Professional Documents
Culture Documents
Learning Objectives:
At the end of the session, students should be able:
(1) To define and differentiate significant influence, joint control and control.
(2) To determine whether the investor can exert significant influence over an investee.
(3) To determine when it is appropriate to use equity method in accounting for
investments.
(4) To understand the underlying principle of equity method.
Reference: IAS 28: Investments in Associate and Joint Ventures
I.
Accounting for equity instruments from the point of view of the investor:
A. Based on managements intention for acquiring the investment.
1. Passive investment
a. Fair value through profit or loss
b. Available for sale investments:
2. Active investment
Level of influence on investees management
Level of control
Control
Definition
Power to govern
Joint control
Type of entity
Subsidiary
Joint venture
Joint operation
Significant influence
Power to
participate
Associate
II. Existence of significant influence. Can the investor exert significant influence over
the investees operating and financing decisions?
IAS 28.3 Significant influence is the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control over those
policies.
IAS 28.5 There is a presumption that an investor can exert significant influence if he
holds 20% or more of the voting power of the investee.
Module 1: Investments in Associate | 1
2,000,000
12,500,000
FMV
January 1, 2004
2,000,000
12,500,000
Module 1: Investments in Associate | 3
14,500,000
Current liabilities
1,450,000
1,450,000
Bonds Payable
8,000,000
8,000,000
Ina was able to acquire Anak on January 2, 2004 for a total cost of P1,262,500.
Anak reported net income of P180,000 and P250,000 at the end of 2004 and 2005, respectively. Anak also
declared and paid cash dividends amounting to P20,000 in 2005.
Required:
(1) Prepare all necessary journal entries in the books of Anak and Ina.
(2) Determine the amount of Share from Anaks net income to be reported in the 2004 and 2005 income
statement of Ina Company.
(3) Determine the carrying value of Investment in Anak Company to be reported in the 2004 and 2005
balance sheet.
Note: Check if BV = FMV = Acquisition price
BV of equity
= 5,050,000 X 25% = 1,262,500
FMV of equity = 5,050,000 X 25% = 1,262,500
Acquisition price = 1,262,500
2004
Books of Ina
P1,262,500
P1,262,500
Books of Anak
Date of
acquisition
None
December 31,
2004
P180,000
P180,000
Balances,
December 31,
2004
Investment in Anak
January
P1,262,500
December
45,000
Ending balance P1,307,500
SHE
Preacquisition SHE
Net income
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
1,307,500
2005
Books of Ina
Books of Anak
December 31,
2005
P250,000
P250,000
Dividends
Dr. Cash
Cr. Investment in Anak
P5,000
P5,000
P20,000
P20,000
Balances,
December 31,
2005
Investment in Anak
January, 2004
NI, 2004
December 31, 2004
NI, 2005
P1,262,500
45,000
P1,307,500
62,500
SHE
Preacquisition SHE
NI, 2004
December 31, 2004
NI, 2005
5,050,000
180,000
5,230,000
250,000
5,000
1,365,000
Less: Dividends
Ending balance
Share of Ina (25%)
20,000
5,460,000
1,365,000
Observe:
Computation of share in associates net income for during the year acquisition prorating current year net income from date of acquisition to end of year because
the net income from beginning of the year to date of acquisition is already
included in the pre-acquisition retained earnings and pre-acquisition SHE.
Remember that pre-acquisition SHE is already a factor in the determination of
the acquisition price of the investment.
Book value
2,000,000
12,500,000
14,500,000
1,450,000
8,000,000
1,450,000
8,000,000
Anak depreciates plant assets over its remaining 20 years useful life (using straightline).
If Ina was able to acquire Anak on January 2, 2004 for a total cost of P1,887,500, compute for investment
income assuming Anak reports net income of P180,000 and P250,000 at the end of 2004 and 2005,
respectively. Anak also declared and paid cash dividends amounting to P20,000 in 2005.
Required:
(1) Prepare all necessary journal entries in the books of Anak and Ina.
(2) Determine the amount of Share from Anaks net income to be reported in the 2004 and 2005 income
statement of Ina Company.
(3) Determine the carrying value of Investment in Anak Company to be reported in the 2004 and 2005
balance sheet.
