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Investment in:Associate
LECTURER: BRIAN CHRISTIAN S. VILLALUZ, CPA Definition of associate
>» An entity over which the investor has significant influence.
> The power fo paricipate in the financial and operating policy decisions of the
investee but not control oF joint control over those Policies. >> yf. chess
Orch. chess
> It is presumed that significant infl ist iLANE Investor owns 20% or more ah Dy
(out not exceeding 50%) of the Coting stock of the investee unléss it can be =
clearly demonstrated that this is note:
> Other factors evidencing the existence of significant influence:
Representation the board of hacion
Participation in policy-making process
Material ironsactions between the investor and the investee.
Interchange of managetial personne!
Provision of essential technical information Accounting for Investment in Associate
DA) Iw in se
> Accounted for using the equity method. ——~P Orr eS ic ao fro In Pe
|. The investment is recorded ot cost, Share in profitand Och = p hv oh sth od we
> (Beaming omount of ne vestment Leou)
> Share inlossandOCL ry Shin Guin tn fo0r we On
» (JEeming omount of he invesmnt fvin ce: ¥%
3, The carrying amount is reduced by the dividend:
Orit. ses 9%
Jovin Ree Yet
.d from the investee.
v Accounting for Investment in Associate (cont'd)
> The carrying value of the investment in associate at year-end is ci puted as follows:
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ov in Pew, End. Problem 1
At the beginning of 2020, Misarnis Company
purchased 20% of Oriental Company's
ordinary shares outstanding for P6,000,000.
Transaction cost incurred is 10% of the
purchase price of the shares. At the date of
acquisition, the carying amount of the
identifiable net assets were equal to thei
fair values. During the current year, the
investee reported net income of P7,000,000
and paid cash dividend of P4,000,000.
In 2021, Oriental reported loss of P1,000,000
and issued 10% stock dividends.
REQUIRED: Prepare the journal entries to
record the foregoing and determine the
following:
1
2
Investment income for 2021
Carrying amount of the investment in
associate on December 31, 2021
Investment loss in 2020.
Carrying amount of the investment in
associae on December 31, 2020. The fair value of the investee’s identifiable
net assets # carrying value.
» The excess shall be amortized as an adjustment to the investment account and to the shar
in profit or loss of the invesiee.
» Any further diference between the cost of investment ond the investor's share of the fair
valves of identifiable net assets wil be accounted for as:
> Goodwil > |. inter,
+ Cost ot investmer{ Sai value ot the investee’s identifiable net assets
> Gain on acquistion py YGe- ® NTA fhe gy Problem 2
Al the beginning of current yeor, US Company
bough! 40% of Se Company's duistanding ordinary
shores. for’ 3,500,000. Tas company "aso. pai
700,000 fo a ‘business broker who helped find
suitable ousiness ond negotiated the purchase,
The comying amount of SE's net ossets at the
purchase date totaled P9,000,000.
The difference was attributed to plant which had a
coming Gmaun! of P1.190.000, ahd a for velvet
2,000,000 and to inventory which had a carrying
amount of £250,000 and a fair value of 350,000. The
Plant has an 18-year fife. Al inventory was ‘sold
during the current yecrr
During the curent year, the investog repared net
income of 1,200,000 and paid a 200,000 cash
dividend,
Reg. 1: Of the amount paid for the invesiment, how
much is altrbutable 10 goodwill?
Reg. 2: How much is the amorlization of purchase
différential during the current yeare Problem 3
At the beginning of curent year, MA Company
urchosed 40% of the outstanding orcincay shates of
R Company for P3,500,000 when the net assets of BR
amounted fo P7,000,000.
At acquisition date, the carying amounts of the
identifiable assets and labillies oF BR were equal to
thet fair valve, except fer equipment for which the
fair valve was 1,500,000 greater than” canyin«
mount and inventory whose Tair value was P500,00
greater ihan cos!
The equipment hos a remaining ile of 4 years and
the inventory was all sold during the current year.
MA. Company reported net income of P4,000,000
ond ‘poid P1.000,000 ‘cash dividends curing “the
current year
What is the maximum amount of the “equity in
eamings of the investee"?
What is the carrying amount of the investment
in associate at year-end? dice) eo) (Vane)
At the beginning of curent year, MA Company,
urchosed 40% of the outstanding ordinary shates of
R Company for P3,500,000 when the net assets of BR
amounted fo P7,000,000.
At acquisition date, the canying amounts of the
identifiable assets and labillies oF BR were equal to
thet fair valve, except for equipment for which the
fair valve was 1,500,000 greater than” canyin«
mount and inventory whose Tair value was P500,00
greater than cost.
The equipment hos a remaining ile of 4 years and
the inventory was all sold during the current year.
MA Company reported net income of P4,000,000
ond "paid (P1:000.000 ‘cash dividends curing “the
current year
-q._1: What_is the maximum amount of the
“equity in earnings of the investee"?
Req. 2: What is the canying amount of the
investment in associate at yearend? Problem 5
On July 31, 2020, DT Company purchased —_Req.: What amount of income from the
30,000 shares of EE Company's 100,000 investment should be reported in 20202
outstanding ordinary shares for P200 per
share. On December 15, 2020, the
investee paid P400,000 in cash dividend
fo the ordinary shareholders.
