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Chapter 18 - advacc solman

Bachelor of Science in Accountancy (Polytechnic University of the Philippines)

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CHAPTER 18

MULTIPLE CHOICES – COMPUTATIONAL

18-1: a
Rental Income P5 million
Expenses (P200,000 + P P1,000,000) 1.2
Net income, 2017 P3.8 million

18-2: a
Rental income P8.0 million
Expenses .5
Net income, 2018 P7.5 million

18-3: a
Investment P10.00 million
Profit share (P3.8 million x 40%) 1.52
Interest entity A, Dec. 31, 2017 P11.52 million

18-4: d
Investment P10.00 million
2017: Profit share (P3.8 M x 40%) in entity A 1.52
2018: Profit share (P7.5 M x 40%) in entity A 3.00
Dividends received (P3 M x 40%) (1.20)
Interest in entity A, Dec. 31, 2018 P13.32 million

18-5: b
Cash P 50,000
Transportation equipment 600,000
Furniture and fixtures 250,000
Total assets P900,000
18-6: c
Cash P 50,000
Furniture and fixtures 250,000

Total assets P300,000

18-7: d
Accounts payable P600,000
Other liabilities 100,000
Total liabilities P700,000

18-8: a
Other liabilities P100,000

18-9: a
Investment in Bank XY P50.0 M
Profit share in Bank XY – 2017 (P4 M x 40%) 1.6 M

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Interest of Bank X, December 31, 2017 P48.4 M

18-10: a
Investment in Bank XY P50.0 M
Profit share in Bank XY – 2017 (P4 M x 40%) 1.6 M
Profit share in Bank XY – 2017 (P5 M x 40%) 2.0 M
Dividends received (4 M x P40%) (1.6) M
Interest of Bank Y, December 31, 2018 P52.0 M

18-11: a
Cash (P3,000,000 less P700,000) P2,300,000
Property, plant and equipment P30,000,000 less P1,400,000) 28,600,000
Total assets P30,900,000

18-12: b
Total equity P30,900,000
Divided by 3
Interest of each party P10,300,000

18-13: b
South’s income, 2016 P80,000
North’s interest 30%
Investment income P24,000

18-14: b
Acquisition cost, 1/2/017 P200,000
Equity in earnings of South (18-13) 80,000
Dividends from South (30% x P50,000) (15,000)
Carrying amount of Investment in South P209,000

18-15: b
Proceeds from sale of stock, 7/1/17 P150,000
Less: Carrying amount of the shares sold:
Carrying amount, 1/2/16 P200,000
Equity in earnings,2016 (30% x 80,000) 24,000
Equity in earnings,2017 (30% x 100,000) 30,000
Dividends received,2017 (30% x 50,000) (15,000)
Carrying amount, 7/1/17 P239,000
Carrying amount of the shares sold (1/2 x 239,000) 119,500
Gain from the sale P 30,500

18-16: a
Equity in earnings: 80% x [60,000 – (10% x 100,000)] P 40,000
Dividend revenue: 20% x (100,000 x 10%) 2,000
Total P 42,000

18-17: b
Investment cost P400,000
Book value of net assets purchased: 40% x P900,000 360,000
Excess of cost over books value 40,000
Attributed to plant assets (40% x P90,000) 36,000

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Attributed to inventory P 4,000

18-17 continued:

Share of income (40% x P120,000) P48,000

Excess amortization:
Plant assets (P36,000/18) P2,000
Inventory 4,000 (6,000)
Investment income P42,000

18-18: c
Tentative income P125,000
Unrealized holding gain (40,000)
Dividend received ( 8,000)
Prior period adjustment P112,000

18-19: b
The equity method is to be used when the investor owns 20% or more of the investee’s
voting stock, unless there is evidence that the investor does not have the ability t exercise
significant influence over the investee. Since this is the case, Saxe must carry must carry
the stock at fair value in the available-for-sale category. Under this method, dividends
received are to recognized as income to the investor and the investor’s share in the
investee’s net income is not recognized. Any changes in the fair value of the stock would
be reflected in the book value of the stock with a corresponding amount in a separate
account in the stockholders’ equity. Therefore the investment account should be valued
at P150,000 at December 31, 2017.

18-20: b
Investment beginning balance, 1/2/17 P400,000
Equity in earnings (10% x P500,000) 50,000
Dividends received (10% x P150,000) (15,000)
Investment balance, 12/31/17 P435,000

18-21: d
Original cost of investment P250,000
Share of income (30% x P100,000) 30,000
Investment in Subsidiary, 12/231/17 P280,000

The excess attributable to land and goodwill are not amortized, hence the investment
account is not affected.

