PAS 28 – Investment in Associate and Joint Venture

1. FAIR VALUE METHOD VS. EQUITY METHOD

On January 4, 2016, Jerome Corp paid P30 million for 1 million shares of Christian Company ordinary shares. The
investment represents a 20% interest in the net assets of Christian and gave Jerome the ability to exercise significant
influence over Christian’s operations. Jerome received dividends of P1.00 per share on December 15, 2016 and
Christian reported net income of P8 million for the year ended December 31, 2016. The market value of Christian’s
ordinary shares at December 31, 2016 was P32 per share. On the purchase date, the book value of Christian’s net
assets was P120 million and the fair market value of Christian’s depreciable assets, with an average remaining useful
life of six years, exceeded their book value by P6 million. The remainder of the excess of cost of the investment over
the book value of net assets purchased was attributable to goodwill.

REQUIRED:
1. How much is the implied goodwill from acquisition?
2. In a two-column presentation, provide all journal entries on the books of the investor under:
a. Fair value method; and
b. Equity method.

2. INVESTMENT IN ASSOCIATE (Excess of cost over book value is attributable to DEPRECIABLE and NON-
Depreciable assets)
On January 1, 2016, John Co. acquired 20,000 ordinary shares out of the 100,000 outstanding ordinary shares of
Peter Inc. for P5,000,000. Peter’s assets and liabilities approximate their fair values except for inventories with carrying
amount of P600,000 and fair value of P650,000, machinery with carrying amount of P1,000,000 and fair value of
P1,500,000 and land with carrying amount of P1,500,000 and fair value of P1,200,000. The remaining useful life of the
machinery is 10 years. Peter’s net assets have book value of P12,000,000.

On December 31, 2016, Peter reported net income of P8,000,000 and declared and paid dividends of P2,000,000.

On April 1, 2017, the land of Peter was sold as a gain of P200,000.

On December 31, 2017, Peter reported net income of P10,000,000 and declared and paid dividends of
P3,000,000.

REQUIRED:
1. How much is the implied goodwill from acquisition?
2. How much is the net share in the profit or loss of the associate (investment income) in 2016?
3. How much is the carrying amount of the investment as of December 31, 2016?
4. How much is the net share in the profit or loss of the associate (investment income) in 2017?
5. How much is the carrying amount of the investment as of December 31, 2017?
6. Provide journal entries in 2016 and 2017.

3. ASSOCIATE WITH OUTSTANDING PREFERENCE SHARES

On January 1, 2016, Jerome Company acquired 30% of the outstanding shares of Arah Company for P6,000,000.
This investment gave Jerome the ability to exercise significant influence over Arah. The book value of the acquired
shares was P5,000,000. The excess of cost over book value was attributed to a depreciable asset which was
undervalued on Arah’s statement of financial position and which had a remaining useful life of eight years.

For the year ended December 31, 2016, Arah’s share capital outstanding is as follows:

10% cumulative preference share capital P 3,000,000

Ordinary share capital 6,000,000

Arah reported net income of P2,500,000 for the year ended December 31, 2016.

CASE No. 1: Assuming the cumulative preference share is treated as equity by Arah and that Arah declared
dividends of P450,000 in the preference shares, answer the following:
A. What amount should Jerome record as investment income for the year ended December 31, 2016?
B. What amount should Jerome record as investment in associate for the year ended December 31, 2016?

CASE No. 2: Assume instead that the preference shares are non-cumulative preference share treated as equity
by Arah and that Arah declared dividends of P450,000 on the preference shares. Answer the following:
A. What amount should Jerome record as investment income for the year ended December 31, 2016?
B. What amount should Jerome record as investment in associate for the year ended December 31, 2016?

CASE No. 3: Assuming the cumulative preference share is treated as financial liability by Arah, answer the
following:
A. What amount should Jerome record as investment income for the year ended December 31, 2016?
B. What amount should Jerome record as investment in associate for the year ended December 31, 2016?
4. CHANGE FROM FAIR VALUE THROUGH PROFIT OR LOSS TO EQUITY METHOD – Step Acquisition

On January 1, 2016, Christine Co. acquired 15,000 ordinary shares out of the 100,000 outstanding ordinary shares
of Mary Inc. for P3,150,000. The investment was classified as fair value through profit or loss (FVTPL). The fair value
per share of Mary are as follows: December 31, 2016, P260; December 31, 2017, P240 and December 31, 2018, P280.

On January 1, 2018, Christine purchased an additional 15,000 of Mary’s stock for representing 15% additional
interest for P3,600,000 when the carrying amount of Mary’s net assets was P12,500,000. The excess was attributable
to the machinery having a remaining life of ten years.

On December 31, 2016, Mary reported net income of P1,200,000 and declared and paid dividends of P500,000.
On December 31, 2017, Mary reported net income of P1,400,000 and declared and paid dividends pf P550,000. On
December 31, 2018. Mary reported net income of P1,600,000 and declared and paid dividends of P700,000.

REQUIRED: Provide the journal entries in 2016, 2017, and 2018.

5. DISCONTINUANCE OF EQUITY METHOD

Marianne Company purchased 300,000 shares of Sexy Co. ordinary shares on January 1, 2015 at P100 per share,
which reflected book value as of that date. At the time of purchase, Sexy Co. has 1,000,000 ordinary shares outstanding.
Marianne had no ownership interest in Sexy prior to this purchase. Sexy reported net income of P4,000,000 for the year
ended December 31, 2015, and declared and paid dividends of P2,500,000.

On January 1, 2016, Marianne sold 160,000 ordinary shares of Sexy for P120 per share and reclassified the
remaining stock as financial asset at FVTOCI. The quoted market price of such investment on January 1, 2016 was
P122 per share. Sexy reported a net income of P6,000,000 for the year ended December 31, 2016 and declared and
paid dividends of P2,000,000. The fair value of Sexy ordinary shares at December 31, 2016 was P125 per share.

REQUIRED: Provide the journal entries in 2016, 2017, and 2018.

6. ASSOCIATE HAVING HEAVY LOSSES

On January 1, 2015, Solenn Company acquired as a long-term investment for P1,400,000, a 40% interest in Lovie
Company when the fair value of Lovie’s net asset was P3,500,000. Lovie Company reported the following net losses:

2015 P 1,000,000
2016 1,400,000
2017 1,600,000
2018 800,000

On January 1, 2017, Solenn Company made cash advances of P400,000 to Lovie Company. On December
31, 2018, it is not expected that Solenn Company will provide further financial support for Lovie Company.

REQUIRED: What amount should Solenn Company report in 2018 as loss from investment?

7. INTER-COMPANY SALE OF INVENTORY

On January 1, 2015, Drenz Co. acquired 25% interest in the ordinary shares of Josiah, Inc. for P3,000,000 which
reflected book value as of that date. On November 20, 2015, Drenz Company sold inventory costing P50,000 to Josiah
Co. for P100,000, 60% of which was still unsold on December 31, 2015. Josiah Company reported net income and paid
dividends for 2015 and 2016 as follows:
2015 2016
Net income P 1,000,000 P 1,500,000
Dividend declared 400,000 700,000
REQUIRED:
A. What is the share in the net income (or loss) of the associate in 2015?
B. What is the share in the net income (or loss) of the associate in 2016?