The investee’s net income for the year
ended December 31, 2020 was
P1,200,000, eamed evenly throughout the
year. Problem 6
On July 1, 2020, BP Company paid Req.: What amount of income should be
P1,000,000 for 100,000 outstanding shares reported from the investment in CA
which represent 40% of CA Company. At_ Company?
that date, the net assets of CA Company
totaled P2,500,000 and the fair values of
all of CA Company's identifiable assets
and liabilities were equal to their carrying
amount. CA Company reported net
income of P500,000 for 2020, of which
200,000 was for the six months ended
June 30, 2020. CA Company paid cash
civdlend ‘of P250,000 on September 30,
2 Investment in associate achieved in
stages
> The investor shall remeasure the previously-held interest at fair value
> Any changes will be included in profit or loss or other comprehensive.
income, depending on the classification of thé previously-held securities.
“TEquly securities at oir valve through profit or loss
¥ Profit orloss
> Equity securities at foir valve through other comprehensive income
¥ Cumulative unrealized gains and losses in OC! willbe reclossfied to retained earnings. Problem 7
On Jonuary 1, 2020, Triple Dragons Property For the years ended December 31, 2020 and 2021, the
Company acquifed 10% of the oulstanding —_invesiee reported ihe following:
gidipary Shares of Global Pioneers Company ot
4,000,000. The invesiment was cppopicciy ST) TT
‘accounted for under cost method, PIMECREAESCIEM 2,000,000 3,000,000
On Jonuay 1, 2021, Triple Dragons Property NSREEE SOO ESO
gained the ability to exercise significan! influence
Sver financial and opersting control of Giobal What is the investment income in 20208
Pioneers by acquiring Gn additional 20% of Global '
Ponees'.’ oultiandg “ordinary shares for 2. What is the investment income in 20212
10,000,000. 3. What is the carying amount of the investment in
The fair value of Globol Pioneers’ net _assets ‘associate on December 31, 20217
equaled their carying amount. The fair value of
the 10% ‘interest’ on January 1, 2020 was
6,000,000. Problem 8
On January 1, 2018, Benedetta Co. acquired Req.: Determine Benedetta Co.'s share in profits and losses to
@ 40% interest in an investee for P14,000,000. be reported for the years 2018-2021
All the investee's net assets were equal to
their foir values on this date. For the years
2018 through 2022, the investee reported the
following profit or loss figures:
ca Profit (loss)
nel
2018 (10,000,000)
2019 (14,000,000)
2020 (16,000,000)
2021 3,750,000
2022 2,500,000 Assessment of impairment of investment in associate
> An impairment loss shall be recognized when the carrying amount of the
investment in associate exceeds its recoverable amount.
» (fighe) between:
acne tlt nin itp
a. Prasent value of the estimates future cash flows expected to ave rom tne continuing use of
te asset and rom is urimete asposa.
> The recoverable amount of an investment in associate is assessed for each
individual associate. Investee with preference shares
» When an associate has outstanding preference shares, the investor shall
compute its share of profits or losses of the investee after considering the
dividends on preference shares.
shel | (-) lye Dir PS
Cams’
*S < An investor shall discontinue the use of the equity method from the date
that it ceases to have significant influence over an associate. < 71
ae
> On the date the significant influence is lost, the investor shall medsuTé any
relcined investment at fair valug
> The difference between The net proceeds from partial disposal of the
investment and the carying amount of the investment sold shall be
included in profit or loss
> The difference between the carrying amount of the retained investment at
the date the significant influengs nd the fair value of the retained
investment shall be included i
fh ceases to be an associate shall be
cognition as a financial asset.
> The fair value of the investmen’
regarded as the fair value on init Problem 10
A Co. acquired 25,000 ordinary shares of
the 100,000 outstanding ordinary shares
of another entity two years ago. On
December 31 of the current year, the
investment in associate account has a
carrying amount of P5,000,000.
The quoted market price per share on
December 31 is P250.
Case 1: On December 31 of the current
year, the investor sold 5,000 ordinary
shares for P1,200,000.
1. How much is the gain or loss on sale of
the shares?
2. What would be the measurement of
the investment account after the
sale? Problem 10
A Co. acquired 25,000 ordinary shares of
the 100,000 outstanding ordinary shares
of another entity two years ago. On
December 31 of the current year, the
investment in associate account has a
carrying amount of P5,000,000.
The quoted market price per share on
December 31 is P250.
Case 2: On December 31 of the current
year, the investor sold 10,000 ordinary
shares for P2,450,000.
1. How much is the gain or loss on sale of
the shares?
2. What would be the measurement of
the investment account after the
sale? Closing summary:
Investments in Equity Securities
Ownership %
Method of accounting
Inificl measurement
Treatment of transaction costs
Treatment of dividends
(except for stock dividends)
Share in P/L of the investee
Yeor-end valuation
Changes in fair valve
FS Presentation
Subject to impairment?
<20%
Fair vole metibd
Foir value
Expense
Profit/loss
NIA
Fair value
Profit/loss
Current assets
No
ae
20% - 50%
Equity method
Cost ff fut cig)
Copitalized
Trev
erotiss
CV. unless impaired
oc NIA
Non-current assets
Yes
