Answer to Question #208217 in Accounting for cdba

Question

on January 1,2021 Kalimutan Mo acquired 30% of the ordinary shares that carry voting rights at a general meeting of shareholders of Sige Sige Lang for ₱300,000. Kalimutan Mo has significant influence over Sige Sige Lang. For the year ended December 31,2021 Sige Sige Lang recognized a profit of ₱400,000.

On December 30,2021 Sige Sige Lang declared and paid a dividend of ₱150,000 for the year 2021. At December 31,2021 the fair value of the investment in Sige Sige Lang is ₱425,000.

Questions:

Case No. 1: Assume there is no published price quotation for Sige Sige Lang and Kalimutan Mo uses the cost model.

1. What amount should be reported by Kalimutan Mo in its statement of comprehensive income?

2. How much is the carrying amount of the investment in associate to be reported by Kalimutan Mo in its statement of financial position as of December 31,2021?

Answer 1

Solution:

1.). The amount Kalimutan Mo should record in its statement of comprehensive income is ₱45,000

Under the cost method, income earned by Sige Sige Lang will be ignored and they do not appear in the records of Kalimutan Mo.

But if dividends are issued by Sige Sige Lang, then Kalimutan Mo should record them as dividend income in the statement of comprehensive income, although they will not affect the investment account.

 

Dividends issued by Sige Sige Lang = 150,000

Share of dividend issued by Sige Sige Lang = $150,000\times 30\% = 45,000$

Dividend income to recorded by Kalimutan Mo = ₱45,000

Dr. Cash                                       45,000

             Cr. Dividend income                               45,000 

(To record dividends received from associate)

 

The amount Kalimutan Mo should record in its statement of comprehensive income is ₱45,000

 

2.). The carrying amount of the investment in associate to be reported by Kalimutan Mo in its statement of financial position as of December 31, 2021, is ₱300,000

Under the cost method, only the purchase value (cost) is recorded in the statement of financial position, and no other entry is made.

The purchase of investment is recorded as an asset in the balance sheet as per the cost method of investment accounting.

Purchase value = 300,000

Dr. Investment in Sige Sige Lang                           300,000

                  Cr. Cash                                                                               300,000

 

The carrying amount of the investment in associate to be reported by Kalimutan Mo in its statement of financial position as of December 31, 2021, is ₱300,000