Reference no: EM132641529

Question - ASSOCIATE WITH OUTSTANDING PREFERENCE SHARES

On January 1, 2016, Jerome Company acquired 30% of the outstanding shares of Arah Company for P6,000,000. This investment gave Jerome the ability to exercise significant influence over Arah. The book value of the acquired shares was P5,000,000. The excess of cost over book value was attributed to a depreciable asset which was undervalued on Arah's statement of financial position and which had a remaining useful life of eight years.

For the year ended December 31, 2016, Arah's share capital outstanding is as follows:

10% cumulative preference share capital - P 3,000,000

Ordinary share capital - 6,000,000

Arah reported net income of P2,500,000 for the year ended December 31, 2016.

CASE No. 1: Assuming the cumulative preference share is treated as equity by Arah and that Arah declared dividends of P450,000 in the preference shares, answer the following:

A. What amount should Jerome record as investment income for the year ended December 31, 2016?

B. What amount should Jerome record as investment in associate for the year ended December 31, 2016?

CASE No. 2: Assume instead that the preference shares are non-cumulative preference share treated as equity by Arah and that Arah declared dividends of P450,000 on the preference shares. Answer the following:

A. What amount should Jerome record as investment income for the year ended December 31, 2016?

B. What amount should Jerome record as investment in associate for the year ended December 31, 2016?

CASE No. 3: Assuming the cumulative preference share is treated as financial liability by Arah, answer the following:

A. What amount should Jerome record as investment income for the year ended December 31, 2016?

B. What amount should Jerome record as investment in associate for the year ended December 31, 2016?