Investments in Associates

MULTIPLE CHOICE – THEORIES

1. An investor uses the equity method to account for investment in associate. The purchase price implies a fair value of
the investee's depreciable assets in excess of the investee's net asset carrying values. The investee's amortization of
the excess
A. decreases the investment account.
B. decreases the goodwill account.
C. increases the investment income account.
D. does not affect the carrying amount of the investment.

2. When an investor uses the equity method to account for investment in associate, the investment account will be
increased when the investor recognizes
A. a proportionate interest in the profit of the investee.
B. a cash dividend received from the investee.
C. impairment of the goodwill related to the purchase.
D. depreciation related to the excess of market value over the carrying amount of the investee's depreciable assets at
the date of purchase by the investor.

3. Which of the following statements is correct regarding the disposal of equity investments?
A. No gain or loss is recognized on disposal of equity investments at fair value through profit or loss.
B. No gain or loss is recognized on disposal of investment in associates.
C. A gain or loss is recognized on the disposal of investment in associates for the difference between the net disposal
proceeds and the carrying amount of the investment.
D. A gain or loss is recognized on the disposal of equity investments at fair value for the difference between the net
disposal proceeds and the acquisition cost of the equity investment.

4. X owns 60% of the voting rights of Y, Z owns' 19% of the voting rights of Y, and the remainder are dispersed among
the public. Z also is the sole supplier of raw materials to Y and has a contract to supply certain expertise regarding the
maintenance of Y's equipment. Which of the following statements is correct?
A. Y is an associate of Z.
B. Y is considered a subsidiary of Z.
C. Y and Z are affiliated entities since both are subsidiaries of X.
D. Y and Z have no business relationship.

5. An entity has bought a 25% share in another entity with a view to selling that investment within six months. The
investment has been classified as held-for-sale in accordance with PFRS 5. How should the investment be treated in
the final year accounts?
A. It should be 'equity accounted.
B. The assets and liabilities should be presented separately from other assets in the statement of financial position
under PFRS 5.
C. The investment should be dealt with under PAS 29 Financial Reporting in Hyperinflationary Economies.
D. Purchase accounting should be used for this investment.

6. Justo Jude holds 40% of the ordinary shares of PRIA Company and properly classifies this as Investment in Associate.
PRIA Company has been incurring significant losses in the past years. Justo Jude Company has no commitment to
financially support the operations of PRIA.

In accounting for its investment in PRIA, Justo Jude should

A. recognize a provision equal to the resulting negative balance of the investment to bring the investment account to
zero balance.
B. consistently use the equity method even if the investment account results in a credit balance.
C. discontinue using the equity method when the balance is equal to the original cost of the investment.
D. discontinue using the equity method when the investment account is reduced to zero.

7. Company X owns 22% of Company Y and is entitled to appoint two directors to the board, which consists of eight
members. The remaining 78% Of the voting rights are held by two other companies; each of which is entitled to
appoint three directors. The board makes decisions on the basis of a simple majority. Because board meetings are
often held at very short notice, Company X does not always, have representation on the board. Often the suggestions
of the representative of Company X are ignored, and the decisions of the board seem to take little notice of any
representations made by the directors from Company X.

Which of the following statements is true?

A. The investment must be classified as Investment in Associate and Company X should use the equity method as
evidenced by the 22% shareholding and representation of 2 seats in the board.
B. Company X is unable to exercise significant influence, as its directors seem to be ignored at board meetings.
Therefore, the equity method should not be used.
C. The investment should be accounted for either using the equity method or the fair value method at the option of
Company X.
D. Company X is unable to exercise significant influence, therefore, the cost method should be used.

8. Under the equity method of accounting for investments, an investor recognizes its share of the profit in the period in
which the
A. investor sells the investment.
B. investee declares a dividend.
C. investee pays dividend.
D. profit is reported by the investee in its financial statements.

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9. These investments are initially recorded at purchase price plus transaction costs.
A. Equity investments at fair value.
B. Investment in associates.
C. Equity investments at FVPL and investment in associates.
D. Equity investments at FVOCI and investment in associates.

10. It is the ability to participate in the financial and operating policy decisions of the investee
A. Significant influence C. Joint control
B. Control D. Undue influence

11. Which statement is incorrect concerning the equity method?

A. The investment in associate is initially recorded at cost.
B. The investment in associate is increased or decreased by the investor's share of the profit or loss of the investee
after the date of acquisition.
C. The investor's share of the profit or loss of the investee is not recognized in the investor's profit or loss.
D. Distributions received from the investee reduce the carrying amount of the investment.

