INSTRUCTIONS: COMPLETE SOLUTION/ EXPLANATION

Problem 1

At the beginning of the current year, Adam Company bought 40% of Eve Company's outstanding ordinary shares for P4,000,000. The carrying amount of Eve's assets at the purchase date totaled P9,000,000.

Fair values and carrying amounts were the same for all items except for plant and inventory, for which the fair values exceeded their carrying amounts by P900,000 and P100,000 respectively.

The plant has an 18-year life. All inventory was sold during the current year

During the current year, the investee reported net income of P1,200,000 and paid P200,000 cash dividend.

What is the carrying amount of the investment in associate at year-end?

Problem 2

2018

Jan 1- Nadayag Company purchased 20,000 shares of Cortez Company, P100 par at P110 per share

Mar 1- Cortez Company issued rights to Nadayag Company, each permitting the purchase of 1/4 share at par. No entry was made. The bid price of the share was P140 and there was no quoted price for the rights

April 1- Nadayag Company paid the new shares charging the payment to the investment account. Since Nadayag Company felt that it has been assessed by Cortez Company, the dividends received from Cortez Company in 2017 and 2018 were credited to the investment account until the debit for payment of the new share was fully offset

Dec 31-Nadayag received annual dividend of P250,000 from Cortez Company

2019

Dec 31-Nadayag received annual dividend of P250,000 from Cortez Company

2020

Jan 1- Nadayag Company received 50% share dividend from Cortez Company. On the same date, the shares received as share dividend were sold at P160 per share and all proceeds were credited to income

December 31- The shares of Cortez Company were split 2 for 1. Nadayag Company found that each new share was worth P5 more than P110 paid for the original shares. Accordingly, Nadayag Company debited the investment account with additional shares received at P110 per share and credited to income

2021

June 30-Nadayag Company sold one half of the investment at P92 per share and credited the proceeds to investment account

Requirement:

1.What is the balance of the investment on December 31, 2020 as it was kept by Nadayag Company?

2. Using the average method, what is the correct balance of the investment on December 31, 2020?

3. What amount of gain on sales of investment should be reported in 2020?