18-22: c
When an investment ht has been accounted for using another method qualifies for the use
of the equity method due to a change in ownership level (such as from 10% to 30%), the
change to the equity method should be reported retroactively. At the date of the change
(1/2/17), the investment account and the retained earnings are adjusted as if the equity
method had been used all along, and the results of operations in prior years are restated to
reflect the equity method. In 2017 use of the equity method results in recognition of
investment income of P195,000 (30% x P650,000). 2016 investment account must be
restated from the previously reported dividend income of P20,000 (10% x P200,000) to
equity income of P60,000 (10% x P600,000), an adjustment of P40,000 (P60,000 –
P20,000).

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18-23: c
1/2/16 purchased P 50,000
12/31/16 purchased 150,000
Equity in earnings 30,000
Investment in Tot, 12/31/17 P230,000

18-24: a
At cost of P300,000.

18-25: c
Dividends declared, 1/2/2013 (P100,000 x 30%) P30,000
Dividends declared, 12/31/2013 (P150,000 x 30%) 45,000
Total dividend income P75,000

18-26: a
At fair value of P425,000.

18-27: a
Fair value of investment P293,000
Cost to sell (3,000)
Investment in entity AB, 12/31/2017 P290,000

18-28: a
Cost P300,000
Recoverable amount 290,000
Impairment loss P 10,000

18-29: a
Dividend income (P300,000 x 30%) P90,000
Increase in fair value (P850,000 – P600,000) 250,000
Increased in profit and loss P340,000

18-30: b
At fair value P850,000.

18-31: c
Cost P300,000
Share in earnings of Entity Z (P400,000 x 30%) 120,000
Dividends received, 1/20/2017 (P100,000 x 30%) (30,000)
Dividends received, 12/31/2017) (P150,000 x 30%) (45,000)
Investment in Entity Z, 12/31/2017 P345,000

No impairment in 2017, fair value exceeds the carrying amount.

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18-32: a
Cost P300,000
Share in Entity Z’s loss (P100,000 x 30%) (30,000)
Carrying amount of venturer’s investment in entity Z, 12/31/2017 P270,000

No impairment loss in 2017, carrying amount of P270,000 is lower that its recoverable
amount 0f P310,000.

18-33: d
Cost of investment in Entity Z P300,000
Share in Entity Z’s loss, 2017 (P100,000 x 30%) (30,000)
Carrying amount before impairment 270,000
Impairment loss:
Recoverable amount P265,000
Carrying amount before impairment 270,000 (5,000)
Investment in Entity Z, 12/31/2017 P265,000

18-34: a
Cost of investment in Entity RS, 1/1/2017:
Carrying amount of machine P160,000
Realized gain (200,000 – 160,000) x 50% 20,000 P180,000
Share in entity RS profit (P60,000 x 50%) 30,000
Realized gain (P20,000 ÷ 10 yrs.) 2,000
Investment in entity RS, 12/31/2017 P212,000

18-35: c
Cost of investment in entity O P450,000
Share in entity O’s profit, 12/31/2017 (P600,000 x 30%) 180,000
Unrealized profit (P90,000 x 50/150) x 30% 9,000
Dividends received (P225,000 x 30%) (67,500)
Investment in entity O, 12/31/2017 P553.500

18-36: b, should be P786,286

Cost of investment P600,000
Share in entity Z realized profit:
Profit, 12/31/2017 P800,000
Unrealized profit in inventories (120,000 x 40%/140%) (34,285)
Realized profit, 12/31/2017 P765,715
Multiply by 40% 306,286
Dividends received (300,000 x 40%) (120,000)

Investment in entity Z, 12/31/2017 P786,286

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SOLUTIONS TO PROBLEMS

Problem 18- 1

Books of Lebron

Construction costs 12 M
Cash / Accounts payable 12 M
To record the construction costs incurred in 2017.

Cash 15 M
Construction revenue 15 M
To record one-half of the construction revenue earned in 2017

Construction revenue 15 M
Construction costs 12 M
Income summary 3M
To close construction revenue and costs of construction

Books of Durant

Construction costs 10 M
Cash/ Accounts payable 10 M
To record the construction costs incurred in 2017

Cash 15 M
Construction revenue 15 M
To recognize one half of the construction revenue.

Construction revenue 15 M
Construction costs 10 M
Income summary 5M
To close construction revenue and costs of construction.