12. It is an entity over which the investor has significant influence and is neither a subsidiary nor an interesting joint
venture.
A. Associate C. Subsidiary
B. Venturer D. Affiliate

13. The existence of significant influence by an investor is usually evidenced in one or more of the following ways, except
A. provision of essential technical information. C. participation in the policy making processes.
B. interchange of managerial personnel. D. representation in the shareholders' meeting.

14. Which statement is correct concerning equity investments at fair value?

A. Cash dividends received are treated as reduction of investment balance.
B. Property dividends received are treated as income.
C. Unrealized gain on investments at FVPL is reported in equity.
D. Gain or loss on sale of equity investments at fair value through profit or loss is the difference between the net
selling price and the original cost of the investment.

15. 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.

16. Any difference between the acquisition cost of an investment accounted under the equity method and the carrying
amount of the investment acquired requires an adjustment in recording share in income from associates.

Which of the following will not require such an adjustment?

(1) Excess attributable to depreciation of depreciable assets
(2) Excess attributable to amortization of intangible assets
(3) Excess attributable to goodwill
(4) Excess attributable to land
A. (1) and (2) C. (2), (3), and (4)
B. (3) and (4) D. (1), (2), (3), and (4)

17. When the investor properly discontinues the use of the equity method,
A. the investment account is adjusted and any adjustment is included in other comprehensive income.
B. the carrying value of the investment is adjusted to conform with its recoverable amount.
C. the carrying value of the investment at the date it ceases to be an associate shall be regarded as its cost on initial
measurement as a financial asset.
D. the fair market value of the investment at the date it ceases to be an associate shall be regarded as its cost on
initial measurement as equity investment at fair value.

18. What should happen when the financial statements of an associate are not prepared to the same date as the investor's
accounts?
A. The associates should prepare financial statements for the use of the investor at the same date as those of the
investor.
B. The financial statements of the associate prepared up to a different accounting date will be used as normal.
C. Any major transactions between the date of the financial statements of the investor and that of the associate
should be accounted for.
D. As long as the gap is not greater than three months, there is no problem.

19. How is goodwill arising on the acquisition of an associate dealt with in the financial statements?
A. It is amortized.
B. It is impairment tested individually.
C. It is written off against profit or loss.
D. Goodwill is not recognized separately within the carrying amount of the investment.

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 20. What accounting method should be used for an investment in an associate where it is operating under severe long-
term restrictions—for example where the government of a company has temporary control over the associate?
A. Fair value method should be used.
B. The equity method should be applied if significant influence can be exerted.
C. The associate should be shown at cost.
D. Proportionate consolidation should be used.

21. The Standard does not require the equity method to be applied when the associate has been acquired and held with a
view to its disposal within a certain time period. What is the period within which the associate must be disposed of?
A. Six months. C. Two years.
B. Twelve months. D. In the near futur

22. How is the impairment test for investment in associate be carried out?
A. The goodwill is separated from the rest of the investment and is impairment tested individually.
B. The entire carrying amount of the investment is tested for impairment under PAS 36 Impairment of Assets by
comparing its recoverable amount with its carrying amount.
C. The carrying value of the investment should be compared with its market value.
D. The recoverable amounts of all investments in associates should be assessed together to determine whether there
has been an impairment on all investments.

MULTIPLE CHOICE – PROBLEMS

A. On March 31, 2021, Gray Company purchased 120,000 ordinary shares of Len Company for P1,700,000, representing
30% of Len Company’s outstanding ordinary shares and an underlying equity of P1,400,000 in Len Company’s net
assets on that date. The excess of the acquisition cost over the equity acquired cannot be attributed to any tangible
asset. As a result of Gray’s 30% ownership of Len Company, Gray has the ability to exercise significant influence over
Len Company’s financial and operating policies.

On March 1, June 1, September 1 and December 1, all of 2021, Len Company paid quarterly dividend of P0.50 per
ordinary share on each of these dates. Len Company’s profit for the year ended December 31, 2021 was P1,200,000
that was earned evenly throughout the year. At December 31, 2021, each ordinary share of Len Company was selling
at P16.

(1) What is Gray Company’s income from associates for the year 2021?
A. P360,000 C. P300,000
B. P330,000 D. P270,000

(2) What is the investment carrying amount at December 31, 2021?

