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:

2. What amount should krizelle record as investment in associate for the year ended December 31,2021?

Answer 1

Solution:

The amount Krizelle should record as an investment in associate for the year ended December 31, 2021, = ₱6,615,000

Investment in associate = Purchase cost + share of net income – share of dividends

= 6,000,000 + 750,000 – 135,000 = 6,615,000

This is calculated as per the below table: