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Ateneo de Davao University ACFAR 3134 CountKnowledgeBaboon4

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PROBLEMS INVESTMENT IN ASSOCIATES ACFAR 2233 INTERMEDIATE ACCOUNTING 2 LEOPOLDO D. MEDINA, CPA, MSA PART I BASIC PRINCIPLES PROBLEM 1 BB Company acquired a 30% interest for P5,000,000 on Januar ... y 1, 2020. This cost exceeds the underlying net assets of the investee by P1,000,000 which is attributed to an undervalued equipment by the investee with useful life of five years. The investee reported the following information for 2020 and 2021. Net income Dividends paid 2020 4,000,000 3,000,000 2021 6,000,000 5,000,000 Required: Prepare journal entries on the books of BB Company from January 1, 2020 to December 31, 2021. 2020 Investment in associate 5,000,000 Cash 5,000,000 Investment in associate 1,200,000 4M x 30% Investment income 1,200,000 Cash 900,000 3M x 30% Investment in associate 900,000 Investment income 200,000 * Investment in associate 200,000 * Excess of cost over carrying amount 1,000,000 Attributed to undervaluation of equipment Amortization of excess cost 1,000,000 divided by 5 years 200,000 When depreciable asset is undervalued, depreciation is understated, resulting to overstatement of investee's net income. Thus, the investor should decrease investment income. [Show More]

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