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Chapter 14
Investments in Associates
1. PAS 28 generally applies when the level of ownership over another company is at what
percentage?
a. Less than 20%
b. 20%-30%
c. 20%-50%
d. More than 50%

2. When an investor uses fair value accounting to account for investments in common stock, cash
dividends received by the investor from the investee would normally be recorded as
a. a deduction from the investment account.
b. dividend revenue.
c. an addition to the investor's share of the investee's profit.
d. a deduction from the investor's share of the investee's profit.

3. Under the equity method in PAS 28, goodwill amortization

a. reduces the investment account.
b. increases the investment account.
c. reduces both investment income and the investment account.
d. is not recorded.

4. The equity method of accounting should be used when an investment

a. is composed of ordinary shares and it is the investor's intent to vote the ordinary shares.
b. ensures a source of supply such as raw materials.
c. enables the investor to exercise significant influence over the investee.
d. gives the investor voting control over the investee.

5. When an investor uses the equity method to account for investments in common stock, the
investment account will be increased when the investor recognizes
a. a proportionate share of the net income of the investee.
b. a cash dividend received from the investee.
c. periodic amortization of the goodwill related to the purchase.
d. depreciation related to the excess of fair value over carrying amount of the investee's
depreciable assets at the date of purchase by the investor.

6. When an investor uses the equity method, cash dividends received from the investee are recorded
as
a. an increase in the investment account.
b. a deduction from the investment account.
c. dividend revenue.
d. a deduction from the investor's share of the investee's profits.
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7. Dane, Inc. owns 35% of Marin Corporation. During the calendar year 2004, Marin had net
earnings of ₱300,000 and paid dividends of ₱30,000. Dane mistakenly recorded these transactions
using the fair value method rather than the equity method of accounting. Dane recognized
₱20,000 gain on the change in fair value of the investment during the year. What effect would this
have on the investment account, net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate

8. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.

9. When a company holds between 20% and 50% of the outstanding stock of an investee, which of
the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circumstances
indicate that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to
exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.

10. Byner Corporation accounts for its investment in the common stock of Yount Company
under the equity method. Byner Corporation should ordinarily record a cash dividend received
from Yount as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.

“Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your
requests be made known to God. And the peace of God, which surpasses all understanding, will guard your
hearts and your minds in Christ Jesus.” (Philippians 4:6-7)

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ANSWERS
1. C 6. B
2. B 7. D
3. D 8. D
4. C 9. B
5. A 10. A
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Use the following information for the next nine questions:

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2004 are
as follows:
Elston Company
Balance Sheet
December 31, 2004
Assets ₱800,000

Liabilities ₱100,000
Capital stock 400,000
Retained earnings 300,000
Total equities ₱800,000
Alley Company
Balance Sheet
December 31, 2004
Assets ₱600,000

Liabilities ₱150,000
Capital stock 370,000
Retained earnings 80,000
Total equities ₱600,000

1. If Elston Company acquired a 20% interest in Alley Company on December 31, 2004 for ₱130,000
and the fair value method of accounting for the investment were used, the amount of the debit to
Investment in Alley Company Stock would have been
a. 90,000.
b. 74,000.
c. 130,000.
d. 120,000.

2. If Elston Company acquired a 30% interest in Alley Company on December 31, 2004 for ₱150,000
and the equity method of accounting for the investment were used, the amount of the debit to
Investment in Alley Company Stock would have been
a. 190,000.
b. 150,000.
c. 120,000.
d. 135,000.

3. If Elston Company acquired a 20% interest in Alley Company on December 31, 2003 for ₱90,000
and during 2004 Alley Company had net income of ₱50,000 and paid a cash dividend of ₱20,000,
applying the fair value method would give a debit balance in the Investment in Alley Company
Stock account at the end of 2004 of
a. 74,000.
b. 90,000.
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c. 100,000.
d. None of these

4. If Elston Company acquired a 30% interest in Alley Company on December 31, 2004 for ₱135,000
and during 2005 Alley Company had net income of ₱50,000 and paid a cash dividend of ₱20,000,
applying the equity method would give a debit balance in the Investment in Alley Company
Stock account at the end of 2005 of
a. 135,000.
b. 144,000.
c. 150,000.
d. 145,000.