Problem 18 – 2

Books of Bryant

Cash (50%) 20,000

Property, plant and equipment (100%) 240,000
Other assets (50%) 100,000
Current liabilities(100%) 240,000
Long-term debt (50%) 50,000
Equity 70,000
To record interest in joint arrangements BW

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Problem 18-2, continued:

Books of Wade:

Cash (50%) 20,000

Other assets (50%) 100,000
Long-term debt(50%) 50,000
Equity 79,000
To record interest in the joint arrangements BW

Problem 18 – 3

Books of Lin:

2017:
Investment in joint venture 10 M
Cash 10 M
To record investment in the joint venture

Investment in joint venture 1 M

Income from joint venture 1 M
To record share in the net income of LK (2 M x ½).

2018:
Investment in joint venture 1.5 M
Income from Joint Venture 1.5 M
To record share in the net income of LK (3 M x ½).

Cash .5 M
Investment in joint venture .5 M
To record dividends received from LK.

Books of Kid:

2017:
Investment in joint venture 10 M
Cash 10 M
To record investment in the joint venturet

Investment in joint venture 1M

Income from joint venture 1 M
To record share in the net income of the joint venture

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Problem 18-3, continued:

2018:
Investment in joint venture 1.5 M
Income from joint venture 1.5 M
To record share in the net income of the joint venture.

Cash .5 M
Investment in joint venture .5 M
To record dividends received for the year.

Problem18 – 4
Requirement (1)

Books of SME X (Cost Model):

2017:
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Investment in jointly controlled entity (entity A) 1,000

Investment in jointly controlled entity (entity B) 1,500
Investment in jointly controlled entity (entity C) 2,800
Cash 5,300
To record transaction costs incurred .

January 2:

Cash 2,500
Dividend income (profit or loss) 2,500
To record dividends received from entity A (P10,000 x 25%)

January 31:

Dividend receivable (entity B) 20,000

Dividend income 20,000
To record dividend receivable from entity B (P80,000 x 25%).

Impairment loss 140,300

Investment in jointly controlled entity (entity C) 140,300
To record impairment of the investment in entity C.

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Problem 18-4, continued:

Computations of the impairment loss:

Cost of investment in entity C (P280,000 + P2,800) P282,800

Fair value P150,000
Less estimated cost to sell (P150,000 x 5%) 7,500 142.500
Impairment loss P140,300

Books of SME Y (Fair Value Model):

2017:
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Transaction costs (profit or loss) 5,300

Cash 5,300
To record transaction costs incurred (P530,000 x 1%)

Cash 2,500
Dividend income (profit or loss) 1,500
To record dividends received from entity A (P10,000 x 25%)

December 31:

Dividend receivable 20,000

Dividend income 20,000
To record dividend receivable from entity B (P80,000 x 25%).

Profit or loss (change in fair value) 130,000

Investment in jointly controlled entity (entity C) 130,000
To record the decrease in fair value of investment in entity C (P280,000 cost less P150,000 fair value.

Investment in jointly controlled entity (entity A) 30,000

Investment in jointly controlled entity (entity B) 140,000
Profit or loss (change in fair value) 170,000
To record increase in fair value of investments in jointly controlled entities A and B.

Entity A Entity B
Fair value P130,000 P290,000
Cost 100,000 150,000
Increase P 30,000 P140,000

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Requirement (2)

Books of SME X (equity method):

2017
January 1:

Investment in jointly controlled entity (entity A) 100,000

Investment in jointly controlled entity (entity B) 150,000
Investment in jointly controlled entity (entity C) 280,000
Cash 530,000
To record acquisition of investments in jointly controlled entities.

Investment in jointly controlled entity (entity A) 1,000

Investment in jointly controlled entity (entity B) 1,500
Investment in jointly controlled entity (entity C) 2,800
Cash 5,300
To record transaction costs incurred.

January 2:

Cash 2,500
Investment in jointly controlled entity (entity A) 2,500
To record dividends received from entity A (P10,000 x 25%)

December 31:

Dividends receivable (entity B) 20,000

Investment in jointly controlled entity (entity B) 20,000
To record dividend receivable from entity B (P80,000 x 25%)

Investment in jointly controlled entity (entity A) 12,500

Income from jointly controlled entity (Profit or loss) 12,500
To record share of entity A’s profit for the year (P50,000 x 25%).

Investment in jointly controlled entity (entity B) 45,000

Income from jointly controlled entity (Profit or loss) 45,000
To record the share of entity B’s profit for the year (P180,000 x 25%)

Loss from jointly controlled entity (Profit or loss) 50,000

Investment in jointly controlled entity (entity C) 50,000
To record share of entity C’s loss for the year (P200,000 x 25%).

Impairment loss (profit or loss) 90,300

Investment in jointly controlled entity (entity C) 90,300
To record impairment of the investment in entity C:
Cost (P282,800 – P50,000) P232,800
Less fair value P150,000
Cost to sell (P150,000 x 5%) (7,500) 142,500
Impairment loss P 90,300

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