Module 1: Investments in Associate | 5
2004
Books of Ina
Books of Anak
Date of
acquisition
P1,887,500
P1,887,500
None
December 31,
2004
Amortization of
excess of FMV
over BV
None
Balances,
December 31,
2004
Investment in Anak
January
P1,887,500
December
45,000
Less: Amortization
31,250
Ending balance P1,901,250
SHE
Preacquisition SHE
Net income
Ending balance
Share of Ina (25%)
P180,000
P180,000
5,050,000
180,000
5,230,000
1,307,500
P1,307,500
2,500,000
25%
625,000
31,250
593,750
P1,901,250
2005
Books of Ina
Books of Anak
December 31,
2005
Amortization of
None
P250,000
P250,000
excess of FMV
over BV
Books of Ina
Cr. Investment in Anak
P31,250
Dividends
Dr. Cash
Cr. Investment in Anak
Balances,
December 31,
2005
Investment in Anak
January
December
Less: Amortization
Ending balance
NI, 2005
Less: Amortization
Less: Dividends
Ending balance
P5,000
P5,000
P1,887,500
45,000
31,250
P1,901,250
62,500
31,250
5,000
1,927,500
Books of Anak
P20,000
P20,000
SHE
Preacquisition SHE
NI, 2004
December 31, 2004
NI, 2005
Less: Dividends
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
250,000
20,000
5,460,000
1,365,000
2,000,000
12,500,000
14,500,000
1,450,000
FMV
January 1, 2004
2,000,000
12,500,000
1,450,000
Module 1: Investments in Associate | 7
8,000,000
8,324,436
Bonds of Anak were issued at par. Coupon rate is set at 9% which is paid every June 30 and
December 31. Market estimated yield at 8%. The bonds mature in 5 years.
If Ina was able to acquire Anak on January 2, 2004 for a total cost of P1,181,391, compute for investment
income assuming Anak reports net income of P180,000 and P250,000 at the end of 2004 and 2005,
respectively. Anak also declared and paid cash dividends amounting to P20,000 in 2005.
Required:
(1) Prepare all necessary journal entries in the books of Anak and Ina.
(2) Determine the amount of Share from Anaks net income to be reported in the 2004 and 2005 income
statement of Ina Company.
(3) Determine the carrying value of Investment in Anak Company to be reported in the 2004 and 2005
balance sheet.
Note: Check if BV = FMV = Acquisition price
BV of equity
= 5,050,000 X 25% = 1,262,500
FMV of equity = 4,725,564 X 25% = 1,181,391
Acquisition price = 1,181,391
(P81,109) excess to be
amortized over life of specific
2004
Books of Ina
Books of Anak
Date of
acquisition
P1,181,391
P1,181,391
None
December 31,
2004
Amortization of
excess of FMV
over BV
None
Balances,
December 31,
2004
Investment in Anak
January
P1,181,391
December
45,000
Amortization*
13,782
Ending balance P1,240,173
SHE
Preacquisition SHE
Net income
Ending balance
Share of Ina (25%)
P180,000
P180,000
5,050,000
180,000
5,230,000
1,307,500
P1,307,500
324,436
25%
Module 1: Investments in Associate | 8
81,109
13,782
67,327
P1,240,173
*Amortization computation => note the effect is a decrease in interest expense and hence an increase in net income.
Challenge Question: Consider this. How will you compute for Inas adjustment to interest expense in its
share in associates net income if the bonds were originally issued by Anak at a premium or discount
instead of at par?
2005
Books of Ina
Books of Anak
December 31,
2005
Amortization of
excess of FMV
over BV
None
Dividends
Dr. Cash
Cr. Investment in Anak
P20,000
P20,000
Balances,
December 31,
2005
Investment in Anak
January
December
Amortization
Ending balance
NI, 2005
Amortization
Less: Dividends
Ending balance
SHE
Preacquisition SHE
NI, 2004
December 31, 2004
NI, 2005
Less: Dividends
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
250,000
20,000
5,460,000
1,365,000
P5,000
P5,000
P 1,181,391
45,000
13,782
P1,240,173
62,500
14,906
5,000
1,312,579
P250,000
P250,000
P1,365,000
324,436
25%
81,109
28,688
52,421
P1,312,579
IAS 28.32. An investment is accounted for using the equity method from the date on
which it becomes an associate or a joint venture. On acquisition of the investment, any
difference between the cost of the investment and the investors share of the net fair
value of the investees identifiable assets and liabilities is accounted for as follows:
a. Goodwill relating to an associate is included in the carrying amount of the
investment. Amortization of that goodwill is not permitted.
FMV
January 1, 2004
2,000,000
12,500,000
2,000,000
12,500,000
14,500,000
Current liabilities
Bonds Payable
1,450,000
8,000,000
1,450,000
8,000,000
Ina was able to acquire Anak on January 2, 2004 for a total cost of P1,500,000.
Anak reported net income of P180,000 and P250,000 at the end of 2004 and 2005, respectively. Anak also
declared and paid cash dividends amounting to P20,000 in 2005.
Required:
(1) Prepare all necessary journal entries in the books of Anak and Ina.
(2) Determine the amount of Share from Anaks net income to be reported in the 2004 and 2005 income
statement of Ina Company.
