On January 1, 2020, Entity A acquired 90% of outstanding ordinary shares of Entity B at a price of P900,000

Subject:AccountingPrice:3.87 Bought7

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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