Reference no: EM132914057

ABC Company bought 40,000 of the available 100,000 voting ordinary shares of Tiny Corporation. This acquisition provided ABC with significant influence. ABC paid P 1,450,000 cash for the investment. At the time of acquisition, Tiny had assets of P 3,000,000, and liabilities of P 1,700,000. Asset values reflected fair market value, except for capital assets that had a net book value of P 400,000 and a fair value of P 625,000. These assets had a remaining useful life of five years. After 12 months of ownership, Tiny reported net income of P 526,000 and paid cash dividends of P 75,000.

Requirement: Create a working paper to document your audit. Make sure that the following questions are answered by your audit working paper:

Problem a) At the end of the first year of ownership, what would appear on the (1) income statement and (2) statement of financial position of ABC?

Problem b) Repeat part 1, assuming that the cost method was used. Under what circumstances would this level of share ownership be accounted for under the cost method?