9. Company A acquired a 30% interest in an associate, Company B, for ₱25 000.

Company A is
part of a consolidated group. In the financial period immediately following the date on which it
became an associate, Company B revalued assets by ₱4 000, generated profits of ₱10 000 and
declared a dividend of ₱5 000. The balance in the investment account after equity accounting has
been applied is:
A. ₱26 200;
B. ₱27 700;
C. ₱28 000;
D. ₱29 200.

The calculation is as follows: Initial investment (25 000) + share of revaluation (30% x 4 000)
+ share of profit (30% x 10 000) – share of dividend (30% x 1 500).

On January 1, 20x1, ABC Co. purchased 20,000 out of the 100,000 total outstanding shares of
XYZ, Inc. for ₱4,000,000. XYZ’s assets and liabilities approximate their fair values. In 20x1, XYZ
Inc. reported profit of ₱12,000,000 and declared and paid cash dividends of ₱800,000. In 20x2,
XYZ reported loss of ₱8,000,000, declared and issued 10% stock dividends, and reported gain on
property revaluation of ₱2,000,000 and loss on exchange differences on translation of foreign
operations of ₱400,000.
12. How much are the amounts reported in ABC Co.’s 20x1 (1) statement of profit or loss and (2)
statement of financial position?
A. 2,400,000 ; 6,240,000
B. 160,000; 4,000,000
C. 2,240,000; 6,240,000
D. 0; 6,400,000

Investment in associate
Jan. 1, 20x1 4,000,000
Sh. in profit (12M x Dividend (800K x
2,400,000 160,000
20%) 20%)
6,240,000 Dec. 31, 20x1

13. How much are the amounts reported in ABC Co.’s 20x2 (1) statement of profit or loss and (2)
statement of financial position?
A. (1,280,000); 4,960,000
B. (1,600,000); 4,960,000
C. (1,280,000); 4,000,000
D. 0; 4,960,000

Investment in associate
Dec. 31, 20x1 6,240,000
Sh. in loss (8M x
1,600,000
20%)
Revaluation (2M x Translation (400K x
400,000 80,000
20%) 20%)
4,960,000 Dec. 31, 20x2

14. ABC Co. owns 15,000 shares out of the 100,000 outstanding shares of XYZ, Inc. As of year-
end, ABC holds 20,000 stock rights which enable ABC to acquire additional shares from XYZ on
a “2 rights for 1 share” basis. The stock rights are exercisable immediately. However, ABC Co.’s
management does not intend to exercise the stock rights. XYZ does not have any other stock rights
outstanding aside from those held by ABC. XYZ reports year-end profit of ₱4,000,000 and

Page 1 of 12
declares cash dividends of ₱400,000. The investment has a carrying amount of ₱1,200,000 before
any year-end adjustment. At what amount should the investment be reported in ABC Co.’s year-
end financial statements?
A. 1,200,000
B. 1,800,000
C. 1,740,000
D. 1,849,200
15,000 + (20,000 stock rights ÷ 2) = 25,000 assumed voting rights held;
25,000 ÷ (100,000 outstanding shares + 10,000 shares received from assumed conversion of
stock rights) = 22.72%
Significant influence is assumed to exist (i.e., 22.72% > 20%). Therefore, the equity method
shall be applied.

Investment in associate
Before adjustment 1,200,000
Sh. in profit (4M x 15%*) 600,000 60,000 Dividend (400K x 15%*)
1,740,000 Adjusted

* Existing ownership interest (15,000 sh. ÷ 100,000 sh.)

15. CDE Co. owns 20% of FGH, Inc.’s ordinary shares. FGH also has outstanding cumulative 6%
preference shares of ₱8,000,000, none of which is held by CDE. Dividends are in arrears for three
years as of year-end. FGH reported year-end profit of ₱4,000,000 and declared no dividends. How
much is CDE Co.’s share in the profit of the associate?
A. 704,000
B. 800,000
C. 512,000
D. 770,000
[4M – (8M x 6%)] x 20% = 704,000

On January 1, 20x1, NORWAY Co. acquired 30,000 ordinary shares representing 30% interest in
PARIS Co.’s net assets for ₱12,000,000. At the time of acquisition, PARIS’s net assets had a fair
value of ₱40,000,000 and a carrying amount of ₱32,000,000. The difference between the fair value
and the carrying amount is attributable to a building which has a remaining useful life of 10 years.
In 20x1, PARIS reported profit of ₱4,000,000 and paid cash dividends of ₱2,400,000. PARIS’s
shares were selling at ₱400 per share on December 31, 20x1.

