Answer to Question #205982 in Accounting for Kkkk

Question

On January 1,2021, Krizelle Company acquired 30% of the outstanding ordinary shares of Arah Company for ₱6,000,000. This investment gave Krizelle the ability to exercise significant influence over Arah. The book value of the acquired shares was ₱5,000,000. The excess of the cost over book value was attributed to a depreciable asset which was undervalued on Arah statement of financial position and which had a remaining useful life of eight years.

For the year ended December 31,2021. Arah’ share capital outstanding is as follows:

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

Ordinary share capital 6,000,000

Arah reported net income of ₱2,500,000 for the year ended December 31,2021

CASE NO. 1: Assuming the cumulative preference share is accounted as equity by Arah and that Arah declared dividends of ₱450,000 on the preference shares answer the following:

1. What amount should krizelle record as investment income for the year ended December 31,2021?

Answer 1

Solution:

The amount krizelle should record as investment income for the year ended December 31, 2021, = ₱750,000

We will apply the equity method since Krizelle company has a significant influence over Arah company by owning more than 20% interest.

Investment income = $2,500,000 \times 30\% = 750,000$

Dr. Investment in Arah’s Co. shares                               750,000

             Cr. Investment income                                                                 750,000

(Being revenue made from the investment)

The amount Krizelle should record as investment income for the year ended December 31, 2021, = ₱750,000