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What is the investment income

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Question - On January 1, 2020, Entity A acquired 90% of outstanding ordinary shares of Entity B at a price of P900,000. Entity A paid P20,000 costs related to acquisition of shares.

At the acquisition date, the net assets of Entity B were reported at P950,000. All the assets of Entity B are properly valued except for a machinery which is undervalued by P150,000. The machinery has a remaining useful life of 5 years.

For the year ended December 31, 2020, Entity B reported net income of P200,000 and declared dividends in the amount of P30,000.

The fair value of Investment in Entity B on December 31, 2020 is P1,000,000 while the cost of disposal is 5%.

Entity A voluntarily prepared its separate financial statements.

1. If Entity A elects cost method to account its Investment in Entity B in its separate financial statements, what is the carrying amount of the Investment in Entity B on December 31, 2020?

A. 900,000

B. 920,000

C. 1,000,000

D. 950,000

2. What is the investment income for 2020 if Entity A elects cost method to account its Investment in Entity B in its separate financial statements?

A. 7,000

B. 27,000

C. 180,000

D. 107,000

3. If Entity A elects fair value model to account its Investment in Entity B in its separate financial statements, what is the carrying amount of the Investment in Entity B on December 31, 2020?

A. 900,000

B. 920,000

C. 1,000,000

D. 950,000

4. What is the net effect in profit or loss for 2020 if Entity A elects fair value model to account its Investment in Entity B in its separate financial statements?

A. 7,000

B. 27,000

C. 180,000

D. 107,000

Reference no: EM132795225

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