On July 1, 20x2, NORWAY sold 60% of its investment in PARIS at the prevailing market price
of ₱480 per share. The retained interest does not give NORWAY significant influence over
LESSES; thus, NORWAY reclassified the remaining investment to held for trading securities.
PARIS reported interim profit of ₱2,000,000 for the six months ended June 30, 20x2. PARIS
reported total profit of ₱4,800,000 in 20x2 and declared ₱4,000,000 cash dividend on December
31, 20x2. PARIS’s shares were selling at ₱540 per share on December 31, 20x2.
16. How much is the total investment-related income recognized in NORWAY’s profit or loss in
20x2?
A. 2,640,000
B. 2,968,000
C. 3,360,000
D. 3,780,000
Solution:
 Journal entries on July 1, 20x2:

Page 2 of 12
 July 1, Investment in associate (2M x 30%) 600,000
20x2
Share in profit of associate 600,000
July 1, Share in profit of associate 120,000
20x2
Investment in associate (a) 120,000
July 1, Cash (30,000 sh. x 60% x ₱480) 8,640,000
20x2
Investment in associate 7,632,000
(12.720M (b) x 60%)
Gain on sale of investment 1,008,000
July 1, Held for trading securities 5,760,000
20x2
(30,000 sh. x 40% x ₱480)
Investment in associate 5,088,000
(12.720M (b) x 40%)
Gain on reclassification 672,000

Investment in associate
Jan. 1, 20x1 12,000,000
Share in profit - 20x1 1,200,000 720,000 Dividend - 20x1
240,000 Undervaluation - 20x1

Share in profit - 20x2 600,000 120,000 Undervaluation - 20x2

12,720,000 July 1, 20x2

 Journal entries on Dec. 31, 20x2:

Dec. 31, Dividend receivable (4M x 12%*) 480,000
20x2
Dividend income 480,000
Dec. 31, Held for trading securities 720,000
20x2
(540 – 480) x 30,000 sh. x 40% unsold
Unrealized gain – OCI 720,000

* 30% x 40% unsold portion = 12% retained interest

Share in profit of associate, net (600K – 120K) 480,000

Gain on sale 1,008,000
Gain on reclassification 672,000
Dividend income 480,000
Unrealized gain on change in fair value 720,000

Page 3 of 12
 Total income recognized in profit or loss – 20x2 3,360,000

Porky Co. owns 40% of Watwat, Inc.’s ordinary shares. On July 1, 20x2, Porky Co. sells half of
its investment in Watwat shares for ₱800,000. The adjusted balances of the related accounts
immediately before the sale are as follows:
 Investment in associate ₱2,400,000
 Cumulative share in Watwat’s revaluation gains 1,000,000

Porky retains significant influence over Watwat after the sale.

17. How much of the cumulative share in Watwat’s revaluation gains is derecognized on July 1,
20x2?
A. 1,000,000
B. 500,000 (1M x 50%)
C. 250,000
D. 0
On January 1, 20x1, VICTORY Co. acquired 10,000 shares representing a 10% interest in
DEMAND, Inc.’s 100,000 outstanding shares for ₱3,200,000. In 20x1, DEMAND reported profit
of ₱20,000,000 and declared and paid dividends of ₱4,000,000. The investment was initially
classified as investment in held for trading securities. The fair value of the shares on December
31, 20x1 was ₱340 per share.

On July 1, 20x2, VICTORY Co. acquired additional 15,000 shares of DEMAND, Inc. at ₱280
per share (the fair value on this date), resulting to an increase in its ownership interest to 25%.
The transaction did not give rise to any goodwill or negative goodwill. In 20x2, DEMAND
reported profit of ₱24,000,000, of which ₱16,000,000 were earned in the second half of the year.
In addition, DEMAND declared and paid dividends of ₱4,000,000 on December 31, 20x2. The
DEMAND shares were quoted at ₱360 per share on December 31, 20x2.
18. How much is the total amount recognized in profit or loss in 20x2 in relation to the
investment? and (2) carrying amount of the investment on Dec. 31, 20x2?
A. 3,000,000
B. 3,400,000
C. 4,000,000
D. 4,600,000

19. How much is carrying amount of the investment on Dec. 31, 20x2?
a. 12,400,000
b. 12,000,000
c. 10,400,000
d. 10,000,000

July 1, Investment in associate (15K sh. x ₱280) 4,200,000

20x2
Cash 4,200,000
to record the purchase of additional shares
July 1, Unrealized loss – P/L (a) 600,000
20x2
Held for trading securities 600,000
to remeasure the previously held equity
interest

