CUP 2 (FAR)

PROBLEM 1
On January 1, 2016, an entity acquired a 10% interest in an investee for P3,000,000. The investment was
accounted for under the cost method. During 2016, the investee reported net income of P4,000,000 and paid
dividend of P1,000,000.

On January 1, 2017, the entity acquired a further 15% interest in the investee for P8,500,000. On such date,
the carrying amount of the net assets of the investee was P36,000,000 and the fair value of the 10% existing
interest was P3,500,000.

The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair
value was P4,000,000 greater than carrying amount. The equipment had a remaining life of 5 years.

The investee reported net income of P8,000,000 for 2017 and paid dividend of P5,000,000 on December 31,
2017.

1. What amount of investment income should be recognized in 2016?

2. What is the implied goodwill arising from the acquisition on January 1, 2017?

3. What total amount of income should be recognized by the investor in 2017?

4. What is the carrying amount of the investment in associate on December 31, 2017?

PROBLEM 2

January 1, 2016, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000

During the current year, the following transactions occurred:

* A tract of land was acquired for P2,000,000 cash as a building site.

* A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity.
On the acquisition date, each share had a quoted price of P45 on a stock exchange. The plant facility was
carried on the seller’s books at P1,600,000 for land and P5,400,000 for the building at the exchange date.
Current appraised values for the land and the building, respectively, are P2,000,000 and P8,000,000. The
building has an expected life of forty years with a P200,000 residual value.

* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred
were freight and unloading P100,000 and installation P300,000. The equipment has a useful life of ten
years with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalks at the entity’s
various plant locations. These expenditures had an estimated useful life of fifteen years.

* Research and development costs were P1,100,000 for the year.

* A machine costing P200,000 on January 1, 2009 was scrapped on June 30, 2016. Straight line depreciation
had been recorded on the basis of a 10-year life with no residual value.

* A machine was sold for P500,000 on July 1, 2016. Original cost of the machine sold was P700,000 on January
1, 2013, and it was depreciated on the straight line basis over an estimated useful life of eight years and a
residual value of P50,000.

1. What is the total cost of land on December 31, 2016?

2. What is the total cost of land improvements on December 31, 2016?

3. What is the total cost of buildings on December 31, 2016?

5. What is total cost of machinery and equipment on December 31, 2016?

PROBLEM 3

An entity reported the following information on January 1, 2016:

Ordinary share capital, P10 par, 800,000 shares 8,000,000

Preference share capital, P50 par, 50,000 shares 2,500,000
12% Bonds payable 5,000,000

The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends on
preference shares are in arrears for two years.

The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond.

Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the
beginning and ending of 2016. The average market price of the ordinary share was P30 per share and the
market price on December 31, 2016 was P40 per share.

May 1 Issued 60,000 ordinary shares at P25 per share.

July 1 Purchased 100,000 ordinary shares at P15 to be held as treasury.
Oct. 1 Converted bonds with face amount of P2,000,000.
Dec. 31 The net income for 2016 was P5,000,000. The tax rate is 30%.

1. What is the amount of basic earnings per share?

2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
3. What is the amount of diluted earnings per share?