Reference no: EM132955041
PROBLEM 1 - Guillen Company acquired 30% of ABC Corporations share for P8,000,000 on July 1, 2020. ABC Corporation's identifiable net assets on the date of acquisition are P20,000,000. Guillen believes that the investee has known goodwill and the fair value of the corporation's net assets is the same as its carrying amount except for the following:
a. Equipment is undervalued by P2,000,000.
b. Inventory's fair value is P2,000,000 greater than its carrying amount.
The equipment has a remaining life of 4 years and depreciated using the straight-line method. At the end of 2020, all inventories at the acquisition date are entirely sold.
On November 30, ABC Corporation pays a P2,000,000 dividend to its shareholders. During the year, ABC Corporation reported a net income of P5,000,000, 40% of these were earned in the first half of the year. The fair value of ABC Corporation's shares held by Guillen at the end of 2020 is P8,250,000.
Requirements -
1. Prepare the necessary journal entries to record the above transactions.
2. Compute the carrying value of the investment in associates on December 31, 2020.
3. Suppose that on November 30, 2020, ABC Corporation revalued its Land that resulted in a revaluation surplus of P5,000,000. Prepare journal entry in the book of Guillen Company to record the changes in the equity of ABC Corporations as a result of the revaluation.
4. Using the information in requirement no. 3, compute the carrying value of the investment in associates on December 31, 2020.
PROBLEM 2 - At the beginning of 2018, Esterlina Corporation purchased 40% of the ordinary shares outstanding of Mary Grace Incorporated for P15,000,000 when the net assets of Mary Grace Incorporated amounted to P30,000,000. At the acquisition date, the carrying amounts of the identifiable assets and liabilities of Mary Grace Incorporated were equal to their fair value, except for the following:
a. Equipment whose fair value was P7,000,000 greater than its carrying amount.
b. Inventory whose fair value was P2,500,000 greater than its carrying amount.
The equipment has a remaining life of 4 years, and the inventory was all sold during 2013.
Mary Grace Incorporated has two classes of shares: Ordinary shares (par value, P100), 300,000 shares outstanding, 15% cumulative preference shares (par value, P50), 100,000 shares outstanding.
The investee reported the following net income (inclusive of enter-company transactions) and payment of cash dividend:
2018 2019
Net Income 20,000,000 35,000,000
Dividend payment 5,000,000 8,000,000
The following were the intercompany transactions between the investor and the associates:
a. In 2018, the Mary Grace Incorporated sold inventory to Esterlina Corporation for P750,000. The cost of the inventory was P500,000. 50% of this inventory was still unsold at the end of 2018, and the remainder were sold in 2019.
b. On July 1, 2019, Esterlina Corporation sold equipment for P900,000 to Mary Grace Incorporated. The carrying amount of the equipment is P500,000 at the time of sale. The remaining life of the equipment is five years, and Mary Grace Incorporated uses the straight-line method of depreciating the equipment.
On January 1, 2020, Esterlina Corporation sold 70,000 shares of Mary Grace Incorporated at P260 per share. The company incurred the broker's fee of P200,000. The sale resulted in a loss of significant influence of Esterlina Corporation over the operation of Mary Grace Incorporated. Esterlina designates the investment at fair value through profit or loss on this date.
During 2018, Mary Grace Incorporated earned P25,000,000 net income and a P10,000,000 cash dividend.
The following are the market value of Mary Grace Incorporated shares at year-end:
2018 - P 156.00
2019 - P 162.00
2020 - P 163.50
Requirements -
1. Prepare the necessary journal entries to record the above transactions.
2. What is the carrying value of the investment on December 31, 2018? December 31, 2019? December 31, 2020?
3. How much is the total income from investment in 2018? 2019? 2020?