Page 4 of 12
 July 1, Investment in associate (10K sh. x ₱280) 2,800,000
20x2
Held for trading securities 2,800,000
to reclassify the previously held equity
interest to investment in associate

(a)
(₱280 fair value on 7/1/x2 - ₱340 fair value on 12/31/x1) x 10,000 sh. = 600,000

 Journal entries on Dec. 31, 20x2:

Dec. 31, Cash (4M x 25%(b)) 1,000,000
20x2
Investment in associate 1,000,000
to record the dividends
Dec. 31, Investment in associate (16M x 25%(b)) 4,000,000
20x2
Share in profit of associate 4,000,000
to record the share in the associate’s
profit in the last half of 20x2

(b)
(10,000 sh. + 15,000 sh.) ÷ 100,000 sh. = 25%

 Total effect in 20x2 profit or loss:

Unrealized loss – P/L (600,000)
Share in profit of associate 4,000,000
Total effect in 20x2 profit or loss 3,400,000

 Carrying amount of investment on 12/31/x2:

Investment in associate
July 1, 20x2 (purchase) 4,200,000
July 1, 20x2 (reclassification) 2,800,000
Share in profit - 20x2 4,000,000 1,000,000 Dividend - 20x2
10,000,000 Dec. 31, 20x2

On January 1, 2020, Mega Company acquired 10% of the outstanding ordinary shares of Penny
Company for P4,000,000. The investment was appropriately accounted for under fair value
method.
On January 1, 2021, Mega gained the ability to exercise significant influence over financial and
operating control of Penny by acquiring an additional 20% of Penny's outstanding ordinary shares
for P10,000,000.
The fair value Penny's net assets equaled carrying amount. The fair value of the 10% interest on
January 1, 2021 was P6,000,000.
For the years ended December 31, 2020 and 2021, the investee reported the following:
2020 2021

Page 5 of 12
Dividend paid 2,000,000 3,000,000
Net income 6,000,000 6,500,000
_________20. What is the investment income in 2020?
A. 200,000 (2,000,000 x10%)
B. 400,000
C. 600,000
D. 300,000
_________21. What is the investment income in 2021?
A. 1,300,000
B. 1,950,000 (6,500,000x30%)
C. 1,000,000
D. 1,900,000
_________22. What is the carrying amount of the investment in associate on December 31, 2021?
A. 16,000,000
B. 17,050,000
C. 15,050,000
D. 16,700,000
FV of 10% interest 6,000,000
Cost of 20% new interest 10,000,000
Total cost 01042024 16,000,000
Inv Income (6.5M x30%) 1,950,000
Share in div (3M x 30%) (900,000)
Carrying amount 17,050,000

Grant Company acquired 30% of South Company's voting share capital for P2,000,000 on January
1, 2020.
Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's
operating and financial policies.
During 2020, South earned P1,500,000 and paid dividends of P500,000.
South reported earnings of P1,000,000 for the six months ended June 30, 2021, and P2,500,000
for the year ended December 31, 2021 but paid dividend of P1,000,000 on October 1, 2021.
On July 1, 2021, Grant sold half of the investment in South for P2,000,000 cash.
On such date, the investment is measured at fair value through profit or loss.
The fair value of the retained investment is P2,200,000 on July 1, 2021 and P2,400,000 on
December 31, 2021.
23. What amount should be recognized as investment income for 2020 as a result of the
investment?
A. 150,000
B. 450,000 (1.5M x 30%)
C. 500,000
D. 750,000

24. What is the carrying amount of the investment on December 31, 2020?
A. 2,000,000,
B. 2,450,000
C. 2,600,000
Page 6 of 12
 D. 2,300,000
Acquisition 2,000,000
Add: Share net income 450,000 (1.5M x30%)
Less Share in cash dividend (150,000) (500k x 30%)
CA 2,300,000

Grey Company acquired a machine with a cash price of P2,000,000.

