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BALIUAG UNIVERSITY

CPA REVIEW

FINANCIAL ACCOUNTING PROBLEMS FAR-2017-11

INVESTMENT IN ASSOCIATE

1. On July 1, 2017, Q COMPANY acquired 20% of the outstanding ordinary shares of another entity
for P5,000,000. The carrying amount of the acquired shares was P4,000,000. The excess of cost
over carrying amount was attributable to an identifiable intangible asset which was undervalued
on the investee’s statement of financial position and which had a remaining useful life of 5 years.
The investee reported net income of P6,000,000 for 2017 and paid cash dividends of P1,000,000
on ordinary shares and issued 10% stock dividend on December 31, 2017?

a. 5,900,000
b. 5,400,000
c. 5,300,000
d. 5,800,000

2. On January 1, 2017, R COMPANY acquired 40% of the ordinary share of an associate. On such
date, assets and liabilities of the investee were recorded at fair value and the acquisition showed
that goodwill of P1,000,000 was acquired. The investee reported net income of P8,000,000 for
2017.

In December 2017, the investee sold inventory costing P3,000,000 to R COMPANY for
P5,000,000. The inventory remained unsold by S COMPANY on December 31, 2017.

On January 1, 2017, the investee sold an equipment to R COMPANY with carrying amount of
P2,500,000 for P4,000,000. The remaining life of the equipment is 5 years.

What amount of investment income should be reported by R COMPANY for 2017?

a. 1,920,000
b. 1,800,000
c. 3,200,000
d. 2,400,000

3. S COMPANY owned 100% of another entity’s preference shares and 40% of ordinary shares. The
investee’s share capital outstanding on December 31, 2017 included P5,000,000 of 10%
cumulative preference shares and P10,000,000 of ordinary shares. The investee reported net
income of P6,000,000 for 2017. No dividend was declared for both preference and ordinary
shares in 2015. What amount should be reported as investment income for 2017?

a. 5,500,000
b. 2,400,000
c. 2,200,000
d. 2,700,000

4. On January 1, 2017, T COMPANY purchased 40% of the outstanding ordinary shares of another
entity for P5,000,000 when the assets of the investee amounted to P10,000,000. At acquisition
date, the carrying amounts of the identifiable assets and liabilities of the investee were equal to
their fair value, except for equipment for which the fair value was P2,000,000 greater than
carrying amount and inventory whose fair value was P1,000,000 greater than cost. The
equipment has a remaining life of 5 years and the inventory was all sold during 2017. The
investee reported at net income of P6,000,000 for 2017 and paid no dividends. What is the
maximum amount which could be included in income before tax to reflect the investor’s equity in
earnings of the investee for 2017?

a. 2,400,000
b. 2,240,000
c. 2,040,000
d. 1,840,000

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BALIUAG UNIVERSITY
CPA REVIEW

FINANCIAL ACCOUNTING PROBLEMS FAR-2017-11

5. U COMPANY owns 20% of V COMPANY’s preference shares and 80% of the ordinary shares. V’s
share capital outstanding on December 31, 2017 as follows:

10% cumulative preference share capital 100,000


Ordinary share capital 700,000

V reported net income of P60,000 for 2017. U does not elect the fair value option to report the
investment in V. What amount should be reported as equity in earnings of V for 2017?

a. 42,000
b. 48,000
c. 48,400
d. 50,000

6. W COMPANY bought 40% of an investee on January 1, 2017 for P400,000. The carrying value of
the investee’s net assets at the purchase date totaled P900,000. Fair values and carrying amounts
were the same for all items except for plant and inventory, for which fair values exceeded their
carrying amounts by P90,000 and P10,000, respectively. The plant has an 18-year life. All
inventory was sold during 2017. During 2017, the investee reported net income of P120,000 and
paid a P20,000 cash dividend. What amount should be reported as income from the investment in
associate for 2017?

a. 48,000
b. 42,000
c. 36,000
d. 32,000

7. On July 1, 2017, X COMPANY paid P1,000,000 for 100,000 outstanding shares (40%) of another
entity. At that date, the net assets of the investee totaled P2,500,000 and the fair values of all of
the identifiable assets and liabilities were equal to their carrying amount. The investee reported
net income of P500,000 for 2017, of which P300,000 was for the six months ended December 31,
2017. The investee paid cash dividends of P250,000 on September 30, 2017. The investor does
not elect the fair value option for reporting the investment in associate. What amount of income
should be reported from the investment in associate?

a. 80,000
b. 100,000
c. 120,000
d. 200,000

8. On January 1, 2016, Y COMPANY 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 is the goodwill on January 1, 2017 presented separately in the books?

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

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


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BALIUAG UNIVERSITY
CPA REVIEW

FINANCIAL ACCOUNTING PROBLEMS FAR-2017-11

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

3. 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

9. On January 1, 2016, Z COMPANY acquired 30% of the voting share capital of another entity for
P2,000,000 which was equal to the carrying amount of interest acquired. The investee reported
net income of P800,000 for 2016 and paid dividend of P500,000 on December 31, 2016. The
investee reported net income of P1,000,000 for the six months ended June 30, 2017 and
P2,500,000 for the year ended December 31, 2017 but paid no dividend during 2017. On July 1,
2017, the investor sold half of the investment for P1,500,000. The fair value of the retained
investment was P1,600,000 on July 1, 2017 and P1,900,000 on December 31, 2017. The retained
investment is to be held as non-trading measured at FVTOCI

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

a. 2,090,000
b. 2,390,000
c. 2,240,000
d. 2,000,000

2. What is the gain on sale of investment that should be reported for 2017?

a. 245,000
b. 305,000
c. 350,000
d. 455,000

3. What amount of gain from remeasurement of investment should be reported for 2017?

a. 405,000
b. 705,000
c. 300,000
d. 0