5. Elston Co. acquires 30% interest in Alley Company on December 31, 2004. The carrying amount
of Alley’s net assets on December 31, 2004 approximates its fair value. If the acquisition did not
result to any implied goodwill, how much is the acquisition cost of the investment?
a. 135,000.
b. 144,000.
c. 150,000.
d. 145,000.

6. Elston Co. acquires 30% interest in Alley Company on December 31, 2004. The carrying amount
of Alley’s net assets on December 31, 2004 approximates its fair value. If the acquisition did not
result to any implied goodwill, how much is the acquisition cost of the investment?
a. 135,000.
b. 144,000.
c. 150,000.
d. 145,000.

7. Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not
result to any goodwill. At the time of acquisition, the carrying amount of Alley’s net assets
approximates its fair value. There have been no impairment losses on the investment. In
principle, the equity method would result to a carrying amount of the investment on December
31, 2004 of
a. 112,500.
b. 135,000.
c. 144,000.
d. Cannot be determined; given information is insufficient

8. Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not
result to any goodwill. At the time of acquisition, the carrying amount of Alley’s net assets
approximates its fair value. There have been no impairment losses on the investment. Alley
Company reported profit of ₱200,000 and declared dividends of ₱40,000 in 2004. Theoretically, the
carrying amount of the investment on December 31, 2003 would approximate which of the
following amounts?
a. 72,500.
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b. 98,500
c. 112,500.
d. Cannot be determined; given information is insufficient

9. Elston Co. acquired 25% interest in Alley Company many years ago. The acquisition did not
result to any goodwill. At the time of acquisition, the carrying amount of Alley’s net assets
approximates its fair value. There have been no impairment losses on the investment. The
carrying amount of the investment on January 1, 2004 is ₱98,500. Alley Company declared
dividends of ₱40,000 in 2004. If the proportionate share of Elston in the net assets of Alley at
December 31, 2004 reflects the carrying amount of Elston’s investment, how much would have
been Alley’s profit in 2004?
a. 200,000.
b. 24,000
c. 96,000.
d. Cannot be determined; given information is insufficient

10. Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company's common
stock for ₱180,000 on January 2, 2004. During 2004, Flynn Company declared dividends of ₱30,000
and reported earnings for the year of ₱120,000. If Karter Company uses the equity method of
accounting for its investment in Flynn Company, its Investment in Flynn Company account at
December 31, 2004 should be
a. ₱174,000.
b. ₱180,000.
c. ₱198,000.
d. ₱204,000.

“Peace I leave with you; my peace I give you. I do not give to you as the world gives. Do NOT let your
hearts be troubled and do NOT be afraid.” (John 14:27)

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SOLUTIONS
1. C
2. B
3. D – The fair value on December 31, 2004 is not given
4. B ₱135,000 + (₱50,000 × .3) – (₱20,000 × .3) = ₱144,000.
5.A (370,000 + 80,000) = 450,000 net assets x 30% = 135,000
6. A
Purchase price (squeeze)
Fair value of net assets acquired 135,000
(370,000 + 80,000) = 450,000 net assets x 30%] (135,000)
Goodwill 0
7. A (370,000 + 80,000) = 450,000 net assets x 25%] = 112,500

8. A
Investment in associate
12/31/2003 (squeeze) 72,500
Sh. in profit 50,000 10,000 Cash dividends
112,500* 12/31/2004

*(370,000 + 80,000) = 450,000 net assets x 25% = 112,500

9. C

Investment in associate
1/1/2004 98,500
Sh. In profit (squeeze) 24,000 10,000 Cash dividends
112,500* 12/31/2004

*(370,000 + 80,000) = 450,000 net assets x 25% = 112,500

24,000 ÷ 25% = 96,000

10.C ₱180,000 + (₱120,000 × 20%) – (₱30,000 × 20%) = ₱198,000.