Down payment 400,000
Note payable in 3 equal annual installments 1,200,000
20,000 shares of Grey Company at fair value 800,000
Prior to use, installation cost of P50,000 was incurred. The machine has a residual value of
P100,000.
34. What is the initial measurement of the new machine?
A. 2,000,000
B. 2,400,000
C. 2,050,000
D. 2,450,000
Cash Price 2,000,000 + installation cost of P50,000
On December 31, 2020, Bart Company purchased a machine in exchange for a noninterest bearing
note requiring eight payments of P200,000.
The first payment was made on December 31, 2020 and the others are due annually on December
31.
At date of issuance, the prevailing rate of interest for this type of note was 11%.
PV of an ordinary annuity of 1 at 11% for 8 periods 5.146
PV of an ordinary annuity of 1 at 11% for 7 periods 4.712

37. What amount should be recorded as initial cost of the machine?

A. 1,600,000
B. 1,029,200
C. 1,400,000
D. 1,142,400 (200,000 x4.712 + 200,000)
38. What is the discount on note payable on December 31, 2020?
A. 657,600
B. 457,600 (1,600,000 - 1,142,400) note: 200,000 eight annual payment
C. 570,800
D. 0
39. What is the interest expense for 2021?
A. 125,664
B. 103,664 (1,142,400 – 200,000 x 11%)
C. 113,212
D. 176,000

Page 7 of 12
Liempo Co. exchanged equipment with Monggo Co. Information on the assets exchanged is as
follows:
Equipment Carrying amount Fair value
- exhanged by Liempo 3,500,000 1,875,000
- exchanged by Monggo 1,200,000 1,000,000

Monggo paid Liempo an additional cash of P700,000.

40. If the exchange transaction has commercial substance, what amounts are recognized in
Liempo's and Monggo's books for (1) the equipment received and (2) the gain (loss) on the
exchange?
Liempo's books Monggo's books
A. 300,000; (1,125,000) 1,175,000; (200,000)
B. 1,175,000; 0 1,700,000; 0
C. 1,175,000; (1,625,000) 1,700,000; (200,000)
D. 2,575,000; (1,625,000) 300,000; (200,000)
Liempo:
1) Equipment received: (1,875,000 – 700,000) = 1,175,000
2) Gain (loss) on exchange: (1,875,000 – 3,500,000) = (1,625,000)
Monggo:
1) Equipment received: (1,000,000 + 700,000) = 1,700,000
2) Gain (loss) on exchange: (1,000,000 – 1,200,000) = (200,000)

41. If the exchange transaction has no commercial substance, what amounts are recognized in
Liempo's and Monggo's books for (1) the equipment received and (2) the gain (loss) on the
exchange?
Liempo's books Monggo's books
A. 2,800,000; 0 1,900,000; 0
B. 1,175,000; 0 1,700,000; 0
C. 4,200,000; 0 500,000; 0
D. 2,800,000; (1,125,000) 1,900,000; (200,000)
Liempo:
1) Equipment received: (3,500,000 – 700,000) = 2,800,000
2) Gain (loss) on exchange: 0

Monggo:
1) Equipment received: (1,200,000 + 700,000) = 1,900,000
2) Gain (loss) on exchange: 0

Summer Rain Co. has the following assets:

Land sold in the ordinary course of business 1,000,000
Land used as plant site 5,000,000
Building under construction to be used as new office 12,000,000
Building leased out under various operating leases 6,000,000
Land and building classified as 'held for sale assets' 5,000,000
Spare parts and minor tools (with average useful life of 1 yr.) 800,000
Equipment held for rental under various operating leases 1,200,000
Fixtures used in rendering services 500,000

Page 8 of 12
42. How much is classified as property, plant and equipment?
A. 18,800,000
B. 24,800,000
C. 27,900,000
D. 18,700,000

Land used as plant site 5,000,000

Building under construction to be used as new office 12,000,000
Equipment held for rental under various operating leases 1,200,000
Fixtures used in rendering services 500,000
Total PPE 18,700,000

43. LOQUACIOUS TALKATIVE Co. acquired a piece of factory equipment overseas on cash
basis for ₱400,000. Additional costs incurred include the following: commission paid to broker
for the purchase of the equipment, ₱20,000; import duties of ₱100,000; non-refundable purchase
taxes of ₱40,000; freight cost of transferring the equipment to LOQUACIOUS’ premises,
₱4,000; costs of assembling and installing the equipment, ₱8,000; costs of testing the
equipment, ₱6,000; administration and other general overhead costs, ₱16,800; and advertisement
and promotion costs of the new product to be produced by the equipment, ₱15,200. The samples
generated from testing the equipment were sold at ₱2,000. How much is the initial cost of the
equipment?
A. 594,800
B. 578,000
C. 592,800
D. 576,000

Purchase price 400,000

Commission to broker 20,000
Import duties 100,000
Non-refundable purchase taxes 40,000
Transportation cost 4,000
Assembling and installation costs 8,000
Testing costs 6,000
Proceeds from sale of samples generated (2,000)
Initial cost of equipment 576,000

