BA 118.

3
ARATEA|INOCENCIO|LAGUNA|ROMERO|UCAT
PROBLEM:
Mr. CPA is the head accountant of Ina Company. He is currently troubled and
stressed because he is trying to catch up with the deadline set by his boss to have
their 2015 financial statements prepared for presentation to a potential investor.
However, a bomb explosion just a few days ago in connection with a terrorist attack
that occurred in the accounting office of both Ina and Anak destroyed all of the
companys files and documents. As part of preparing the needed financial
statements, he needs to reconcile data pertaining to Anak Company, an associate of
Ina Company. The deadline is fast approaching and Mr. CPA is having a hard time
because he could not prepare the necessary journal entries to reflect the
transactions pertaining to Inas associate, so he finally gives up and asks your help.
Fortunately, he was able to save some company documents and files and gathered
the following information on the investor-associate relationship of Ina and Anak
Company which could help you in your task:
1. Mr. CPA was able to remember that Ina acquired a 30% interest (54,000
shares) in Anak on June 30, 2014. Unfortunately, he was not able to figure out
how much Ina Company paid for the transaction.
2. As of December 31, 2015, the Investment in Associate Anak Company
account has a debit balance of P9,677,500 according to Mr. CPAs files.
3. For the six-month period ended December 31, 2014, Mr. CPA mistakenly
accounted for the investment as an available-for-sale security under IAS 39.
After being reprimanded by his boss to instead use the equity method, he
adjusted the books for all transactions relating to the investment account and
saw in his files the correcting entries he made at the end of 2014:
Dec. 31, 2014
Dr. Investment in Associate Anak Company 7,560,000
Cr. Investment in AFS Anak Company
7,560,000
[correcting entry to reclassify IIAFS to IIA]
Dr. Unrealized Gain/Loss OCI
410,000
Cr. Investment in Associate Anak Company
410,000
[correcting entry to derecognize unrealized gain on IIAFS]
Dr. Dividend Income
555,000
Cr. Investment in Associate Anak Company
555,000
[correcting entry to derecognize income on dividends received from
Anak Company]
Dr. Investment in Associate Anak Company 877,500
Cr. Share in Associates Net Income Anak Company
877,500
[correcting entry to recognize share in Anaks net income]
4. Fortunately, Anak Company prepares interim financial statements so you are
able to identify the relevant share in book value of the companys net assets.
Also, you found an excel sheet in Mr. CPAs files showing the fair market value
of the companys assets and liabilities as of June 30, 2014:

ASSETS
Current Assets
Land
Building, net
LIABILITIES AND
EQUITY
Current Liabilities
Bonds Payable
C/S
R/E

Book Value

Fair Value

3,532,750.00
15,000,000.0
0
12,455,000.0
0

4,352,500.00
18,500,000.0
0
10,625,000.0
0

3,340,500.00
9,121,128.12
4,500,000.00
14,026,121.8
8

3,340,500.00
8,416,249.98

5. Mr. CPA also provided you a summary of Anaks net income and dividends
that it paid to common shareholders for years 2014 to 2015 which he found
from his old working papers. He also noted that the net income was incurred
evenly throughout the year and dividends were paid on December 31 of each
year.
Net
Income
Dividend
s

2014
P5,850,000.
00
P1,850,000.
00

2015
P6,125,000.
00
P1,700,000.
00

6. Some details pertaining to certain items on which differences arise between

book value and fair value are as follows:
a. The current assets on which the excess relates were sold in 2015 by
Anak Company.
b. A land was purchased by Anak for P5,000,000 few years ago as part of
its expansion project which has a fair market value of P8,500,000 on
the date of acquisition by Ina. However, due to sudden changes in the
industry dynamics, the Anak Company changed its mind and instead
sold the land for P10,000,000 to third parties late 2015.
c. It is the policy of Anak to depreciate plant assets using the straight-line
method. Plant assets have a residual value of 12% and a remaining life
of 20 years. A similar policy is also adopted by Ina.
d. The bonds in Anaks balance sheet pertain to a P7,500,000 par value
bond which pays a coupon rate of 10.5% and is to be amortized using
an 8% yield-to-maturity over its remaining 15-year term.
7. You learned from Mr. CPA that as part of their respective company policies,
Ina Company uses the FIFO cost flow assumption in measuring its inventory
while Anak Company uses weighted average. Mr. CPA said that ever since
Inas acquisition of Anak, he has not been taking into account these
differences in accounting policies when recording transactions pertaining to

the investor-associate relationship. Assuming Anak Company had used a FIFO

inventory cost flow assumption, its net income for year 2014 would be higher
by P350,000 and P475,000 for 2014 and 2015, respectively.
8. Ina and Anak also entered into several intercompany transactions which you
were able to note while searching for helpful working papers in Mr. CPAs files:
a. Ina had been selling inventory items to Anak and vice versa ever since
its acquisition of interest at a constant inter-company gross profit rate
of 30%. In 2014, Ina purchased 150,000 units of Anaks inventory for
P25 each. At the end of the year, 25,000 units were left in the
inventory of Ina. In 2015, Ina again acquired another 225,000 units
from Anak at a selling price of P28. A total of 75,000 units of Anaks
inventory remained in Ina Companys books at the end of 2015.
b. On June 30, 2015, Ina also issued semi-annual bonds with face value of
1,000,000 to Anak at stated rate of 10%, for 10 years. The prevailing
rate in the market for these kinds of bonds at that time was 8%.
9. At the beginning of 2015, Anak decided to raise additional capital in
anticipation of a big project in 2016. It issued 20,000 common shares at the
prevailing market price of P104. However, Ina failed to exercise its
preemptive right on its interest. Mr. CPA failed to consider any change in
accounting for the investment that would result from such transaction.
Required:
1. How much was paid by Ina to acquire the 30% interest in Anak Company in
2014?
2. How much is goodwill/gain on bargain purchase pertaining to the acquisition
of the 30% interest in Anak Company by Ina Company? (indicate if goodwill or
gain on bargain purchase)
3. How much is the Share in Associates Net Income from Anak to be recognized
by Ina Company in 2014?
4. How much is the excess of fair value from book value relating to the bonds
payable as of December 31, 2014?
5. What is the balance of the Investment in Associate Anak Company account
as of December 31, 2014?
6. What is the percentage interest of Ina in Anak Company after the companys
stock issuance on January 1, 2015?
7. How much is the excess of fair value from book value relating to the building
as of December 31, 2015?
8. What is the balance of the Investment in Associate Anak Company account
as of December 31, 2014?
9. How much is the Share in Associates Net Income from Anak to be recognized
by Ina Company in 2015?
10.After taking into account the equity transaction of Anak Company in 2015,
how much goodwill/gain on bargain purchase pertains to the acquisition of
the 30% interest in Anak Company by Ina Company? (indicate if goodwill or
gain on bargain purchase)