A. P1,920,000 C. P1,730,000
B. P1,790,000 D. P1,700,000

(3) Assume the excess of acquisition cost over the underlying equity acquired is due to a piece of equipment with
a remaining life of 5 years on the date of investment acquisition, and a straight-line depreciation basis, what
is
the investment carrying amount at December 31, 2021?
A. P1,920,000 C. P1,745,000
B. P1,790,000 D. P1,730,000

B. On July 1, 2020, Jude Company purchased 10,000 shares of Rigby Company ordinary shares for P510,000 plus
broker’s fees of P5,100. The shares represented 25% of the outstanding shares of Rigby and Jude has an ability to
exercise significant influence over the financial and operating policies of Rigby. The acquisition cost reflected book
value of the investee’s net assets as of that date. Rigby Company reported profit of P850,000 (evenly earned) for the
year ended December 31, 2020. At December 31, 2020, Rigby declared and paid cash dividends of P320,000.

At January 1, 2021, Jude Company sold one-half of the investment in Rigby for P275,000 less broker’s fees of P2,750.
Jude Company does not have the intention to dispose the remaining securities in the immediate future. For the year
ended December 31, 2021, Rigby Company reported profit of P980,000 and declared and paid cash dividends of
P450,000.

Market value per share of Rigby Company ordinary shares were as follows:
December 31, 2020 – P55 December 31, 2021 – P49

(4) How much was the investment acquisition cost at July 1, 2020?
A. P515,100 C. P509,400
B. P510,000 D. P504,900

(5) What is the investment carrying amount at December 31, 2020?

A. P647,600 C. P541,350
B. P550,000 D. P536,250

(6) How much was the gain or loss on sale of investment on January 1, 2021?
A. P1,575 loss C. P4,325 loss
B. P1,575 gain D. P4,325 gain

(7) What was the carrying amount of the remaining equity investment at December 31, 2021?
A. P275,000 B. P270,675

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 C. P250,000 D. P245,000

C. On April 1, 2021, Car Company purchased 25,000 ordinary shares of Way Company at an amount that reflected book
value as of that date. At the time of purchase, Way Company had 100,000 ordinary shares outstanding. Car had no
ownership interest in Way before the purchase. The first quarter statement ending March 31, 2021 of Way Company
had profit of P480,000. For the year ended December 31, 2021, Way Company reported profit of P2,400,000. Way
Company paid Car Company dividends of P60,000 on June 1 and P80,000 on December 31, 2021. The carrying amount
of the investment in Way Company at December 31, 2021 is P4,840,000.

(8) What was Car Company’s acquisition cost of its investment in Way Company on April 1, 2021?
A. P4,360,000 C. P4,840,000
B. P4,500,000 D. P5,180,000

D. On July 1, 2021, Ron Company purchased 25% of Buck Company’s ordinary shares. No goodwill resulted from the
acquisition; however, the purchase difference of P1,000,000 was allocated to an undervalued equipment with a
remaining useful life of five years. Ron Company appropriately carries this investment using equity method and the
balance of the investment account was P12,000,000 at December 31, 2021. Buck Company reported profit of
P20,000,000 for the year ended December 31, 2021 and paid Ron Company dividends of P1,000,000 on December 31,
2021.

(9) How much did Ron Company pay for its 25% interest in Buck Company?
A. P10,600,000 C. P9,900,000
B. P10,400,000 D. P9,650,000

E. On January 1, 2021, BeeGees Company acquired a 30% interest in Al Company for P2,430,000. On this date, Al
Company’s shareholders’ equity was P5,000,000. At acquisition date, the carrying amount of Al Company’s identifiable
net assets approximated their fair values, except for the following:

Excess of Fair Value Over Carrying Value

Land P 2,000,000
Inventory 600,000
Machinery 500,000

All of the inventories that are undervalued at January 1, 2021 was sold during the year. The machinery is being
depreciated using the straight-line method and had a remaining useful life of 4 years at January 1, 2021. For the year
2021, Al company reported profit of P1,520,000 and paid its shareholders dividends of P650,000.

(10) What is the carrying amount of the investment in associates at December 31, 2021?
A. P2,473,500 C. P2,653,500
B. P2,691,000 D. P2,430,000

F. On January 1, 2021, Spinners Company purchased 10% of Sharon Company’s outstanding ordinary shares for
P200,000. Spinners Company is the largest single shareholder in Sharon Company and the officers of Spinners
Company are the majority members of Sharon Company’s board of directors. Sharon Company reported profit of
P1,500,000 for 2021 and paid dividends of P900,000. Market value of Sharon Company’s ordinary shares at December
31, 2021 is P265,000.

(11) In its December 31, 2021 statement of financial position, what amount should Spinners Company report as its
investment in Sharon Company?
A. P350,000 C. P200,000
B. P260,000 D. P265,000

G. On April 30, 2021, Marie Company purchased for cash 18,000 of the 60,000 voting shares of Robbie Company for
P650,000. The amount exceeded the underlying equity acquired in the net assets of Robbie Company by P150,000.
The excess is attributable to undervaluation of Robbie Company’s land and equipment by P250,000 and P100,000,
respectively. At April 30. 2021, the equipment had a remaining useful life of 5 years. The remaining excess was
attributable to goodwill.