44. On January 1, 20x1, REEDY SLENDER Co. purchased fixtures at an installment price of
₱520,000. REEDY paid ₱40,000 cash down payment and issued a three-year noninterest bearing
note of ₱480,000 payable in three equal annual installments starting December 31, 20x1 for the
balance. The prevailing rate for the note as of January 1, 20x1 is 12%. How much is the initial cost
of the fixtures?
a. 360,000 c. 480,000
b. 424,293 d. 520,000

Cash down payment 40,000

PV of note (480K ÷ 3) x PV of an ordinary annuity of 1 @12%, n=3 384,293

Page 9 of 12
 424,293

On April 1, 20x1, ESCULENT EDIBLE Co. purchased land and building by paying ₱40,000,000
and assuming a mortgage of ₱8,000,000. The land and building have appraised values of
₱20,000,000 and ₱40,000,000, respectively. The building will be used by ESCULENT Co. as its
new office.
Additional costs relating to the purchase include the following:
Legal cost of conveying and registering title to land ₱32,000
Payment to tenants to vacate premises 36,000
Option paid on the land and building 24,000
Option paid on similar land and building not acquired 12,000
Broker's fee on the land and building 60,000
Unpaid real estate taxes prior to April 1, 20x1 assumed
by ESCULENT Co. – assessed on land 120,000
Real estate taxes after April 1, 20x1 80,000
Repairs and renovation costs before the building
is occupied 160,000
Repair costs after the building is occupied 200,000

45. How much is the respective costs of the land?

A. 14,592,000
B. 15,492,000
C. 16,192,000
D. 17,292,000

46. How much is the respective costs of the building?

A. 24,440,000
B. 32,240,000
C. 32,640,000
D. 23,420,000

Cash payment 40,000,000

Mortgage assumed 8,000,000
Total acquisition cost 48,000,000

Fair values Fractions

Land 20,000,000 20/60

Building 40,000,000 40/60
60,000,000

Land Building
Purchase price (48M x 20/60); (48M x 40/60) 16,000,000 32,000,000
Legal cost of conveying and registering title 32,000 -
to land
Payment to tenants to vacate premises 12,000 24,000
(36K x 20/60); (36K x 40/60)

Page 10 of 12
 Option paid on the land and building 8,000 16,000
(24K x 20/60); (24K x 40/60)
Broker's fee on the land and building 20,000 40,000
(60K x 20/60); (60K x 40/60)
Unpaid real estate taxes prior to April 1, 120,000 -
20x1 assumed – assessed on land
Repairs and renovation costs before the - 160,000
building is occupied
Totals 16,192,000 32,240,000

47. Nail Bite Co. acquired land with fair value of ₱4,000,000 in exchange for Nail Bite’s 10,000
shares with par value of ₱40 per share and quoted price of ₱360 per share. How much gain (loss)
should Nail Bite Co. recognize on the exchange?
a. 3,200,000
b. 400,000
c. (400,000)
d. 0

LOATH HATE Co. purchased a lot for ₱8,000,000. Immediately after the purchase, LOATH Co.
started the construction of a new building on the lot. Additional information follows:
Legal cost of conveying title to land ₱ 40,000
Special assessment 20,000
Survey costs 60,000
Materials, labor, and overhead costs 22,000,000
Cash discounts on materials purchased not taken 120,000
Clerical and other costs related to construction 56,000
Excavation costs 400,000
Architectural fees and building permit 240,000
Supervision by management on construction 48,000
Insurance premiums paid for workers 520,000
Payment for claim for injuries not covered by
insurance 180,000
Savings on construction 800,000
Cost of changes to plans and specifications due to
560,000
inefficiencies
Paving of streets and sidewalks (not included in
blueprint) 40,000
Income earned on a vacant space rented as parking
lot during construction 36,000

48. How much is the capitalized costs of the land?

A. 8,120,000 23,096,000
B. 8,160,000 23,144,000
C. c. 8,100,000 23,184,000
D. 8,060,000 23,264,000

49. How much is the capitalized costs of the building?

A. 23,096,000
B. 23,264,000
C. 23,184,000
D. 23,144,000

Page 11 of 12
 Land
Land New building
improvement
Purchase price of lot 8,000,000 - -
Legal cost of conveying 40,000 - -
Special assessment 20,000 - -
Survey costs 60,000 - -
Materials, labor, & OH - - 22,000,000
Cash discounts not taken - - (120,000)
Clerical and other costs - - 56,000
Excavation costs - - 400,000
Arch. fees & bldg. permit - - 240,000
Supervision by mgmt. - - 48,000
Insurance premiums - - 520,000
Paving of streets - 40,000 -
Totals 8,120,000 40,000 23,144,000

Page 12 of 12