Answer to Question #208225 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.

Case No. 2: Assume there is no published price quotation for Sige Sige Lang and Kalimutan Mo uses the equity method.

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 ₱120,000

Under the equity method share of net income is recognized and recorded in the statement of comprehensive income.

Net profits earned by Sige Sige Lang = 400,000

Share of net income by Kalimutan Mo = 400,000 x 30% = 120,000

Dr. Investment in Sige Sige Lang                   120,000

                 Cr. Investment revenue                                       120,000

(To record share of net income)

 

The amount Kalimutan Mo should record in its statement of comprehensive income is ₱120,000

 

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 ₱375,000

Under the equity method, the beginning carrying amount is the purchase value, then add the share of net income and deduct the share of dividends received to get the ending carrying amount balance.

 

Beginning carrying amount = 300,000

Add: Share of net income  =  120,000

Less: Dividends received =   (45,000)

Ending carrying amount =     375,000

 

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 ₱375,000