Reference no: EM132960046
Question - Recede Corporation purchased 10,000 shares of DEF Company on January 1, 2020, for P120 per share. On the date of purchase, DEF Company has an outstanding ordinary share of 50,000 shares (par value P100), and an outstanding 20,000 shares, 8% cumulative preference shares (par value P200). The carrying value of DEF Company's net asset on January 1, 2020, is P7,000,000. The fair value of all identifiable assets and liabilities of DEF Company is the same as its carrying value.
During the year, Recede Corporation and DEF Company have the following intercompany transactions:
a. On June 30, 2020, Recede Corporation sold equipment to DEF Company for P800,000. On this date, the carrying amount of this equipment in the books of Recede Corporation amounted to P500,000. The equipment has a remaining life of 5 years on the date of sale.
b. On December 1, 2020, DEF Company sold merchandise to Recede Corporation for P1,000,000, inclusive of a 40% gross profit on sales. These merchandises were still unsold at the end of 2020.
DEF Company reported net income and dividend payments as follows:
Net Income Dividend
2020 P2,000,000 P1,000,000
2021 3,500,000 2,000,000
Requirements -
1. Necessary journal entries to record the above transactions.
2. How much is the investment income to be reported to the profit or loss of Recede Corporation in 2020? 2021?
3. What is the carrying value of the investment in associates on December 31, 2020? December 31, 2021?