INVESTMENT IN ASSOCIATES

4-11

1. Investment in Associate 2,000,000

Cash 2,000,0000

Cost of investment VS Share in fair value of net assets of investee

2,000,000 8,000,000 x 20% = 1,600,000

Excess = 400,000 (attributable to goodwill because net assets are fairly valued and will not be
separately recognized in the books of the investor)

2. Investment in Associate 300,000

Share in profit of associate 300,000
1,500,000 x 20%
3. Memo : Received 2,000 ordinary shares of Atlanta Company representing 10% bonus issue on
20,000 shares previously held.

4. Investment in Associate 600,000

Share in profit of associate 600,000
3,000,000 x 20%
5. Cash 200,000
Investment in Associate 200,000
1,000,000 x 20%

Carrying amount of the investment at December P 2,700,000 (2,000,000 +300,000+600,000-200,000)

31,2020

4-12

Jan. 1 Investment in Associate 5,160,000

Cash 5,160,000

Cost of investment VS Share in fair value of net assets of investee

5,160,000 12,400,000 x 30% = 3,720,000

Excess = 1,440,000 (attributable to goodwill and will not be separately recognized in the books of
the investor)

Cash 120,000
Investment in Associate 120,000
400,000 x 30%
Dec. 31 Investment in Associate 1,080,000
Share in profit of associate 1,080,000
3,600,000 x 30%

EMPV
 Carrying amount of the investment at December P 6,120,000 (5,160,000 -120,000+1,080,000)
31,2019

4-13

3/1/2019 Investment in Associate 1,365,000

Cash 1,365,000

Cost of investment VS Share in fair value of net assets of investee

1,365,000 3,550,000 x 30% = 1,065,000

Excess = 300,000

Attributable to undervalued inventories (50,000x30%) = (15,000) à all sold during the year
Attributable to undervalued depreciable assets (750,000x30%) = (225,000) à w/ remaining useful lives of 5 years
Attributable to goodwill 60,000

Cash 240,000
Investment in Associate 240,000
800,000 x 30%
12/31/2019 Investment in Associate 300,000
Share in profit of associate 300,000
1,200,000 x 30% X 10/12
Share in profit of Associate 52,500
Investment in Associate 52,500
Adjustment to share in profit of associate:

Attributable to undervalued inventories = (15,000) à All sold during the year( additional COGS)
Attributable to undervalued depreciable assets
= 225,000/ 5 years = 45,000/ year
45,000 x 10/12 (37,500) à Additional depreciation expense from
March 1 to December 31,2019
Total adjustment (52,500)

Carrying amount of the investment at December P 1,372,500 (1,365,000- 240,000 +300,000-52,500)

31,2019
Share in profit of associate for year 2019 P 247,500 (300,000 -52,500)

RECLASSIFICATION OF EQUITY SECURITIES

4-14

Jan 1,Yr 1 Equity investments @ FVOCI- Pen 900,000

Cash 900,000
Cash 200,000
Dividend Income 200,000

EMPV
 2,000,000 x 10%= 200,000

Under equity investment at fair value (FVPL/FVOCI), if there is a distribution of dividends from the investee,
the investor recognizes it as a dividend income.

No entry will be done regarding the profit reported by the investee for year 1 of P 6,000,000 because the
investor company holds only 10% of ownership and classifies its investment at fair value. So, no share
from the profit of the associate will be recorded in the books for year 1.

Dec. 31,Yr 1 Equity investment @ FVOCI- Pen 480,000

Unrealized gains& losses -FVOCI 480,000
Adjustment to fair value:
FV : 1,380,000
CV : 900,000
480,000

Jan 1,Yr 2 Investment in Associate 3,980,000

Cash 2,600,000
Equity investments @ FVOCI 1,380,000

Unrealized gains& losses -FVOCI 480,000

Retained Earnings 480,000

Investor company acquired an additional 20% of the investee’s outstanding shares, as a result, the investor
company now holds 30% (10% + 20%) of ownership over the investee company. Because investor company
now holds 30% ownership, it will gain a significant influence over the investee company. So, the investor
company should reclassify its previously equity investment at FVOCI to investment in associate. No need to
compare the cost of investment of the two purchases over the share in the net assets in the investee
company because it was already stated in the problem that the cost of these investment are already equal
to their proportionate share in the net assets of investee company (meaning no excess). So on January 1,
Year 2 , this equity investment at FVOCI will be reclassified to Investment in associate on the reclassification
date which is January 1,Yr 2. Also, the cumulative balance of UG&L –FVOCI is transferred to retained
earnings.

Cash 900,000
Investment in Associate 900,000
3,000,000x 30%
Dec. 31,Yr 2 Investment in Associate 1,950,000
Share in profit of associate 1,950,000
6,500,000 x 30%
Carrying amount of the investment at December P 5,030,000 (3,980,000 -900,000 + 1,950,000)
31,Yr 2

4-15

EMPV
Jan 1,Yr 1 Investment in Associates 8,250,000
Cash 8,250,000*
Percentage of ownership = 50,000 ordinary shares/ 200,000 outstanding ordinary shares = 25%

Because the percentage of ownership is 25%, E corporation is presumably given a significant influence over
F company. So, the investment should be accounted for as an investment in associate using the equity
method. At the date of acquisition, there is also no need to know if there is an excess because it was already
indicated that the purchase price already reflects the carrying value of the net assets of investee(meaning
there is no excess).

*50,000x 165

Aug.1, Yr 1 Cash 210,000

Investment in Associates 210,000
No need to prorate because it was indicated in the problem the E received P 210,000 meaning this is already
the share in the dividends.
Dec. 31,Yr 1 Investment in Associate 170,000
Share in profit of associate 170,000
680,000 x 25%
Dec. 31, Yr 2 Cash 240,000
Investment in Associates 240,000

Investment in Associate 250,000

Share in profit of associate 250,000
1,000,000 x 25%

Jan.1 Yr 3 Cash 3,500,000

Investment in Associate 3,288,000
Gain on sale of investment 212,000
Selling Price : 3,500,000
Carrying value( 8,220,000 x 20,000/50,000 shares) : 3,288,000
Gain on sale 212,000

E lost its significant influence over F because 20,000 shares were sold making his percentage ownership
decline to 15%. So the investment in associate must be reclassified to equity investments @ fair value on
the reclassification date. It was indicated in the problem that the equity investment will be classified as
fair value thru other comprehensive income and initially recorded at its fair value.

Equity investments @ FVOCI 5,250,000

Investment in Associate 4,932,000
Gain on reclassification 318,000

Dec. 31,Yr 3 Cash 120,000

Dividend Income 120,000
Equity investment @ FVOCI 450,000
Unrealized gains& losses -FVOCI 450,000
Adjustment to fair value:
EMPV
FV : 30,000 x 190 = 5,700,000
CV : 5,250,000
Unrealized gain 450,000
Carrying amount of the investment at December P 8,210,000 (8,250,000 – 210,000 +170,000)
31,Yr 1
Carrying amount of the investment at December P 8,220,000 (8,210,000 -240,000+250,000)
31,Yr 2
Carrying amount of the investment at December P 5,700,000 ( 30,000 x 190)
31,Yr 3

EMPV