

*Del, Inc. reported loss of P1,000,000 in 20x2.

>Share in loss of associate (1M×20%) (200,000)

Dec. 31, 20x2 Share in loss of associate 140,000
Investment in preference 40,000
shares Advances to associate 100,000
to recognize the share in the loss
•the excess of P60,000 is disclosed as loss not recognized.

*Del, Inc. reported loss of P200,000 in 20x3. In addition, Wat incurred constructive obligation of
P240,000 in favor of Del and made payments of P160,000 on behalf of Del.

> The P200,000 loss will not be recognize because the balance of the interest in associate is
already reduced to zero. The 'should have been' share of P40,000 (200,000 loss in 20x3 ×20%) is
disclosed as loss not recognized. The cumulative balance of "losses not recognized" is P1,000,000
(P60,000 in 20x2 + P40,000 in 20x3).

Dec. 31, 20x3 Loss on associate (240K-260K) 400,000

Liability incurred on behalf of associate 240,000
Cash 160,000
to recognize the constructive obligation and the
payment made on behalf of the associate

*In 20x4, Del, Inc. reported profit of P2,000,000.

>The share in the profit is computed as:

Share in profit of associate before adjustment (2M×20%) 400,000

Cumulative losses not recognized (1,000,000)

Share in profit of associate - adjusted (600,000)

Dec. 31, 20x4 Advances to associate 400,000

Investment in preference shares 200,000
Share in profit of associate 600,000

7. Requirement: Provide the journal entry on Dec. 31, 20x1.

>Impairment loss is computed as follows:
Recoverable amount (FVLCD-higher) 1,600,000
Carrying amount of investment (2,000,000)
Impairment loss (400,000)

Dec. 31, 20x1 Impairment loss 400,000

Investment in associate 400,000
PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL

1. c

2. a

3. a

4. d

5. c

6. d

7. b

8. a

9. c

10. a

11. b

12. d

13. a

14. a

15. c

16. a