During the year 2021, Robbie Company reported profit of P600,000, of which P120,000 was earned during January
through April. Robbie Company declared and distributed a dividend of P4.00 per share on June 30, 2021. Market price
of Robbie Company shares at December 31, 2021 is P40 per share.

(12) How much goodwill is included in the carrying amount of the investment?
A. P150,000 C. P71,250
B. P105,000 D. P45,000

(13) What is the carrying amount of the investment in associates at December 31, 2021?
A. P708,500 C. P718,000
B. P716,000 D. P720,000

H. On October 1, 2020, Michael Company purchased 30,000 ordinary shares of Jackson Company at P180 per share that
reflected book value as of that date. At the time of purchase, Jackson had 100,000 ordinary shares outstanding.
Michael Company had no ownership interest in Jackson Company before the purchase. The nine months ending
September 30, 2020, Jackson Company recorded profit of P2,960,000. For the year ended December 31, 2020, Jackson

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 Company reported profit of P4,800,000. Jackson Company paid Michael Company dividends of P120,000 on December
31, 2020.

For the year 2021, Jackson reported profit of P2,800.000 and paid dividends of P1,700,000 to its ordinary
shareholders.

On January 2, 2022, Michael Company sold 20,000 ordinary shares of Jackson Company for P250 per share. For year
ended December 31, 2022, the reported profit of Jackson Company was P4,000,000 and dividends of P40,000 was
paid to Michael Company. Market value of the remaining shares at this time is P2,300,000.

(14) What is the investment carrying value at December 31, 2021?

A. P6,162,000 C. P5,832,000
B. P5,970,000 D. P5,400,000

(15) What is the gain (loss) on the sale of 20,000 shares at January 2, 2022?
A. P1,400,000 C. P1,000,000
B. P1,020,000 D. P892,000

(16) What is the amount at which the investment is reported on the statement of financial position at December
31, 2022?
A. P5,270,000 C. P2,414,000
B. P2,500,000 D. P2,300,000

I. On July 1, 2021, Larmaine Company acquired a 25% interest in the outstanding share of Dovi Company at a total cost
of P1,750,000. The underlying equity of the shares acquired by Larmaine Company was P1,500,000. The difference
was due to the following:

a. Land with current fair value of P750,000 more than its carrying amount.
b. Depreciable plant assets with current fair value of P150,000 more than carrying amount.
c. Inventories which are undervalued by P20,000.

All other identifiable assets of Dovi Company have fair values equivalent to their book values. The depreciable plant
assets have remaining useful lives of 10 years from the date of acquisition of the investment. All of the inventories
have been sold as of December 31, 2021.

Larmaine Company received P100,000 dividends from Dovi Company in 2021. Dovi Company reported P1,350,000
profit during the year ended December 31, 2021. Interim reports from Dovi Company revealed that it earned
P650,000 during the first two quarters of 2021. There are no differences in accounting policies between the two
companies, nor do differences in reporting dates exist. Assume that there is no indication of impairment in the shares
as of December 31, 2021.

(17) How much was the income from associate reported in Larmaine Company’s profit and loss for the year ended
December 31, 2021?
A. P161,875 C. P168,125
B. P166,250 D. P175,000

J. The Harvard Company acquired a 30% equity interest in Baywatch Company for P4,000,000 on January 1, 2020. In
the year 2020, Baywatch Company earned profits of P800,000 and paid no dividends. In the year 2021, Baywatch
Company incurred losses of P320,000 and paid P100,000 dividends.

(18) In Harvard’s consolidated statement of financial position at December 31, 2021, what should be the carrying
amount of interest in Baywatch Company?
A. P4,000,000 C. P4,144,000
B. P4,114,000 D. P4,380,000

K. On January 1, 2020, Jaya, Inc. acquired as a long-term investment for P1,400,000, a 40% interest in Ramsey Company
when the fair value of Ramsey’s net assets was P3,500,000. Due to the COVID-19 pandemic, Ramsey Company
experienced difficulty in continuing its business and reported the following net losses:

2021 P 1,000.000
2022 1,400,000
2023 1,600,000
2024 800,000

In order to sustain its operations, Jaya made cash advances of P400,000 to Ramsey Company in 2023. On December
31, 2024, it is not expected that Jaya will provide further financial support for Ramsey.

(19) What amount should be reported as loss from investment in 2024?

A. P320,000 C. P200,000
B. P800,000 D. P120,000

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