(3) Determine the carrying value of Investment in Anak Company to be reported in the 2004 and 2005
balance sheet.
Note: Check if BV = FMV = Acquisition price
BV of equity
= 5,050,000 X 25% = 1,262,500
FMV of equity = 5,050,000 X 25% = 1,262,500
Acquisition price = 1,500,000
2004
Books of Ina
P1,500,000
P1,500,000
Books of Anak
Date of
acquisition
None
December 31,
2004
P180,000
P180,000
Balances,
December 31,
2004
Investment in Anak
January
P1,500,000
December
45,000
Ending balance P1,545,000
SHE
Preacquisition SHE
Net income
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
1,307,500
Reconciliation
Share of Ina in Anaks SHE
Unimpaired goodwill
Investment in Anak (Inas books)
P1,307,500
237,500
P1,545,000
Module 1: Investments in Associate | 11
2005
Books of Ina
Books of Anak
December 31,
2005
P250,000
P250,000
Dividends
Dr. Cash
Cr. Investment in Anak
P5,000
P5,000
P20,000
P20,000
Balances,
December 31,
2005
Investment in Anak
January, 2004
NI, 2004
December 31, 2004
NI, 2005
Less: Dividends, 2005
Ending balance
P1,500,000
45,000
P1,545,000
62,500
5,000
1,602,500
SHE
Preacquisition SHE
NI, 2004
December 31, 2004
NI, 2005
Less: Dividends
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
250,000
20,000
5,460,000
1,365,000
Reconciliation
Share of Ina in Anaks SHE
P1,365,000
Add:
Unimpaired goodwill
237,500
(1,500,000 1,262,500)
Investment in Anak (Inas books)
P1,602,500
Challenge Question: Assuming no intercompany transactions, when will Inas Investment in Anak account
equal to its proportionate share in Anaks stockholders equity?
IAS 28.32. b. any excess of the entitys share of the net fair value of the investees
identifiable assets and liabilities over the cost of the investment is included as income in
the determination of the entitys share of the associates profit or loss in the period in
which the investment is acquired.
Example 5: Book value = FMV > Acquisition price of investment
Ina Corporation acquired 25% of Anak Company. The following are taken from the due diligence report
prepared by a consultant hired by Ina.
Current assets
Plant assets
Total assets
Current liabilities
Bonds Payable
Book value
2,000,000
12,500,000
14,500,000
1,450,000
8,000,000
1,450,000
8,000,000
Module 1: Investments in Associate | 12
Ina was able to acquire Anak on January 2, 2004 for a total cost of P1,200,000.
Anak reported net income of P180,000 and P250,000 at the end of 2004 and 2005, respectively. Anak also
declared and paid cash dividends amounting to P20,000 in 2005.
Required:
(1) Prepare all necessary journal entries in the books of Anak and Ina.
(2) Determine the amount of Share from Anaks net income to be reported in the 2004 and 2005 income
statement of Ina Company.
(3) Determine the carrying value of Investment in Anak Company to be reported in the 2004 and 2005
balance sheet.
Note: Check if BV = FMV = Acquisition price
BV of equity
= 5,050,000 X 25% = 1,262,500
FMV of equity = 5,050,000 X 25% = 1,262,500
Acquisition price = 1,200,000
2004
Books of Ina
Date of
acquisition
P1,200,000
P1,200,000
Books of Anak
None
P180,000
P180,000
Balances,
December 31,
2004
Investment in Anak
January
P1,200,000
Negative GW
62,500
Net income
45,000
Ending balance P1,307,500
SHE
Preacquisition SHE
Net income
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
1,307,500
2005
Books of Ina
Books of Anak
December 31,
2005
P250,000
P250,000
Dividends
Dr. Cash
Cr. Investment in Anak
P5,000
P5,000
P20,000
P20,000
Balances,
December 31,
2005
Investment in Anak
January, 2004
Negative GW
NI, 2004
December 31, 2004
NI, 2005
Less: Dividends, 2005
Ending balance
P1,200,000
62,500
45,000
P1,307,500
62,500
5,000
1,365,000
SHE
Preacquisition SHE
NI, 2004
December 31, 2004
NI, 2005
Less: Dividends
Ending balance
Share of Ina (25%)
5,050,000
180,000
5,230,000
250,000
20,000
5,460,000
1,365,000
Observe:
2,000,000
12,500,000
14,500,000
1,450,000
8,000,000
FMV
January 1, 2004
2,000,000
15,000,000
1,450,000
7,116,790
Additional information:
Bonds of Anak were issued at par. Coupon rate is set at 9% which is paid every June 30 and
December 31. Market estimated yield at 12%. The bonds mature in 5 years.
Anak depreciates plant assets over its remaining five years useful life (using SYD).
Module 1: Investments in Associate | 14