Reference no: EM132795225
Question - 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