AUDTG 421 – Applied Auditing

Review of Accounting Procedures for Investment in Associates, Investment Property, and Derivatives

A. On January 1, 2017, Heaven Company acquired 20% of the ordinary shares of an associate for
P6,000,000. On this date, all the identifiable assets and liabilities of the associate were recorded
at fair value. An analysis of the acquisition showed that goodwill of P300,000 was acquired.

The net income and dividend of the associate were as follows:

2017 2018
Net income 3,000,000 4,000,000
Dividend paid 1,000,000 1,500,000

In December 2017, the associate sold inventory to Heaven Company for P900,000. The cost of
the inventory was P600,000. This inventory remained unsold by Heaven Company on December
31, 2017. However, it was sold by Heaven Company in 2018. In December 2018, the associate
sold inventory to Heaven Company for P750,000. The cost of the unsold inventory was
P500,000. This inventory remained unsold by Heaven Company on December 31, 2018.

Requirements:
1. Prepare journal entries on the books of Heaven Company in relation to the investment in
associate for the years 2017 and 2018.
2. Prepare a schedule showing the balance to be presented as investment in associate in the
statement of financial position for the years 2017 and 2018.

B. Galore Company ventured into construction of a condominium in Makati which is rated as the
largest state-of-the-art structure. The board of directors decided that instead of selling the
condominium, the entity would hold this property for purposes of earning rentals by letting out
space to business executives in the area. The construction of the condominium was completed
and the property was placed in service on January 1, 2017. The cost of the construction was
P50,000,000. The useful life of the condominium is 25 years and the residual value is
P5,000,000. The entity adopted the fair value model of accounting for investment property. An
independent valuation expert provided the following fair value at each subsequent year-end:
December 31, 2017 55,000,000
December 31,2018 53,000,000
December 31, 2019 60,000,000

Required:
1. Journal entry in relation to the investment property for the years 2017 – 2019.

C. On January 1, 2017, Nocturnal Company borrowed P5,000,000 from a bank at a variable rate of
interest for 4 years. Interest will be paid annually to the bank on December 31 and the principal
is due on December 31, 2020. Under the agreement, the market rate of interest on each January
1 resets the variable rate for that period and the amount of interest to be paid on December 31.

To protect itself from fluctuation in interest rate, the entity hedged the variable interest by
entering into a four-year “receive variable, pay fixed” interest rate swap with a speculator. The
interest rate swap is based on a notional amount of P5,000,000 and an 8% fixed interest rate.
This agreement means that the entity will receive a swap payment from the speculator if the
market rate on January 1 is more than 8% and will make a swap payment to the speculator if the
market rate on January 1 is lower than 8%. The swap payments are made at the end of the year.
The entity has designated this interest rate swap as a cash flow hedge of the variability of
interest payments on the variable rate loan. The market interest rates are 8% on January 1,
2017, 10% on January 1, 2018, 11% on January 1, 2019, and 12% on January 1, 2020.

Required: Journal entries to for 2017 – 2020.